International Economics Exam Preparation Guide
Course Introduction
International Economics explores the flow of goods, services, and capital across national borders, analyzing the complex interactions between countries in the global marketplace. The course examines the theories of international trade and finance, including comparative advantage, trade policy instruments, balance of payments, exchange rate systems, and the roles of international organizations. It also addresses current issues such as globalization, trade agreements, economic integration, and the impact of international economic policies on development and inequality. Through real-world examples and analytical frameworks, students develop a comprehensive understanding of how economic relationships between nations shape global economic trends and policy decisions.
Recommended Textbook
International Finance Theory and Policy 10th Edition by Paul R. Krugman
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Page 2
Chapter 1: Introduction
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Q1) The distinction between international trade and international money is not entirely clear because
A) real developments in the trade accounts do not have monetary implications.
B) the balance of payments includes only real measures.
C) developments caused by purely monetary changes have no real effects.
D) trade models focus on real, or barter relationships.
E) most international trade involves monetary transactions.
Answer: E
Q2) During the first three years of its existence,the euro
A) depreciated against the $U.S.
B) maintained a strict parity with the $U.S.
C) strengthened against the $U.S.
D) proved to be an impossible dream.
E) exported exclusively to the U.S.
Answer: A
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Chapter 2: National Income Accounting and the Balance of Payments
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Q1) Discuss the values of private saving in closed and open economies.
Answer: In a closed economy,private saving, S ,is equals to,I + (G - T).In a open economy,private saving, S ,is equals to I + CA + (G - T).Open economy helps in extending the opportunities for private saving or dis-saving,or borrowing.
Q2) Disposable income is National income
A) less taxes collected from households and firms by the government. B) plus net taxes collected from households and firms by the government.
C) less net taxes collected from firms by the government.
D) less net taxes collected from households by the government.
E) less net taxes collected from households and firms by the government.
Answer: E
Q3) Consider how the United States balance of payments accounts are affected when U.S.banks forgive two billion in debt owed to them by the government of Argentina.
Answer: In this case,the United States makes a two billion dollars capital transfer to Argentina,which should appear as a negative two billions entry in the capital account.The associated credit is in the financial account,in the form of a two billion dollars reduction in U.S.assets held abroad,i.e.,a net asset "export," and therefore a positive balance of payments entry.
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Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Q1) In 1975,wage levels in South Korea were roughly 5% of those in the United States.It is obvious that if the United States had allowed Korean goods to be freely imported into the United States at that time,this would have caused devastation to the standard of living in the United States,because no producer in this country could possibly compete with such low wages.Discuss this assertion in the context of the Ricardian model of comparative advantage.
Answer: Regardless of relative wage levels,the United States would be able to provide its populace with a higher standard of living than would be possible without trade.Also,low wages tend to be associated with low productivities.
Q2) Suppose the United States' production possibility frontier was flatter to the widget axis,whereas Germany's was flatter to the butter axis.We now learn that the German mark sharply depreciates against the U.S.dollar.We now know that
A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Germany has a comparative advantage in widgets.
E) Germany has lost its comparative advantage.
Answer: B
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Chapter 4: Specific Factors and Income Distribution
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Q1) International trade can have important effects on the distribution of income because A) different industries employ different factors of production.
B) of government corruption.
C) the more powerful country dictates the terms of trade.
D) rich countries take advantage of poor countries.
E) different countries use different currencies.
Q2) Refer to the production possibility graph above.Assume that the economy is in equilibrium at point e.If a war reduces the country's capital stock by 40%,the new equilibrium is most likely to be
A) point b.
B) point h.
C) point f.
D) point d.
E) point e.
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Chapter 5: Resources and Trade: The Heckscher-Ohlin Model
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Q1) According to the Heckscher-Ohlin model,the source of comparative advantage is a country's
A) factor endowments.
B) technology.
C) advertising.
D) human capital.
E) political system.
Q2) In the Heckscher-Ohlin model,when there is international-trade equilibrium
A) the relative price of the capital intensive good in the capital rich country will be the same as that in the capital poor country.
B) the capital rich country will charge less for the capital intensive good than the price paid by the capital poor country for the capital-intensive good.
C) the capital rich country will charge more for the capital intensive good than the price paid by the capital poor country for the capital-intensive good.
D) workers in the capital rich country will earn more than those in the poor country.
E) the workers in the capital rich country will earn less than those in the poor country.
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Chapter 6: The Standard Trade Model
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Q1) What is intertemporal comparative advantage?
Q2) Refer to the figure above,which shows a country's possible production possibility frontiers and indifference curves.If the country is producing at ________,then moving to ________ will cause utility to ________.
A) point b; point c; remain unchanged
B) point a; point b; increase
C) point c; point b; increase
D) point c; point b; decrease
E) point a; point c; remain unchanged
Q3) An export subsidy has the opposite effect on terms of trade to the effect of an import tariff.Domestically a tariff will raise the price of the import good,deteriorating the domestic terms of trade.A production subsidy for the export product will lower the local price of the export good,lowering the domestic terms of trade for the country.Hence the export subsidy and the import tariff have the same effect.This analysis seems to contradict the first sentence in this paragraph.Discuss this paradox.
Q4) Other things being equal,a rise in a country's terms of trade increases its welfare.What would happen if we relax the ceteris paribus assumption,and allow for the law of demand to operate internationally?
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Chapter 7: External Economies of Scale and the
International Location of Production
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Q1) External economies of scale will ________ average cost when output is ________ by ________.
A) reduce; increased; the industry
B) reduce; increased; a firm
C) increase; increased; a firm
D) increase; increased; the industry
E) reduce; reduce; the industry
Q2) Patterns of interregional trade are primarily determined by ________ rather than ________ because factors of production are generally ________.
A) external economies; natural resources; mobile
B) internal economies; external economies; mobile
C) external economies; population; immobile
D) internal economies; population; immobile
E) population; external economies; immobile
Q3) The primary determinant of patterns of interregional trade is
A) accidents of history.
B) resource allocations.
C) factor abundance.
D) weather.
E) centralized optimization.
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Chapter 8: Firms in the Global Economy: Export
Decisions,Outsourcing,and Multinational Enterprises
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Q1) Under oligopoly,firms' pricing policies are ________ and,under monopolistic competition,they are ________.
A) interdependent; independent
B) independent; interdependent
C) cooperative; uncooperative
D) uncooperative; cooperative
E) profit maximizing; revenue maximizing
Q2) What is the nature of the proximity-concentration tradeoff that firms have to deal with then making decisions regarding foreign direct investment?
Q3) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q.What is total cost equal to when Q = 10?
Q4) Trade without serious income distribution effects is most likely to happen
A) in sophisticated manufactures trade between rich countries.
B) in simple manufactures trade between developing countries.
C) in sophisticated manufactures trade between rich and poor countries.
D) in agricultural trade between rich countries.
E) in labor-intensive industries like clothing.
Q5) What are the consequences of outsourcing production on the welfare of countries?
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Chapter 9: The Instruments of Trade Policy
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Q1) Suppose an import-competing firm is imperfectly competitive.Replacement of an export tariff with an import quota that yields the same level of imports will ________ market price,________ producer surplus,________ consumer surplus,________ government revenue,and ________ overall domestic national welfare.
A) increase; increase; decrease; decrease; decrease
B) have no effect on; have no effect on; have no effect on; decrease; decrease C) increase; have no effect on; decrease; decrease; increase
D) increase; increase; increase; decrease; have an ambiguous effect on E) decrease; decrease; increase; decrease; increase
Q2) A lower tariff on imported steel would most likely benefit
A) foreign producers at the expense of domestic consumers.
B) domestic manufacturers of steel.
C) domestic consumers of steel.
D) workers in the steel industry.
E) foreign consumers of steel.
Q3) Refer to above figure.With free trade and no tariffs,what is the quantity of Widgets imported?
Q4) Refer to above figure.With a specific tariff of $3 per unit,what is the quantity of Widgets produced domestically?
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Chapter 10: The Political Economy of Trade Policy
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Q1) Developing countries have often attempted to establish cartels so as to counter the actual or perceived inexorable downward push on the prices of their exported commodities.OPEC is the best well known of these.How are such cartels expected to help the developing countries? At times importing countries profess support for such schemes.Can you think of any logical basis for such support? How are cartels like monopolies,and how are they different from monopolies.Why is there a presupposition among economists that such schemes are not likely to succeed in the long run?
Q2) Which organization determines procedures for the settlement of international trade disputes?
A) World Bank
B) World Trade Organization
C) International Monetary Organization
D) International Bank for Reconstruction and Development
E) The League of Nations
Q3) Refer to above figure.What is the revenue gain or loss for Europe as a whole (including taxpayers)?
Q4) Refer to above figure.Assume that Boeing is the first to enter the Hungarian market.Without a government subsidy what price would they demand,and what would be their total profits?
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Chapter 11: Trade Policy in Developing Countries
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Q1) In 2003,the per-capita income in China was roughly ________ of that in the U.S.
A) one hundredth
B) one eighth
C) one half
D) the same as
E) one twentieth
Q2) The remarkable success of the HPAEs proves that
A) trade policy is the key to successful economic growth.
B) trade policy is irrelevant to successful economic growth.
C) high educational standards is the key to successful economic growth.
D) dual economies must suffer economic stagnation.
E) trade policy can lead to a higher standard of living for developing countries.
Q3) Which trade strategy have developing countries used to restrict imports of manufactured goods so that the domestic market is preserved for home producers?
A) international commodity agreement
B) export promotion
C) multilateral contract
D) import substitution
E) export subsidies
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Chapter 12: Controversies in Trade Policy
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Q1) The reason Airbus succeeded in the Brander Spencer example is that A) the European government made an explicit subsidy offer, but the U.S. government did not.
B) Airbus' prices were better when adjusted for quality and warranty services.
C) Boeing traditionally refused to undertake any exchange rate risk in its transactions.
D) the U.S. acted in accordance with its ideological reliance on market solutions, whereas the Europeans ignored market and technological factors.
E) the Airbus plane benefited from more advanced technology.
Q2) The evidence usually cited to prove that globalization hurts workers in developing countries
A) is inconclusive due to poor statistical design of the underlying samples.
B) is inconclusive due to the poorly funded Central Statistical Office of Mexico.
C) is inconclusive due to the ambiguous theoretical implications of the findings.
D) is conclusive.
E) does not take into account the Heckscher-Ohlin model.
Q3) What is a pollution haven?
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