Assignment 7 Part I Multiple-choice questions 1. In the country of Zana, a unit of labor can produce 4 units of good X or 2 units of good Y; in the country of Bren, a unit of labor can produce 2 units of good X or 1 unit of good Y. Which of the following is true? a. b. c. d. e. 2. Assuming that Country A has a comparative advantage in wheat and Country B in wine, which of the following is true? a. b. c. 3. The price of wheat in country B falls when trade opens between the two countries. The price of wine in country B falls when trade opens between the two countries. The prices of wine and wheat in country B fall when trade opens between the two countries. According to the Heckscher-Ohlin theorem, trade arises are due to a. b. c. d. 4. Bren has absolute advantage in producing both goods X and Y. Bren has comparative advantage in producing good Y. Zana has comparative advantage in producing good Y. Bren should export good X to Zana. Bren and Zana cannot benefit from trading with each other. Differences in technology. Differences in relative factor endowments and intensities. Differences in tastes and preferences. The existence of economies of scale in production. Based on the trade theories, which of the following statement is NOT true? a. b. c. d. Trade occurs because of differences in the availability of factor inputs across countries and differences in the proportions of those factor inputs used in producing different products. Trade causes expansion in the export-oriented sector and causes contraction in the import-competing sector. Trade allows a trading nation to consume beyond its production capacity. Trade benefits everyone or every group within a trading nation. 1 5. Refer to the following graph. Which of the following is true in a free trade situation for Country 1? The Heckscher-Ohlin (H-O) Model Effects of Trade on Welfare  PX   PY Y Country 1   1,before trade  PX   PY 700 600 •C A• 400 D O • •B 600 800 Trade theories a. b. c. d. 6. 35 Country 1 exports 200 units of X and imports 300 units of Y. Country 1 imports 200 units of X and exports 300 units of Y. Country 1 exports 600 units of X and imports 100 units of Y. Country 1 imports 600 units of X and exports 100 units of Y. The infant-industry argument The national defense argument The infant-government argument The nationally optimal tariff argument Intra-industry trade can be explained by: a. b. c. d. 8. X _____________ says that a new industry (especially in less developed countries) needs protection until it attains a competitive level of cost (and output) in world markets. a. b. c. d. 7.    1World The Ricardo trade theory The H-O trade theory Product differentiation and consumers’ preference for variety. Protective measures taken by the trading nations _____________ says that imposing a tariff may lead to an improvement of a country’s terms of trade and welfare. a. b. c. d. The infant-industry argument The national defense argument The infant-government argument The nationally optimal tariff argument 2 9. If China’s export prices go up and import prices go down as a result of currency revaluation, China’s terms of trade a. b. c. d. 10. According to the mercantilist view of international trade, a. b. c. d. 11. Improve. Deteriorate. Remain unchanged. Are uncertain. Trade is mutually beneficial. Import and export are equally important. Export is better than import. Countries should not trade at all. Refer to the following information and answer the question based on the Ricardo model: Wheat (bushels/labor hour) Cloth (yards/labor hour) The U.S. has comparative advantage in: a. b. c. d. 12. U.S. 100 150 U.K. 40 30 Cloth. Wheat. Both Wheat and Cloth. Neither product Most favored nations (MFN) treatment basically means: a. b. c. d. Granting first and most favorable treatment to a nation or nations that other nations do not generally get. Granting special privileges and concessions to a particular nation that are not enjoyed by any other nations. Extending to any trading partner with MFN status the same privileges and concessions that have been granted in negotiations to any other trade partner. Treating some countries with special privilege while discriminating against others. 3 13. Refer to the graph below. Which line represents the consumption possibilities in Country I with free trade? The Ricardo Model: Gains from trade Consumption and Welfare (Country I) Cloth PW 1  PC 4 500 3 PPF 2 PW 1  PC 2 PW 1  PC 3 1 1000 a. b. c. 14. Wine 22 Line 1. Line 2. Line 3. Refer to the graph below. Which area(s) represent the consumers’ loss (decrease in consumer surplus) caused by a tariff (t)? Partial Equilibrium Analysis Effects of a tariff P S (1+t)PW PW O a. b. c. d. a c b d D f Q1 Q3 Q4 Q2 Q 31 a a+f. a+b+c. a+b+c+d. 4 15. Which of the following is NOT true about the effect of an import tariff or quota? a. b. c. d. Consumers of the product in the importing country suffer a reduction in well-being as a result of the tariff Producers in the importing country experience an increase in well-being as a result of the tariff. The decrease in the domestic price of imported goods increases consumer surplus as a result of the quota. If not auctioned, quota gives the government no revenue. Part II. Problem-solving questions Refer to the following graph for questions 16-18. For a particular product, Country A’s supply and demand are represented by the following functions: Qs = 2 + P; Qd = 52 – P Suppose Country A is a small country (which cannot influence the world price). In free trade, Country C can export the product for $10 (PC = $10) and Country B for $15 (PB = $15). (Round your answer to two decimal places unless it is an integer. Please do NOT include words like “units” or “$” in your answer.) Trade creation and trade diversion: welfare analysis Country A P (1+t)PC PB $20 a b c d $15 e PC O S $10 D Q1 Q3 Q5 Q6 Q4 Q2 Q 29 16. Situation 1 – free trade: If there is free trade, where does Country A import (from Country B or Country C)? How much does it import? Answers: Country A imports from Country ______ (B/C) with the amount______. 17. Situation 2 – non-discriminative tariff: If Country A imposes a 100% tariff on imports from all countries, where does Country A import? At what price? How much to import? Answers: Country A imports from Country ______ (B/C) at the price level ______ with the amount ______. 5 18. Situation 3 – customs union: Suppose Country A joins Country B for a customs union – allowing free trade with member countries but still keeping 100% tariff on imports from non-member countries. Where does Country A import? At what price? How much? Moving from Situation 2 to Situation 3 does Country A gain or lose welfare as measured by changes in consumer surplus, producer surplus, and government tariff revenue? Answer: Country A imports from Country ______ (B/C) at the price level______ with the amount ______. Answer: Country A will______welfare. (gain/lose) Refer to the following information for questions 19-20. (Problems based on the H-O model) Country A possesses 8000 units of labor (L) and 8000 units of capital (K), while Country B possesses 6000 units of L and 7200 units of K. At a given wage/rental ratio, both countries use 6 units of L and 12 units of K to produce a specific amount of Commodity X (produced only in Industry X), and 9 units of L and 27 units of K to produce a specific amount of Commodity Y (produced only in Industry Y). Assume all the assumptions of the H-O theory hold. 19. Country A is abundant in______. (Labor/capital) Industry X is ______ intensive. (Labor/capital) 20. Country B has comparative advantage in Industry______. (X/Y) Part III. 21. Essay(s) Some people against trade will argue that “trade makes workers become unemployment”. ONLY based on H-O model, do you agree or disagree that “in the long run, trade makes workers become unemployment”. Why? 6
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