Theory of International Trade (ECON0301) Dr. Stephen Chiu First Midterm Time allowed: 50 minutes Please answer ALL questions. The total score is 100. Please budget your time wisely. Name: University Number: Tutorial Group:
Part I: Multiple Choice Questions. Circle the best answer for each question. Each question carries 4.5 points. (63%) 1. International trade has strong effects on income distributions. Therefore, international trade A. is beneficial to everyone in both trading countries. B. will tend to hurt one trading country. C. will tend to hurt some groups in each trading country. D. will tend to hurt everyone in both countries. 2. The marginal product of labor in manufacturing slopes downward because of A. diseconomies to scale. B. discontinuities in the production function. C. diminishing returns. D. gross substitution with the food sector. 3. In the Specific Factors model, each of the two sectors A. employs the same factors used by the other. B. employs different factors than those employed in the other. C. employs a fixed coefficient production function. D. shares one factor of production with the other sector. 4. Consider a specific factors model in which both capital and land are immobile factors (capital is useful only for manufactures production and food only for cloth production). If Japan is relatively capital rich and the United States is relatively land rich, then trade between these two, formerly autarkic countries will A. lead to perfect specialization with Japan alone producing manufactures. B. create a world relative price of food that is lower than that of the U.S. C. lower the price of food in both countries. D. raise the price of food in both countries. 5. The reason trade clearly benefits a country in an aggregate sense is that A. it raises the real income of the more productive elements in society. B. it lowers the real income of the less productive elements in society. C. it increases the levels of consumption of everyone. D. it increases society's consumption choices. 6. In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the border to a country would A. move the country s point of production along its production possibility curve. B. shift its production possibility curve outward, and increase its production of both goods. C. shift its production possibility curve outward and decrease its production of the labor-intensive product. D. shift its production possibility curve outward and decrease its production of the capital-intensive product. 2
7. The Leontief Paradox A. supported the validity of the Ricardian theory of comparative advantage. B. supported the validity of the Heckscher-Ohlin model. C. failed to support the validity of the Ricardian theory. D. failed to support the validity of the Heckscher-Ohlin model. E. proved that the U.S. economy is different from all others. 8. According to the Hecksher-Ohlin model, A. everyone automatically gains from trade B. the scarce factor necessarily gains from trade C. the gainers would compensate the losers and still retain gains. D. a country gains if its exports have a high value added. 9. Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins A. wages and rents should rise in H B. wages and rents should fall in H C. wages should rise and rents should fall in H. D. wages should fall and rents should rise in H. 10. Suppose that there are two factors, capital and land, and that the United States is relatively land endowed while the European Union is relatively capital-endowed. According to the Heckscher-Ohlin model, A. European landowners should support US-European free trade. B. European capitalists should support US-European free trade. C. all capitalists in both countries should support free trade. D. all landowners should support free trade. 11. Given the following information: Number of Units Produced by one Unit of Labor Cloth Widgets Home 10 20 Foreign 60 30 A. Neither country has a comparative advantage. B. Home has a comparative advantage in cloth. C. Foreign has a comparative advantage in cloth. D. Foreign has a comparative advantage in widgets. E. Home has a comparative advantage in both products. 12. If a very small country trades with a very large country according to the Ricardian model, then A. the small country will suffer a decrease in economic welfare. B. the large country will suffer a decrease in economic welfare. C. the small country will enjoy gains from trade. D. the large country will enjoy gains from trade. 3
13. In a two-country, two-product world, the statement "Germany enjoys a comparative advantage over France in autos relative to ships" is equivalent to A. France having a comparative advantage over Germany in ships. B. France having a comparative disadvantage compared to Germany in autos and ships. C. Germany having a comparative advantage over France in autos and ships. D. France having no comparative advantage over Germany. 14. Which of the following is true for constant returns to scale technology? A. F(K,L)=MPK*K+MPL*L B. F(2K,2L)=2*F(K,L) C. MPK(2K,2L)=MPK(K,L) D. F(2K,L)=F(K,2L) E. A to C only 4
Part II. Short questions. Answer all of them. (38%) 1) Consider the Ricardian model with one factor of production and two goods. Given the following information: Units Produced by One Worker/Hour Cloth Widgets Home 100 200 Foreign 60 30 If these two countries trade these two goods with each other according to comparative advantage, then what is the lower limit for the world equilibrium price of cloth? (6 points) 2) In less than 40 words, state and explain the factor equalization theorem (effect). (7 points) 5
2) Consider a specific factor with 100 units of labor, which is mobile across the cloth and food sectors. Suppose the marginal product of labor in the food sector MPL c equals 5L c 0.5 where L c is the amount of labor used in the sector. Similarly the marginal product of labor in the food sector MPL f equals 10L f 0.5 where L f is the amount of labor used in the sector. Let cloth price and food price both equal $10/unit. Determine the equilibrium wage rate as well as L c and L f. (18 points) 6
3) There is concern that China s accession to the World Trade Organization makes its labor worse off. It is also noted that China is a country which is abundant in labor but scarce in capital. Please explain why according to Hechscher-Ohlin model the aforementioned concern is unwarranted. (7 points) Bonus question: Detailed study of the real world shows convincingly that the increase in income inequality in the US during 70s to early 90s was due to its increased trade with developing countries in that period of time. True or False. (4 points) End of paper 7