International Economics
Midterm Exam
Course Introduction
International Economics explores the fundamental principles and theories that govern economic interactions among countries. The course examines topics such as international trade, trade policy, exchange rates, balance of payments, globalization, and the impact of international organizations and agreements. Students learn how nations benefit from trade, the effects of tariffs and quotas, factors influencing currency values, and the challenges and opportunities presented by economic integration and international financial markets. Emphasis is placed on understanding real-world implications and policy debates concerning global economic relations.
Recommended Textbook
International Economics 11th Edition by Dominick Salvatore
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21 Chapters
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623 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) International trade theory refers to:
A)the microeconomic aspects of international trade
B)the macroeconomic aspects of international trade
C)open economy macroeconomics or international finance
D)all of the above
Answer: A
Q2) The gravity model of international trade predicts that trade between two nations is larger
A)the larger the two nations
B)the closer the nations
C)the more open are the two nations
D)all of the above
Answer: D
Q3) Economic theory:
A)seeks to explain economic events
B)seeks to predict economic events
C)abstracts from the many detail that surrounds an economic event
D)all of the above
Answer: D
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Page 3
Chapter 2: The Law of Comparative Advantage
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Q1) Explain why Ricardo's model of trade was superior to Adam Smith's.
Answer: Smith's model was based on absolute advantage,which required each nation to have an absolute productivity advantage in order for mutually beneficial trade to occur.Ricardo's model considered relative productivity,showing that even if a nation had an absolute advantage in everything it could still benefit from trade.
Q2) The theory of comparative advantage was first proposed by
A)Adam Smith
B)David Ricardo
C)J.M.Keynes
D)Paul Krugman
Answer: B
Q3) According to Adam Smith,international trade is based on:
A)absolute advantage
B)comparative advantage
C)both absolute and comparative advantage
D)neither absolute nor comparative advantage
Answer: A
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Chapter 3: The Standard Theory of International Trade
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Q1) The graph below shows an autarky point for a nation that is assumed to have a comparative advantage in good Y.Suppose that international trade begins,and thus the relative price of X falls (relative price of Y rises).On the graph,show the new equilibrium point and then show the gains from exchange,specialization,and trade,as based on your graph.
Answer: Answers will vary slightly as based on graphing,but should identify all points and label the breakdown of gains.U is the new indifference curves,so U - U represents the utility gain from trade.U - U is the gain from specialization,and U - U represents the gain from exchange.
Q2) The marginal rate of transformation (MRT)of X for Y refers to:
A)the amount of Y that a nation must give up to produce each additional unit of X
B)the opportunity cost of X
C)the absolute slope of the production frontier at the point of production
D)all of the above
Answer: D
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Chapter 4: Demand and Supply, offer Curves, and the Terms of Trade
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Q1) Using a graph of offer curves,for each of the following,identify the effect of the change listed on the relative price of good Y and on exports of good Y by Nation 2.
a.The demand for X increases in Nation 2.
b.The supply of Y increases in Nation 2.
Q2) The equilibrium price and quantity for a commodity traded between two nations occurs where
A)the slopes of the two offer curves are the same.
B)the two offer curves intersect
C)the slopes of the two offer curves is equal to zero
D)the price ratio of good X for good Y is equals one.
Q3) Suppose the terms of trade for nation X rises from 100 to 110.Explain how this will impact the terms of trade for nation Y.
Q4) Using a graph of offer curves,for each of the following,identify the effect of the change listed on the relative price of good X and on exports of good X by Nation 1.
a.The supply of Y increases in Nation 2.
b.The demand for X decreases in Nation 1.
Q5) Carefully define an offer curve and explain how it is derived.
Q6) Carefully define and explain the meaning of "equilibrium terms of trade"
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Chapter 5: Factor Endowments and the Heckscher-Ohlin
Theory
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Q1) According to the H-O model,international trade will:
A)reduce international differences in per capita incomes
B)increases international differences in per capita incomes
C)may increase or reduce international differences in per capita incomes
D)lead to complete specialization
Q2) a)Identify the conditions that may give rise to trade between two nations.
b)What are some of the assumptions on which the Heckscher-Ohlin theory is based?
c)What does this theory say about the pattern of trade and effect of trade on factor prices?
Q3) The H-O model is a simplification of a truly general equilibrium model because it deals with:
A)two nations
B)two commodities
C)two factors of production
D)all of the above
Q4) The H-O model assumes a world in which factors of production cannot move but goods can.In terms of output prices and factor prices,explain what (if anything)would be different about a world in which there was complete factor mobility but no trade versus a world in which there was absolutely free trade but no factor mobility.
Page 7
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Chapter 6: Economies of Scale, imperfect Competition, and International Trade
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Q1) Define and explain economies of scale.
Q2) a)Explain why the Heckscher-Ohlin trade model needs to be extended.
b)Indicate in what important ways the Heckscher-Ohlin trade model can be extended.
c)Explain what is meant by differentiated products and intra-industry trade.
Q3) How do differing environmental standards between countries affect international trade,and why can this create problems?
Q4) If a nation exports twice as much of a differentiated product that it imports,its intra-industry (T)index is equal to:
A)1.00
B)0.75
C)0.50
D)0.25
Q5) With intra-industry trade,the gains from trade
A)decrease.
B)come from reductions in cost due to comparative advantage and exchange.
C)come from increases in the variety of goods available.
D)come from the reduction of tariffs and trade.
Q6) How is intra-industry trade measured?
Does the degree of intra-industry trade depend on how an industry is defined?
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Chapter 7: Economic Growth and International Trade
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Sample Questions
Q1) When a nation's growth deteriorates its terms of trade to the point that its welfare drops it is experiencing
A)debilitating growth
B)immiserizing growth
C)population growth
D)GDP per capital growth
Q2) Doubling L with trade in a small L-abundant nation:
A)reduces the welfare of representative citizens.
B)reduces the nation's terms of trade
C)reduces the volume of trade
D)reduces national consumption.
Q3) Doubling L is likely to:
A)increases the relative price of the L-intensive commodity
B)reduces the relative price of the K-intensive commodity
C)reduces the relative price of the L-intensive commodity
D)any of the above
Q4) What does the Rybczynski theorem postulate?
Q5) Carefully identify and discuss the conditions which can lead to immiserizing growth.
Q6) What is meant by comparative static analysis?
Page 9
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Chapter 8: Economic Growth and International Trade
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Q1) The optimum tariff is the tariff rate that
A)saved the most domestic jobs
B)generates the largest tax revenue
C)maximizes domestic production
D)maximizes the net benefit from improving the improvement in the terms of trade relative to loss from the reduction in the volume of trade
Q2) Which of the following statements is incorrect?
A)An ad valorem tariff is expressed as a percentage of the value of the traded commodity
B)a specific tariff is expressed as a fixed sum of the value of the traded commodity.
C)export tariffs are prohibited by the U.S.Constitution
D)The U.S.uses exclusively the specific tariff
Q3) Using the concept of effective protection,explain how and why tariffs tend to vary with the level of processing of goods (that is,raw materials,intermediate goods,and finished goods).
Q4) Explain the redistribution effects of a tariff.
Q5) Is there such thing as an optimum tariff for a small nation?
Q6) Explain the difference between an ad valorem,specific and compound tariff
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) Industrial policy refers to:
A)an activist policy by the government of an industrial country to stimulate the development of an industry
B)the granting of a subsidy to a domestic industry to stimulate the development of an industry
C)the granting of a subsidy to a domestic industry to counter a foreign subsidy
D)all of the above
Q2) Adjustment to any shift in the domestic demand or supply of an importable commodity occurs:
A)in domestic price with an import quota
B)in the quantity of imports with a tariff
C)through the market mechanism with an import tariff but not with an import quota
D)all of the above
Q3) A fallacious argument for protection is:
A)the infant industry argument
B)protection for national defense
C)the scientific tariff
D)to correct domestic distortions
Q4) What is an infant industry,and why would a country want to protect it?
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) (a)Why did the United States supported economic integration in Europe after World War II?
(b)What direct or indirect evidence can you give to conclude that U.S.support for economic integration in Europe did in fact result in the hope-for outcome?
(c)What are the major economic disputes between the United States and Europe about these days?
What dangers do they create?
Q2) The formation of a free trade area among the countries of Eastern Europe is advocated in order to:
A)restore trade trading
B)retain the traditional trade links that can be justified on market principles
C)reduce the need for structural change
D)none of the above
Q3) Discuss the attempts at economic integration in developing countries.Why have these attempts been less successful than in developed countries?
Q4) Discuss the potential dynamic welfare gains that can result from the formation of a customs union.
Q5) What is trade diversion?
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Chapter 11: International Trade and Economic Development
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Q1) What is the difference between import substitution and export orientation?
Q2) According to Nurkse,international trade was an engine of growth for:
A)the regions of recent settlements during the 19th century
B)regions of recent settlements during the 20th century
C)developed nations during the 19th century
D)developed nations during the 20th century
Q3) Those nations that liberalized trade during the past decade
A)grew faster than those that did not
B)grew more slowly than those that did not
C)grew at about the same rate as those that did not
D)any of the above
Q4) The following region of the world has been the least successful in creating economic development and growth over the last thirty years
A)Latin America
B)Asia
C)Africa
D)Europe
Q5) List four of the Millennium Development Goals.
Q6) Explain why import substitution strategies have largely been less than successful.
Page 13
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Chapter 12: International Resource Movements and Multinational Corporations
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Sample Questions
Q1) Today's multinational corporations account for roughly what percentage of world output
A)10%
B)25%
C)50%
D)75%
Q2) U.S.labor generally
A)opposes U.S.investments abroad
B)favors U.S.investments abroad
C)is indifferent to U.S.investments abroad
D)we cannot say without additional information
Q3) Direct investments usually involve the transfer of all of the above except:
A)capital
B)technology
C)management
D)bonds
Q4) Explain how international capital transfers impact employment in the receiving and investing nation.
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Q5) Discuss the changes in the magnitude of foreign investment into the U.S.and U.S.investment overseas over the last fifty years.
Chapter 13: Balance of Payments
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Q1) Which of the following is false?
A)A credit transaction leads to a payment from foreigners
B)A debit transaction leads to a payment to foreigners
C)A credit transaction is entered with a negative sign
D)Double-entry bookkeeping refers to each transaction entered twice.
Q2) The international investment position of a nation measures
A)the current account minus the financial account
B)the current account plus the financial account
C)the total assets owned abroad minus the domestic assets owned by foreigners
D)the total assets owned abroad plus the domestic assets owned by foreigners
Q3) Which of the following is a debit?
A)The export of goods
B)The export of services
C)Unilateral transfers given to foreigners
D)Capital inflows
Q4) Accommodating items are:
A)transactions in official reserve assets
B)the items below the line
C)needed to balance international transactions
D)all of the above
15
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) Spot currency transactions must settle within
A)two business days
B)one week
C)one month
D)one year
Q2) Hedging refers to:
A)the acceptance of a foreign exchange risk
B)the covering of a foreign exchange risk
C)foreign exchange speculation
D)foreign exchange arbitrage
Q3) Carry trade refers to
A)covered interest arbitrage in the spot and forward markets.
B)moving investment funds to countries in which there is less risk.
C)borrowing low-yielding currencies and lending high-yielding currencies.
D)exporting to one country and importing from another.
Q4) Destabilizing speculation refers to the:
A)sale of the foreign currency when the exchange rate falls or is low
B)purchase of the foreign currency when the exchange rate falls or is low
C)sale of the foreign currency when the exchange rate rises or is high
D)all of the above
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Chapter 15: Exchange Rate Determination
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Q1) The relative PPP theory gives better results:
A)in the long run than in the short run
B)when structural changes take place
C)the greater is the level of commodity aggregation
D)in tests including developed and developing countries
Q2) If the increase in a nation's money supply grows less rapidly than its GNP,the nation will face a:
A)once-and-for-all balance of payments deficit
B)once-and-for-all balance of payments surplus
C)continuous balance of payments deficit
D)continuous balance of payments surplus
Q3) According to the monetary approach to the balance of payments,a surplus nation will have to give up in the long-run its goal of:
A)price stability
B)fixed exchange rate
C)price stability or fixed exchange rate
D)price stability and fixed exchange rate
Q4) Explain absolute and relative purchasing power parity (PPP).
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Chapter 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange
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Q1) The mint parity refers to the:
A)gold export point
B)gold import point
C)equilibrium exchange rate
D)ratio of the price of a unit of gold in terms of the currency of two nations
Q2) For a small nation:
A)the foreign supply of exports is horizontal
B)the domestic demand for imports is horizontal
C)the foreign demand for its exports is horizontal
D)the foreign supply of exports is vertical
Q3) A depreciation of a nation's currency shifts:
A)down its supply curve of exports in terms of the domestic currency
B)down its supply curve of exports in terms of the foreign currency
C)down its demand curve for exports in terms of the foreign currency
D)up its supply curve of imports in terms of the foreign currency
Q4) A depreciation of the nation's currency causes its terms of trade to:
A)deteriorate
B)improve
C)remain unchanged
D)any of the above
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Chapter 17: The Income Adjustment Mechanism and Synthesis
of Automatic
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Q1) Why is the foreign trade multiplier smaller than the corresponding multiplier in a closed economy?
Q2) An open economy can be described by the following functions (all figures in millions of dollars):
C = 500 + 0.8Y
I = 600
X = 400
M = 200 + 0.05Y
Calculate equilibrium income and the trade balance.
Q3) A depreciation of a deficit nation's currency from a condition of full employment:
A)may improve the nation's trade balance
B)will improve the nation's trade balance
C)will leave the nation's trade balance unchanged
D)will cause a deterioration in the nation's trade balance
Q4) Why is the foreign trade multiplier smaller in a large nation relative to small nation?
Q5) According to the absorption approach,under what conditions will a competitive devaluation fail to reduce a balance of payments deficit?
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Chapter 18: Open-Economy Macroeconomics: Adjustment Policies
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Q1) The LM curve is positively sloped because:
A)at higher levels of income,the transactions demand for money is higher.
B)higher rates of interest lead to lower capital flows
C)at lower interest rates the levels of investment and national income are higher
D)at lower interest rates the level of national income is higher
Q2) To correct a balance of payments surplus and inflation a nation requires:
A)expansionary fiscal policy and easy monetary policy
B)contractionary fiscal policy and tight monetary policy
C)contractionary fiscal policy and easy monetary policy
D)expansionary fiscal policy and tight monetary fiscal policy
Q3) Can a nation reach both internal and external balance under fixed exchange rates using only monetary policy?
Explain.
Q4) What is meant by a three market balance equilibrium?
Q5) Suppose a nation faces domestic unemployment and a surplus in its balance of payments.(a)Explain in detail the expenditure-changing policies required to cure the unemployment.(b)What would happen to the nation's external balance?
Why?
Page 20
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Chapter
Aggregate Demand and Aggregate Supply
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Q1) Inflation targeting refers to:
A)central banks targeting a precise number for the inflation rate.
B)central banks targeting a range for the inflation rate.
C)fiscal policies that target a precise number for the inflation rate.
D)fiscal policies that target a range for the inflation rate.
Q2) In general,as the economy expands or contracts over the business cycle
A)prices change rapidly
B)prices remain unchanged except in a recession
C)prices remain unchanged until the economy reaches full employment
D)prices change,but slowly
Q3) Why does the ease of combating a recession with expansionary fiscal or monetary policy depend on how flexible prices are downward?
Q4) During the last decade the inflation rate in the U.S.has been roughly
A)0%
B)3%
C)5%
D)8%
Q5) What is the natural level of output?
Q7) What conditions lead to the stagflationary environment of the 1970s? Page 21
Q6) Why is monetary policy ineffective under a fixed exchange rate system?
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Page 22
Coordination
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Q1) What are the advantages of the adoption of the euro as common currency for the euro member nations?
Q2) Under a flexible as compared to a fixed exchange rate system:
A)a nation can more easily achieve its desired inflation-unemployment tradeoff
B)it is more difficult for a nation to achieve its desired inflation-unemployment tradeoff
C)it is more difficult for a nation to achieve internal balance
D)it is more difficult for a nation to achieve external balance
Q3) A primary cause of the Eurozone Crisis has been
A)excessive borrowing by weaker countries in the euro area.
B)too rapid growth that has fueled inflation.
C)the failure of some nations to join the Eurozone.
D)recession in the United States,which caused a recession in Europe.
Q4) Price discipline is:
A)greater under a fixed than under a flexible exchange rate system
B)greater under a flexible than under a fixed exchange rate system
C)about the same under a fixed as under a flexible exchange rate system
D)is unrelated to the type of exchange rate system
Q5) Carefully explain the costs and benefits of a flexible exchange rate regime.
Q6) What is a currency board? Page 23
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Page 24
Past,present,and Future
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Q1) Explain the Mexican peso currency crisis.
A sharp increase in U.S.interest rate in 1994 reversed U.S.-to-Mexico capital flows,putting pressure on the peso.To try to stop the capital flows,Mexico issued short-term,dollar-denominated securities.However,investors still lacked confidence in the peso,and thus the capital outflow did not stop.Mexico was forced to devalue the peso by 15%,but when this turned out not to be sufficient,the peso was allowed to float,resulting in a rapid depreciation.The U.S.and the IMF provided support to help to stabilize the peso,but Mexico was unable to avoid a severe recession.
Q2) Identify the major trade imbalances in the world today,and explain why they are not sustainable and what must happen in the long run.
Q3) Even with persistent trade deficits,the value of the U.S.dollar continued to rise into the mid-2000s primarily due to
A)strong dollar policies of the U.S.Treasury.
B)falling U.S.fiscal deficits.
C)economic growth in the U.S..
D)expansionary U.S.monetary policy.
Q4) What are the most serious economic problems facing the world today?
Q5) What is IMF conditionality?
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