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International Economics

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What questions does Modern Trade Theory address?
(1) What constitutes the basis for trade? (2) At what terms of trade do nations export and import certain products? (3) What are the gains from trade in terms of production and consumption?
The trading-triangle concept is used to indicate a nation's
terms of trade, imports, exports
When a nation is in autarky and maximizes its living standard, its consumption and production points are
along the production possibilities schedule
In a two-product, two-country world, international trade can lead to increases in
output of both products and consumer welfare in both countries
Increasing opportunity costs suggest that
resources are not perfectly shiftable between the production of two goods
The earliest statement of the principle of comparative advantage is associated with
David Ricardo
Unlike the merchantilists, Adam Smith maintained that
all nations can gain from free international trade
According to Ricardo, a country will have a comparative advantage in the product in which its
labor productivity is relatively high
When nations are of similar size, and have similar taste patterns, the gains from trade
are shared equally between them
Adam Smith developed the theory of
absolute advantage
David Ricardo developed the theory of
comparative advantage
Autarky point
point on the curve in absence of trade
Marginal Rate of transformation
what you are giving up/what you need
Terms of trade
export price index/import price index x100
T/F Ignoring the role of relative intensities of demand in determining precise terms of trade, Smith and Ricardo maintained that a country's competitive position is determined by cost conditions.
True
A production possibilities schedule (PPS) illustrates the costs of producing one good relative to another. The slope of the production possibilities schedule indicates
Marginal Rate of Transformation
If the PPF is bowed outward, the nation is producing under conditions of
increasing costs
If the PPF is bowed inward, the nation is producing under conditions of
decreasing costs
If the PPF is linear, the nation is producing under conditions of
constant costs
A country can devote all of its resources to the production of a good without losing its comparative advantage when
specialization is complete (under constant opportunity cost conditions)
T/F A trade triangle is bounded on the right by the trading possibilities line given by the terms of trade and on the two remaining sides by the country's imports and exports.
True
What is one of the arguments for why with a given level of world resources, international trade may bring about an increase in total world output?
Specialization allows for an efficient division of labor
T/F By recognizing only the role of supply, the Ricardian model is unable to determine the equilibrium terms of trade.
True
True or False: Mill's theory of reciprocal demand asserts that within the outer limits of the terms of trade, the actual terms of trade are determined by the relative strength of each country's demand for the other country's product.
True
T/F Intra-industry trade would occur if computers manufactured in the US by IBM are exported to Japan while the US imports computers manufactured by Hitachi of Japan
True
T/F Europe's jumbo-jet manufacturer, Airbus, has justified receiving governmental subsidies on the grounds that the subsidies prevent the US from becoming a monopoly in the jumbo-jet market
True
T/F When transportation costs are added to our trade model, the low-cost exporting country produces less, consumes more, and exports less than that which occurs in the absence of transportation costs
True
T/F The Heckscher-Ohlin theory asserts that relative differences in labor productivity underlie comparative advantage
False
Which trade theory suggests that comparative advantage tends to shift from one nation to another as a product matures?
Product life cycle theory
The Leontif paradox questioned the validity of the theory of
factor endowments
Which trade theory suggests that a newly produced good, once exported, could ultimately end up being imported as the the technology is transferred to lower cost nations?
Product life cycle theory
The simultaneous import and export of computers by Germany is an example of
Intra-industry trade
A firm is said to enjoy economies of scale over the range of output for which the long-run average cost is
decreasing
Expanding trade or technological improvements
increases the demand for skilled workers and decreased the demand of unskilled workers
If Japanese workers receive lower wages in the production of autos than do American workers,
production costs could be lower in he US if American labor productivity is higher than the Japanese
Legislation requiring domestic manufacturers to install pollution abatement equipment tends to promote
higher production costs and a decrease in output
Assume the cost of transporting autos from Japan to Canada exceeds the pretrade price difference for autos between Japan and Canada. Trade in autos is
impossible
Linder's theory of overlapping demand provides an example of
intra-industry trade
What are effects of transportation costs on international trade patterns?
Transportation costs are a source of comparative advantage and transportation costs influence firms' decisions regarding geographical location
The Stolper-Samuelson theorem states that an increase in the price of a product ______ the income earned by resources that are used intensively in its production. Conversely, a decrease in the price of a product ______ the income of the resources that it uses intensively. The theorem ______ that all the resources used in the export industries are better off.
increases, decreases, does not state
T/F The Heckscher-Ohlin theory maintains that factor endowments determine a nation's comparative advantage.
True
T/F The Stolper-Samuelson theorem states that the abundant resource that fosters comparative advantage realizes an increase in income and the scarce resource realizes a decrease in its income regardless of industry.
True
T/F An empirical test of the factor-endowment theory, undertaken by Wassily Leontief in 1954, revealed that the U.S. capital/labor ratio for export industries was lower than that of its import-competing industries. Contrary to the prediction of the factor-endowment model, this result suggested that exports were less capital-intensive than import-competing goods.
True
True or False: According to Staffan Linder's theory of overlapping demands, the foreign markets with the greatest export potential are found in nations with consumer demands similar to those of domestic consumers.
True
The product life cycle theory views a variety of _____ goods as going through a trade cycle, during which a nation initially is an ______, then loses its export markets, and finally becomes an ______ of the product.
manufactured, exporter, importer
T/F trade cycles exist for manufactured goods at some times.
true
Economies of scale exist when expansion of the scale of production causes total production costs to increase ________ to output, which causes long-run average costs of production to ______
less than proportionally, decrease
Which of the following are correct descriptions of the effects of economies of scale on world trade patterns?
Economies of scale are a source of comparative advantage and a key aspect of increasing-returns trade theory is the home market effect
Which of the following accurately defines inter-industry trade?
The exchange of products of different industries.
Which of the following are industrial policies?
Low interest rate loans, trade protection, and research and development subsidies
True or False: Regulation by the U.S. government may impair the competitiveness and trade prospects of affected industries.
True
Which of the following are factors that determine the international trade in services?
The potential for economies of scale made possible by the size of the market and availability of capital equipment
What is an ad valorem tariff?
A fixed percentage of the value of the imported product as it enters the country.
What tariff provides the best protection for both domestic manufactures and the finished-goods industry?
a specific tariff
T/F two common valuation concepts used by customs appraisers are the free-on-board (FOB) technique and the cost insurance freight (CIF) technique. Under an FOB valuation, an ad valorem tariff is applied to a product's value as it leaves the exporting country. Under a CIF valuation, an ad valorem tariff is levied as a percentage of the imported commodity's total value as it arrives at its final destination.
True
T/F When material inputs or intermediate products enter a country at a low duty while the final imported product is protected by a high duty, the nominal tariff rate on the final product overstates the effective rate of protection.
True
Effective Rate of Production formula
e= n-ab/1-a
Which of the following is in the best interest of less developed nations?
Avoidance by industrialized countries of disproportionate tariff reductions on raw materials
The difference between the amount that buyers would be willing and able to pay for a good and the actual amount they pay
consumer surplus
The difference between the minimum amount that producers would be willing sell their products for and the actual amount they receive
producer surplus
Which of the following results from a decrease in the market price
An increase in consumer surplus and a decrease in producer surplus
T/F An import tariff does not need to push the price of the imported computer above the price of its domestic counterpart for the domestic producers to prosper. The tariff should be just high enough to reduce the price differential between the imported products and the domestically made products.
True
Generally, what factor influences the size of the revenue, protective, consumption, and redistributive effects of a tariff?
the response of domestic producers and consumers to price changes
Suppose a large economy imposes a specific tariff of 2,000 on imported appliances. If the terms of trade effect exceeds the deadweight losses resulting from the tariff, its national welfare ________.
increases
Which of the arguments for trade restrictions are most relevant in today's world?
National security argument and infant-industry argument
Although tariffs may improve the welfare of a single nation, the world's welfare may decline. Under what conditions would this be true?
A tariff sparks retaliatory tariffs by other nations and tariffs lower the volume of trade
T/F the imposition of a tariff on a large nation improves its terms of trade while trade volume declines.
true
Which of the following accurately describe the effects of an import tariff imposed on oil imports?
Higher manufacturers' prices, a tariff imposes costs in the form of higher energy prices on domestic consumers and energy-consuming manufacturers, output of domestic energy companies increases, and jobs and compensation in energy industry increase
What is meant by the term foreign trade zone?
An area into which foreign merchandise can be imported without the need to pay customs duties as long as the merchandise remains in the area and doesn't enter the domestic market
How do foreign trade zones help importers mitigate the effects of domestic import duties?
They allow for storage of merchandise to be used in the manufacturing of final products.
T/F An ad valorem tariff provides domestic producers a declining degree of protection against import-competing goods during periods of changing prices
False
t/f According to the infant industry argument, temporary tariff protection granted to an infant industry will help it become competitive in the world market; when international competitiveness is achieved, the tariff should be removed
False
T/F Unlike a specific tariff, an ad valorem tariff differentiates between commodities with different values
True
T/F Graphically, consumer surplus is represented by the area above the demand curve and below the producer's market price
False
T/F With a specific tariff, the degree of protection afforded to domestic producers varies directly with changing prices
False
T/F With a compound tariff, a domestic importer of an automobile might be required to pay a duty of a percentage of the automobile and an amount of money
True
T/F A nation whose imports constitute a very small portion of the world market supply is a price taker
True
T/F A compound tariff permits a specified amount of goods to be imported at one tariff rate while any imports higher than this amount are subjected to a higher tariff rate
False
A beggar thy neighbor policy is the imposition of
trade barriers to increase domestic demand and employment
When a tariff on imported inputs exceeds that on the finished good,
the nominal tariff rate on the finished product would tend to overstate its protective effect
Arguements for US trade restrictions include all of the following
job protection, infant industry support, and maintenance of domestic living standard
Developing nations often maintain that industrial countries permit raw materials to be imported at very low tariff rates while maintaining high tariff rates on manufactured imports. This is known as
a tariff escalation effect
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