Key to this old exam

There is still one question on this old exam that you could use for practice. Question number 2 concerns the HO Model from chapter 4 Note that our second exam will cover material through chapter 5, including the Specific Factors Model, the reading "Misconceptions Concerning  Comparative Advantage,"  the article "Trade and Income Distribution: The Debate and New Evidence." Any of the material that we have covered through 16-Oct,  may appear on the test. Try answering the questions in bold face type (especially #2), then checking your answers against the text. You may also bring your answers to the review session.

   INTERNATIONAL ECONOMICS --  Introduction  through HO Model

 FOLLOW THESE INSTRUCTIONS: Use the paper supplied for the following two short answer questions. Use about one-half page for each graph you draw. Label both axes clearly and don't forget to specify the units.

1.        Use the classical model of international trade to answer the following questions. The table below shows the number of hours of labor necessary to produce one unit of each good:

a.        (5 points.) Which country has absolute advantage in which good and why?

b.       (5 points.) Which country has comparative advantage in which good and why?

c.        (5 points.) How many units (jars) of Salsa will Argentina produce in international trade equilibrium if they are endowed with 8000 hours of labor per year? How many units (bottles) of Tequila will Argentina produce?

d.       (5 points.) How many units (jars) of Salsa will Brazil produce in international trade equilibrium if they are endowed with 4000 hours of labor per year? How many units (bottles) of Tequila will Brazil produce?

e.        (5 points.) What are the limits on Argentina’s wage rate relative to the wage rate in Brazil if trade is to flow between these two countries according to comparative advantage?

f.         (10 points.) Using your answers to parts a-d, illustrate a hypothetical international trade equilibrium, including production and consumption points, CICs, and trade volumes for a given but permissible value of the international terms of trade. Write your assumed international terms of trade here:

______ unit (jars) of Salsa trades for ____ units (bottles) of Tequila.

2.        Consider the following data on two countries, A and B:

a.        (5 points.) Which country is capital abundant and why?

b.       (5 points.) Which country is labor abundant and why?

c.        (5 points.) Supposing that the good T (toupees) is labor intensive relative to good S (Sombreros), which country will have a comparative advantage in the production of T? Explain your answer.

d.       (5 points.) Which country will have a comparative advantage in the production of S? Explain your answer.

e.        (5 points.) Which factors gain and which lose when trade is opened between the two countries? Explain carefully.

f.         (10 points.)  Draw two national supply and national demand diagrams to illustrate the autarky equilibria for each country and a possible international equilibrium. Label the autarky prices, the international price, and the relative quantities consumed and produced in each country. Describe the adjustment from autarky to free-trade equilibrium.

TRUE/FALSE (Circle the correct answer. Explain your answer briefly.)

1.        T     F                      A country's index of openness can never exceed 100 in value.

2.        T     F                      As measured by the index of openness, the United States is relatively closed, and yet, it was the world's largest exporter in 1994.

3.        T     F                      Countries have trade surpluses when they export more than they import.

4.        T     F                      Most of world trade is in the form of manufactured consumer goods such as TVs, stereos, VCRs, and running shoes.

5.        T     F                      If individuals have money illusion, they react to changes in certain prices without regard to simultaneous changes in other prices.

6.        T     F                      Technological progress in country A's S industry would increase the opportunity cost of T.

7.        T     F                      A country must have absolute advantage in a good in order to have comparative advantage in the good.

8.        T     F                      According to the Rybczynski theorem, if a country increases its endowment of capital and prices remain constant, then its output of both the capital and labor intensive goods will rise.

9.        T     F                      In the HO model, tastes are assumed to be identical across countries to rule out differences in demand determining the direction of trade.

10.     T     F                      The assumption that the two goods are made using different factor intensities raises the likelihood of incomplete specialization after trade begins. 

11.     T     F                      According to the factor price equalization theorem, free international trade will result in wages equaling rents worldwide.

12.     T     F                      According the Stopler Samuelson theorem, the scarce factor in any given country will lose from international trade.

13.     T     F                      Even if international trade hurts some people, the HO model predicts that free international trade improves the standard of living for the country as a whole.

14.     T     F                      In a two-country world, at least one country must lose from trade.

15.     T     F                      A country gains more from international trade the more its terms of trade differ from its autarky price.

16.     T     F                      Per capita real GDP provides one possible measure of a country's standard of living.

17.     T     F                      If a country were to experience an increase in its factors of production, its production possibilities frontier would shift outward.

18.     T     F                      Developed countries get all the gains from trade when they trade with developing countries.

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