Lecture 1 Overview of international economics

2.1 Who Trades with Whom?

4) Annual Gross Domestic Product (GDP) measures

A) the total value of all goods and services produced domestically in a country's economy in one
year.
B) the total value of all goods and services produced domestically and abroad by a country's
citizens in one year.
w6C) the total value of all goods and services attributed to each individual citizen of a country
in one year.
D) the total value of all goods and services imported and exported by a country in one year.

5) 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.

7) The gravity model explains why

A) trade between Sweden and Germany exceeds that between Sweden and Spain.
B) countries with oil reserves tend to export oil.
C) capital rich countries export capital intensive products.
D) intra-industry trade is relatively more important than other forms of trade between
neighboring countries.
E) European countries rely most often on natural resources.

9) According to the Gravity Model, the reason why the United States trades more heavily with
Germany, the United Kingdom, and France than with other countries in Europe is because of
A) the size of their economies.
B) their ties to the European Union.
C) mutual rights and responsibilities.
D) their currencies and trade policies.

11) In general, which of the following do NOT tend to increase trade between two countries?
A) linguistic and/or cultural affinity
B) historical ties
C) larger economies
D) mutual membership in preferential trade agreements
E) the existence of well controlled borders between countries

14) The two neighbors of the United States do a lot more trade with the United States than
European economies of equal size.
A) This contradicts predictions from gravity models.
B) This is consistent with predictions from gravity models.
C) This is irrelevant to any inferences that may be drawn from gravity models.
D) This is because these neighboring countries have exceptionally large GDPs.
E) This relates to Belgium's trade record with the U.S.

2.2 The Changing Pattern of World Trade

3) A situation where a final product goes through many production stages by different companies
in different countries instead of being produced by one company in one country is called
A) vertical disintegration.
B) vertical integration.
C) horizontal integration.
D) horizontal disintegration.

5) In the early 20th century, the United Kingdom exported mainly

A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) livestock.

10) In the present, most of the exports from Vietnam are

A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) overpriced by world market standards.

11) In today's modern economy, international trade in services

A) dominates world trade.
B) does not exist.
C) is an increasingly important component of global trade.
D) is relatively stagnant.
E) far surpasses the predictions of economist Alan Blinder.

12) When a service previously done within a country is shifted to a foreign location, the change
is known as
A) service outsourcing.
B) location shifting.
C) service outreaching.
D) global transferring.

14) World trade grew rapidly in the decade leading up to World War I but then fell significantly
and did not return to pre-World War I levels until the late 1970s. Explain the fall and rise of
world trade.

15) When comparing the composition of world trade in the early 20th century to the early 21st
century, we find major compositional changes. These include a relative decline in trade in
agricultural and primary-products (including raw materials). How would you explain this in
terms of broad historical developments during this period?

16) Third world or developing countries mainly exported primary products in the 1970s. How
have things changed since then? Explain.

17) Explain how important service trade may become in the years ahead.

Labor Productivity and Comparative Advantage: The Ricardian Model

3.1 The Concept of Comparative Advantage

1) In order to produce winter roses, the U.S. economy must produce fewer of other things, such
as computers. Such a trade-off is an example of
A) opportunity cost.
B) trade cost.
C) sunk cost.
D) production cost.

2) A country has a ________ in producing a good if the opportunity cost of producing that good
in terms of other goods is lower in that country than it is in other countries.
A) comparative advantage
B) absolute advantage
C) trading advantage
D) cost advantage

4) Trade between two countries can benefit both countries if

A) each country exports that good in which it has a comparative advantage.
B) each country enjoys superior terms of trade.
C) each country has a more elastic demand for the imported goods.
D) each country has a more elastic supply for the exported goods.
E) each country produces a wide range of goods for export.

7) The Ricardian model attributes the gains from trade associated with the principle of
comparative advantage result to
A) differences in technology.
B) differences in preferences.
C) differences in labor productivity.
D) differences in resources.
E) gravity relationships among countries.

9) 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.
10) In a two-country, two-product world, the statement "Germany enjoys a comparative
advantage over France in autos relative to ships" is equivalent to
A) France having a comparative advantage over Germany in ships.
B) France having a comparative disadvantage compared to Germany in autos and ships.
C) Germany having a comparative advantage over France in autos and ships.
D) France having no comparative advantage over Germany.
E) France should produce autos.

3.2 A One-Factor Economy

1) Unit labor requirement is defined as

A) the number of hours of labor required to produce one unit of output.
B) the quantity of output that can be produced with one hour of labor.
C) the amount of input other than labor required to produce one unit of output.
D) the quantity of output that can be produced without using labor input.

2) The production possibility frontier shows

A) the maximum amount of goods and services that can be produced by an economy during a
given time period using all its limited resources.
B) the minimum amount of goods and services that can be produced by an economy during a
given time period using all its limited resources.
C) the potential amount of goods and services that can be produced by an economy in the future
with current limited resources.
D) the increasing amount of goods and services that can be produced by an economy during a
given time period without sacrificing some production of another good.
E) the decreasing amount of goods and services that can be produced by an economy during a
given time period with sacrificing some production of another good.

4) The number of gallons of wine the economy would have to give up in order to produce an
extra pound of cheese is called
A) the opportunity cost of a pound of cheese in terms of wine.
B) the opportunity cost of a gallon of wine in terms of cheese.
C) the opportunity cost of a pound of cheese and a gallon of wine.
D) the opportunity cost of either a pound of cheese or a gallon of wine.

6) The economy will specialize in the production of ________ if the relative price of cheese
exceeds its opportunity cost in terms of wine; it will specialize in the production of ________ if
the relative price of cheese is less than its opportunity in terms of wine.
A) cheese; wine
B) wine; cheese
C) cheese; cheese
D) wine; wine
8) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
Answer:

9) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.

3.3 Trade in a One-Factor World

1) Assume Home's unit labor requirements in cheese and wine production are aLW and aLC; and
Foreign's unit labor requirements in cheese and wine production are a*LW and a*LC. Home has
a comparative advantage in cheese when
A) aLC/aLW < a*LC/a*LW
B) aLC/aLW > a*LC/a*LW
C) aLC/aLW = a*LC/a*LW
D) aLC/ a*LC = aLW /a*LW

2) When one country can produce a unit of a good with less labor than another country, the first
country has a(n) ________ in producing that good.
A) absolute advantage
B) comparative advantage
C) advanced advantage
D) comparable advantage

3) In order to know whether a country has a comparative advantage in the production of one
particular product we need information on at least ________ unit labor requirements.
A) four
B) one
C) two
D) three
E) five

4) Given the information in the table above

A) Neither country has a comparative advantage in cloth.
B) Foreign has a comparative advantage in cloth.
C) Home has a comparative advantage in both cloth and widgets.
D) Home has a comparative advantage in cloth.
E) Neither country has a comparative advantage in widgets.

5) Given the information in the table above, 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.

9) Given the information in the table above, Home's opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.

10) 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.

15) In a two-product, two-country world, international trade can lead to increases in

A) consumer welfare only if output of both products is increased.
B) output of both products and consumer welfare in both countries.
C) total production of both products but not consumer welfare in both countries.
D) consumer welfare in both countries but not total production of both products.
E) prices of both goods in both countries.

16) A nation engaging in trade according to the Ricardian model will find its consumption
bundle
A) inside its production possibilities frontier.
B) on its production possibilities frontier.
C) outside its production possibilities frontier.
D) inside its trade-partner's production possibilities frontier.
E) on its trade-partner's production possibilities frontier.

17) 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.

18) Assume that labor is the only factor of production and that wages in the United States equal
$20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the
United States as compared to Japan if
A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.
B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour.
C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour.
D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour.
E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour.

19) An examination of the Ricardian model of comparative advantage yields the clear result that
trade is (potentially) beneficial for each of the two trading partners since it allows for an
expanded consumption choice for each. However, for the world as a whole the expansion of
production of one product must involve a decrease in the availability of the other, so that it is not
clear that trade is better for the world as a whole as compared to an initial situation of non-trade
(but efficient production in each country). Are there in fact gains from trade for the world as a
whole? Explain.

4) We know that in antiquity, China exported silk because no one in any other country knew how
to produce this product. From this information we know that
A) China had a comparative advantage in silk.
B) China had an absolute advantage, but not a comparative advantage in silk.
C) no comparative advantage could exist because the technology was not diffused.
D) China exported silk for political reasons even though it had no comparative advantage.
E) China was unable to profit by exporting silk because it was unknown in the rest of the world.

5) The pauper labor and the exploitation arguments

A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative
advantage.
B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance.
C) are not relevant because the Ricardian model is based on the labor theory of value.
D) are not relevant because the Ricardian model allows for different technologies in different
countries.
E) invalidate the Ricardian model.
6) If labor productivities were exactly proportional to wage levels internationally, this would
A) not negate the logical basis for trade in the Ricardian model.
B) render the Ricardian model theoretically correct but practically useless.
C) negate the logical basis for trade in the Ricardian model.
D) negate the applicability of the Ricardian model if the number of products were greater than
the number of trading partners.
E) demonstrate the validity of the Ricardian model.

7) Many countries in sub-Saharan Africa have very low labor productivities in many sectors, for
example in manufacturing and agriculture. They often despair of even trying to attempt to build
their industries unless it is done in an autarkic context, behind protectionist walls because they do
not believe they can compete with more productive industries abroad. Discuss this issue in the
context of the Ricardian model of comparative advantage.

8) In 1975, wage levels in South Korea were roughly 5% of those in the United States. It is
obvious that if the United States had allowed Korean goods to be freely imported into the United
States at that time, this would have caused devastation to the standard of living in the United
States, because no producer in this country could possibly compete with such low wages.
Discuss this assertion in the context of the Ricardian model of comparative advantage.