International Trade and Finance: Review questions for midterm
1. Use the production possibilities below to answer this question
Alpha’s production possibilities :
Omega’s production possibilities :
a. Draw domestic production possibilities for Alpha and Omega (hint: these are linear tradeoffs).
b. Suppose each country specializes in its comparative advantage, and the terms of trade are 1 ton
of steel for 2 tons of wheat. Can Alpha and Omega both achieve a level of consumption outside
of their production possibilities? Use the graphs from Part a to explain your answer.
c. Suppose in autarky (i.e. as a self-sufficient economy) both Alpha and Omega produce at point C
on their respective production possibilities functions. Based on your answer to Part b, how much
has total consumption increased for both Alpha and Omega?
2. Suppose the American Association of University Professors (AAUP) successfully coordinated and
lobbied congress to pass a requirement that all professors at U.S. universities must have
graduate degrees from U.S. universities.
a. How would this requirement affect the market for 4-year college degrees in the U.S.? Graph
and explain your answer. What would happen to tuition and the number of degrees
b. How would this requirement affect the market for graduate degrees at universities outside
the U.S.? Again, graph your answer and explain what would happen to both tuition and the
number of degrees conferred.
c. Suppose that the requirement were instead that all professors at U.S. universities had to be
U.S. citizens, but there was no requirement that professors’ graduate degrees be conferred
by U.S. universities. How would this policy change your answers to Parts a and b?
3. Name a good or service that the U.S. exports that you believe is an example of U.S. firms’
a. Explain where you believe that comparative advantage comes from. Do you believe the
comparative advantage is best explained by factor conditions, domestic rivalry, or network
externalities from related and supporting industries? Explain your answer in 5-8 sentences.
b. Explain how the Product Life Cycle Theory applies to the good or service you chose, and
which country(ies) you believe will be the future exporters of this product. Make your case
in 4-6 sentences.
4. Medical Doctors earn much higher salaries in the U.S. than in most of the world. Salaries vary
widely by specialty and region, but the average for all physicians is roughly $200,000 per year.
Explain why, in 3-4 paragraphs. You may give more than one reason, but use the labor market
for doctors’ services to explain your answer. A graph is not required, but it can clarify your
5. Using consumer behavior theory, i.e. utility-maximization theory, to explain how international
trade makes consumers better off in terms of individual utility. Who is harmed by international
trade? Explain how, using the tools of microeconomics. Your answer should be 3-4 paragraphs
long and should include supply and demand graphs where appropriate.
6. In 3-4 sentences, explain how growth in international trade can lead to rising average wages for
workers in developing economies. In 4-6 sentences, explain how growth in international trade
can lead to rising average wages for workers in advanced economies. Use supply and demand
models of the labor market in each of your answers.
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