International Economics
Final Exam Questions
Course Introduction
International Economics explores the fundamental principles and theories that govern economic interactions between countries. The course covers topics such as international trade, comparative advantage, trade policy, exchange rates, balance of payments, and the impact of globalization on economies. Students will examine the factors influencing cross-border flows of goods, services, capital, and labor, as well as the role of international organizations in shaping economic policy. Practical case studies and real-world data are used to understand contemporary issues such as trade disputes, emerging markets, and global economic integration, equipping students with the analytical tools to assess the effects of international economic relations on national and global prosperity.
Recommended Textbook
International Trade Theory and Policy 10th Edition by Paul R. Krugman
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Chapter 1: Introduction
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Q1) Which of the following does NOT belong?
A)NAFTA
B)Uruguay Round
C)World Trade Organization
D)non-tariff barriers
E)major free trade agreements of the 1990s
Answer: D
Q2) In 1998 an economic and financial crisis in South Korea caused it to experience
A)a surplus in their balance of payments.
B)a deficit in their balance of payments.
C)a balanced balance of payments.
D)an unbalanced balance of payments.
E)a lull in international trade.
Answer: A
Q3) It is argued that global trade tends to be more important to countries with smaller economies than the U.S.Is this empirically verified?
Answer: Yes.Figure 1-2 shows exports and imports as a percentage of national income in the U.S.and five other countries and notes that "International trade is even more important to most other countries than it is to the U.S."
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Chapter 2: World Trade: An Overview
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Q1) Since World War II,the relative importance of raw materials,including oil,in total world trade
A)remained constant.
B)increased.
C)decreased.
D)fluctuated widely with no clear trend
E)increased slightly before dropping off.
Answer: C
Q2) Why does the gravity model work?
A)Large economies became large because they were engaged in international trade.
B)Large economies have relatively large incomes,and hence spend more on government promotion of trade and investment.
C)Large economies have relatively larger areas which raises the probability that a productive activity will take place within the borders of that country.
D)Large economies tend to have large incomes and tend to spend more on imports.
E)Large economies tend to avoid trading with small economies.
Answer: D
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Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Q1) 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 wage doubles,but U.S.wages do not change at all.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)Not enough information is given.
E)Germany gains a comparative advantage in widgets.
Answer: B
Q2) The growth of clothing exports originating in Bangladesh is the result of the A)high productivity of workers in Bangladesh.
B)low wages in Bangladesh.
C)low productivity of workers in other countries.
D)low productivity of workers in Bangladesh in industries other than those that produce clothing for export.
E)high wages in other countries.
Answer: D
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Chapter 4: Specific Factors and Income Distribution
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Q1) In the specific factors model,which of the following is treated as a specific factor?
A)land
B)labor
C)cloth
D)food
E)technology
Q2) The relative price of a unit of cloth in the small isolated country of Moribundia is 5 units of food.When then central city,Mudhole,puts in an airstrip,the country is able to engage in trade.If the relative price of cloth in the outside world is 8 units of food,then Moribundia will export ________ and ________ factors used in the production of ________ will benefit.
A)cloth;immobile;cloth
B)food;immobile;food
C)food;mobile;food
D)cloth;mobile;cloth
E)cloth;immobile;food
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Chapter 5: Resources and Trade: the Heckscher-Ohlin Model
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Q1) Refer to the table above.You are told that Country B has no minimum wage or child labor laws.Now the correct answer is
A)country B will export good S.
B)country A will export good S.
C)both countries will export good S.
D)trade will not occur between these two countries.
E)both countries will import good S.
Q2) In the Heckscher-Ohlin model,when two countries begin to trade with each other
A)the relative prices of traded goods in the two countries converge.
B)relative factor prices in the two countries diverge.
C)benefits from trade are evenly distributed between the two countries.
D)all factors in both countries will gain from trade.
E)all factors in one country will gain,but there may be no gains in the other country.
Q3) The 1987 study by Bowen,Leamer and Sveikauskas
A)supported the validity of the Leontief Paradox.
B)supported the validity of the Heckscher-Ohlin model.
C)used a two-country and two-product framework.
D)demonstrated that in fact countries tend to use different technologies.
E)proved that the U.S.'s comparative advantage relied on skilled labor.
Page 7
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Chapter 6: The Standard Trade Model
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Q1) If the ratio of price of cloth (P<sub>C</sub>)divided by the price of food (P<sub>F</sub>)increases in the international marketplace,then
A)world relative quantity of cloth supplied will increase.
B)world relative quantity of cloth supplied and demanded will increase.
C)world relative quantity of cloth supplied and demanded will decrease.
D)world relative quantity of cloth demanded will decrease.
E)world relative quantity of food will increase.
Q2) Suppose Albania is exporting product B,and experienced economic growth biased in favor of product B as seen in the figure above.We are also told that Albania's new consumption point is at point d.Would you still consider the economic growth,which took place biased in favor of B? If Albania were a large country how would this growth affect its terms of trade?
Q3) The meaning of "terms of trade" is
A)the price of a country's exports divided by the price of its imports.
B)the amount of exports sold by a country.
C)the price conditions bargained for in international markets.
D)the quantities of imports received in free trade.
E)the tariffs in place between two trading countries.
Q4) What is intertemporal comparative advantage?
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Chapter 7: External Economies of Scale and the
International Location of Production
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Q1) Explain why positive economies of scale in one (of two)sectors may establish a comparative advantage for the large (as compared to the small)country in the production of the commodity which exhibits positive scale economies.
Q2) If output is increased in the long-run,average production costs in the presence of internal diseconomies of scale will ________,and in the presence of external diseconomies of scale,will ________.
A)decrease;decrease
B)increase;remain constant
C)remain constant;increase
D)decrease;remain constant
E)increase;decrease
Q3) The existence of external economies of scale
A)may be associated with a perfectly competitive industry.
B)cannot be associated with a perfectly competitive industry.
C)tends to result in one huge monopoly.
D)tends to result in large profits for each firm.
E)focuses more on individual firms than the industry as a whole.
Q4) Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition?
Page 9
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Q1) A monopoly firm will maximize profits by producing where
A)marginal revenue is the same in domestic and foreign markets.
B)prices are the same in domestic and foreign markets.
C)marginal revenue is higher in foreign markets.
D)marginal revenue is higher in the domestic market.
E)total revenue from domestic and foreign sales is maximized.
Q2) Refer to above figure.While selling exports it would also maximize its domestic sales by equating its marginal (opportunity)cost to its marginal revenue of $5.How much steel would the firm sell domestically,and at what price?
Q3) In the model of monopolistic competition,compared to a firm with a higher marginal cost,a firm with a lower marginal cost will set a ________ price,produce ________ output,and earn ________ profits.
A)lower;more;more
B)higher;more;more
C)lower;less;less
D)higher;less;less
E)higher;less;more
Q4) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q.What is average fixed cost equal to when Q = 10?
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Chapter 9: The Instruments of Trade Policy
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Q1) Should the home country be "large" relative to its trade partners,its imposition of a tariff on imports would lead to an increase in domestic welfare if the terms of the trade rectangle exceed the sum of the
A)revenue effect plus redistribution effect.
B)protective effect plus revenue effect.
C)consumption effect plus redistribution effect.
D)production distortion effect plus consumption distortion effect.
E)terms of trade gain.
Q2) The U.S.sugar quota
A)generates government revenue.
B)results in net welfare benefits to the U.S.economy.
C)results in benefits to sugar producers that exceed the cost to consumers.
D)results in costs to consumers that exceed the benefits to sugar producers.
E)does not result in an efficiency loss.
Q3) The principle benefit of tariff protection goes to
A)domestic consumers of the good produced.
B)foreign consumers of the good produced.
C)domestic producers of the good produced.
D)foreign producers of the good produced.
E)the domestic government.
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Chapter 10: The Political Economy of Trade Policy
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Q1) In 1980 the United States announced an embargo on grain exports to the Soviet Union in response to the Soviet invasion of Afghanistan.This embargo was mainly resisted by
A)U.S.grain consumers of bread.
B)U.S.grain producers.
C)foreign grain producers.
D)U.S.communists.
E)economists concerned with U.S.terms of trade.
Q2) One of the major issues that arose during the Doha round of negotiations involved complaints by ________ about ________.
A)developing countries;agricultural subsidies.
B)manufacturers;intellectual property
C)industrialized countries;enforcement of contracts
D)Eastern European countries;European Union tariffs
E)South and Central American countries;domestic content requirements
Q3) Refer to above figure.What would be the cost of the subsidy to European taxpayers?
Q4) Refer to above figure.What is the revenue gain or loss for Europe as a whole (including taxpayers)?
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Chapter 11: Trade Policy in Developing Countries
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Q1) Refer to above figure.If OmL1 workers are employed in manufacturing then what is the marginal productivity of labor in manufacturing?
Q2) Which of the following could explain why the terms of trade of developing countries might deteriorate over time?
A)Developing country exports consist mainly of manufactured goods.
B)Developing country exports consist mainly of primary products.
C)Commodity export prices are determined in highly competitive markets.
D)Commodity export prices are solely determined by developing countries.
E)Developing country exports are too diverse.
Q3) Historically those few developing countries which have succeeded in significantly raising their per-capita income levels
A)did not accomplish this with import-substituting industrialization.
B)did accomplish this with import-substituting industrialization.
C)tended to provide heavy protection to domestic industrial sectors.
D)favored industrial to agricultural or service sectors.
E)did so to the detriment of their nearest neighbors.
Q4) Refer to above figure.If OmL1 workers are employed in manufacturing then what is the marginal productivity of labor in agriculture?
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Chapter 12: Controversies in Trade Policy
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Q1) The Shipbreakers of Alang represent a perfect example of how a developing country can apply the principles of the Heckscher-Ohlin model,since
A)shipbreaking is generally considered to be a capital-intensive operation and India,being a large country has much capital.
B)shipbreaking is a labor-intensive operation in India,and India has many workers since it is such a large country.
C)shipbreaking is a labor-intensive operation in India,and India's availability of capital per worker is less than that of its trade partners.
D)shipbreaking is a capital-intensive operation elsewhere in the world,and therefore represents a case of a factor intensity reversal.
E)India's climate lends itself to the work involved in shipbreaking.
Q2) The Ricardian model of comparative advantage lends support to the argument that
A)trade tends to worsen the conditions of unskilled labor in rich countries.
B)trade tends to worsen the conditions of owners of capital in rich countries.
C)trade tends to worsen the conditions of workers in poor countries.
D)trade tends to worsen the conditions of workers in rich countries.
E)trade is mutually beneficial to the countries that engage in it.
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Chapter 13: National Income Accounting and the Balance of Payments
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Q1) For most macroeconomists
A)gross national income and gross national product are the same.
B)gross national income exceeds gross national product.
C)gross national product exceeds gross national product.
D)it is hard to tell whether gross national income equal gross national product.
E)gross national product is much more important than gross national income.
Q2) An American buys a Japanese car,paying by writing a check on an account with a bank in New York.How would this be accounted for in the balance of payments?
A)current account,a Japanese good import
B)current account,a U.S.good import
C)financial account,a U.S.asset import
D)financial account,a U.S.asset export
E)a current account as a U.S.good import and a financial account,a U.S.asset export
Q3) What is the national income identity for an open economy?
Q4) What is the national income identity for a closed economy?
Q5) What types of international transactions are recorded in the balance of payment accounts?
Page 15
Q6) "The balance of payments is seldom in balance in practice." Discuss.
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: An Asset Approach
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Q1) Futures contracts differ from forward contracts in that
A)future contracts ensures you will receive a certain amount of foreign currency at a specified future date.
B)future contracts bind you into your end of the deal.
C)future contracts allow you to sell your contract on an organized futures exchange.
D)future contracts are a disadvantage if your views about the future spot exchange rate are to change.
E)futures contracts don't allow you to realize a profit of a loss right away.
Q2) What are the three factors that affect the demand for foreign currency?
Q3) The future date on which the currencies are actually exchanged is called what?
A)the value date
B)the spot exchange date
C)the two-day window
D)the commitment date
E)the forward exchange rate
Q4) Explain risk and liquidity of assets.
Q5) Show graphically a drop in the interest rate paid by euro deposits.What is the effect on the dollar?
Q6) Who are the major participants in the foreign exchange market?
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Chapter 15: Money,Interest Rates, and Exchange Rates
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Q1) Explain the exchange rate over-shooting hypothesis.
Q2) The most extreme inflationary conditions occurred
A)in Zimbabwe in 2008.
B)in Chile in 2012.
C)in Eastern Europe in the 1990s.
D)in Western Europe in the 1980s.
E)in Germany in 20013.
Q3) Using year-by-year data from 1987-2007 shows that
A)there is a strong positive relation between average Latin American money-supply growth and inflation.
B)there is a strong negative relation between average Latin American money-supply growth and inflation.
C)there is a strong positive relation between average Latin American money-supply growth and deflation.
D)it is difficult to find a strong positive relation between average Latin American money-supply growth and inflation.
E)there is a weak positive relation between average Latin American money-supply growth and inflation.
Q4) What will be the effects of an increase in real output on the interest rate?
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) If people expect relative PPP to hold
A)the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected,in the United States and Europe,respectively,over the relevant horizon.
B)the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States,respectively.
C)the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected,over the relevant horizon,in the United States and Europe,respectively,in the short run.
D)the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected,over the relevant horizon,in the United States and Europe,respectively.
E)the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected,over the relevant horizon,in the United States and Europe,respectively.
Q2) What is the real exchange rate between the dollar and the euro equal to?
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) Monetary expansion causes the current account balance to increase in the short run.Discuss.Is the same the case for fiscal expansion?
Q2) Describe what is a J Curve?
Q3) Demonstrate how a permanent fiscal expansion will not increase output in the long run.
Q4) A naïve implication of the DD-AA framework is that either fiscal or monetary policy can lead to full employment.Discuss why this view is naïve.
Q5) Current account is given by the equation:
A)CA = IM - EX (measured in terms of domestic output).
B)CA = IM - EX (measured in terms of foreign output).
C)CA = EX - IM (measured in terms of domestic output).
D)CA = EX - IM (measured in terms of foreign output).
E)CA = EX + IM (measured in terms of domestic output).
Q6) Explain what are the factors that shift the AA Schedule?
Q7) Find the real exchange rate for the following case: Assume that the representative basket of European goods and services costs 40 euros and the representative U.S.basket costs $50,and the dollar/euro exchange rate is $0.90 per euro,then the price of the European basket in terms of U.S.basket is ________.
Page 19
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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Q1) From the Civil War up to 1914,the United States adhered to a A)gold standard.
B)silver standard.
C)bimetallic standard.
D)bronze standard.
E)copper standard.
Q2) Which one of the following statements is the MOST accurate?
A)Under a fixed exchange rate,central bank monetary tools are powerless to affect the economy's money supply.
B)Under a flexible exchange rate,central bank monetary tools are powerless to affect the economy's money supply or its output.
C)Under a fixed exchange rate,fiscal policy tools are powerless to affect the economy's money supply or its output.
D)Under a fixed exchange rate,central bank monetary tools are powerless to affect the economy's money supply or its output.
E)Under a dirty float exchange rate,central bank monetary tools are powerless to affect the economy's money supply or its output.
Q3) Explain risk and liquidity of assets.
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Chapter 19: International Monetary Systems: An Historical Overview
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Q1) Refer to the above figure.Use the DD-AA model to examine and compare the response of an economy under fixed and floating exchange rate to a temporary fall in foreign demand for its exports.
Q2) Why do governments prefer to avoid current account deficits that are too large?
Q3) A current account surplus
A)poses a problem if domestic savings are being invested more profitably abroad than they would be at home.
B)may pose no problem if domestic savings are being invested more profitably abroad than they would be at home.
C)may pose no problem if domestic savings are being invested less profitably abroad than they would be at home.
D)there is no relation between current account surplus and between savings and investment.
E)poses a problem if domestic savings are being invested less profitably abroad than they would be at home.
Q4) "The line distinguishing external from internal goals can be fuzzy." Discuss.
Q5) What is a convertible currency?
Q6) "Fixed exchange rates are not even an option for most countries." Discuss.
Q7) "A monetary policy is not a policy tool under fixed exchange rates." Discuss.
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Chapter 20: Financial Globalization: Opportunity and Crisis
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Q1) Explain why large interest rate differences would be strong evidence of unrealized gains from trade.
Q2) The main problem with securitization is that
A)governments are no longer able to repackage bank assets.
B)securitized banks grow too large and create oligopolies.
C)There is no problem.Governments can still get an accurate picture of global financial flows by simply examining bank balance sheets.
D)governments are not able to monitor bank assets or to asses a bank's risk to the soundness of the international banking system.
E)the bank assets are not marketable.
Q3) People who are risk averse
A)value a collection of assets only on the basis of its expected returns.
B)value a collection of assets only on the basis of the risk of that return.
C)value a collection of assets not only on the basis of its expected returns but also on the basis of the risk of that return.
D)are less likely to invest in life insurance.
E)are less likely to have a diverse portfolio.
Q4) What is securitization?
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Chapter 21: Optimum Currency Areas and the Euro
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Q1) What led to the over-extension of credit by some private banks and central banks in the euro zone prior to the 2009 euro crisis?
Q2) Explain why the oil price shocks after 1973 made countries unwilling to revive the Bretton Woods system of fixed exchange rates.See also Chapter 19.
Q3) The credibility theory of EMS had as an effect
A)the inflation rates of member countries converging to the low German levels,a result that was not matched by similar countries who did not fix their exchange rates.
B)the inflation rates of member countries failing to converge to the low German levels.
C)the inflation rates of member countries converging to the low German levels,but other countries including U.S.and Britain also reduced inflation in this time period without fixing exchange rates.
D)the inflation rate in Germany rose to match the inflation rates of other member countries.
E)the inflation rate in the U.S.dropped to the low German levels.
Q4) Explain the credibility theory of the EMS.
Q5) Is the EU an optimum currency area? Why or why not?
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) Describe alternative forms of capital inflow to finance external deficits and explain why these methods were used in different times?
Q2) In 1981-1983,the world economy suffered a steep recession.Naturally,the fall in industrial countries' aggregate demand had a direct negative impact on the developing countries.What other mechanism was an even more important contributor to this event?
A)the immediate steep inflation that followed the recession
B)the dollar's sharp depreciation in the foreign exchange market
C)the increase in primary commodity prices,increasing terms of trade in many poor countries
D)the collapse in primary commodity prices and the immediate,large rise in the interest burden that debtors had to pay
E)the influx of defaulting credit
Q3) Based on the 1997 Crisis and your own experience,what are the main weaknesses of the East Asian economies?
Q4) Does it appear that currency boards make low-inflation policies credible?
Q5) What are the five major channels,which developing countries use to finance their external deficit?
Q6) What is the theory of Second Best?
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