International Trade
Textbook Exam Questions
Course Introduction
International Trade explores the theories, policies, and practical aspects that govern the exchange of goods and services across national borders. This course examines key concepts such as comparative advantage, trade barriers, balance of payments, and the impact of globalization on world markets. Students will analyze the economic, political, and cultural factors that influence international commerce, as well as the role of global institutions such as the World Trade Organization (WTO). Through case studies and contemporary examples, the course aims to develop a critical understanding of the benefits and challenges associated with international trade in the modern global economy.
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) A fundamental problem in international economics is how to produce
A)a perfect degree of monetary harmony.
B)an acceptable degree of harmony among the international trade policies of different countries.
C)a world government that can harmonize trade and monetary policies
D)a counter-cyclical monetary policy so that all countries will not be adversely affected by a financial crisis in one country.
E)a worldwide form of currency.
Answer: B
Q2) After World War II,the United States has pursued a broad policy of
A)strengthening "Fortress America" protectionism.
B)removing barriers to international trade.
C)isolating Iran and other members of the "axis of evil."
D)protecting the U.S.from the economic impact of oil producers.
E)restricting trade of manufactured goods.
Answer: B
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3
Chapter 2: World Trade: An Overview
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Q1) In the pre-World War I period,the United Kingdom imported mainly
A)manufactured goods.
B)services.
C)primary products including agricultural.
D)technology intensive products.
E)from the United States.
Answer: C
Q2) The gravity model offers a logical explanation for the fact that
A)trade between Asia and the U.S.has grown faster than NAFTA trade.
B)trade in services has grown faster than trade in goods.
C)trade in manufactures has grown faster than in agricultural products.
D)Intra-European Union trade exceeds international trade by the European Union.
E)the U.S.trades more with Western Europe than it does with Canada.
Answer: D
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Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Q1) In the Ricardian model,comparative advantage is likely to be due to A)scale economies.
B)home product taste bias.
C)greater capital availability per worker.
D)labor productivity differences.
E)political pressure.
Answer: D
Q2) Given the information in the table above.If these two countries trade these two goods in the context of the Ricardian model of comparative advantage,then what is the lower limit of the world equilibrium price of widgets?
Answer: 1/2 Cloths.
Q3) A country engaging in trade according to the principles of comparative advantage gains from trade because it
A)is producing exports indirectly more efficiently than it could alternatively.
B)is producing imports indirectly more efficiently than it could domestically.
C)is producing exports using fewer labor units.
D)is producing imports indirectly using fewer labor units.
E)is producing exports while outsourcing services.
Answer: B
Page 5
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Chapter 4: Specific Factors and Income Distribution
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Q1) In the specific factors model,the effects of trade on welfare overall are ________ and for fixed factors used to produce the imported good they are ________.
A)positive;negative
B)positive;positive
C)negative;positive
D)ambiguous;positive
E)positive;ambiguous
Q2) The Ricardian two-country two-good model predicts that there are potential benefits from trade,but NOT
A)the effect of trade on income distribution.
B)the mechanism that determines which country will specialize in which good.
C)when one country has an absolute advantage in the production of both goods.
D)when one country has significantly lower wages than the other country.
E)when both countries have the same types of technology available.
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Chapter 5: Resources and Trade: the Heckscher-Ohlin Model
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Q1) The Heckscher-Ohlin model differs from the Ricardian model of Comparative Advantage in that the former
A)has only two countries.
B)has only two products.
C)has two factors of production.
D)has two production possibility frontiers (one for each country).
E)has varying wage rates.
Q2) Refer to above figure.If trade were to open up between P and R,where would the world terms of trade locate in the figure above (somewhere on the P<sub>C</sub>/P<sub>F</sub> axis)? Would relative wages (w/r)in the two countries become equal? Is this consistent with the Heckscher-Ohlin model? Explain.
Q3) Trade benefits a country by
A)increasing available consumption choices.
B)reducing the need for specialization in production.
C)reducing the relative price of the exported good.
D)increasing the real income of all resource owners.
E)increasing the wage rate.
Q4) Why do you suppose that South-South trade does not conform in volume,but does conform in pattern with expectations generated by the Heckscher-Ohlin model?
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Chapter 6: The Standard Trade Model
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Q1) An increase in a country's net commodity terms of trade will
A)not always guarantee positive changes in the country's economy.
B)always increase the country's economic welfare.
C)always increase the country's real income.
D)never increase the country's quantity of exports.
E)always increase the country's production of its import competing good.
Q2) 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.
Q3) Suppose,as a result of various dynamic factors associated with exposure to international competition,Albania's economy grew,and is now represented by the rightmost production possibility frontier in the figure above.If its point of production with trade was point c,would you consider this growth to be export-biased or import biased? If Albania were a large country with respect to the world trade of A and B,how would this growth affect Albania's terms of trade? Its real income?
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Chapter 7: External Economies of Scale and the
International Location of Production
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Q1) External economies of scale will ________ average cost when output is ________ by ________.
A)reduce;increased;the industry
B)reduce;increased;a firm C)increase;increased;a firm D)increase;increased;the industry E)reduce;reduce;the industry
Q2) If output is increased in the long-run,average production costs in the presence of internal economies of scale will ________,and in the presence of external economies of scale,will ________.
A)decrease;decrease B)increase;remain constant
C)remain constant;increase
D)decrease;remain constant E)increase;decrease
Q3) Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition?
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?
Page 9
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Q1) If the market for products produced by firms in a monopolistically competitive industry becomes ________,then there will be ________ firms and each firm will produce ________ output and charge a ________ price. A)larger;more;more;lower B)larger;fewer;more;lower C)larger;fewer;more;higher D)larger;more;more;higher E)larger;more;less;higher
Q2) 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
Q3) Refer to above figure.Given the opportunity to sell at world prices,the marginal (opportunity)cost of selling a ton domestically is what?
Q4) What are the consequences of outsourcing production on the welfare of countries?
Page 10
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Chapter 9: The Instruments of Trade Policy
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Q1) Which type of tariff is forbidden in the United States on Constitutional grounds?
A)import tariff
B)export tariff
C)specific tariff
D)prohibitive tariff
E)import quota
Q2) If a good is imported into (large)country H from country F,then the imposition of a tariff in country H
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.
Q3) 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.
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Chapter 10: The Political Economy of Trade Policy
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Q1) The world trading system combines negotiated agreements that promote trade liberalization called ________ with binding agreements called ________ that block tariff increases.
A)fiscal policies;monetary policies
B)truces;aggressions
C)free trade;enforcement contracts
D)levers;ratchets
E)wheels;walls
Q2) Developing countries have often attempted to establish cartels so as to counter the actual or perceived inexorable downward push on the prices of their exported commodities.OPEC is the best well known of these.How are such cartels expected to help the developing countries? At times importing countries profess support for such schemes.Can you think of any logical basis for such support? How are cartels like monopolies,and how are they different from monopolies.Why is there a presupposition among economists that such schemes are not likely to succeed in the long run?
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?
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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 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
Q3) 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.
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 utilize much labor and little capital,thereby supporting the applicability of the
A)factor proportions explanation of the sources of comparative advantage.
B)specific factor theory of comparative advantage.
C)monopolistic competition theory of comparative advantage.
D)scale economies theory of comparative advantage.
E)basis of the non-dumping legislation.
Q2) Spencer and Brander's model highlights the conventional assumption that
A)government involvement in business or in the economy tends to fail.
B)government subsidies tend to waste taxpayer's money.
C)government subsidies cannot create a successfully competing export.
D)government tends to distort when it displaces Adam Smith's Invisible Hand.
E)government subsidies can produce profits that exceed the subsidy's value.
Q3) In the second half of the 1990s a rapidly growing movement focused on the harm caused by international trade to
A)land owners in poor countries.
B)capital owners in rich industrialized countries.
C)land owners in rich industrialized countries.
D)production workers in both rich and poor countries.
E)terms of trade in developing countries.
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Chapter 13: National Income Accounting and the Balance of Payments
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Q1) In 2006,the United States had
A)a surplus in the current account.
B)a balance in the current account.
C)a deficit in the current account.
D)From 2006 data,it is too difficult to determine whether a surplus or a deficit existed in the current account.
E)a positive balance of net financial flows.
Q2) The highest component of GNP is
A)the current account.
B)investment.
C)government purchases.
D)consumption.
E)trade.
Q3) Net unilateral transfers
A)are part of a national income.
B)are part of a country's product.
C)must be added to NNP in calculations of national income.
D)are part of a country's GNP.
E)Only A and C.
Q4) What is the national income identity for an open economy?
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: An Asset Approach
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Q1) Show graphically a drop in the interest rate paid by euro deposits.What is the effect on the dollar?
Q2) Which one of the following statements is the MOST accurate?
A)For a fixed interest rate,a rise in the expected future exchange rate causes a rise in the current exchange rate.
B)For a fixed interest rate,a rise in the expected future exchange rate causes a fall in the current exchange rate.
C)For a fixed interest rate,a rise in the expected future exchange rate does not cause a change in the current exchange rate.
D)For a given dollar interest rate and a constant expected exchange rate,a rise in the interest rate of the euro causes the dollar to depreciate.
E)For a fixed interest rate,a fall in the expected future exchange rate causes a rise in the current exchange rate.
Q3) In the year 2012,Shinzo Abe became prime minister of Japan,promising bold policies to improve Japan's economy.What was the focus of his policies and how did they affect Japan's trade position?
Q4) Discuss the effects of a rise in the dollar interest rate on the exchange rate.
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Chapter 15: Money,Interest Rates, and Exchange Rates
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Q1) The aggregate demand for money can be expressed by
A)Md = P × L(R,Y).
B)Md = L × P(R,Y).
C)Md = P × Y(R,L).
D)Md = R × L(P,Y).
E)Md = R × L(R,P).
Q2) For main industrial countries such as Japan and the U.S.
A)there is much less month-to-month variability of the exchange rate,suggesting that price levels are relatively sticky in the short run.
B)there is much more month-to-month variability of the exchange rate,suggesting that price levels are relatively sticky in the short run.
C)there is almost the same month-to-month variability of the exchange rate and price levels.
D)it is hard to tell whether month-to-month variability of the exchange rate is similar to changes in price levels.
E)there is much more month-to-month variability of the exchange rate,suggesting that price levels are relatively sticky in the long run.
Q3) Explain the exchange rate over-shooting hypothesis.
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?
Q2) Under the monetary approach to the exchange rate
A)an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates.
B)an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates.
C)an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates.
D)an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates.
E)an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.
Q3) What effect do non-tradable goods have on PPP?
Q4) Define the concept of the real exchange rate and explain how it differs from the nominal exchange rate.
Q5) Explain why exchange rate model based on PPP is a long run theory.
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) In the short-run,a temporary increase in money supply
A)shifts the DD curve to the right,increases output and appreciates the currency.
B)shifts the AA curve to the left,increases output and depreciates the currency.
C)shifts the AA curve to the left,decreases output and depreciates the currency.
D)shifts the AA curve to the left,increases output and appreciates the currency.
E)shifts the AA curve to the right,increases output and depreciates the currency.
Q2) Explain what are the factors that shift the DD Schedule.
Q3) Give 4 examples of situations that would cause the DD-curve to shift to the left.
Q4) Monetary expansion causes the current account balance to increase in the short run.Discuss.Is the same the case for fiscal expansion?
Q5) Assuming that the value effect dominates,the current account will increase if
A)the real exchange rate decreases.
B)the real exchange rate increases.
C)disposable income increases.
D)exports fall.
E)domestic prices fall.
Q6) What is the real exchange rate? What is its relationship to the current account?
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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 correct?
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) Assuming perfect asset substitutability,can sterilized intervention by the central bank be effective? Please discuss.
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Chapter 19: International Monetary Systems: An Historical Overview
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Q1) Comparing fixed to flexible exchange rate,the response of an economy to a temporary fall in foreign demand for its exports is
A)output actually falls less under fixed rate than under floating rate.
B)output actually falls more under fixed rate than under floating rate.
C)output actually remains the same under fixed rate than under floating rate.
D)the currency value grows in a fixed rate system and falls in a flexible system.
E)output grows in a fixed rate system and falls in a flexible system.
Q2) Countries where investment is
A)relatively unproductive should have current account deficits.
B)relatively productive should have current account surpluses.
C)relatively productive should have current account deficits.
D)relatively productive should have balanced current accounts.
E)relatively unproductive should have balanced current accounts.
Q3) The main policy goal for a country according to the mercantilists is
A)to create a one-time deficit in the balance of payments.
B)to create a continuing deficit in the balance of payments.
C)to create a one-time surplus in the balance of payments.
D)to create a continuing surplus in the balance of payments.
E)to create specie overflows.
Page 21
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Chapter 20: Financial Globalization: Opportunity and Crisis
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Q1) In the United States,which of the following safety precautions has the government NOT taken to reduce Bank failures?
A)implemented deposits insurance
B)bank reserve requirements
C)capital requirements and asset restrictions
D)required bank examination
E)forcibly closing poorly run banks
Q2) What are three things to measure for in evaluating the performance of the capital markets?
A)level of intertemporal trade,international trade,portfolio diversification
B)level of portfolio diversification,balanced capital accounts,global inflation
C)level of portfolio diversification,intertemporal trade,efficiency of foreign exchange
D)onshore-offshore interest rate parity,level of portfolio diversification,stability of eurocurrency market
E)onshore-offshore interest rate parity,interest parity and foreign exchange,balanced capital accounts
Q3) Discuss studies based on the interest parity conditions.
Q4) Why is the foreign exchange market so vital?
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Chapter 21: Optimum Currency Areas and the Euro
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Q1) The European Economic and Monetary Union
A)set up a single currency and sole bank for European economic monetary policy.
B)eliminated all barriers to trade such as tax differentials between borders.
C)produced a single government for handling European affairs.
D)created the Common Agricultural Pact.
E)eliminated all local currencies in Western Europe.
Q2) Describe the effects of the reunification of eastern and western Germany in 1990 on both Germany and its neighboring European countries using the AA-DD framework.
Q3) Why did the EU countries move away from the EMS toward the goal of a single shared currency?
Q4) The European Central Bank has its headquarter in
A)London.
B)Berlin.
C)Frankfurt.
D)Paris.
E)Brussels.
Q5) Describe the main provisions of the Maastricht Treaty of 1991.
Q6) Discuss the benefits and costs of joining a fixed-exchange area.
Q7) Explain the theory of optimum currency areas.
Page 23
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) Over the period 1960-2000,France grew ________ than the United States economy
A)2 % slower.
B)2% faster.
C)more than 2% slower.
D)less than 2% faster.
E)more than 2% faster.
Q2) East Asia's crisis was relatively long lived because
A)East Asia's financial institutions had encouraged borrowing all together.
B)East Asia's financial institutions had encouraged heavy borrowing in local currency.
C)East Asia's financial institutions had extended low-interest loans.
D)East Asia's financial institutions had extended high-interest loans.
E)East Asia's financial institutions had encouraged heavy borrowing in dollars.
Q3) Explain the theory behind convergence and why it is a "deceptively simple" theory.
Q4) Contrast the crisis in Poland and Russia.Explain why the Polish economy has done better?
Q5) Explain why despite enormous natural resources,much of Latin America's population remains in poverty and the region has been repeatedly experiencing financial crises.
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