Review Question (1)
1. What makes international trade different from domestic trade (within the regions of a nation state.)
2. How have the US patterns of trade changed in the past 50 years?
3. What are some of the important factors that have contributed to the growth of international trade?
4. What was the principle idea in the doctrine of mercantilism?
5. What was David Hume's specie-flow mechanism?
6. Country A uses 4 units of labor to produce
one unit of food and 8 units of labor to produce one unit of cloth. Country
B uses 3 units of labor
to produce on unit of food and 5 units of labor to produce cloth. Assuming that labor is the only factor of production in booth countries, can
these two countries gain from trade? Use a diagram to clearly explain. Be as specific as you can and clearly explain the key points on your graph.
7. What is does MRS (along an indifference curve) reflect/explain?
8. Show how a country's production and consumption are determined under autarky.
9. What did David Ricardo mean by "comparative advantage?"
10. What do we mean by "terms of trade?"
11. A small country produces computers and
rugs. At the relative price of 10 rugs per 1 computer this country produces
50 rugs and 10
computers under autarky.
a) Draw a Neoclassical production possibilities
curve and show the point of production (and consumption) for this country
to reflect the
information described above.
b) b) Now suppose the country opens to international trade. As a small country the international relative price of computers would be given to
this country and it would have no influence on it. Assuming the international relative price of computers is 5 rugs per 1 computer, show the
country's export and import and its gain from trade. Hint: You must draw a production possibilities curve and a set of indifference curves that
would be consistent with the information given in the description.
12. Use a set of diagrams to show the gains
from trade in two-country/two-good model in context of a Neoclassical
world. Be very clear and
specific about your assumption on factor abundance and production.
13. What is an offer curve? Explain the information contained in an offer curve (and a specific point on an offer curve) clearly.
14. Using a set of offer curves, demonstrate
how equilibrium terms of trade are achieved in a two-country/two-good (say
food and cloth) world.
Then, try to explain how each of the following developments may affect the size of trade and the terms of trade.
a. Economic growth in one of the two countries
b. Economic growth in both countries
c. Economic recession in one of the two countries
d. A tariff imposed by one country on its imports
15. Explain the Heckscher-Ohlin theorem.
16. What is meant by "Leotief Paradox?"
17. Explain some of the reasons why the H-O model does not explain the real trade patters of the world.
18. Explain the factor price equalization theorem.
19. Describe the Stolper-Samuelson Theorem
20. Who stands to gain the most
from trade in a labor-abundant country? Explain why under certain conditions
(the specific-factor model)
some capital owners and labor groups might oppose free trade.
21. Explain the Leontief Paradox.
22. Outline and briefly discuss the explanations for Leontief paradox.
23. Explain the Stolper-Samuelson Theorem. Be careful to explain the underlying assumptions of the theorem.
24. Explain how trade could affect (relative) prices and thus factor prices.
25. How do changes in factor prices affect the production process? (Hint: Think of K/L ratio, for example.)
26. Explain some of the reason why we do not observe factor price equalization.
27. Explain how factor mobility could
affect adjustments in factor prices following the opening of trade.
(Consider both short run and long run.)
28. Explain who will be the losers and
who will the gainers (from free trade) under the assumption of factor immobility.
Think of two factors
production: capital and labor.
29. What do we mean by intra-industry trade? Explain some of the reasons for such trade.
30. China is considered a labor-abundant
country. It is widely held that China’s attempt to join WTO will
eventually result in China having
freer trade relation with the rest of the world. Using H-O analysis, who in China stands to gain more from free trade? Explain.
31. If we assume that the existence of
different skill levels in the US labor market is an explanation for the
Leontief Paradox, how would you
expect free trade to affect income distribution in the US?
Review Questions (1A)
1. Consider a small country (Agraria) with given resource endowments that produces agricultural (A) and manufactured (M) products. Suppose that agricultural products are land-intensive while manufacturing is labor intensive. The country is (relatively) more richly endowed with land than with labor.
a. Based on the above description, draw a hypothetical production-possibilities
frontier (curve) for this economy. (Your PPF does not have to be identical
to those of others.)
b. Under autarky, the ratio between the price of agricultural products and the price of manufactured products (Pa/Pm) is 1/2. Assuming the country is operating under full employment and full production, show the country's production point under autarky on your diagram.
c. Suppose this country opens to trade with the rest of the world. The world's price ratio, (Pa/Pm)w, is equal to one. Show the country's production point after trade.
d. Now draw a set of community indifference map consistent with country's consumption under autarky. Show the country's consumption point after trade.
e. Show the country's levels of export and import on your diagram.
f. Discuss the country's gain from trade.
2. Suppose Agraria's neighboring country (Laboria) is also a small
country. Laboria, however, is a country with a relatively small landmass
but a large population. Laboria also produces agricultural as well
as manufactured products.
a. Based on the above description, draw a hypothetical production-possibilities frontier (curve) for this country as well. (Your PPF for this country does not have to be identical to those of others.)
b. Under autarky, the ratio between the price of agricultural products and the price of manufactured products (Pa/Pm) in Laboria is equal to 2. Assuming the country is operating under full employment and full production, show the Laboria's production point under autarky on your diagram.
c. Now suppose that rather than opening their borders to the rest of the world, the two countries enter into a bilateral trade agreement according to which they trade with each other freely while keeping their borders closed to the rest of the world. Using your diagrams, explain and demonstrate how the terms of trade (price ratio) between the two countries get established.
d. Show how each county would gain from trading with each other.
e. Determine the levels of export and import of each country. ( Show them on your diagram)
3. Can two countries with identical PPFs gain from trade with each other? Explain clearly.
4. Carefully and clearly explain under what conditions (or circumstances) a country could lose in social welfare as a result of (international) trade.
5. Draw Agraria's "offer curve".
a. Explain what an offer curve shows?
b. Assuming Agraria, as a small country, faces an international price ration (Pa/Pm) of one. Show Agraria's export and import levels on its offer curve.
Review Questions (2)
1. Explain internal and external economies of scale.
2. Explain how internal economies if scale affect patterns of trade.
3. Explain how external economies of scale affect patterns of trade.
4. What is a tariff?
5. One way of determining the overall level of tariff for a country is to simply average tariff rates applied to different (imported) goods: a
simple unweighted average. What is problem with this method?
6. One way of determining the overall level of tariff for a country is to calculate the weighted-average of all tariff rates based on the (relative)
size of each import. What is the problem with this method?
7. Which group of countries has lowered its tariff rates more since the completion of the Uruguay Round? How have the lowered tariff rates
affected the patterns of trade in the world?
8. Explain consumer and producer surplus.
9. Explain the welfare effects of tariffs in the case of a small country. Use a diagram to demonstrate. Who gains who loses and what is the net
effect on the society?
10. Why is it that a large country could gain from tariffs on certain imports? Explain.
11. In one of tables in the textbook (Chapter Six) the net welfare effects of tariffs for certain U.S. imports have been listed. Which imports
rank highest? Can you explain why?
12. What do mean by the "effective tariff rate?"
13. The tariff rate on women's footwear is 10 percent. Imported inputs constitute 75% of the value of women's footwear and there is only 20%
tariffs on these imports. Determine the effective tariff rate on women's footwear.
14. Explain (you do not have to draw graphs) the welfare implications of export taxes for, a small country, a large country, and the world.
15. Use offer curves to explain the effect of import tariffs in the case of a large country.
16. Compare the welfare implications of tariffs and quotas.
17. Explain the welfare implication of an export subsidy from the perspective of a small importing country.
18. What are countervailing duties?
19. What is dumping? Explain each of the different types of dumping discussed in the textbook.
20. What are some of the problems associated with predatory dumping?
21. What are the conditions under which a firm can engage in persistent dumping? Explain.
22. Briefly explain some of the more commonly used non-tariff barriers and discuss their effectiveness.
23. Explain the two common methods of measuring non-tariff barriers.
24. Explain the "infant industry" argument for protection.
25. Assuming the infant status of an industry justifies some kind of protection for it, from among a tariff, a quota, and a subsidy which approach would you recommend? Clearly explain why. You might want to use graphs to make your point.
26. What is an optimal tariff? Explain its implications for the importing country and the world.
27. Demonstrate how international trade can affect a firm that has monopolistic power at home.
28. Demonstrate that when a firm has monopolistic power in the domestic market even restricted (by tariffs) trade could be better for
consumers than no trade.
29. Explain under what conditions externalities could justify trade restrictions.
30. One of the common arguments for protection has to do with the difficulties that industrial countries have competing with low wage
countries. Is that a valid argument? Explain.
Review Questions (3)
Ad valorem tariffs
2. What are the advantages of ad valorem tariffs over specific tariffs?
3. What is the net loss of economic welfare resulting from the imposition of an import tariff called?
4. Optimal tariffs: Explain under what conditions a country could gain in economic welfare by imposing tariffs on its imports.
5. What is an effective rate of protection? What does it depend on? How do we calculate it?
6. What is an import quota?
7. Compare tariffs and quotas with respect to their welfare implications.
8. Why do we say quotas are more restrictive than tariffs?
9. Explain why quota and voluntary export restrictions might not have significant impacts on a country’s balance of trade position.
10. Why do countries impose tariffs on their imports?
11. Demonstrate why economists prefer subsidies, as an import-restricting tool, to tariffs and quotas.
12. Demonstrate the welfare effects of an export subsidy on an exporting country and its trading partners (the world).
13. One way of determining the overall level of tariffs for a country is to calculate the weighted average of all tariff rates based on the (relative) size of each import. What is the problem with this method?
14. Explain and demonstrate why when all countries subsidize a certain
export product not only will such subsidies become ineffective (in terms
supports for producers) they result in a misallocation of economic resources. Besides, when an export subsidy becomes permanent a number of countries, no
single country would be willing to abandon it because of the fear of losing its export markets to other countries.
15. Explain and demonstrate the welfare impacts of an export tax first in the case of a small country and then for a large country.
16. What are countervailing duties?
17. Discuss the welfare effects of a combination of an export subsidy and a countervailing duty on both exporting and importing country.
18. What is “dumping”?
19. Describe different types of dumping and the conditions under which they might occur.
20. Name and briefly describe four other types of non-tariff barriers.
21. Explain and briefly discuss each of the following protectionist
a. Infant industry argument
b. Optimal tariff argument
22. Why is argued that a monopoly under autarky could cause a misallocation of resources?
23. How does free trade affect the behavior of a monopoly?
24. If we are to provide protection for a monopolistic firm in a (small) country, is a tariff or a quota more harmful to consumers? Explain.
25. When production of a certain good in a country produces external
benefits some degree of protection for that good may be justified. Among
a quota, a tariff
and a subsidy, which policy instrument would you recommend? Clearly explain. You may use graphs to demonstrate your points more clearly.
26. One of the arguments made in support of protection has to with the observation that in many counties costs of production are lower than, say, in the US because of cheap labor. So it wouldn’t be fair to expect American firms to compete with produces in these low-wage countries. Do you agree with this argument? Explain.
27. What were the important provisions in the Reciprocal Trade Agreements Act of 1934?
28. What is “GATT”? Briefly explain.
29. What were the major accomplishments of the Uruguay Round?
30. What is meat by the “fast track” process?
31. Briefly explain each of the following “forms” of trade or economic
· Preferential trading arrangement
· Free-trade area
· Customs union
· Common markets
· Economic union
31. Explain and demonstrate how a free-trade agreement between two or more countries could result in trade diversion.
32. Is it possible for a free trade agreement to cause only trade creation? Explain.
33. In which of the above category does the NAFTA belong? Explain.
34. What are Maquiladoras? Would you say they have generally benefited Mexico?
35. Based on what you have learned in the course, in your opinion, what have been, the success and the failures of NAFTA for is members?
36. What are the factors contributing to economic growth?
37. Demonstrate how economic growth could affect a country’s welfare in autarky.
38. Demonstrate how economic growth could affect a small country’s welfare, assuming that the country is open to trade.
39. Demonstrate how labor-endowment growth could (assuming no population growth) affect a small country’s trade, income, and terms of trade.
40. Explain and demonstrate how labor-endowment growth could affect a large country’s, trade, income, and terms of trade.
41. Explain and demonstrate how capital-endowment growth could affect a large country’s, trade, income, and terms of trade.
42. Explain how technology-driven growth could cause a decline in economic welfare: immiserizing growth
43. Using a diagram demonstrate how a wage differential between two countries could result in the movements of labor and eventually wage equalization.
44. Using a diagram demonstrate how a rent (the rate of return on
capital) differential between two countries could result in capital movements
45. What could explain the fact that most of the foreign investments go to industrial countries that are relatively capital rich?
46. Identify and briefly explain different types of capital movements.
46. What are some the reasons or concerns behind the opposition to immigration policies?
Review Questions (4)
1. Silverland is small country facing international terms of trade (Px/Pm) of 3/2.
At these terms of trade the country imports 600 units.
a. Determine the country's export.
b. Draw a hypothetical offer curve for Silverland consistent with the above information.
c. Using your diagram, determine Silverland's elasticity of import at the above terms of trade.
d. Suppose as a result of discovery of new mineral reserves (silver), Silverland's economy has had
significant growth. Explain the possible effects of this economic growth on the country's offer
curve and its elasticity of import.
2. Consider a two-country world with Country A and Country
a. Draw a hypothetical offer curve for each country.
b. Determine and show the equilibrium terms of trade between these two countries.
c. Using your diagram, show and determine the elasticity of import for each country.
d. Suppose a significant amount of capital is transferred from Country A to Country B. Show and
discuss the possible effects of this capital transfer on each country's offer curve, exports, imports,
and elasticity of import.
3. At the international terms of trade of one car for six rugs Mexico,
as a small country, imports 20,000 cars per year.
a. In a two-dimensional space measuring rugs on the vertical axis and cars on the horizontal axis, draw the international terms of trade line.
b. Draw a hypothetical offer curve for Mexico showing her export and import quantities.
c. As a result of NAFTA, Mexico lowers its tariff on imported cars. Show the effect on the diagram and explain it.
4. I n a two-country world with countries A and B, country A imports
300 bushels of tomatoes from country B and exports 900 bushels of corn
to that country.
a. Assuming an equilibrium terms of trade, draw the two countries’ offer curves.
b. Now suppose country A imposes a tariff on imported tomatoes to protect its tomato farmers. Show and explain the effect of this tariff on the trade between the two countries.
c. How does this tariff affect the terms of trade for each country?
d. In retaliation country B considers imposing an import tariff on Corn. Discuss the welfare effect a retaliatory tariff on the two countries.
5. The following diagram shows the offer curve for a small country
importing food products and exporting manufactured goods.
a. Calculate the elasticity of demand for import for this country at (relative) price ratios:
Pm/Pf = 1/5
Pm/Pf = ½
b. Explain (and compare) the effect of a change in each
of these relative prices on the export and import of the country.
c. Assuming that the international (relative) terms of trade (Pm/Pf) are 1/2, show and explain the impact of a significant inflow of capital on the country's
trade patterns. How will the inflow of capital affect the country's elasticity of demand for imports?
Note: Try to be as precise as you can when using the diagram.
6. Outline the underlying assumption of the Heckscher-Ohlin theorem.
7. One of the important assumptions of H-O analysis is that
each good is (relatively) more intensive in a given factor (say, capital
or labor) at all relative
factor prices. Use a diagram to demonstrate this assumption.
8. Explain the Heckscher-Ohlin theorem.
9. Explain the factor price equalization theorem.
10. Describe the Stolper-Samuelson Theorem
11. Describe the effect of a factor intensity reversal on the trade patterns between two countries.
12. Use a diagram to explain how the absence of perfect competition would prevent factor price equalization to be realized. (Hint: Monopoly and price discrimination)
13. Who stand to gain the most from trade in a labor-abundant country? Explain why under certain conditions (the specific-factor model) some capital owners and labor groups might oppose free trade.
14. Explain the Leontief Paradox.
15. Outline and briefly discuss the explanations for Leontief paradox.
16. Explain the fundamentals of the “commodity approach” to testing the H-O theorem.
17. China is considered a labor-abundant country. It is widely
held that China’s attempt to join WTO will eventually result in China having
relation with the rest of the world. Using H-O analysis, who in China stands to gain more from free trade? Explain.
18. If we assume that different skill levels in the US labor market is an explanation for the Leontief Paradox, how would you expect free trade to affect income distribution in the US?
19. Explain and compare “specific” and "ad valorem" tariffs. Which one would you characterize as being more effective in providing consistent levels of protection for domestic industries? Explain.
20. Use a diagram to compare tariffs and quotas in terms of their welfare implications.
21. Compare the welfare implications of a tariff with those of an equally protective subsidy.
22. Critique the Generalized System of Preference (GLS) from an efficiency standpoint.
23. What is the rationale for “offshore assembly provisions” (OAP)?
24. The nominal tariff rate for shoes (footwear) is 8.8 percent. Most shoe manufactures in the US import the partly assembled tops and soles of their shoes from abroad. Generally, the imported tops make up about 25 percent of the value of a pair of shoes and the soles about 30 percent. There is a 5 percent tariff on imported tops and 6.5 percent on imported soles. Determine the effective rate of protection for shoe manufacturers.
25. Why do we say that weighted-average tariff rates could be biased downward?
26. Use a supply and demand diagram to demonstrate the welfare implications of a tariff (in terms of changes in consumer and producer surplus) for a small country.
27. Compare tariffs and quotas in terms of their welfare implications.
28. Explain why it is argued that from a welfare standpoint a subsidy is preferred to a tariff and quota.
29. Consider a small country in which rice is a staple food.
The country produces rice and, under autarky, the domestic (equilibrium)
price of rice is $3 per bushel. Draw a hypothetical supply and demand diagram
to show the market for rice in this country. Suppose the international
price of rice is $5 per bushel.
a. Show the effect of free trade on the production and consumption of rice in this country.
b. Now suppose a export tax of $1 is imposed on rice. Demonstrate the effect of this tax on the production, domestic consumption, and the export of rice.
30. Use a diagram to show the implications of a specific tariff in the case of a large country. Explain who bears the burden of a tariff. (a) Under what condition(s) is the burden of a tariff fully borne by the importing country? (b) Under what condition(s) is the burden of a tariff fully borne by the exporting county?
31. Use a diagram to show the effect of an ad valorem export tax in the case of a large country. Show who bears the burden of an export tax? What are the welfare implications of such a tax?
32. Use offer curve diagram(s) to demonstrate and compare the effects
of import tariffs for small and large countries.
Review Questions (5)
1. Explain how changes in transportation costs could affect the patterns of international trade.
2. For what types of goods is trade more likely to be affected by changes in transportation costs?
3. We know that a concave (bowed-out) production possibilities curve indicates increasing opportunity cost (caused by diminishing returns). What might a convex (bowed-in) production possibilities curve indicate?
4. Explain how, under free trade, a large country might be able to drive small counties’ producers out of the market even when small countries have a comparative cost advantage over the large country?
5. Free trade agreements among small countries (before they open their borders to free trade completely) might help them take advantage of their production potentials more fully. Explain.
6. Use an example to explain the “product cycle” theory of trade.
7. Use the scale economies theory of trade to explain why small countries may be at an disadvantage when opening their borders to free trade.
8. In negotiating the terms of their membership in the WTO, while
demanding free access to the markets in other member countries, developing
countries often request that they be given a longer transition period for
the removal of their trade barriers. Explain how they could use the
economies of scale argument to justify their request.