Questions

Question 1

If a country exports the good that it can produce at a low opportunity cost and imports those goods that it would otherwise produce at a high opportunity cost, we say that such trade is based on:

1. the theory of absolute advantage.

2. the arbitrage pricing theory.

3. theory of factor endowments.

4. the theory of comparative advantage.

Question 2

Suppose that under autarky, wheat costs 5 dollar per bushel in the U.S. and 9 dollar per bushel in the Rest of the World. After the opening of free trade between the U.S. and the Rest of the World at a world price of $6 per bushel:

1. neither the U.S. nor the Rest of the World gain from trade.

2. both countries gain from trade, but the U.S. gains more than the Rest of the World.

3. both countries gain from trade, but the Rest of the World gains more than the U.S.

4. the net change in national welfare in the U.S. is zero but the Rest of the World gains.

Question 3

Which of the following can help explain the rise of intra-industry trade?

1. Recent recessions and increase in the price of oil have led to lower national income levels.

2. The demand for product variety has increased substantially over time.

3. Countries widely vary in terms of their resource endowments.

4. The developed nations have recently implemented more conservative fiscal policies.

Question 4

Which of the following features does a common market not have?

1. Common set of external tariffs

2. Free trade among its members

3. Harmonization of all economic policies

4. Free movement of factors of production

Question 5

The net loss from trade diversion for a country A that is forming a trade union with country B is likely to be smaller if:

1. country A’s supply curve is very steep.

2. country A’s tariff rate on the product is higher.

3. the good can be produced at relatively lower cost in B than in the outside world.

4. B’s export price is closer to the tariff-inclusive price for imports from countries outside the trade union.

Question 6

Under a floating exchange rate system, the dollar per euro ($/€) exchange rate rises when:

1. The U.S. trade deficit with the euro-area countries increases.

2. European demand for U.S. products increases.

3. The U.S. government raises personal income tax rates.

4. The inflation rate in the U.S. is much lower than the inflation rate in the euro-area.

Question 7

Suppose the average price of a book in the United States is $3.50 while in Japan the average price is 400 yen. If the market exchange rate is 1 dollar per 100 yen, the purchasing power parity model of exchange rate determination suggests that:

1. the yen is overvalued.

2. the yen value is about correct.

3. the yen is undervalued.

4. the dollar will depreciate against the yen.

Question 8

If a country with a relatively high inflation rate maintains a pegged exchange rate against the currency of a relatively low inflation country:

1. its currency will depreciate.

2. its exports will become more competitive in international market.

3. its currency will sell at a discount.

4. its exports will become less competitive in the international market.

Question 9

A country’s balance of payments records:

1. the prices that a country pays for its imports and the prices that the country receives for its imports.

2. the value of transactions between that country’s residents and residents of the rest of the world during a period of time.

3. capital gains and losses on a country’s international assets.

4. the value of a country’s holdings of foreign assets, minus the value of foreign holdings of the country’s assets.

Answers