International Economics Test
Preparation
Course Introduction
International Economics explores the foundational concepts and analytical frameworks used to understand economic interactions among countries. This course examines the theories of international trade and finance, analyzing how and why nations exchange goods, services, and capital across borders. Topics include comparative advantage, trade policy, exchange rates, balance of payments, and the impact of globalization. Students will also examine the roles of international organizations and contemporary issues such as trade disputes, economic integration, and the effects of global economic shocks. Through real-world case studies and policy analysis, the course equips students to critically assess the economic implications of international economic activities and policies.
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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Sample Questions
Q1) It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico,then U.S.industry would migrate south,and U.S.wages would fall to the level of Mexico's.What do you think about this argument?
Answer: The student may think anything.The purpose of the question is to set up a discussion,which will lead to the models in the following chapters.
Q2) The international financial crisis of 2007 was the result of
A) failure of the Euro currency.
B) runaway inflation in the U.S.
C) a deep global recession.
D) the collapse of global currency markets.
E) defaults on U.S. mortgage-backed securities.
Answer: E
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3
Chapter 2: National Income Accounting and the Balance of Payments
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Sample Questions
Q1) The United States began to report its gross domestic product (GDP)only since A) 1900.
B) 1921.
C) 1931.
D) 1941.
E) 1991.
Answer: E
Q2) The position of the United States current account balance in 2009 was
A) lent over 6 percent of its GNP, resulting in a large current account surplus.
B) borrowed over 9 percent of its GNP, leading to a large current account deficit.
C) achieved a currant account balance of zero.
D) borrowed over 10 percent of its GNP, leading to a large current account deficit.
E) borrowed less then 5 percent of its GNP, leading to a large current account surplus.
Answer: B
Q3) What is the national income identity for a closed economy?
Answer: Y = C + I + G
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4
Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Sample Questions
Q1) Given the information in the table above.If these two countries trade these two goods with each other in context of the Ricardian model of comparative advantage,what is the lower limit for the price of cloth?
Answer: One half a widget.
Q2) Given the information in the table above,Home's opportunity cost of widgets is A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: B
Q3) Given the information in the table above,Foreign's opportunity cost of widgets is A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: A
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Chapter 4: Specific Factors and Income Distribution
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Sample Questions
Q1) The specific factors model was developed by
A) Paul Samuelson and Ronald Jones.
B) Adam Smith and David Ricardo.
C) Richard Nixon and Robert Kennedy.
D) C.B. deMille and Gordon Willis.
E) Bill Clinton and Monica Lewinsky.
Q2) In the four-quadrant diagram of the specific factors model,the graph in the upper left quadrant is a country's
A) production function for food.
B) production possibility frontier.
C) labor allocation constraint.
D) production function for cloth.
E) labor supply curve.
Q3) A factor of production that cannot be used outside of a particular sector of an economy is a(an)
A) specific factor.
B) mobile factor.
C) variable factor.
D) import-competing factor.
E) export-competing factor.
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Chapter 5: Resources and Trade: The Heckscher-Ohlin Model
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Sample Questions
Q1) Refer to the table above.You are told that Country B is very much larger than country A.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) Why is the H.O.model called the factor-proportions theory?
Q3) One of the commonly used assumptions in deriving the Heckscher-Ohlin model is that tastes are homothetic,or that if the per capita incomes were the same in two countries,the proportions of their expenditures allocated to each product would be the same as it is in the other country.Imagine that this assumption is false,and that in fact,the tastes in each country are strongly biased in favor of the product in which it has a comparative advantage.How would this affect the relationship between relative factor abundance between the two countries,and the nature (factor-intensity)of the product each exports? What if the taste bias favored the imported good?
Q4) "No country is abundant in everything." Discuss.
Q5) International trade leads to complete equalization of factor prices.Discuss.
Q6) "A good cannot be both land- and labor-intensive." Discuss.
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Chapter 6: The Standard Trade Model
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Sample Questions
Q1) International borrowing and lending may be interpreted as one form of A) intertemporal trade.
B) intermediate trade.
C) trade in services.
D) unrequited international transfers.
E) aid to offset trade advantages.
Q2) The intertemporal tradeoff between present and future consumption is measured by the
A) real interest rate.
B) inflation rate.
C) nominal interest rate.
D) terms of trade.
E) rate of economic growth.
Q3) 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?
Q4) Describe the nature of trade between two countries based on intertemporal comparative advantage.
Q5) 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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Sample Questions
Q1) Is it possible for an equilibrium that is consistent with purely competitive conditions to arise in an industry with positive scale economies? If so,explain how this could happen.If not,why not?
Q2) Why is it that if an industry is operating under conditions of internal scale economies then the resultant equilibrium cannot be consistent with the pure competition model?
Q3) The long-run market supply curve in the presence of internal economies of scale is ________,and in the presence of external economies of scale,it is ________.
A) downward sloping; downward sloping
B) upward sloping; horizontal
C) horizontal; upward sloping
D) downward sloping; horizontal
E) upward sloping; downward sloping
Q4) What is meant by an "industrial district" and what are the three main sources of the economic advantages derived from locating in such a district?
Q5) Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition?
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Chapter
Decisions,Outsourcing,and Multinational Enterprises
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Sample Questions
Q1) Firms that produce ________ products must be ________ competitive. A) differentiated; imperfectly B) differentiated; perfectly C) standardized; imperfectly D) standardized; perfectly E) exported; imperfectly
Q2) A firm is more likely to engage in horizontal foreign direct investment if A) trade costs are high and there are internal economies of scale. B) trade costs are low and there are internal economies of scale. C) trade costs are high and there are external economies of scale. D) trade costs are low and there are external economies of scale. E) trade costs are low and firms experience constant returns to scale in production.
Q3) An imperfectly competitive firm has the following demand curve: Q = 100 - 2P.What is marginal revenue equal to when P = 40?
Q4) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q.What is total cost equal to when Q = 10?
Q5) An imperfectly competitive firm has the following demand curve: Q = 100 - 2P.What is marginal revenue equal to when P = 30?
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Chapter 9: The Instruments of Trade Policy
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Sample Questions
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) The fact that industrialized countries levy very low or no tariff on raw materials and semi processed goods
A) helps developing countries export manufactured products.
B) has no effect on developing country exports.
C) hurts developing country efforts to export manufactured goods.
D) hurts developing country efforts to export raw materials.
E) does not affect industrialized countries' exports.
Q3) Refer to above figure.In the absence of trade,what is the country's producer surplus?
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Chapter 10: The Political Economy of Trade Policy
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Sample Questions
Q1) The effect of an export tariff on a large country is to ________ the terms of trade. A) always improve
B) sometimes improve
C) leave unchanged
D) sometimes worsen
E) always worsen
Q2) The Smoot-Hawley Tariff Act of 1930 has generally been associated with A) falling tariffs.
B) free trade.
C) intensifying the worldwide depression.
D) recovery from the worldwide depression.
E) non-tariff barriers.
Q3) The quantitative importance of U.S.protection of the domestic clothing industry is best explained by the fact that
A) this industry is an important employer of highly skilled labor.
B) this industry is an important employer of low skilled labor.
C) most of the exporters of clothing into the U.S. are poor countries.
D) this industry is a politically well organized sector in the U.S.
E) the technology involved is very advanced.
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Page 12
Chapter 11: Trade Policy in Developing Countries
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Sample Questions
Q1) Sophisticated theoretical arguments supporting import-substitution policies include A) terms of trade effects.
B) scale economy arguments.
C) learning curve considerations.
D) the problem of appropriability.
E) domestic market failure arguments.
Q2) The "East Asian Miracle" of the "Four Tigers" in the 1960s was replicated by A) developing countries around the world.
B) other East Asian countries.
C) Sub Sahara African countries.
D) Industrialized countries.
E) Eastern European countries.
Q3) Classical and Neoclassical trade theory makes the case that free trade can bring a country to an optimum and economically efficient use of its resources;and hence is an optimal trade-policy,if the objective is maximizing long term economic growth.There are those who argue that the experience of the Asian Miracle countries,such as Taiwan,South Korea and Singapore verify this argument in the real world.Explain.There are others who argue that the experience of these countries cannot be used to verify or support the argument above.Explain.
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Chapter 12: Controversies in Trade Policy
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Sample Questions
Q1) Japan's protection of its semiconductor (RAM)producers is today seen as an object lesson in
A) how strategic planning may backfire and cause a large waste of resources.
B) how externalities may be successfully exploited by protectionist policies.
C) how excess returns may be successfully exploited by protectionist policies.
D) how government intervention may create a meaningful comparative advantage.
E) how monopolies can outlast government intervention.
Q2) The Heckscher-Ohlin,factor-proportions model 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 tends to worsen the conditions of highly skilled workers in rich countries.
Q3) Describe the environmental Kuznets curve.
Q4) Refer to the above table.How could the U.S.government justify its decision to offer a subsidy to a profitable and successful business?
Q5) What is a pollution haven?
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