ECON 461

International Trade
Final Exam
Spring Quarter 2014
Prof. Giorgio Canarella
Essays (100 points)
1.The exchange rate value of the U.S. dollar increased recently. Is it good news or bad news?
Why? Should we worry about it?
2.The U.S. has a whopping trade deficit. Why? Should we worry about it? Are we shipping all our
jobs to China and Mexico? Could we save precious U.S. jobs by restricting imports from
countries with cheap labor? Could we reduce our trade deficit by restricting imports?
3.The U.S. owes the rest of the world $2.9 trillion more than the rest of the world owes to the
U.S., making the U.S. "the world biggest debtor nation". Why is this? Should we worry about it?
Multiple choice questions (100 points)

1) Over the last fifty years, trade has grown

A) slower than during the first 50 years of the twentieth century.
B) faster than during the first 50 years of the twentieth century.
C) slower than GDP.
D) faster than GDP.
E) Both B and D.

1) _______

2) Which of the following is a TRUE statement regarding the index of openness?

A) The United States, as the largest participant in international trade, has an unusually high
index of openness.
B) The U.S. openness index has shown a steady rise over the last 110 years.
C) If a country has a relatively high openness index compared to its neighbors, it must have
lower barriers to trade.
D) Smaller countries tend to have higher openness measures than larger countries.

2) _______

3) Which of the following kinds of agreements between two or more countries would be an example
of a deep integration measure?
A) An agreement to reduce tariffs and quotas
B) An agreement to impose the same limits on cartels and monopolies
C) An agreement to reduce exports
D) An agreement to unify customs forms in order to speed up cross-border traffic
E) An agreement to limit imports

3) _______

4) Which of the following is FALSE?

A) The openness index helps to give a sense of how important trade is to an economy.

4) _______

B) A country that exported $20 billion, imported $30 billion, and had GDP of $100 billion
would have an index of openness of 0.5 or 50 percent.
C) It is possible for an openness index to be greater than 100 percent.
D) Smaller countries tend to have lower openness measures than large countries.
5) According to the text, which of the following would NOT be a reason to convince economists that
the benefits of trade outweigh the costs?
A) Trade makes possible increased innovation, access to new technology, and economies of
scale.
B) The associated costs are minor and negligible.
C) The evidence of statistical comparisons of countries
D) The casual empirical evidence of historical experience
E) Trade benefits consumers in terms of lower prices and increased variety of goods.

5) _______

6) Economists overwhelmingly support more open markets because trade

A) increases the profit margins of firms.
B) leads to a better allocation of resources inside countries.
C) directly benefits everyone in the country.
D) creates jobs.
E) All of the above.

6) _______

7) Which of the following is a problem that arises when trying to classify regional trade agreements?
A) Some agreements include cultural issues while others do not.
B) The definition of free trade area includes that of a customs union.
C) The most favored nation clause includes all of them.
D) Many agreements combine elements from different categories.
E) None of the above.

7) _______

8) The primary mission of the World Bank today is to

A) provide a safe place for people around the world to put their money.
B) help countries manage their exchange rates.
C) provide capital to firms around the world.
D) provide financial assistance for the reconstruction of war-damaged nations.
E) provide capital to underdeveloped countries.

8) _______

9) A free trade agreement plus a common set of tariffs toward non-members is called
A) a customs union.
B) a free trade area.
C) a common market.
D) an economic union.
E) a partial trade agreement.

9) _______

10) Which of the following was NOT a creation of the Bretton Woods conference?
A) WTO
B) World Bank
C) IMF
D) IBRD
E) None of the above.

10) ______

11) The original mission of the World Bank was to

A) provide a safe place for people around the world to put their money.
B) help countries manage their exchange rates.

11) ______

C) provide capital to firms around the world.

D) provide financial assistance for the reconstruction of war-damaged nations.
E) provide capital to underdeveloped countries.
12) Which of the following is NOT a feature of a common market?
A) Factor mobility
B) Free trade in goods and services between the members
C) Common external barriers to trade
D) Substantial coordination of macroeconomic policies among the members

12) ______

13) When the United States gives MFN status to China, it means that
A) China is treated better than other U.S. trading partners.
B) China is treated worse than other U.S. trading partners.
C) China is legally bound to reciprocate.
D) China is treated the same as other U.S. trading partners.
E) China is better than all the nations in the WTO.

13) ______

14) The international organization that serves as a forum for trade discussions and the development
of trade rules is called
A) Bretton Woods.
B) the United Nations.
C) the WTO.
D) the World Bank.
E) the IMF.

14) ______

15) An important function of international institutions during times of crisis is to

A) make goods nonrival.
B) prevent nondiscrimination.
C) prevent free riding.
D) encourage free riding.
E) make goods nonexcludable.

15) ______

16) One reason markets may fail to provide the optimal quantity of public goods is the problem of
A) nontariff barriers.
B) nondiscrimination.
C) economic integration.
D) free riders.
E) determining what the public wants.

16) ______

17) Most favored nation (MFN) status means that a country treats another country
A) worse than its other trading partners.
B) any way it chooses since it is the "most favored nation."
C) the same as its other trading partners.
D) better than its other trading partners.
E) None of the above.

17) ______

18) The economic philosophy that favors strict limits on imports and strong support for exports is
called
A) absolute advantage.
B) autarky.
C) zero sum.
D) mercantilism.

18) ______

E) comparative advantage.
19) If a nation has no absolute advantage, then it
A) still gains from trade.
B) can only gain from trade if it raises its productivity levels.
C) can only gain from trade if it produces outside its production possibilities curve.
D) can only gain from trade if it reduces wages paid.
E) cannot gain from trade.

19) ______

20) Competition between the United States and Mexico is

A) equivalent to the competition between two giant corporations.
B) a struggle over which country will keep the most advanced technology.
C) unfair if wages in Mexico are lower than in the United States.
D) a struggle over which country will get the best jobs.
E) not a meaningful way to analyze trade.

20) ______

21) Certain kinds of tropical fruits are impossible to grow outdoors in the United States. Suppose,
however, that in order to create jobs in Wyoming, the U.S. government offered extensive
subsidies to firms to produce bananas. With the subsidies, firms could build greenhouses and
offer the fruit at world prices.
A) The United States has a comparative advantage, but is not competitive.
B) The United States has a comparative advantage and is competitive.
C) The United States is competitive, but does not have a comparative advantage.
D) The United States now has a comparative advantage in bananas.
E) None of the above.

21) ______

22) When economists talk about the gains from trade they mean that
A) no one ever gets hurt by trade.
B) business firms benefit from trade but not necessarily individuals.
C) economic restructuring is usually quick and painless.
D) the benefits of trade outweigh the losses.
E) trade increases government revenue through taxes on imports.

22) ______

23) If two countries agree to specialize and trade based on comparative advantage, which of the
following is most likely to be TRUE?
A) One of the countries will both consume and produce on its production possibilities curve.
B) Both of the countries will consume outside their respective production possibilities curves.
C) Only one of the countries will produce on and consume outside its production possibilities
curve.
D) One of the countries will end up receiving all of the gains from trade.

23) ______

Use the data in the table below to answer the following question(s):
Table 3.1
Output per Hour Worked

24) Based on Table 3.1, trade between the United States and Mexico will occur as long as the relative
price of shoes is between
A) three computers and one computer.
B) three computers and two computers.

24) ______

C) one-half computer and one-third computer.

D) six computers and three computers.
E) None of the above.
25) If one nation is able to produce a good at a lower opportunity cost than another, it has
A) a comparative advantage in that good.
B) a technological advantage in that good.
C) an absolute advantage in that good.
D) a productivity advantage in that good.
E) no reason to want to trade that good.

25) ______

26) The basis for free trade is the concept of

A) comparative advantage.
B) differences in natural resources and climate.
C) absolute advantage.
D) differences in nominal wages.

26) ______

27) Using the HO model, assume that the United States is capital abundant and Mexico is labor
abundant. If soybeans are capital intensive and avocados are labor intensive, it would be
reasonable to expect the United States to
A) increase soybean production, but still produce some avocados.
B) specialize completely in soybean production.
C) specialize completely in avocado production.
D) increase avocado production, but still produce some soybeans.

27) ______

Use the below mentioned table for the following question(s).

Suppose that all goods are made with two factorslabor and capital. The table below shows the total endowments of each
factor in the United States and Canada.
Table 4.1
Endowment of Labor and Capital

28) Based on Table 4.1, relative to the United States, Canada is

A) capital scarce.
B) labor scarce.
C) labor abundant.
D) None of the above.
E) Not enough information to tell.

28) ______

29) Which of the following statements is NOT true about international trade theory?
A) The Heckscher-Ohlin theory says that if the price of a good rises, then the income of factors
used intensively in its production rises as well.
B) As the wage-rent ratio falls, the labor-intensive commodity becomes cheaper relative to the
land-intensive commodity.
C) The equalization of the wage-rent ratio between trading nations does not imply the
equalization of the real wage rate and the real rental rate for land.
D) The Heckscher-Ohlin theorem states that a country has a comparative advantage in the
production of that good which uses the country's abundant factor more intensively.
E) The factor-price theorem is the result of factor endowment theory.

29) ______

30) If the price of a good rises, then the effect on the income of the factors that are used intensively in
its production will be
A) to raise income by an absolute amount that is more than the rise in prices.
B) to raise income by a greater percentage than the rise in prices.
C) to raise income by an absolute amount that is less than the rise in prices.
D) to raise income by a smaller percentage than the rise in prices.
E) to cause income to fall.

30) ______

Use the below mentioned table for the following question(s).

Suppose that all goods are made with two factorslabor and capital. The table below shows the total endowments of each
factor in the United States and Canada.
Table 4.1
Endowment of Labor and Capital

31) Based on Table 4.1, according to the Stolper-Samuelson Theorem, the income distribution effects
of free trade in the United States are likely to favor
A) capital.
B) labor.
C) either capital or labor, depending on U.S. productivity.
D) neither capital nor labor.
E) Not enough information to tell.

31) ______

32) Which of the following is NOT a proposition of the Heckscher-Ohlin model?

A) Countries will completely specialize in the product in which they have a comparative
advantage if free trade is allowed to occur.
B) If Mexico is an unskilled labor abundant country, then Mexico has a comparative advantage
in the production of goods that use unskilled labor more intensively.
C) If the United States is a skilled labor abundant country, then the United States has a
comparative advantage in the production of goods that use skilled labor more intensively.
D) A country has a comparative advantage in the production of that commodity which uses
more intensively the country's more abundant resource.
E) The effect of international trade is to tend to equalize factor prices between the trading
nations.

32) ______

33) After trade opens, the short run impact on the income of the variable factor will be
A) an increase.
B) zero.
C) a decrease.
D) indeterminate, depending on the consumption pattern of the owners of the variable factor.
E) indeterminate, depending on the productivity of the variable factor.

33) ______

34) Empirical tests of the theory of comparative advantage have provided

A) strong support for both the Ricardian and Heckscher-Ohlin models.
B) strong support for the Ricardian model and mixed support for the Heckscher-Ohlin model.
C) mixed support for the Ricardian model and strong support for the Heckscher-Ohlin model.
D) mixed support for both Ricardian and Heckscher-Ohlin models.

34) ______

E) no support for either the Ricardian or the Heckscher-Ohlin models.

35) If the case studies are correct in their analysis of factor abundance,
A) Chinese unskilled labor should see their income rise as trade increases.
B) U.S. skilled labor inputs should see their incomes fall as trade increases.
C) Chinese capital owners should see their income rise as trade increases.
D) Mexican capital owners should see their income rise as trade increases.

35) ______

36) In economic terms, tariffs are preferred to quotas because

A) given the way quotas are usually administered, tariffs cause a smaller net national welfare
loss.
B) tariffs are easier to administer.
C) there is less loss of consumer surplus.
D) domestic manufacturers gain more producer surplus.
E) quotas create a greater production inefficiency.

36) ______

Use the graph below and the following information to answer the next question(s). The world price of soybeans is $2.00 per
bushel, and the importing country is small enough not to affect the world price.

Figure 6.1
37) Based on Figure 6.1, how much revenue will the government raise from a $0.25 per bushel tariff
on soybean imports?
A) The government will raise $15 million.
B) The government will raise $5 million.
C) The government will raise $2.5 million.
D) The government will raise $32.5 million.
E) The government will see no increase in income; because the country is small, foreign firms
will simply not serve it after the tariff is imposed.

37) ______

38) Nominal rates of protection

A) cannot be negative.
B) are always greater than effective rates of protection.
C) are always smaller than effective rates of protection.

38) ______

D) refer to the tariffs placed on intermediate goods used to make the final good or service.
39) Which of the following would be a deadweight loss from a tariff?
A) The decrease in consumer surplus due to a drop in consumption
B) The decrease in consumer surplus
C) The increase in producer surplus
D) The shift of consumer surplus to government
E) All of the above.

39) ______

40) In which way are tariffs different from quotas?

A) They reduce the volume of imported products.
B) They raise government revenue.
C) They increase the domestic quantity supplied of the product.
D) They raise the price of the imported products to consumers.

40) ______

41) Which of the following is NOT correct about the effects of a tariff on an imported product?
A) Tariffs increase government revenue.
B) Tariffs mean higher prices and less consumption for consumers of the product.
C) Tariffs benefit domestic producers by raising price and domestic output.
D) Tariffs increase the efficiency of how resources are allocated.

41) ______

Use the graph below and the following information to answer the next question(s). The world price of soybeans is $2.00 per
bushel, and the importing country is small enough not to affect the world price.

Figure 6.1

42) Based on Figure 6.1, suppose the government puts a tariff of $0.25 per bushel on soybean imports.
How much will the tariff reduce imports?
A) Imports will decrease by 60 million bushels.
B) Imports will not change after the tariff.
C) Imports will decrease by 20 million bushels.
D) Imports will decrease by 10 million bushels.

42) ______

43) In order for large countries to successfully use tariffs to increase well being,
A) the deadweight loss created by the tariff must be greater than the government revenue the
tariff generates.
B) domestic production must increase more significantly than for the small country case.
C) domestic consumption and imports must decrease more significantly than in the small
country case.
D) they must have significant market power so that foreign firms will cut prices to preserve
their sales.

43) ______

44) Your text identifies all of the following as reasons why unsustainable debt may occur except
A) when government officials try to buy votes with unsustainable spending.
B) when countries are dependent on one or two key export commodities, and there is a sudden
drop in the price of those commodities.
C) when there are corrupt politicians and practices.
D) when natural disasters occur.
E) when civil conflicts are resolved and a peace dividend occurs.

44) ______

45) Which of the following is FALSE about the Highly Indebted Poor Countries initiative?
A) Countries qualify for debt relief partly based on their level of poverty.
B) Most of the countries included are in sub-Saharan Africa.
C) External debt levels must be high relative to exports in order to qualify.
D) Countries do not have to have established a past track record of economic reform in order to
qualify as long as they make future commitments.

45) ______

46) A current account deficit implies that

A) exports of goods and services exceed imports of goods and services.
B) the financial account is in surplus.
C) unilateral transfers are positive.
D) the financial account is negative.
E) None of the above.

46) ______

47) All of the following are true about foreign direct investment (FDI) and portfolio investment
except
A) both portfolio investments and FDI are the same in that they both give their holders a claim
on the future output of the foreign economy.
B) increases in the flow of portfolio investments increase the likelihood of financial crisis.
C) FDI is relatively illiquid compared to portfolio investment.
D) portfolio investments have been on the decline in recent years (or decades).
E) FDI investors must be willing to go through many ups and downs in order to benefit from
their long-term investments.

47) ______

48) If a country runs a current account surplus and national private savings equals domestic
investment, then the combined governmental accounts
A) must be positive.
B) must be balanced.
C) could be either negative or positive, depending on the net international investment position.
D) could be either negative or positive, depending on the capital account.
E) must be negative.

48) ______

49) All else equal and given the current system of exchange rates, if the United States enters a period
of exceptionally strong growth,
A) the pressure on the dollar is to revalue.
B) the pressure on the dollar is to depreciate.
C) the pressure on the dollar is to devalue.
D) the pressure on the dollar is to appreciate.
E) Both A and D.

49) ______

50) Suppose that the nominal exchange rate between the U.S. dollar and the Mexican peso is 0.10
dollars per peso. If Mexico's inflation is 10 percent and the United States' inflation is 0 percent,
from the U.S. point of view, the real exchange rate
A) appreciates to 0.11 dollars per peso.
B) depreciates to 0.09 dollars per peso.
C) depreciates to 0.11 dollars per peso.
D) appreciates to 0.2 dollars per peso.
E) appreciates to 0.09 dollars per peso.

50) ______

51) An increase in the U.S. demand for the Mexican peso

A) causes the U.S. dollar to depreciate.
B) causes Mexican goods to be relatively more expensive.
C) causes an increase in the U.S. dollar price of a Mexican peso.
D) causes the Mexican peso to appreciate.
E) All of the above.

51) ______

52) The Smithsonian Agreement of 1971 was hailed by President Nixon as a fundamental
reorganization of the international monetary system. In fact, what it accomplished was
A) the elimination of gold backing for the dollar.
B) the devaluation of the dollar.
C) the reduction of the gold content of the dollar.
D) the revaluation of the dollar.
E) Both B and C.

52) ______

53) According to purchasing power parity, which of the following is FALSE about an overvalued
dollar compared to the Japanese yen?
A) Prices in the United States would tend fall.
B) U.S. merchants would be motivated to import more Japanese goods.
C) Japanese merchants would tend to export more to the United States.
D) Over the long term, the exchange rate would fall.
E) Prices in Japan would tend to rise.

53) ______

54) Suppose that the nominal exchange rate between the U.S. dollar and the Canadian dollar is 0.75
U.S. dollars per Canadian dollar. If Canada's rate of inflation is 0 percent and the U.S. rate is 10
percent, then the real exchange rate for the U.S. dollar will
A) appreciate by 10 percent.
B) depreciate by about 9 percent.
C) depreciate by 10 percent.
D) appreciate by about 9 percent.
E) None of the above.

54) ______

55) U.S. opponents of NAFTA argue that the agreement will hurt the United States. In their view,
NAFTA's greatest harm will be its
A) harmonization of product safety standards.
B) harmonization of labor policies.
C) job destruction and downward pressure on U.S. wages.
D) harmonization of the use of pesticides and herbicides.
E) harmonization of environmental policies.

55) ______

56) The United States functions as a "safety valve" for the Mexican economy
A) when U.S. firms engage in direct foreign investment in Mexico.
B) when Mexican workers who can't find jobs in Mexico migrate to the United States and send
part of their income back to Mexico.
C) when the U.S. government bails Mexico out of financial crisis.
D) when the U.S. market buys products from the maquiladora industry.

56) ______

57) One reason why most economists forecast that the effects of NAFTA on the U.S. economy would
be small is because
A) the Mexican economy is small relative to the U.S. economy.
B) NAFTA does not bring down tariffs far enough.
C) Mexico was not expected to live up to its obligations under the agreement.
D) NAFTA trade opening provisions only cover a handful of sectors.
E) the United States was not expected to live up to its obligations under the agreement.

57) ______

58) The single most important reason for Canada's seeking a free trade agreement with the United
States was to
A) avoid international outsourcing in low wage countries.
B) ensure its ability to join NAFTA.
C) ensure its access to the U.S. market.
D) harmonize its environmental laws with the United States.
E) ensure the continuation of its social programs.

58) ______

59) The World Bank's view of the effectiveness of industrial policies in East Asia is that, in general,
they
A) worked in Japan and Korea, but not in the other countries.
B) hindered growth.
C) are the main factor in the success of the East Asian economies.
D) had little or no effect on growth.
E) encouraged growth.

59) ______

60) Which of the following is a false statement about education in the HPAE?
A) Spending was focused on the primary and secondary level, where it has the greatest social
impact.
B) An emphasis on state funding of advanced degree programs, such as engineering and
computer science, increased manufacturing production significantly
C) As the average educational level rose, workers could take on more technological,
sophisticated production, pushing new investment into product lines
D) Literacy rates rose dramatically in the HPAE and laid a foundation for a skilled labor force.

60) ______

61) One economic advantage of a large share of exports in GDP is that countries
A) will have greater equality in their incomes.
B) can maintain lower rates of unemployment.
C) can reduce their budget deficits.

61) ______

D) develop more labor-intensive industry.

E) can purchase the imports they need.
62) In general, the relationship between democracy and economic growth is that
A) democracies are much more variable in their rates of growth than undemocratic nations.
B) democratic nations grow faster than undemocratic nations.
C) democratic nations grow slower than undemocratic nations.
D) there does not seem to be a relationship between democracy and economic growth.
E) democracies are much less variable in their rates of growth than undemocratic nations.

62) ______

63) One of the most important ways in which local instabilities are quickly spread to the international
economy is through
A) firms.
B) labor.
C) goods.
D) capital.
E) services.

63) ______

64) From the late 1940s until the creation of the WTO, the organization that was primarily responsible
for conducting rounds of trade negotiations was the
A) World Bank.
B) GATT.
C) ITO.
D) United Nations.
E) IMF.

64) ______

65) IMF conditionality refers to the

A) technical assistance the IMF gives.
B) changes a country must make in order to receive IMF financial assistance.
C) minimum size of a national debt problem that a country must have before the IMF gets
involved.
D) minimum-sized loan the IMF will make.
E) maximum-sized loan the IMF will make.

65) ______

66) Which of the following is FALSE?

A) Because of international recognition of national sovereignty, individual nations are
unaffected by global trade and capital flows.
B) Because trade policies are laws of individual nations, it is difficult for other nations and
international organizations to force changes on unwilling nation states.
C) Foreign investors may not have a legal right to impose policies on a nation state, but the
nation state may still experience consequences of poor policies.
D) National sovereignty limits outsiders' ability to change the trade laws and practices of
individual nation states.

66) ______

67) The Tokyo Round of the GATT negotiations was notable because it was the first round
A) to begin establishing rules on subsidies.
B) that included textiles and apparel.
C) to begin discussions of exchange rates.
D) that included Japan.
E) to limit the tariffs of the United States.

67) ______

68) Which of the following is TRUE?

A) Absolute advantage is based on comparing the opportunity costs of trading partners.
B) David Ricardo proposed the theory of absolute advantage as the basis for trade.
C) The Ricardian model assumes labor is perfectly mobile.
D) Adam Smith proposed the theory of comparative advantage as the basis for trade in The

68) ______

Wealth of
Nations.
69) In our simple trade model, having a comparative advantage in a product implies that a country
will specialize completely in the product
A) where total output is lower per worker-hour.
B) with the lowest opportunity cost.
C) where total output is greater per worker-hour.
D) with the highest opportunity cost.

69) ______

Use the data in the table below to answer the following question(s):
Table 3.1
Output per Hour Worked

70) Based on Table 3.1, the opportunity cost of a pair of shoes in the United States is
A) one-half computer.
B) three computers.
C) one computer.
D) two computers.
E) None of the above.

70) ______

71) Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is
natural resource intensive and computers are capital intensive, then
A) Chile will produce more timber after trade begins with Brazil.
B) Brazil will produce more timber after trade begins with Chile.
C) Chile will produce more computers after trade begins with Brazil.
D) Brazil will completely specialize in computers once trade begins with Chile.

71) ______

72) In the case of a small country, producer surplus

A) increases more with quotas.
B) increases more with a quota than with an equivalent tariff.
C) increases the same with tariffs and equivalent quotas.
D) increases more with a tariff than with an equivalent quota.
E) is not changed by tariffs or quotas.

72) ______

Scenario 6.1
Suppose that United States furniture makers import $100 of wood and parts in order to make a dining room table selling
for $500. The imports have no tariff of quota restrictions.
73) Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room tables,
and another tariff of 50 percent is placed on imports of wood and parts, then the effective rate of
protection on tables made in the United States is
A) 0 percent.
B) 70 percent.
C) 50 percent.
D) 12.5 percent.
E) 20 percent.

73) ______

74) Efficiency losses are

A) the increase in producer surplus that is created by a tariff.
B) the total loss in consumer surplus from a tariff.
C) the deadweight loss that is created because domestic firms have to charge higher prices to
produce units of output than foreign firms would have to charge.
D) deadweight losses caused by consumers being prevented by tariffs from buying products at
the world price, products that they value more highly than that price.

74) ______

75) Which of the following describes the asymmetry Moncur Olson observed in the incentives to
support and oppose trade policy?
A) The benefits of protection are spread out over a large number of firms and industries, but
the costs are concentrated on consumers.
B) The costs of protection are concentrated on a few firms, and the benefits of protection are
spread out over a large number of consumers.
C) The benefits of policy are concentrated, and the costs are spread out over a large number of
participants.
D) The benefits of those seeking protection outweigh the costs imposed by the protection.

75) ______

76) U.S. tariffs and quotas reduce national welfare the most in
A) machinery.
B) textiles.
C) agriculture.
D) chemical products.
E) clothing.

76) ______

Use the information in the following table to answer the following question(s).
Table 9.1

77) Based on Table 9.1, the balance on the capital account is

A) +200.
B) -200.
C) 0.

77) ______
D) +100.

E) -100.

78) One of the problems with excessive debt is that

A) it worsens the central government's budget position by adding large debt service payments
to other budget items.
B) it reduces the quantity of resources available to invest in economic development.
C) it can intensify and spread a crisis.
D) if debt service is substantial, schools, health clinics, roads, ports, other infrastructure, and
social needs are less likely to be addressed.
E) All of the above.

78) ______

79) All else equal, if Canada raises its interest rates,

A) the dollar depreciates.
B) the U.S. demand for Canadian dollars increases.
C) the Canadian supply of Canadian dollars increases.
D) Both A and B.
E) Both A and C.

79) ______

80) A firm that buys foreign exchange in order to take advantage of higher foreign interest rates is
A) responding to fluctuations in the business cycle.
B) demonstrating purchasing power parity.
C) ignoring the nominal rate of exchange.
D) engaging in interest rate arbitrage.
E) speculating.

80) ______

81) Purchasing power parity (PPP) measurements of income are a way to make international
comparisons by correcting for national differences in
A) government subsidies.
B) inflation.
C) unemployment.
D) prices of goods and services.
E) economic growth.

81) ______

82) Which of the following is FALSE about increased U.S. enforcement efforts on the U.S/Mexican
border?
A) Illegal migration has moved toward more inhospitable areas on the border.
B) The increase of enforcement personnel stationed at the border has been very effective in
averting migration.
C) Migrants are staying in the United States longer on average than they were before the
enforcement efforts.
D) Thousand of migrants are estimated to have died since the increased enforcement efforts
began.

82) ______

83) Which of the following economic conditions cause export growth to be a basis for faster overall
economic growth?
A) Economies of scale in production for the world market
B) High and constant levels of productivity in export production
C) A larger-than-average manufacturing sector
D) Diseconomies of scale in production for the domestic market
E) A larger-than- average service sector

83) ______

84) Recent technological changes have had profound effects on the movement of capital across
international boundaries. One of the main effects has been
A) a long-run decline in real interest rates.
B) a long-run increase in real interest rates.
C) a decrease in the transaction costs of moving capital.
D) an increase in the transaction costs of moving capital.
E) None of the above.

84) ______

85) One of the distinguishing characteristics of capital mobility today is that

A) there are far more kinds of financial instruments than there were 100 years ago.

85) ______

B)
C)
D)
E)

foreign capital flows are better managed and rarely cause financial problems.
nations are no longer dependent on their own national savings for their investment funds.
the bulk of foreign capital flows are tied to labor flows.
None of the above.

86) Based on the theory of comparative advantage, nations maximize their well being when they
A) increase trade surpluses.
B) create more jobs.
C) allocate resources more efficiently
D) increase exports.

86) ______

87) Which of the following is TRUE according to the case studies on NAFTA and China presented in
the chapter?
A) The United States has relative scarcity in unskilled labor.
B) The United States has relative scarcity in capital.
C) Mexico has relative abundance in skilled labor.
D) China has relative abundance in capital.

87) ______

88) Which of the following is FALSE?

A) Pharmaceuticals, computer hardware, telecommunications equipment, and other high
technology products are valuable because of the innovation and research they incorporate.
B) Software, movies, music, and other artistic expressions are valued for their creativity.
C) The protection given to creators and innovators varied greatly internationally until
standardization began with the signing of the TRIPs agreement.
D) Developing countries usually strongly advocate the protection of intellectual property
rights.
E) At the end of the twentieth century, more and more traded goods and services incorporated
specialized knowledge and unique ideas.

88) ______

89) "Cheap foreign wages" is a poor argument for protection because it fails to recognize the
importance of productivity. Which of the following does NOT contribute to increasing
productivity?
A) Capital
B) Education and training
C) Government subsidies
D) Infrastructure

89) ______

90) The current account balance of the United States began to deteriorate in
A) the early 1990s.
B) the early 1980s.
C) the late 1980s.
D) the early 1970s.
E) the late 1960s.

90) ______

91) Which of the following would NOT be a cause for an increased American demand for the
Mexican peso?
A) The United States having lower interest rates than Mexico
B) More economic expansion in the United States
C) Increased American demand for Mexican goods
D) The expectation by speculators that the value of the peso is edging up
E) None of the above.

91) ______

92) Under NAFTA, environmental standards are

A) not harmonized.
B) harmonized around Mexican rules.
C) harmonized around U.S. rules.

92) ______

D) harmonized around Canadian rules.

E) harmonized around a combination of the rules in all three countries.
93) A major impact of the transatlantic telegraph was
A) a reduction in time required to obtain market information and conclude a transaction
between New York and London
B) a decrease in trade barriers between the United States and Europe.
C) an increase in labor flows across the Atlantic.
D) an increase in trade conflicts between the United States and Europe.
E) None of the above.

93) ______

94) Which of the following is TRUE?

A) A common market is more deeply integrated than a customs union.
B) Customs unions require the creation of a common currency.
C) The European Union is a shallower and broader form of integration than NAFTA.
D) NAFTA is an example of a customs union.

94) ______

95) Suppose that Canada can produce 15 timber or 3 film and Mexico can produce 9 timber or 3 film.
Suppose that opportunity costs are constant. Which of the following is FALSE?
A) Canada and Mexico would find trade mutually advantageous at a ratio of one unit of film to
six units of timber.
B) The opportunity costs for producing timber are lower in Canada than in Mexico.
C) Canada has an absolute advantage in timber production.
D) Mexico has a comparative advantage in film production.

95) ______

96) Using the specific factors model, assume that strawberry production requires the specific factor of
land, tractor production requires the specific factor of capital, and labor is variable. If the United
States is capital abundant compared to Mexico, and Mexico is land abundant compared to the
United States, then in the short run with trade we would expect
A) the income of U.S. workers to increase.
B) the income of Mexican land owners to increase.
C) the income of Mexican workers to increase.
D) the income of U.S. land owners to increase.

96) ______

97) Japanese tariffs and quotas reduce national welfare the most in
A) chemical products.
B) agriculture.
C) clothing.
D) machinery.
E) textiles.

97) ______

Use the following table to answer the next question(s). All values are net.
Table 9.3

98) Based on Table 9.3, if values in the table are amended to reflect a net increase in U.S. foreign direct
investment of 100, then the new balance for the capital account balance becomes
A) -25.
B) +25.
C) +75.
D) -75.
E) +225.

98) ______

99) Covered interest arbitrage involves both

A) the purchase of a foreign asset and a forward contract in the market for foreign exchange.
B) the sale of a foreign asset and the purchase of a forward contract in the market for foreign
exchange.
C) the purchase of a domestic asset and a spot contract in the market for foreign exchange.
D) the sale of domestic stocks and the purchase of foreign bonds.
E) None of the above.
100) Which of the following is most important in determining the number of jobs in an economy?
A) Tax policies
B) Macroeconomic policies
C) Urban policies
D) Environmental policies
E) Trade policies

99) ______

100) _____