Deck 10: Post Heckscher-Ohlin Theories of Trade and Intra-Industry Trade

Question 1

In empirical tests of the Linder hypothesis for a given test country, a finding that conforms to the hypothesis would be that the test country trades more intensely with countries in which per capita income is __________ the per capita income of the test country. If the test country does not trade with some countries that have similar per capita incomes to the test country and these other countries are excluded from the empirical test, then the results of the empirical test will be __________ confirmation of the Linder hypothesis.

A) different from rather than similar to; biased against
B) different from rather than similar to; biased toward
C) similar to rather than different from; biased against
D) similar to rather than different from; biased toward

Answer 1

D

Question 2

The situation where international trade occurs because various stages in the production Process of a good are occurring in different countries is known as

A) vertical specialization-based trade.
B) intra-industry trade.
C) dumping or international price discrimination.
D) gravity model-type trade.

Answer 2

vertical specialization-based trade.

Question 3

(This question pertains to material in Appendix C.)
Suppose that country A has only three categories of traded goods and that A's exports and imports in the three categories are as shown in the table below:
$\begin{array} { l cc } & \text { exports } & \text { imports } \\\text { good T } & \$ 30 & \$ 100 \\\text { good W } & 60 & 20 \\\text { good X } & 60 &80 \\\\\text { total } & \$ 150 & \$ 200\end{array}$
In this situation, country A's index of intra-industry trade would have a value of
__________.

A) 0.3
B) 0.4
C) 0.6
D) 0.7

Answer 3

0.7

Question 4

The Linder theory of trade suggests that

A) a country with a per capita income of $15,000 is likely to have more intense trade with A country that has a per capita income of $16,000 than with a country that has aPer capita income of $25,000.
B) the most intense trade of low-income, developing countries will be with high-income,Developed countries.
C) countries will confine themselves to inter-industry trade.
D) the exports of primary products of a country will mainly flow to other countries with Per capita income levels similar to that of the exporting country.

Question 5

The situation where a country both exports and imports goods in the same product classification category is known as __________ trade, and such a trade situation for countries in the real world is likely to be __________ associated with country per capita income levels.

A) intra-industry; positively
B) intra-industry; negatively
C) inter-industry; positively
D) inter-industry; negatively

Question 6

What features of the product cycle theory are at variance with the assumptions of the Heckscher-Ohlin model? Explain.

Question 7

In the Krugman model of trade where there are economies of scale and monopolistic competition, which one of the following indicates the situation for the typical firm in the long run (where P = price of output, Q = quantity of output, W = the wage rate, and a and b are constants that are > 0)?

A) (a + bQ)∙W = P
B) P∙(a +b) = W
C) (a + bQ)∙W = P∙Q
D) (a + bQ)·W < P·Q

Question 8

Present in detail the following two theories/models associated with "post-Heckscher-Ohlin" trade theory. In the case of each theory/model, be sure to indicate important characteristics of real-world international trade that the theory/model is attempting to explain.
(a) the product cycle theory
(b) the Krugman theory/model with economies of scale and monopolistic competition

Question 9

Suppose someone stated that the Heckscher-Ohlin model is best-suited for explaining trade between developed countries and developing countries, while newer theories such as those of Linder and Krugman are best-suited for explaining trade among developed countries. Would you agree with this observation? Why or why not?

Question 10

(This question pertains to material in Appendix A.)
Explain why, when a country is engaged in international trade as a result of economies of scale, production may move to an endpoint of the PPF.

Question 11

How might the imitation lag hypothesis be incorporated into the product cycle theory?

Question 12

Which of the following findings would NOT be consistent with the product cycle theory?

A) a finding that developing countries export "older" manufactured products
B) a finding that the United States exports "new" products
C) a finding that U.S. export industries are heavily engaged in research and development (R&D) activities
D) a finding that the United States exports goods catering mainly to "low income" tastesRather than "high income" tastes

Question 13

Why might it be hypothesized that a typical developed country is likely to have a greater relative amount of intra-industry trade than is a typical developing country? Explain.

Question 14

Suppose that data are assembled on (1) research and development expenditures as a fraction of industry costs across U.S. industries (ranked from highest to lowest), and (2) the export success of U.S. industries (ranked from highest to lowest). If the "product cycle theory" is useful as an explanation for the pattern of U.S. exports, then an analyst would expect that statistical association (rank correlation coefficient) between these two series of data would be

A) positive.
B) zero.
C) negative
D) positive, zero, or negative - cannot be determined without more information.

Question 15

Does the assumption in the Krugman model that demand becomes less elastic as consumption increases seem realistic to you? Why or why not? What would the PP schedule in Krugman's basic diagram look like if demand became more elastic as per capita consumption increased?

Question 16

In the Krugman model with economies of scale and monopolistic competition (with L =Amount of labor hired by the firm, Q = quantity of output of the firm, W = wage rate for Labor, P = price of the firm's product, and a and b are constants), the equation that states The labor requirement of the firm is __________. In the model, the existence of zero Profits for the firm in long-run equilibrium can be stated as __________.

A) L = bQ; PQ = W(a + bQ)
B) L = bQ; PQ - (a + bQ) = 0
C) L = a + bQ; PQ = W(a + bQ)
D) L = a + bQ; PQ - (a + bQ) = 0

Question 17

Suppose that two countries each have the exact convex-to-the-origin production-Possibilities frontier (PPF) as in Question #17 above (i.e., the countries have identical PPFs like the Question #17 PPF) and the two countries also have identical tastes. In this situation,

A) neither of the two countries could never gain from trade with each other.
B) one country could gain from trade with the other but they could never both gain from The trade.
C) both countries would go to the same endpoint of the PPF if the two countries engaged In trade with each other.
D) it is possible for the two countries to gain from trade with each other if one country Produces at one endpoint of the PPF and the other country produces at the other Endpoint of the PPF

Question 18

(Questions 17 and 18 pertain to material in Appendix A.)
Given the convex to-the-origin production-possibilities frontier (PPF):

Suppose that we envision a very slight movement of production away from the equilibrium point E toward point F (with unchanged goods prices). If this movement Takes place, (P_X/P_Y) will be __________ (MC_X/MC_Y), and production will thus move
__________.

A) less than; back to point E
B) less than; further away from point E
C) greater than; back to point E
D) greater than; further away from point E

Question 19

Suppose that you test the Linder hypothesis by comparing Germany's absolute difference in per capita income from each of its trading partners with the size of Germany's total trade with each respective partner. You find a strongly negative correlation. Do you thus conclude that the Linder hypothesis must necessarily offer a good explanation of Germany's trade? Why or why not?

Question 20

Which one of the following statements pertaining to Vernon's "product cycle theory" for Explaining U.S. trade is INCORRECT?

A) There is no international trade in the "new product" stage.
B) Throughout the "maturing product" stage, because the good is exclusively being Produced abroad, the United States imports the good.
C) In the "maturing product" stage, U.S. firms may start producing the good from an Overseas location, and thus exports of the good from the United States may Decrease.
D) In the "standardized product" stage, the good is exported by developing countries.

Question 21

In the Linder theory of trade, a country sends goods to other countries which __________, and the greatest trade of a country is expected to be with countries which have per capita income levels __________ that of the original country.

A) also produce those goods; similar to
B) also produce those goods; very different from
C) do not produce those goods; similar to
D) do not produce those goods; very different from

Question 22

In the Krugman model, when a country is opened to international trade, the total output of each firm __________ and the real wage of workers in the country __________.

A) increases; decreases
B) increases; also increases
C) decreases; also decreases
D) decreases; increases

Question 23

If the labor required per unit of output falls as output increases (such as is specified in the Krugman model), this can be thought of as a situation

A) of constant returns to scale.
B) of decreasing returns to scale.
C) of increasing returns to scale.
D) that is exactly the same situation as was the case in Ricardo's analysis.

Question 24

(This question pertains to material in Appendix C.)
Given the following information on the exports of country A in 2009, and assuming that Goods X and Y are the only goods in country A's trade sector:
$\begin{array}{ccc}&\underline{\text { exports }}& \underline{\text { imports }}\\\operatorname{good} \mathrm{X} & \$ 600 & \$ \\ \text { good Y } & 400 & 800 \\\\\text { tota } & \$ 1,000 & \$ 800 \\\end{array}$

Country A's "index of intra-industry trade has a value of __________.

A) 0.4
B) 0.6
C) 1.0
D) 200

Question 25

The heavy export of a product by developing countries is most likely to occur in which of the following "stages" of the product cycle theory?

A) "new product" stage
B) "maturing product" stage
C) "standardized product" stage
D) cannot be determined a priori - equally likely to occur in the "new product,""maturing product," and "standardized product" stages

Question 26

In the "imitation lag hypothesis," the length of time that elapses between when a new Product is introduced by innovating firms in country I and when consumers in country II Decide that the new product is a good substitute for products in their current consumption Bundle is known as the __________.

A) "imitation lag"
B) "demand lag"
C) "net lag"
D) "product cycle lag"

Question 27

In the "imitation lag" hypothesis,

A) the period of most intense export by the innovating country is the "imitation lag"Period.
B) the period of most intense export by the innovating country is the "demand lag"Period.
C) the period of most intense export by the innovating country is the "net lag" period.
D) technology is identical in all countries at all times.

Question 28

Which expression below indicates the relationship between product price (P), marginal cost (MC), and the price elasticity of demand facing a firm (e_D, which is negative) when the firm is pricing in order to maximize profit?

A) P = MC [(e_D + 1)/(e_D)]
B) P = MC [(e_D)/(e_D + 1)]
C) MC = P [e_D/(e_D - 1)]
D) P - MC = [e_D/(e_D + 1)]

Question 29

In the context of a country's international trade, a "gravity model" is usually employed to investigate, for the country,

A) the determinants of the amount or volume of the country's trade with its trading Partners.
B) the determinants of the country's terms of trade with its trading partners.
C) the value of the country's "Leontief statistic."
D) whether the Stolper-Samuelson theorem is valid for the country.

Question 30

Empirical tests pertaining to the determinants of intra-industry trade at the country level tend to suggest that the amount of intra-industry trade

A) of a country is negatively related to the country's per capita income level.
B) between any two countries is negatively related to the geographic distance between The two countries.
C) of a country is negatively related to the country's total GDP level.
D) between any two countries is negatively related to the average income level of the two Countries.