Download International Trade Midterm Examination (semester 2, 2011) 1. The

International Trade
Midterm Examination (semester 2, 2011)
1. The unit labor requirement in the traditional Ricardian trade model (that we learned in class)
a) is the capital requirement for one worker for one unit of output in a country.
b) reflects the productivity of capital required for one worker.
c) is one unit of output produced by workers employed in an industry.
d) is the number of workers needed for one unit of output in an industry.
2. The production technology assumed in the Ricardian trade model can be described as
a) Constant returns to scale.
b) Increasing returns to scale.
c) Decreasing returns to scale.
d) None of the above.
3. The Ricardian trade model predicts that, if a country has a comparative advantage in X industry,
then the country
a) Consumes X only.
b) Produces X only.
c) Imports X only.
d) None of the above.
The marginal products of labor (MPL) in Home and Foreign are given below.
Industries
Country
Cheese
Wine
Home
2
4
Foreign
6
2
Home:
Supply Side: Total labor force: L = 10
Demand Side: Representative Utility function: U=qc×qw
Budget Constraint: I = pc×qc + pw×qw
Foreign:
Supply Side: Total labor force: L* = 15
Demand Side: Representative Utility function: U*=qc*×qw*
Budget Constraint: I* = pc*× qc* + pw*× qc*
Use the above given information to answer questions 3, 4, 5, 6, 7, 8, 9, 10 and 11 based on the
Ricardian trade model that we learned in class.
4. The autarky price ratios (pc/pw) in Home and Foreign countries are respectively,
a) 1/3 and 1/4
b) 1/2 and 3
c) 1 and 3
d) 2 and 1/3
5. The autarky equilibrium consumption ratios (qc/qw) in Home and Foreign countries are
respectively,
a) 1/4 and 1/2
b) 1/2 and 3
c) 2 and 1/3
d) 6 and 2
6. The Free Trade equilibrium relative price of cheese to wine (pcFT/pwFT) is
a) 2/3
b) 3/2
c) 4/9
d) 1/6
7. The Free Trade equilibrium consumption ratio of cheese to wine (qcFT/qwFT) in home country is,
a) 6
b) 3/2
c) 9/4
d) 2/3
8. Under the free trade equilibrium, the patterns of exports are such that
a) Home exports 20 Wine and Foreign exports 45 Cheese
b) Home exports 10 Cheese and Foreign exports 20 Wine
c) Home exports 10 Wines and Foreign exports 45 Cheese
d) Home exports 30 Cheese and Foreign exports 25 Wine
9. The Free Trade equilibrium wage ratio of home to foreign countries (wFT/w*FT) is,
a) 2/3
b) 3/2
c) 1/2
d) 3
10. The welfare levels of Home under autarky equilibrium and under Free trade equilibrium are
respectively,
a) 200 and 900
b) 675 and 800
c) 450 and 1000
d) 400 and 700
11. Suppose that there is a common trading cost between the two countries by t, which is defined
as an “iceberg” cost and 0<t<1. Furthermore, let us assume that t is 0.3. Then, are the two
countries still trading under the free trade system? (In other words, are they getting mutual gains
from the free trade?)
a) Yes, they are.
b) No, they are not.
c) Not sure at all.
d) The probability of continuing the free trade system is 50%.
12. Heckscher-Ohlin trade model (that we learned in class) assumes that factor intensities across
industries in a country before free trade are
a) Identical.
b) Different.
c) Increasing.
d) Decreasing.
13. The Heckscher-Ohlin trade model assumes that workers are perfectly mobile in a sense that
a) The workers in a country can travel to the other country as tourists.
b) The workers in both countries get paid an identical wage rate.
c) The workers in both industries in a country get paid an identical wage rate.
d) The workers’ total incomes in both industries are the same.
14. Suppose that Korea is labor abundant country and US is capital abundant country. According
to the Heckscher-Ohlin trade model (that we learned in class),
a) Korea will export labor intensive products to US.
b) US will export labor intensive products to Korea.
c) Korea will import capital from US.
d) US will import workers from Korea.
15. According to the Heckscher-Ohlin trade model (that we learned in class), if the marginal rate
of transformation of good X to Y (i.e. the slope of production possibility frontier line when X is on
horizontal axis and Y is on vertical axis.) is smaller than the relative price of X to Y, then
a) The production of good X should be increased and the production of good Y should be
increased.
b) The production of good X should be decreased and the production of good Y should be
increased.
c) The production of good X should be increased and the production of good Y should be
decreased.
d) The production of good X should be decreased and the production of good Y should be
decreased.
Following figure shows a diagram of Home in free trade equilibrium. Use this figure to
answer the questions 16, 17, 18, 19, and 20, based on the Heckscher-Ohlin trade model
that we learned in class.
QX
Terms of Trade
• Production
Indifference Curve
• Consumption
QY
Suppose that Home is capital abundant and Foreign is labor abundant; and the two countries
are trading goods X and Y where X is capital intensive and Y is labor intensive.
16. Compared to autarky equilibrium price ratio (pX/pY) in Home, the price ratio (pXFT/pYFT) under
the above free trade equilibrium in Home is
a) Increased.
b) Decreased.
c) Unchanged.
d) Not sure.
17. Compared to autarky equilibrium consumption ratio (QX/QY) in Home, the consumption ratio
(QXFT/QYFT) in Home under the above free trade equilibrium is
a) Increased.
b) Decreased.
c) Unchanged.
d) Not sure.
18. Compared to real income of workers in Home under autarky equilibrium, the real income of
the workers in Home under the above free trade equilibrium is
a) Increased.
b) Decreased.
c) Unchanged.
d) Not sure.
19. Compared to capital intensity (KY/LY) in Y industry in Home under autarky equilibrium, the
capital intensity in Y industry in Home under the above free trade equilibrium is
a) Increased.
b) Decreased.
c) Unchanged.
d) Not sure.
20. According to the Rybczynski theorem (that we learned in class), if the capital endowment in
Home country is increased, then the output of X is increased and the output of Y is decreased.
How many unit of Y should be decreased per unit of X increased? (note that K(w,r) and L(w,r) are
the optimal K and L to minimize unit cost.)
a) KX(w, r)/LY(w, r)
b) KY(w, r)/LX(w, r)
c) LY(w, r)/LX(w, r)
d) Lx(w, r)/LY(w, r)
Suppose that the world economy consists of two countries, A and B and they are currently under
free trade equilibrium, according to Heckscher-Ohlin model. Suppose that we could find out the
equilibrium factor intensities for two industries, X and Y, under the free trade equilibrium and
construct the following diagram with factor endowments of the two countries. Use this diagram,
please answer to questions, 21 and 22.
K
KX/LX

B

A
KY/LY
L
21. If the factor endowment point of country A is the point A and the factor endowment point of
country B is the point B, then
a) The production of Y in country A is smaller than in country B.
b) The production of X in country A is smaller than in country B.
c) The production of Y in country B is greater than in country A.
d) The production of X in country B is smaller than in country A.
22. If the factor endowment point of country A is the point A and the factor endowment point of
country B is the point B, then
a) Country A exports good Y and country B exports good X.
b) Country A imports good Y and country B imports good X.
c) Country A exports good Y and country B imports good X.
d) Country A imports good Y and country B exports good X.
23. The type II specific factors model (that we learned in class) predicts that, when only price of
good X is increased, the real income of the X-industry specific factor owners is
a) Increased.
b) Decreased.
c) Not sure.
d) None of the above.
24. The type II specific factors model (that we learned in class) predicts that, when only X-industry
specific factor endowment is increased, the real income of the Y-industry specific factor owners is
a) Unchanged.
b) Increased.
c) Decreased.
d) Not sure.
25. The type II specific factors model (that we learned in class) predicts that, when only labor
endowment is increased, the real income of workers is
a) Not affected.
b) Up to how to define the real income of workers.
c) Increased.
d) Decreased.
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