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International Trade
Examination 1

These questions are from the test bank. Some questions have multiple parts. Each question is worth 10 points unless otherwise stated.

Short Answer Essay

1. Which decision does a firm make whether to outsource or not?

(a) What are the problems of outsourcing?

(b) What are the benefits of outsourcing?

2. If the exchange rate is $1 = 2 Turkish lira and changes to $1 = 1.5 Turkish lira, which currency appreciates and which one depreciates?

(a) What happens to U.S. exports, if Turkey is a major trading partner?

(b) What happens to U.S. imports, if Turkey is a major trading partner?

3. Why do China and the Asian tigers weaken their currencies?

(a) Is this a form of mercantilism?

(b) Is this policy of weakening their currencies successful?

(c) Who benefits and who suffers from a weaker currency in those countries?

4. Why is Europe trying to unite economically and politically?

(a) Are the European countries successful?

(b) What are two requirements to join the EU?

(c) Some countries like Britain refuse to adopt the euro as their currency. Why do some countries refuse to give up their currency?

5. Why does the United States and many other countries maintain a strong U.S. dollar?

(a) What are the problems and benefits of a strong dollar have on the U.S. economy?

(b) How are the U.S. trade deficit and U.S. government debt related?

6. Please draw a market for soda drinks, such as Pepsi and Coca-Cola.  A political disruption interferes with the production facilities of the soda industry, ceteris paribus.  Show graph and explain in words.

(a) Which function shifts?

(b) What happens to market price and quantity?

(c) What happens to social welfare?

7. Please draw a market for the sugar market. Consumers expect sugar prices to be greater, ceteris paribus. Show graphically and explain in words.

(a) Which function shifts?

(b) What happens to market price and quantity? (Is this result interesting???)

(c) What happens to social welfare?

8. Please draw a market for coffee. An unusual drought for the last three years strikes the region where Colombia grows coffee, ceteris paribus.  Unfortunately, this story is true. Show graphically and explain in words.

(a) Which function shifts?

(b) What happens to market price and quantity?

(c) What happens to social welfare?

9. Please derive graphically an excess demand (ED) function for the corn market?

(a) What does the excess demand function represent?

(b) Which direction does the product and money flow?

(c) What happens to the domestic industry?

10. Please derive graphically an excess supply (ES) function for the computer market?

(a) What does the excess surplus function represent?

(b) Which direction does the product and money flow?

(c) What happens to the domestic industry?

11. Please show the United States and Malaysia engaging in free trade for laptop computers. Malaysia exports laptops while the United States imports them. A correct answer requires a laptop market for the United States, a laptop market for Malaysia, and the international market sandwiched in between.

(a) Please show the welfare effects for the United States for both autarky and free trade.

(b) Please show the welfare effects for Malaysia for both autarky and free trade.

(c) Which direction does the money flow?

(d) Which parties in Malaysia and the United States are harmed by free trade?

(e) Could economists determine if one trade partner benefits more from trade than the other?

(f) Trade theory assumes the countries cannot have trade deficits and trade surplus. How do economists reconcile this observation with the model?

12. Please show the United States and China engaging in free trade for soybeans. The U.S. exports soybeans while China imports them. A correct answer requires a soybean market for the U.S., a soybean market for China, and the international market that is sandwiched in between.

(a) Please show the welfare effects for the United States for both autarky and free trade.

(b) Please show the welfare effects for China for both autarky and free trade.

(c) Which direction does the money flow?

(d) Which parties in China and the United States are hamed by free trade?

(e) Could economists determine if one trade partner benefits more from trade than the other?

(f) Trade theory assumes the countries cannot have trade deficits and trade surplus. How do economists reconcile this observation with the model?

13. What is the traditional definition of Mercantilism?

(a) Which direction does the money and manufactured goods flow?

(b) How does national security play a role in Mercantilism?

(c) What can governments do with the money in terms of building a modern nation?

14. What is absolute advantage?

(a) Who came up with this theory?

(b) Looking at the table below of labor productivity, which country has an advantage in cars and corn?

(c) What is a short coming of this theory?

Productivity United States China
Cars 5 3
Corn 100 200

15. What is comparative advantage?

(a) Who came up with this theory?

(b) Using the table below, please convert the labor productivities into relative prices.

(c) Which country has a comparative advantage in cars? Which country has a comparative advantage in corn?

(d) How does arbitrage apply to international trade?

Productivity United States China
Cars 5 3
Corn 200 100

16. Two countries, the United States and China, produce computer chips and soybeans. China can produce either 100 computer chips or 50 bushels of soybeans, while the United States produces either 25 computer chips or 100 bushels of soybeans.

(a) Draw the straight-line Production Possibilities Curve (PPC) for both countries.

(b) If both countries do not trade, what is China's and the United States' production levels, if both set production at 50/50 for each product?

(c) If both countries open up their economies to free trade, which products do the countries specialize in, and what is the increase in production in both countries?

17. What is the North-South dilemma?

(a) What is Dependency Theory? In your answer, make sure you describe which goods are traded and the relative value of the goods.

(b) How could Dependency Theory be expanded to include research and technology?

(c) What explanation does the author present that explains the income differences between the Less-Developed Countries (LDCs) and the developed countries?

18. Please draw a curved Production Possibilities Curve (PPC) for the United States.

(a) What does a point in the interior represent?

(b) How can a society consume outside the boundaries of the PPC?

(c) How is the opportunity cost embedded into the PPC?

(d) What is the difference between a straight-line PPC and a curved PPC?

19. How is economic growth represented on a PPC? In your answer, include a graph of a PPC. One good is machines while the other good is for pure consumption.

(a) Please identify the sources of economic growth?

(b) The Asian tigers and China have high savings rates. Why is a high savings rate important for economic growth?

20. Please draw the Production Possibilities Curve for Bosnia and Herzegovina. One product is corn, while the other product is machines.

(a) Explain and show graphically on the PPC what happens when Bosnian industries adapt new technology?

(b) Identify the factors that could cause the PPC curve to shift inward?

21. Please draw two Production Possibilities Curves for the United States and China. Draw the PPCs, so China has a comparative advantage in laptops while the U.S. has a comparative advantage in soybeans.

(a) Draw the Community Indifference Curves and Production Possibilities Curves (PPCs) for both China and the U.S. under autarky.

(b) Show graphically how China and the U.S. gain from trade by attaining higher Community Indifference Curves.

(c) Please explain why a country does not completely specialize in the production of a product, when the PPCs are curved?

(d) Identify a problem with the Community Indifference Curves?

22. What is the Heckscher-Ohlin Theory?

(a) Distinguish between labor-abundant and labor-intensive?

(b) According to Hecksher-Ohlin Theory, explain the observation China imports agricultural products and exports labor-intensive products?

 

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