International Economics & Policy

International Economics & Policy(VV2)
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Assignment A
1 . A century ago, most French imports came from relatively distant locations: North
America, Latin America, and Asia. Today, most French imports come from European countries.
How does this fit with the changing types of goods that make up world trade?
2 . Canada and Australia are mainly English-speaking countries with populations that are
not too different in size (Canada is 60 percent larger.) But Canadian trade is twice as large,
relative to GDP, as Australia's. Why should this be the case?
3 . How does the fact that many goods are nontraded affect the extent of possible gains
from trade?
4 . Suppose that there are many countries capable of producing two goods and that each
country has only one factor of production, labour. What could we say about the pattern of
production and trade in this case?
5 . "The world's poorest countries cannot find anything to export. There is no resource that
is abundant - certainly nor capital or land, and in small poor nations not even labour is
abundant." Discuss.
6 . In many developed countries, labour movements represent blue-collar workers rather
than professionals and highly educated workers, and traditionally favour limits on imports from
less-affluent countries. Is this a shortsighted policy or a rational one in view of the interests of
union members? How does the answer depend on the model of trade?
7 . In some economies relative supply may be unresponsive to changes in prices. For
example, if factors of production were completely immobile between sectors, the production
possibility frontier would be right-angles, and output of the two goods would not depend on
their relative prices. Is it still true in this case that a rise in the terms of trade increases welfare?
8 . It is just as likely that economic growth will worsen a country's terms of trade as that it
will improve them. Why, then, do most economists regard immeserizing growth, where growth
actually hurts the growing country, as unlikely in practice?

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Assignment B
Case Detail :
Another major reason that international trade may take place is the existence of economies of
scale (also called increasing returns to scale) in production. Economies of scale means that
production at a larger scale (more output) can be achieved at a lower cost (i.e. with economies
or savings). When production within an industry has this characteristic, specialization and trade
can result in improvements in world productive efficiency and welfare benefits that accrue to
all trading countries. Trade between countries need not depend upon country differences
under the assumption of economies of scale. Indeed, it is conceivable that countries could be
identical in all respects and yet find it advantageous to trade. For this reason, economies of
scale models are often used to explain trade between countries like the US, Japan and the
European Union. For the most part these countries, and other developed countries, have
similar technologies, endowments and to some extent similar preferences. Using classical
models of trade (Ricardian, Heckscher-Ohlin), these countries would have little reason to
engage in trade. And yet, trade between the developed countries makes up a significant share
of world trade. Economies of scale can provide an answer for this type of trade. Another
feature of international trade that remains unexplained with classical models is the
phenomenon of intra-industry trade. A quick look at the aggregate trade data reveals that many
countries export and import similar products. For example, the US imports and exports
automobiles, it imports and exports machine tools, it imports and exports steel, etc. To some
extent intra-industry trade arises because many different types of products are aggregated into
one category. For example, many different types of steel are produced, from flat-rolled to
specialty steels. It may be that production of some types of steel require certain resources or
technologies in which one country has a comparative advantage. Another country may have the
comparative advantage in another type of steel. However, since all of these types are generally
aggregated into one export/import category, it could appear as if the countries are exporting
and importing "identical" products when in actuality they are exporting one type of steel and
importing another type.

1. In perfect competition, firms set price equal to marginal cost. Why isn't this possible
when there are internal economies of scale?
2. Give two examples of products that are traded on international markets for which there
are dynamic increasing returns. In each of your examples, show how innovation and learning-
by-doing are important to the dynamic increasing returns in the industry.
3. There are shops in Japan that sell Japanese goods imported back from the United States
at a discount over the prices charged by other Japanese shops. How is this possible?
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1. In the long run, countries with faster inflation have had
appreciating currencies
no change in the value of their currencies
depreciating currencies
at some times and in some places, appreciating currencies, while at other times in other places,
depreciating currencies.
2. Which of the following observations about a tariff is not true? A tariff:
is usually an ad valorem tax
can raise revenues for the imposing government
usually benefits domestic producers more than consumers
can be used to protect foreign industries
3. An economic transaction is recorded in the balance of payments as a debit if it leads to
a payment to foreigners
the receipt of payments from foreigners

an increase in foreign exchange reserves
neither an inflow or an outflow of value.
4. Which of the following is not recorded as a debit item in the U.S. balance-of-payments
accounts?
U.S. grain company engages Russian ships to carry U.S. wheat to Russian ports.
the U.S. Treasury contributes $1 million to the United Nations Development Fund.
a French firm sells 25-year bonds, valued at $100 million, in the United States
a West German firm pays $3 million in interest to the holders of its bonds in the US.
5. Which of the following is true with respect to the infant industry argument for
protection?
It does not refer to temporary protection to establish a domestic industry.
To be valid, the return to the grown-up industry need not be sufficiently high to repay for the
higher prices paid by domestic consumers of the commodity during the infancy period.
It is inferior to an equivalent production subsidy to the infant industry.
None of the above.
6. The nationally optimal tariff hopes to take advantage of the idea that
you can increase domestic producers’ well-being by keeping foreign competition minimal
you can limit imports and extract low import prices from foreign suppliers if you are a major
world buyer
you can gain optimal tariff revenues for public purposes by taxing foreign imports
you can charge optimal (minimal) tariffs and encourage good will from trade partners, leading
to tariff-free exports for domestic producers and workers
7. Intra industry trade is more likely to occur between
rich and poor countries
countries with high and similar income levels
developing countries

developed and developing countries
8. If the general level of prices in the United States increases relative to prices in Japan,
the value of the dollar will likely depreciate relative to the yen.
the value of the dollar will likely appreciate relative to the yen.
the value of the dollar will likely remain constant relative to the yen.
not enough information is given.
9. The organization responsible for mediating trade disputes is the
International Monetary Fund.
World Trade Organization.
World Bank.
The G-7 Countries.
10. The optimal monopoly markup is
higher with more elastic demand for cartel sales
higher with less elastic demand for cartel sales
lower with less elastic demand for cartel sales
higher with more elastic supply schedules
11. An international cartel that maximizes its profits is optimal for
the member countries and the world
the member countries but not the world
the consuming countries and the world
no country at all
12. The characteristics of quotas and tariffs are described correctly by which of the
following:
tariffs assure a certain final price for imports, but not as surely as a quota does.

quotas assure a certain limited quantity of imports, but not as well as a tariff does.
quotas assure a certain final price for imports better than a tariff does.
tariffs do not assure a certain limited quantity of imports as a quota does.
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13. Intervention at the source of a distortion in resource allocation problems and the use of
policy tools closest to the sources of the distortions is called
public policy
benefit/cost analysis
the specificity rule
resource allocation
14. The best and probably rarest way to allocate import licenses is
applying rational rather than arbitrary (bureaucratic) criteria to award import licenses on the
basis of merit.
avoiding injustice and favoritism by granting the scarce and highly demanded licenses on a
purely random basis (regarded as the “lottery effect” of license distribution).
inviting the countries or firms who want to sell the commodity in question to participate in a
competitive auction to be held by the customs agency of the importing country for import
licenses.
achieving equity by assigning fixed shares to firms according to the market shares they have
previously enjoyed in the market in question.
15. “When a country exports a commodity produced with intensive use of its abundant
factor, that factor’s returns will rise.” This statement is
The Hecksher-Ohlin theory
the Stolper-Samuelson Theorem

The Leontief paradox
the modern trade theory
16. “Countries export commodities produced through the intensive use of factors which
they possess in abundance. Labor abundant countries export labor-intensive
commodities and import capital-intensive commodities.” This statement is
Classical Smith/Ricardo trade theory
None of the above
17. The best way to characterize monopolistic competition is
a product group of ten to fifteen firms
a product group of fifteen to twenty firms
a product group with the same demand curve
a product group which perceives no interdependence
18. Wine costs $10, cloth costs fr 30 and the dollar exchange rate is fr 6. The wine price in
terms of cloth is:
3 cloth
3 wine
2 cloth
5 wine
19. Economies of scale are more likely to occur in
a small scale textile industry
the footwear industry
the aircraft industry
small business

20. In a monopolistic competition model of trade
if two countries have the same overall capital labor ratio there is no trade
there are gains from trade from an increased variety of goods and large firm scale
firms earn positive economic profits in the long run
factor endowments do not play any role in determining inter industry trade
21. In the Heckscher Ohlin model, international trade is based mostly on a difference in
technology
product differentiation
economies of scale
factor endowments
22. Intra-industry trade (IIT) is
the result of nations following their comparative advantage.
the result of capital-intensive nations trading with labor-intensive nations.
trade among the various firms of a single industry in one country.
two-way international trade in very similar products.
23. Biased growth implies
trade patterns cannot change
the growing economy will have increased willingness to trade
the growing economy will have decreased willingness to trade
either b or c could be true.
24. According to modern (“alternative”) trade theory,
trade depends on scale economies, not consumer preferences
trade depends on consumer preferences, not scale economies.
historical quirks can lead to external economies which promote trade advantages

trade patterns are unrelated to the industrial or market structures (monopolistic competition
or oligopoly) of traded goods.
25. Ricardo explained the law of comparative advantage on the basis of
opportunity costs
the law of diminishing returns
economies of scale
the labor theory of value
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26. In terms of international trade, a small nation is best described as one which
is of limited geographical size
is land-locked nation without sea ports
doesn’t have many sellers
has small numbers of buyers and sellers
27. The nationally optimal tariff hopes to take advantage of the idea that
you can increase domestic producers’ well-being by keeping foreign competition minimal
you can limit imports and extract low import prices from foreign suppliers if you are a major
world buyer
you can gain optimal tariff revenues for public purposes by taxing foreign imports
you can charge optimal (minimal) tariffs and encourage good will from trade partners, leading
to tariff-free exports for domestic producers and workers
28. “When a country exports a commodity produced with intensive use of its abundant
factor, that factor’s returns will rise.” This statement is

29. “In tests run in the late 1940s, it was discovered that the U.S. was actually exporting
labor-intensive goods and importing capital-intensive goods.” This statement is
30. Which of the following statements is correct?
Real GDP is the total market value of the final goods and services produced in America for sale
in a year valued in the prices of 1992.
Your buying stock in the stock market is an example of investment spending
Potential Real GDP is always greater than Equilibrium
Real GDP
31. The period of the business cycle in which real GDP is increasing is called the:
expansion
peak
recession
trough
32. Assume that, in the population, 95 million people worked for pay last week, 5 million
people did not work for pay but had been seeking a job, 5 million people did not work
for pay and had not been seeking a job for the past several months, and 45 million were
under age 16. The unemployment rate, given these numbers, is:
5%
8%

10%
20%
33. A type of unemployment in which workers are in-between jobs or are searching for new
and better jobs is called _______ unemployment:
frictional
cyclical
structural
turnover
34. Consider three consumer goods: 100 of Good A, 100 of Good B, and 100 of Good C. In
the base year, Good A sold at a price of $1, Good B sold at a price of $1, and Good C sold
at a price of $1. In the current year, Good A sold at a price of $3, Good B sold at a price
of $5, and Good C sold at a price of $10. The Consumer Price Index (CPI) for the current
year is:
100
300
500
600
35. Which of the following is a "loser" from unexpected inflation?
workers with COLAs
the middle class
people who own Treasury Bills
people who own homes and have fixed-rate mortgages
36. If the nominal interest rate on a checking account is 2% and the inflation rate is 3% this
year, the real interest rate is:
5%
25

2/3%
–1%
37. Which of the following would cause the demand curve for automobiles to shift to the
left?
an increase in the price of the automobiles
an increase in the interest rate paid to borrow money to pay for the automobile
an increase in buyers' incomes
an increase in the cost of production of automobiles
38. Suppose it is announced that industry analysts are predicting that decreased oil supplies
from Iraq will cause gasoline prices to rise, beginning next month. In the current week,
the announcement would:
shift the supply of gasoline right
shift the demand for gasoline right
shift the demand for gasoline left
have no effect on the demand or supply of gasoline
39. "At the price of $500, tickets for the Super Bowl are expensive. Yet, the are long lines of
people who wish to buy them. Many people who desire tickets will not be able to find
them." From this quote, we know that the price of Super Bowl tickets must be:
below equilibrium
above equilibrium
equal to equilibrium
None of the above
40. Assume that the market for computers begins in equilibrium. Then, there is a decrease
in a price of Pentium processors used in the production of computers. When the new
equilibrium is reached,
the price and quantity of computers will both have risen
the price and quantity of computers will both have fallen

the price of computers will have risen and the quantity will have fallen
the price of computers will have fallen and the quantity will have risen
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International Economics & Policy

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