This is a draft of the study guide for our first exam. It closely reflects the exam used in an earlier semester. I will revise this somewhat as our exam draws closer.

Note that our first exam will cover material through chapter 3, including appendix 3.1, the reading "Misconceptions Concerning  Comparative Advantage," and the article "Is Liberalization Reversible?" Any of the material that we have covered through 18-Sep may appear on the test. Try answering the questions below, then checking your answers against the text. Don't forget your other worksheets, homework, and the solutions that I distributed (for the second CA worksheet) or reviewed in class.

Solutions

   INTERNATIONAL ECONOMICS --  Introduction through Ricardian 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.        Which country has absolute advantage in which good and why?

b.       Which country has comparative advantage in which good and why?

c.        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.       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.        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.         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.         Discuss some of the common misconceptions concerning the theory of comparative advantage.

3.         Explain what international economists mean by "the importance of being unimportant."

4)       Draw country A's national supply curve for T. Assume that A's economy is characterized by constant opportunity costs, and the P_S/P_T equals 2. Be careful!

5)       For this question, assume that the assumptions of the classical model hold. Also assume that country A exports S and imports T. Starting from a situation where country A desires to export more S than country B desires to import, show (and discuss) how the process of reciprocal demand leads to international trade equilibrium. To receive credit, you must illustrate your answer with an National Supply-National Demand diagram for each country.

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

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

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

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

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

Back to top