International Trade Practice Exam
Course Introduction
International Trade explores the theories, policies, and practices that govern the exchange of goods and services across national borders. This course examines fundamental concepts such as comparative advantage, gains from trade, tariff and non-tariff barriers, and the role of international organizations like the World Trade Organization (WTO). Students will analyze the impact of international trade on economic growth, income distribution, and development, as well as contemporary issues such as trade agreements, globalization, and trade disputes. Emphasis is placed on real-world applications, allowing students to understand the challenges and opportunities that arise in the global marketplace.
Recommended Textbook
International Economics 11th Edition by Dominick Salvatore
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Chapter 1: Introduction
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Sample Questions
Q1) What does the gravity model suggest?
Answer: That bilateral trade is positively related to the product of two countries GDP's and is smaller the greater distance between the two nations.
Q2) Identify some of the topics that international economics studies
Answer: The basis and gains from trade,the reasons and effects of protectionism,the flow of international payments,exchange rate systems and determination,macroeconomic policy in an open economy.
Q3) International trade is most important to the standard of living of:
A)the United States
B)Switzerland
C)Germany
D)England
Answer: B
Q4) Identify some of the criticisms of the anti-globalization movement.
Answer: Increased world income inequality,child labor,environmental pollution.
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Chapter 2: The Law of Comparative Advantage
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Q1) If with one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input):
A)Px/Py=1 in nation A
B)Px/Py=3 in nation B
C)Py/Px=1/3 in nation B
D)Px/Py=3 in nation A
Answer: D
Q2) A difference in relative commodity prices between two nations can be based upon a difference in:
A)factor endowments
B)technology
C)tastes
D)all of the above
Answer: D
Q3) If domestically 3X=3Y in nation A,while 1X=1Y domestically in nation B:
A)there will be no trade between the two nations
B)the relative price of X is the same in both nations
C)the relative price of Y is the same in both nations
D)all of the above
Answer: D
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Chapter 3: The Standard Theory of International Trade
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Sample Questions
Q1) 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
Q2) Nation 1's share of the gains from trade will be greater:
A)the greater is nation 1's demand for nation 2's exports
B)the closer Px/Py with trade settles to nation 2's pretrade Px/Py
C)the weaker is nation 2's demand for nation 1's exports
D)the closer Px/Py with trade settles to nation 1's pretrade Px/Py
Answer: B
Q3) Trade allows nations to attain and indifference curve that is
A)beyond the indifference curve it could attain without trade
B)inside the indifference curve it could attain without trade
C)is positively sloped
D)is negatively sloped
Answer: A
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Chapter 4: Demand and Supply, offer Curves, and the
Terms of Trade
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Sample Questions
Q1) If a nation's terms of trade improve,the nation's social welfare
A)will deteriorate.
B)will improve.
C)will remain unchanged.
D)might improve,deteriorate,or remain unchanged.
Q2) The offer curve of a nation curves toward the axis measuring the nation's A)import commodity
B)export commodity
C)export or import commodity
D)nontraded commodity
Q3) Which of the following statements regarding partial equilibrium analysis is false?
A)It relies on traditional demand and supply curves
B)It studies a single market.
C)it can be used to determine the equilibrium relative commodity price but not the equilibrium quantity with trade.
D)It can be used to show changes in prices when demand or supply changes in another country.
Q4) Carefully define an offer curve and explain how it is derived.
Q5) 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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Sample Questions
Q1) A difference in relative commodity prices between nations can be based on a difference in:
A)technology
B)factor endowments
C)tastes
D)all of the above
Q2) The Leontief paradox refers to the empirical finding that U.S.
A)import substitutes are more K-intensive than exports
B)imports are more K-intensive than exports
C)exports are more L-intensive than imports
D)exports are more K-intensive than import substitutes
Q3) The H-O model is a general equilibrium model because it deals with:
A)production in both nations
B)consumption in both nations
C)trade between the two nations
D)all of the above
Q4) Define and explain factor intensity reversal
Q5) In the United States,labor unions consistently oppose international trade and support trade barriers.Use the H-O model to explain why.
Q6) List at least four of the assumptions of the Heckscher-Ohlin theory Page 7
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Page 8
Chapter 6: Economies of Scale, imperfect Competition, and International Trade
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Q1) How do differing environmental standards between countries affect international trade,and why can this create problems?
Q2) How is intra-industry trade measured?
Does the degree of intra-industry trade depend on how an industry is defined?
Q3) Define and discuss the differences between intra-industry trade and inter-industry trade.
Q4) The Grubel and Lloyd index measures the magnitude of a nation's
A)product life cycle
B)comparative advantage
C)economies of scale
D)intra-industry trade
Q5) Transport costs:
A)increase the price in the importing country.
B)increase the price in the exporting country.
C)prevent international trade.
D)increase international trade.
Q6) Discuss the stages of the product cycle model.
Q7) Define and explain economies of scale.
Q8) Carefully explain how and why the share of intra-industry trade has changed for countries. Page 9
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Page 10
Chapter 7: Economic Growth and International Trade
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Sample Questions
Q1) 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
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) A proportionately greater increase in the nation's supply of labor than of capital is likely to result in a deterioration in the nation's terms of trade if the nation exports:
A)the K-intensive commodity
B)the L-intensive commodity
C)either commodity
D)both commodities
Q4) Carefully identify and discuss the conditions which can lead to immiserizing growth.
Q5) What does the Rybczynski theorem postulate?
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Chapter 8: Economic Growth and International Trade
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Q1) The increase in producer surplus when a small nation imposes a tariff is measured by the area:
A)to the left of the supply curve between the commodity price with and without the tariff
B)under the supply curve between the quantity produced with and without the tariff
C)under the demand curve between the commodity price with and without the tariff
D)none of the above.
Q2) Is there such thing as an optimum tariff for a small nation?
Q3) A tariff in a large country
A)will not benefit the country or the world.
B)will benefit the country but not the world.
C)will benefit the world but not the country.
D)may benefit the country but not the world.
Q4) If a small nation increases the tariff on its import commodity:
A)the rent of domestic producers of the commodity increases
B)the protection cost of the tariff decreases
C)the deadweight loss decreases
D)all of the above
Q5) Explain the redistribution effects of a tariff.
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) Which of the following was not negotiated under the Uruguay Round?
A)reduction of tariffs on industrial goods
B)replacement of quotas with tariffs
C)reduction of subsidies on industrial products and on agricultural exports
D)liberalization in trade in most services
Q2) On which of the following principles does GATT rest?
A)nondiscrimination
B)elimination of nontariff barriers
C)consultation among nations in solving trade disputes
D)all of the above
Q3) Trade protection in the United States is usually provided to:
A)low-wage workers
B)well-organized industries with large employment
C)industries producing consumer products
D)all of the above
Q4) 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
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) Which is a stumbling block to successful economic integration among groups of developing nations?
A)benefits are not evenly distributed among nations
B)many developing nations are not willing to relinquish part of their newly-acquired sovereignty to a supranational community body,as required for successful economic integration
C)the complementary nature of their economies and competition for the same world markets for their agricultural exports
D)all of the above
Q2) Which of the following statements is correct?
A)In a customs union,member nations apply a uniform external tariff
B)in a free-trade area,member nations harmonize their monetary and fiscal policies
C)within a customs union there is unrestricted factor movement
D)a customs union is a higher form of economic integration than a common market
Q3) Discuss the conditions which are more likely to lead to increased welfare with the formation of a customs union.
Q4) Why do economies that are competitive rather than complementary tend to increase the benefits from customs unions?
Page 14
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Chapter 11: International Trade and Economic Development
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Q1) If the prices of a nation's exports and imports both rise,the nation's commodity terms of trade may:
A)improve
B)deteriorate
C)remain unchanged
D)any of the above
Q2) Supporting the price of a commodity by buying it when its price is low is:
A)a buffer stock
B)a purchase contract
C)an export control
D)a marketing board
Q3) Which of the following is not part of the demand for a NIEO?
A)the establishment of international commodity agreements
B)preferential access for the manufactured exports of developed nations
C)removal of the agricultural trade barriers in developed nations
D)increasing the yearly flow of foreign aid to developing nations
Q4) Explain why import substitution strategies have largely been less than successful.
Q5) List four of the Millennium Development Goals.
Q6) List the current problems facing developing countries?
15
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) Labor in developing countries generally
A)opposes an inflow of foreign direct investments from abroad
B)favors an inflow of foreign direct investments from abroad
C)is indifferent to foreign direct investments from abroad
D)we cannot say without additional information
Q2) Two-way international capital flows can be explained by the desire to:
A)earn higher yields abroad
B)avoid tariffs
C)diversify risks
D)all of the above
Q3) The most prominent form of private international economic organization today is the
A)European Union
B)World Trade Organization
C)multinational corporation
D)individual investor
Q4) Discuss the changes in the magnitude of foreign investment into the U.S.and U.S.investment overseas over the last fifty years.
Q5) Discuss the motives for international labor migration.
Q6) What are the basic motives for international portfolio investments? Page 16
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Chapter 13: Balance of Payments
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Q1) For the following set of international transactions with the United States,indicate in what specific category and account in the United States balance of payments each transaction would be included and whether it is a credit or debit. Kodak exchanges 50,000 received from export sales for dollars at the Federal Reserve bank of New York.
Q2) For the following set of international transactions with the United States,indicate in what specific category and account in the United States balance of payments each transaction would be included and whether it is a credit or debit. Kodak,a U.S.company,sells photographic film in Europe and receives 50,000 euros in exchange.
Q3) The largest trading partner of the United States is
A)Mexico
B)China
C)Japan
D)Canada
Q4) What is the international investment position and how has it changed for the United States over the last fifty years.
Q5) What is meant by autonomous transactions?
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) (a)If the positive interest rate differential in favor of a foreign monetary center is 3 percent per year and the foreign currency is at a forward discount of 1 percent per year,roughly how much would an interest arbitrageur earn from the purchase of foreign three-month treasury bills if he covers the foreign exchange risk?
(b)How much would an interest arbitrageur earn if the foreign currency were instead at a forward premium of 1 percent per year?
(c)What would happen if the foreign currency were at a forward discount of 3 percent per year?
Q2) Spot currency transactions must settle within
A)two business days
B)one week
C)one month
D)one year
Q3) Discuss the reasons for the existence and growth of Eurocurrency markets
Q4) The U.S.interest rate is 2%.The U.K.interest rate is 2.25% The spot rate is 2.01 $/£,and the forward rate (for a 12 month contract)is 1.96 $/£ .
What do you expect to happen to forward and spot rates?
Explain carefully why this must happen.
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Chapter 15: Exchange Rate Determination
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Q1) According to the portfolio balance approach,a reduction in the risk premium on the foreign bond leads domestic residents to increase the demand for the:
A)domestic money
B)domestic bond
C)foreign bond
D)all of the above
Q2) Which is correct with respect to the absolute PPP theory?
A)It postulates that the exchange rate between two currencies is equal to the ratio of the price levels in the two nations
B)it does not take into consideration transportation costs or other obstructions to the flow of international trade
C)can be very misleading
D)all of the above
Q3) 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
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 United States has a trade problem with Japan because the U.S.trade deficit with Japan:
A)is very large
B)has persisted for a long time
C)did not seem to decline when the dollar depreciated sharply with respect to the yen
D)all of the above
Q2) When a nation's demand curve for exports in terms of the foreign currency is inelastic:
A)the nation's supply curve of the foreign currency is negatively inclined
B)the nation's supply curve of the foreign currency is vertical
C)the nation's demand curve for the foreign currency is negatively inclined
D)the other nation's supply curve of the nation's currency is negatively inclined
Q3) Which of the following is a true statement?
A)A currency depreciation will be passed along completely as an increase in import prices.
B)A currency depreciation may or may not result in an increase in import prices.
C)A currency depreciation will not be passed along into input prices.
D)A currency depreciation will result in lower import prices.
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Chapter 17: The Income Adjustment Mechanism and Synthesis
of Automatic
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Q1) The S-I function is upward sloping because:
A)rising I are subtracted from constant S
B)constant I are subtracted from rising S
C)rising I are subtracted from rising S
D)constant I are added to falling S
Q2) The marginal propensity to consume measures:
A)the ratio of imports to income
B)the ratio of income to imports
C)the change in imports over the change in income
D)the change in income over the change in imports
Q3) The United States current account deficit as a percentage of GDP has generally
A)worsened in the 2000s
B)improved in the 2000s
C)remained relatively unchanged in the 2000s
D)the U.S.has been running a current account surplus in the 2000s
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?
Page 22
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Chapter 18: Open-Economy Macroeconomics: Adjustment Policies
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Q1) To achieve external balance and correct a recession,a nation will always have to use tight monetary policy if at the full employment level of national income the nation's BP curve is:
A)above the LM curve
B)below the LM curve
C)steeper than the LM curve
D)above the IS curve
Q2) In order to achieve internal and external balance simultaneously,a nation must usually use at least:
A)one policy
B)two policies
C)three policies
D)cannot say
Q3) Restrictions on capital exports is an example of a(n)
A)exchange control
B)trade control
C)quota
D)none of the above
Q4) Use graph to illustrate the effect of perfect capital mobility under fixed and flexible exchange rate regimes.
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Aggregate Demand and Aggregate Supply
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Q1) Suppose that the economy is in long-run equilibrium,and people in other countries suddenly decide to purchase fewer US goods.Explain the short-run effects on the US economy under both fixed and flexible exchange rates.
Q2) Empirical evidence suggests which of the following about central bank independence and inflation rates?
A)More independent central banks are associated with lower rates of inflation.
B)More independent central banks are associated with constant rates of inflation.
C)More independent central banks are associated with higher rates of inflation.
D)There is no observable relationship between inflation rates and central bank independence.
Q3) The correlation between the degree of central bank independence and average rate of inflation tends to be
A)negative
B)positive
C)there is no correlation
D)none of the above
Q4) How does an increase in government expenditure impact aggregate demand?
Q5) Why is monetary policy ineffective under a fixed exchange rate system?
Page 24
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Coordination
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Q1) The following established the conditions under which and European Union member nation could join the currency union:
A)The Treaty of Rome
B)The Single European Act
C)The Maastricht Treaty
D)The Treaty of Paris
Q2) 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.
Q3) 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
Q4) Carefully explain the costs and benefits of a flexible exchange rate regime.
Q5) What is a currency board?
Page 25
Q6) Carefully explain the costs and benefits of a flexible exchange rate regime.
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Chapter 21: The International Monetary System:
Past,present,and Future
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Q1) Which of the following was a primary cause of the U.S.balance of payments deficits during the late 1960s?
A)Capital outflows
B)Domestic inflation
C)Increased foreign competition
D)All of the above
Q2) In the wake of the 2008-2009 global financial crisis the following is a potential economic problem facing the world today
A)rising trade protection
B)a large U.S.balance of payments deficit
C)deep poverty in many developing nations
D)all of the above
Q3) Which of the following is false with regard to the present international monetary system?
A)Special Drawing Rights are the primary reserve asset
B)Monetary authorities intervene in foreign exchange markets to smooth out excessive short-run fluctuations in exchange rates
C)It was forced on the world by the collapse of the Bretton Woods System
D)It was formally recognized in the Jamaica Accords
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