World Economy Final - Week 8

Front 1

If factors of production cannot flow between countries

A) there is no reason to expect that wages should be equal worldwide.
B) multinational corporations would not exist.
C) trade in goods could still occur.
D) All of the above.

Back 1

D. ALL OF THE ABOVE

Front 2

Given constant returns to scale between labor and output, if it takes 1 hour to make 10 yards of cloth, then 100 yards of cloth can be made in

A) 10 hours.
B) 100 hours.
C) 1000 hours.
D) Can't tell without knowing how much capital is used.

Back 2

A. 10 HOURS

Front 3

The classical theory predicts that

A) countries will completely specialize in the production of export goods.
B) considerable trade will occur between countries with different levels of technology.
C) small countries could obtain all of the gains from trade when trading with large countries.
D) All of the above.

Back 3

D. ALL OF THE ABOVE

Front 4

The gains from international trade are closely related to

A) the labor theory of value.
B) how much the autarky price differs from the international price (i.e. the terms of trade).
C) the fact that one country must lose from trade.
D) All of the above.

Back 4

B. HOW MUCH THE AUTARKY PRICE DIFFERS FROM THE INTL PRICE (I.E. THE TERMS OF TRADE)

Front 5

Absolute advantage is determined by

A) actual differences in labor productivity between countries.
B) relative differences in labor productivity between countries.
C) Both A and B.
D) Neither A nor B.

Back 5

A. ACTUAL DIFFERENCES IN LABOR PRODUCTIVITY B/W COUNTRIES

Front 6

Which of the following statements about international trade is true?

A) Potentially, a country can have absolute advantage in all goods.
B) Potentially, a country can have relative advantage in all goods.
C) After trade, countries tend to specialize in the production of those goods in which they enjoy absolute advantage.
D) None of the above is true.

Back 6

A. POTENTIALLY, A COUNTRY CAN HAVE ABSOLUTE ADVANTAGE IN ALL GOODS

Front 7

QUESTION 7: SEE WORKSHEET

Back 7

SEE WORKSHEET

Front 8

Explain how trade will tend to emerge along the lines of comparative advantage if markets are allowed to work freely.

Back 8

Comparative advantage is determined by autarky prices. Foreign demand will tend to drive up (down) the autarky price of a country's comparative advantage (disadvantage) good, raising short term profits and attracting resources to that industry. These resources come from the import competing comparative disadvantage sector.

Front 9

Suppose that workers in A can produce 1 unit of S in 3 hours and 1 unit of T in 9 hours. Suppose that the relative price of S in B is 2. Graph the PPF for country A. Indicate the exact slope of the PPF. Show how the autarky equilibrium is determined. Illustrate a hypothetical international trade equilibrium, including production and consumption points, and trade volumes for a given (your assumption-be explicit) but permissible value of the international terms of trade.

Back 9

The autarky price of S in A is 1/3, so that must be the slope of its PPF. A has comparative advantage in S, so once trade begins it must completely specialize in S. The international terms of trade must lie between 1/3 and 2.

Front 10

Can a country have comparative advantage in all products?

Back 10

No, a country can never have comparative advantage in all products, no matter how productive it is in general. Comparative advantage has to do with the relative price a country can produce one good or another in autarky versus the cost at which they can trade those goods with other economies. There will always be goods that are cheaper to produce in another country than at home, relative to the opportunity cost of not producing goods in which the country has comparative advantage

Front 11

QUESTION 11: SEE WORKSHEET

Back 11

SEE WORKSHEET