Download Midterm Practice Questions

Question 1 (50 points)
A country will export a good that uses a lot of the productive factor, such as land, labor,
or capital, that is relatively abundant / scarce in the country (circle one).
When the country begins to export this good
a) the income of this factor will increase / decrease / remain the same. (Circle one.)
Explain why.
b) the domestic price of the exported good will increase / decrease / remain the same.
(Circle one.) Explain why.
c) the quantity of the good consumed domestically will increase / decrease / remain the
same. (Circle one.) Explain why.
d) the well-being of domestic consumers of this exported good will increase / decrease /
remain the same. (Circle one.) Explain why.
e) Foreigners get to consume or to use the goods that are exported by the United States.
How, then, is it possible for Americans to gain by exporting things? [Isn’t it better to
get than to give?]
Question 2 ( 50 points)
Domestic value added is the difference between the sales price of a good sold by a US
firm and the cost of imported inputs, if any. The domestic value added of a bicycle
“made in the USA” that sells for $500 but uses $200 of imported parts, for example, is
$300. Imported bicycles of the same quality, of course, also sell for $500.
a) If a tariff is placed on imported bicycles, the domestic value added of US-made
bicycles will increase / decrease / remain the same. (Circle one.) Explain why.
b) If a tariff is placed on imported bicycle parts, the domestic value added of US-made
bicycles that use those imported parts will increase / decrease / remain the same.
(Circle one.) Explain why.
c) US made bicycles use some imported parts. A percentage tariff on imported bicycles
increases the effective rate of protection enjoyed by domestic bicycle makers by
more than / less than / the same as the tariff’s nominal rate. Explain why.
d) If a tariff is placed on imported bicycle parts but not on imported bicycles, the
domestic price of bicycles will increase / decrease / remain the same. (Circle one.)
Explain why.
e) American wages are so high compared to wages elsewhere that it is inconceivable
that any bicycles at all would be made in the USA unless US bicycle makers were
protected by tariffs or quotas. True / False. (Circle one.) Explain why.
Briefly answer the following. (10 point each part)
i.
What is meant by “most favored nation” status?
ii.
What was GATT? What is WTO? What is the difference?
iii.
What is the difference between a Free Trade Area, a Customs Union, and a Common
Market?
iv.
In what sense do international factor flows substitute for trade … and vice versa.
v.
What motivates some firms to become MNEs?
Question 4 (50 points)
a) Imposing a tariff on an imported good is a bad idea. Explain why using the diagram below. If you
use fancy terms like consumers surplus and deadweight loss, explain what they mean. (30 points)
Price
Domestic Supply
A
B
E
C
D
Pw + t = World Price + Tariff
F
Pw = World Price
G
Domestic Demand
Qs
Qs’
Qd’
Qd
Quantity of Good Produced and Consumed
d) If tariffs are such a bad idea, why do nations impose tariffs? (20 points)
What countries have the highest standard of living on the planet? List five of the richest twenty-five
countries.
What countries have the lowest standard of living on the planet? List five of the poorest twenty-five
countries.
Contrast income in China with income in the United States. Comment on average levels of income in the
two countries, the distributions of income across provinces (states), and recent rates of income growth in
the two countries.
What does “GDP per capita at PPP US$” mean? Why do we use PPP US$ when comparing per capita
GDPs across countries? Why not simply translate each country’s measured GDP in euros, lira, real, pesos
or whatever into US$ at the prevailing exchange rate?
Question II
Things are increasingly the same throughout the developed world. The same brands are on sale in
shopping malls from Montreal to Madrid to Melbourne … and at about the same prices. The relative wages
of farm workers and factory workers, of bakers and bankers, are increasingly similar across the developed
world as well. Explain why increased openness to international trade leads to
(a) convergence of product prices (20 points)
(b) equalization of factor prices (20 points)
(c) The United States exports civilian aircraft to Europe but it also imports civilian aircraft from
Europe. Sweden exports cars and trucks to Germany but it also imports cars and trucks from
Germany. This pattern of trade between developed countries, which accounts for most of
international trade, cannot be explained by conventional international trade theory. That theory
says a country should export things that use a lot of its relatively abundant resources and should
import things that use a lot of its relatively scarce resources. But the relative abundance and
scarcities of resources in the U.S. and Europe, in Sweden and Germany, are about the same. How
then can you explain the observed flows of very similar goods moving in both directions between
countries with very similar resource endowments? (20 points)
Question III
Suppose you were elected to Congress and wanted to protect Nevada’s manufacturers of gaming devices
against foreign competition.
(a) Would you argue for a tariff or for a quota on imported gaming devices? Why would you prefer
one over the other? (15 points)
(b) Tariffs and quotas go against the spirit of free trade that is sweeping the world. How else could
you protect Nevada’s slot machine manufacturers against foreign competition? (10 points)
(c) Nevada’s congressional delegates have never pushed for trade barriers against imported gaming
devices. Why not? (10 points)