Course Introduction
International Trade Practice Questions
International Trade explores the economic, political, and institutional factors that influence the exchange of goods and services across national boundaries. The course examines theories of comparative advantage, trade policy instruments such as tariffs and quotas, and the role of international organizations in regulating trade. Students will analyze the impacts of globalization on economic growth, labor markets, and income distribution, considering both developed and developing countries. Case studies and contemporary trade issues will help students understand the complexities and dynamics of international economic relations and policy-making in a globalized world.
Recommended Textbook
International Economics 9th Edition by
Paul R. Krugman Maurice Obstfeld
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) International Economists cannot discuss the effects of international trade or recommend changes in government policies toward trade with any confidence unless they know
A) their theory is the best available.
B) their theory is internally consistent.
C) their theory passes the "reasonable person" legal criteria.
D) their theory is good enough to explain the international trade that is actually observed.
E) their theory accounts for China's unique position in international trade.
Answer: D
Q2) 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
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Page 3
Chapter 2: World Trade: An Overview
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Sample Questions
Q1) We see that the Netherlands, Belgium, and Ireland trade considerably more with the United States than with many other countries.
A) This is explained by the gravity model, since these are all large countries.
B) This is explained by the gravity model, since these are all small countries.
C) This fails to be consistent with the gravity model, since these are small countries.
D) This fails to be consistent with the gravity model, since these are large countries.
E) This is explained by the gravity model, since they do not share borders.
Answer: C
Q2) Which of the following does not explain the extent of trade between Ireland and the U.S.?
A) historical ties
B) cultural Linguistic ties
C) Gravity Model
D) multinational corporations
E) large numbers of Irish-Americans
Answer: C
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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 it is ascertained that Foreign uses prison-slave labor to produce its exports, then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Q2) According to Ricardo, a country will have a comparative advantage in the product in which its
A) labor productivity is relatively low.
B) labor productivity is relatively high.
C) labor mobility is relatively low.
D) labor mobility is relatively high.
E) labor is outsourced to neighboring countries.
Answer: B
Q3) Given the information in the table above. What is the opportunity cost of Cloth in terms of Widgets in Foreign?
Answer: One half a widget.
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Chapter 4: Specific Factors and Income Distribution
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Sample Questions
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) In the specific factor model, the effect of an increase in the productivity of labor in the production of cloth will cause a(an) ________ in the quantity of labor used to produce cloth, a(an) ________ in the quantity of labor used to produce food and a(an) ________ in the wage rate.
A) increase; decrease; increase
B) decrease; increase; increase
C) increase; decrease; decrease
D) decrease; increase; no change
E) increase; increase; no change
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6
Chapter 5: Resources and Trade: The Heckscher-Ohlin Model
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Q1) Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins
A) wages should rise and rents should fall in H.
B) wages and rents should rise in H.
C) wages and rents should fall in H.
D) wages should fall and rents should rise in H.
E) rent will be unchanged but wages will rise in H.
Q2) 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?
Q3) "No country is abundant in everything." Discuss.
Q4) Why do we observe the Leontief paradox?
Q5) Countries do not in fact export the goods the H.O. theory predicts. Discuss.
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Chapter 6: The Standard Trade Model
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Q1) If Slovenia were a large country in world trade, then if it instituted a large set of subsidies for its exports, this must
A) harm its terms of trade.
B) have no effect on its terms of trade.
C) improve its terms of trade.
D) decrease its marginal propensity to consume.
E) harm world terms of trade.
Q2) Refer to above figure. Albania refused to engage in international trade for ideological reasons. To maximize its economic welfare it would choose to produce at which point in the diagram above? Suppose the P<sub>A</sub>/P<sub>B</sub> at point a was equal to 1. Given this information, in which good (A or B) does Albania enjoy a comparative advantage?
Now that the Cold War is over, Albania is interested in obtaining economic welfare gains from trade. The relevant international relative price is P<sub>A</sub>/P<sub>B</sub> = 2. Albania would therefore choose to produce at which point (a, b, or c)? Given this additional information, in which good does Albania enjoy a 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) Restaurant meals are an example of a ________ good and clothing is an example of a ________ good. The pattern of interregional trade is determined primarily by
A) nontraded; traded; external economies.
B) traded; nontraded; internal economies
C) nondurable; durable; natural resource
D) durable; nondurable; natural resources
E) consumer; style; population
Q2) If two countries begin trade and both produce a product subject to external economies of scale, then the country with the ________ rate of production will ________ production until it controls ________ of the market.
A) higher; increase; 100%
B) higher; increase; 50%
C) lower; increase; 100%
D) lower; increase; 50%
E) higher; decrease; 0%
Q3) 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?
Page 9
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Sample Questions
Q1) 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
Q2) Two countries engaged in trade in products with scale economies, produced under conditions of monopolistic competition, are likely to be engaged in A) intra-industry trade. B) price competition.
C) inter-industry trade.
D) Heckscher-Ohlinean trade.
E) immiserizing trade.
Q3) What is the nature of the proximity-concentration tradeoff that firms have to deal with then making decisions regarding foreign direct investment?
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Page 10
Chapter 9: The Instruments of Trade Policy
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Q1) The change in the economic welfare of a country associated with an increase in a tariff equals
A) efficiency loss - terms of trade gain.
B) efficiency gain - terms of trade loss.
C) efficiency loss + tax revenue gain.
D) efficiency loss + tax revenue gain + terms of trade gain.
E) efficiency loss - tax revenue gain.
Q2) Refer to above figure. In the absence of trade, how many Widgets does this country produce and consume?
Q3) If a good is imported into (large) country H from country F, then the imposition of a tariff in country H in the presence of the Metzler Paradox,
A) raises the price of the good in both countries (the "Law of One Price").
B) raises the price in country H and cannot affect its price in country F.
C) lowers the price of the good in both countries.
D) lowers the price of the good in H and could raise it in F.
E) raises the price of the good in H and lowers it in F.
Q4) Refer to above figure. The loss of Consumer Surplus due to the tariff equals
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Page 11
Chapter 10: The Political Economy of Trade Policy
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Sample Questions
Q1) Countervailing duties are intended to neutralize any unfair advantage that foreign exporters might gain because of foreign A) tariffs.
B) subsidies.
C) quotas.
D) Local-Content legislation.
E) comparative advantage.
Q2) The reason protectionism remains strong in the United States is that
A) economists can produce any result they are hired to produce.
B) economists cannot persuade the general public that free trade is beneficial.
C) economists do not really understand how the real world works.
D) the losses associated with protectionism are diffuse, making lobbying by the public impractical.
E) economists cannot agree on trade policy recommendations.
Q3) Assume that a country has a domestic demand curve defined as Qd = 100 - 2P and a domestic supply curve defined as Qs = -20 + 3P. What is the autarchy equilibrium price and quantity?
Q4) Refer to above figure. What happens to the Consumer Surplus of Hungarian customers as a result of this subsidy?
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Chapter 11: Trade Policy in Developing Countries
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Q1) 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
Q2) The United States, as it began its long and successful growth in the early 19th century, consciously promoted domestic production through such activities as tariffs, Clay's American System, and many direct subsidies to railroads, canal companies, farmers (free land) etc. Today we view this blatant example of large scale and extensive import-substitution industrialization as having been very successful. Comment on this.
Q3) Import substitution policies make use of
A) tariffs that discourage goods from entering a country.
B) quotas applied to goods that are shipped abroad.
C) production subsidies granted to industries with comparative advantage.
D) tax breaks granted to industries with comparative advantage.
E) production facilities provided by industrialized countries.
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Chapter 12: Controversies in Trade Policy
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Q1) It has been claimed that the Chinese burst of modernization which has been propelling its manufactured exports throughout the world at an unprecedented rate, is made possible by the use of slave (penal) labor. If this is true should China have been accepted as a full fledged member of the WTO? Why (or why not)?
Q2) When one applies the Heckscher-Ohlin model of trade to the issue of trade-related income redistributions, one must conclude that North South trade, such as U.S.-Mexico trade,
A) must help low skill workers on both sides of the border.
B) is likely to hurt high-skilled workers in the U.S.
C) is likely to hurt low-skilled workers in the U.S.
D) is likely to hurt low-skilled workers in Mexico.
E) is likely to help highly skilled workers in Mexico.
Q3) 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.
Q4) Describe the environmental Kuznets curve.
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Chapter 13: National Income Accounting and the Balance of Payments
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Sample Questions
Q1) The official settlements balance or balance of payments is the sum of
A) the current account balance, the capital account balance, the non reserve portion of the financial account balance, the statistical discrepancy.
B) the current account balance and the capital account balance.
C) the current account balance, the capital account balance, the non reserve portion of the financial account balance.
D) the current account balance and the non reserve portion of the financial account balance.
E) the current account balance and the interest in all investments.
Q2) Which one of the following statements is the most accurate?
A) The sale of a used textbook does generate income for factors of production.
B) The sale of a used textbook does not generate income for any factor of production.
C) The sale of a used textbook sometimes does and sometimes does not generate income for factors of production.
D) It is hard to tell whether a sale of a used textbook does or does not generate income for factors of production.
E) the sale of a used textbook is a part of the GNP.
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Page 15
Chapter 14: Exchange Rates and the Foreign Exchange
Market: An Asset Approach
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Sample Questions
Q1) The Japanese currency is called the A) DM.
B) Yen.
C) Euro.
D) Dollar.
E) Pound.
Q2) Explain what is a "vehicle currency." Why is the U.S. dollar considered a vehicle currency?
Q3) Which one of the following statements is the most accurate?
A) A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
B) A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.
C) A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.
D) For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
E) A rise in the interest rate offered by the dollar causes the euro to appreciate.
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16
Chapter 15: Money, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Inflation targeting was initiated by which central bank in 1989?
A) U.S.
B) Japan
C) Canada
D) New Zealand
E) U.K.
Q2) Combine the graph showing the interest parity condition and one showing money demand and supply to demonstrate simultaneous equilibrium in the money market and the foreign exchange market.
How would an increase in the U.S. money supply affect the Dollar/Euro exchange rate and the U.S. interest rate? Illustrate your answer graphically and explain.
Q3) A reduction in a country's money supply causes:
A) its currency to depreciate in the foreign exchange market.
B) its currency to appreciate in the foreign exchange market.
C) does not affect its currency in the foreign market.
D) does affect its currency in the foreign market in an ambiguous manor.
E) affects other countries currency in the foreign market.
Q4) Analyze the effects of an increase in the European money supply on the dollar/euro exchange rate.
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) Which of the following statements is the most accurate?
A) Absolute PPP does not imply relative PPP.
B) Relative PPP implies absolute PPP.
C) There is no causality relation between the two.
D) Absolute PPP implies relative PPP.
E) Absolute PPP is inversely related to relative PPP.
Q2) In practice,
A) changes in national price levels often tell us relatively little about exchange rate movements.
B) changes in national price levels raise the exchange rate.
C) changes in national price levels lower the exchange rate.
D) changes in national price levels often tell us about exchange rate movements.
E) changes in national price levels match identical changes in the exchange rate.
Q3) Explain Purchasing Power Parity.
Q4) What is the real interest rate parity condition?
Q5) What effect do non-tradable goods have on PPP?
Q6) Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?
Page 18
Q7) Discuss the effects of ongoing inflation based on the PPP theory.
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) The current account increases when
A) real exchange rate decreases.
B) real exchange rate increases.
C) disposable income increases.
D) exports fall.
E) domestic prices fall.
Q2) In practice, many U.S. import prices tend to rise by only around
A) 1/4 of a typical dollar depreciation over the following year
B) 1/3 of a typical dollar depreciation over the following year
C) 1/2 of a typical dollar depreciation over the following year
D) 2/3 of a typical dollar depreciation over the following year
E) 2/5 of a typical dollar depreciation over the following year
Q3) Give 4 examples of situations that would cause the DD-curve to shift to the left.
Q4) The domestic currency price of a representative foreign expenditure basket is
A) P, the domestic price level.
B) E, the nominal exchange rate.
C) P times E, the domestic price level times the domestic price level.
D) P, the foreign price level.
E) P times E, the foreign price level times the nominal exchange rate.
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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Q1) Which one of the following statements is the most true?
A) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign asset implies an increased home money supply.
B) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign asset implies a decreased home money supply.
C) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign asset implies an increased home money demand.
D) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in the home central bank's foreign asset implies an increased home money supply.
E) If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in the home central bank's foreign asset implies an increased home money supply.
Q2) Define devaluation and use a figure to show the effect of a currency devaluation on the economy.
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Chapter 19: International Monetary Systems: An Historical Overview
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Q1) In the case of a domestic monetary shock, floating exchange rates:
A) make the home economy less vulnerable.
B) make the home economy more vulnerable.
C) make the foreign economy more vulnerable.
D) would not affect the foreign economy.
E) would not affect the home economy.
Q2) What explains the nearly universal scope of the Great Depression?
Q3) Countries with the
A) biggest deflations and output contractions are countries which were never on the gold standard until 1936.
B) biggest inflations and output contractions are countries which were on the gold standard until 1936.
C) lowest deflations and output contractions are countries which were on the gold standard until 1936.
D) biggest deflations and output increases are countries which were on the gold standard until 1936.
E) biggest deflations and output contractions are countries which stayed on the gold standard until 1936.
Q4) Why do governments prefer to avoid current account deficits that are too large?
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Chapter 20: Optimum Currency Areas and the European Experience
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Q1) Which of the following is not true about the future of the EU and its associated institutions?
A) The lack of a strong EU political center may limit the ECB's political legitimacy in the eyes of the European public.
B) There is a danger that voters throughout Europe will come to view the ECB as a distant and politically unaccountable group of technocrats unresponsive to people's needs.
C) Asymmetric economic development within different countries of the euro zone will be hard to handle through monetary policy.
D) Persistent barriers to labor mobility might continue to result in high levels of unemployment.
E) The majority of Europeans do not support the currency union.
Q2) Is Europe an optimum currency area?
Q3) A key barrier to labor mobility within Europe is
A) the laziness of Germans.
B) full employment in most European countries.
C) differences in language and culture.
D) lack of transportation.
E) the physical barriers in the landscape.
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Chapter 21: Financial Globalization: Opportunity and Crisis
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Q1) Who is the Basel Committee? Discuss both their involvement in the Concordat as well the role of the Concordat in international banking.
Q2) Departures from interest parity
A) can be explained using theories of risk premium.
B) cannot be explained using theories of risk premium.
C) may or may not be able to be explained using theories of risk premium, more research is needed.
D) are completely unrelated to risk premium.
E) occur when risk premium is overcalculated.
Q3) Explain Tobin's idea of "Don't put all your eggs in one basket."
Q4) Suppose the two countries can trade shares in the ownership of their perspective assets. Further assume that a Home owner of a 25 percent share in Foreign land. He will receive 25 percent share in Foreign land and thus receives 25 percent of the annual Foreign kiwi fruit harvest. Further assume that also that a Foreign owner of a 25 percent share in Home land is permitted. In this case, a Foreigner is entitled to 25 percent of the Home harvest. Calculate the expected value of kiwi fruit for each investor.
Q5) Explain why the FDIC is following a "too-big-to-fail" policy of fully protecting all depositors at the largest banks.
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) Should the IMF be abolished? Discuss.
Q2) Economists Eichengreen and Hausmann coined the phrase original sin to describe developing countries inability to borrow in their own currencies. Where do they believe that this inability comes from? What are other beliefs on this topic?
Q3) What is Argentina's Convertibility Law of April 1991? Explain.
Q4) The world's economies can be divided into four main categories according to their annual per-capita income levels: low-income, lower middle-income, upper middle-income and high-income economies. What category would Singapore falls under?
A) low-income
B) upper middle-income
C) high-income
D) lower middle-income
E) Singapore falls between low income and lower middle-income economies.
Q5) Based on the case study, answer the following question: Can currency boards make fixed exchange rates credible?
Q6) Describe the crisis in Russia starting from 1989. Explain why?
Q7) What do you think about dollarization?
Q8) What are the main lessons economists learned from the developing country crisis? Page 24
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