Midterm Exam – International Trade Theory (40 points)

(2nd Semester, 2006)

Name:Student Number:

I. Answers to the multiple choice questions: (2 points each)

1.2.3.4.5.6.7.

8. 9. 10. 11.12.13.

III. Essay type questions (7 points each)

1. Suppose two nations (Nation 1 and Nation 2) are producing commodities X and Y. Suppose further that Nation 1 is more efficient in producing both commodities. Show that both nations can gain from trade using the diagrams of production possibility frontiers with constant returns to scale. (Recall the Ricardian model using the concept of opportunity cost.)

2. What does the Heckscher-Ohlin theorem postulate? Prove the theorem. (Write your answer in the back.)

I. Multiple choice questions (2 points each)

  1. The opening or expansion of international trade usually affects:
  2. most members of society positively
  3. most members of society negatively
  4. most members of society positively but some negatively
  5. most members of society negatively but some positively
  6. half members of society positively but half negatively
  1. The commodity in which the nation has the greater absolute advantage is the commodity of its:
  2. absolute disadvantage
  3. absolute advantage
  4. comparative disadvantage
  5. comparative advantage
  6. None of above
  1. In the Recardian model, if with one hour of labor time nation 1 can produce either 3X or 3Y while nation 2 can produce either 3X or 1Y (and labor is the only input):
  2. Nation 1 has a comparative advantage in commodity X
  3. Nation 2 has a comparative advantage in commodity Y
  4. Y is relatively cheaper in Nation 1 than in Nation 2.
  5. Nation 1 has a comparative advantage in neither commodity
  6. None of the above
  1. If the internal Py/Px is greater in nation 1 than in nation 2 without trade:
  2. Nation 1 has a comparative advantage in commodity X
  3. Nation 2 has a comparative disadvantage in commodity Y
  4. Nation 1 has a comparative disadvantage in commodity X
  5. Nation 1 has a comparative advantage in neither commodity
  6. None of the above
  1. Mutually beneficial trade can occur if production frontiers are:
  2. different but tastes are the same
  3. different and tastes are also different
  4. the same and tastes are also same
  5. all of the above
  6. none of the above
  1. Which of the following is not a reason for increasing opportunity costs:
  2. factors of production are not homogeneous
  3. factors of production are not used in the same fixed proportion in the production of all commodities
  4. for the nation to produce more of a commodity, it must use resources that are less and less suited in the production of the commodity
  5. factor endowments differ between nations
  6. none of the above
  1. Which of the following statements about community indifference curves is not true?
  2. They are negatively sloped
  3. They are convex to the origin
  4. They are related to individuals’ indifference curves
  5. They never intersect each other
  6. The problems arising from intersecting community indifference curves can be overcome by the application of the compensation principle
  1. Export prices must rise for a nation to increase its exports because the nation:
  2. faces increasing opportunity costs in the production of export goods.
  3. faces increasing opportunity costs in producing import substitutes
  4. faces increasing opportunity costs in both the production of export goods and import substitutes.
  5. facesdecreasing opportunity costs in the production of export goods, but increasing opportunity costs in producing import substitutes.
  6. all of the above
  1. The offer curve of a nation shows:

a.the supply of a nation’s imports

b.the demand for a nation’s export

c.the trade partner’s demand for imports and supply of exports

d.the nation’s supply of imports and demand for exports

e.the nation’s willingness to import and export at various relative commodity prices.

  1. Which of the following is the right statement?
  2. Commodity X is K-intensive with respect to Y when more K is used in the production of X than Y
  3. Commodity X is K-intensive with respect to Ywhen ahigherK/L ratio is required in the production of Y than in the production of X
  4. Nation 1 is abundant in K if it has agreater absolute amount of K than Nation 2.
  5. Nation 1 is abundant in K if it has a higher L/Kthan Nation 2.
  6. Nation 1 is abundant in K if it has a lower r/w than Nation 2.
  1. According to the H-O model, international trade will:
  2. reduce international differences in relative factor prices, but not in absolute prices
  3. reduce international differences in relative and absolute factor prices
  4. increase international differences in relative and absolute factor prices
  5. increase international differences in absolute but not relative commodity prices
  6. increase international difference in both commodity prices and factor prices
  1. From empirical studies, we concluded that the H-O theory:
  2. must be rejected
  3. must be accepted without reservation
  4. explains only some part of international trade
  5. explains all international trade
  6. explains none of international trade
  1. Which of the following assumptions of the Heckscher-Ohlin theory, when relaxed, require new trade theories?
  2. Constant returns to scale
  3. Perfect mobility of factors within country
  4. Similar tastes in both nations
  5. Incomplete specialization after trade
  6. None of the above

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