Deck 6: The Standard Trade Model

Question 1

If the economy is producing at point a on its production possibility frontier, then

A) all of its capital is used, but not efficiently.
B) all of the country's capital is used for one product.
C) all of the country's workers are employed.
D) all of the country's workers are specialized in one product.
E) all of the country's exports are produced in equal amounts.

Answer 1

all of the country's workers are employed.

Question 2

If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the international marketplace, then

A) the terms of trade of food exporters will improve.
B) the terms of trade of all countries will improve.
C) the terms of trade of cloth exporters will worsen.
D) all countries would be better off.
E) the terms of trade of cloth exporters will improve.

Answer 2

the terms of trade of cloth exporters will improve.

Question 3

Other things being equal, a rise in a country's terms of trade increases its welfare. What would happen if we relax the ceteris paribus assumption, and allow for the law of demand to operate internationally?

Answer 3

Let us assume that the terms of trade (or technically the net commodity terms of trade) improve, thus the relative price of a country's exports increase. This would, logically, lead to a shift away by world consumers to substitute goods. If the demand for a country's exports is elastic, the quantity decrease would be proportionally larger than the per unit price increase. This term of trade effect would actually lower the country's real income and economic welfare.

Question 4

If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the international marketplace, then

A) world relative quantity of cloth demanded will decrease.
B) world relative quantity of cloth supplied will increase.
C) world relative quantity of cloth supplied and demanded will decrease.
D) world relative quantity of cloth supplied and demanded will increase.
E) world relative quantity of food will increase.

Question 5

Refer to the figure above, which shows a country's possible production possibility frontiers and indifference curves. If the country is producing at ________, then moving to ________ will cause utility to ________.

A) point b; point a; increase
B) point a; point b; increase
C) point c; point b; increase
D) point c; point b; decrease
E) point a; point c; remain unchanged

Question 6

Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania's economy grew, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point b, would you consider this growth to be export-biased or import biased?
If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania's terms of trade?
Its real income?
What if Albania were a small country?

Question 7

Tastes of individuals are represented by

A) isovalue lines.
B) production possibility frontiers.
C) production functions.
D) indifference curves.
E) the terms of trade.

Question 8

When the production possibility frontier shifts out relatively more in one direction, we have

A) immiserizing growth.
B) unbiased growth.
C) imbalanced growth.
D) biased growth.
E) balanced growth.

Question 9

Refer to the figure above, which shows a country's possible production possibility frontiers and indifference curves. If the country is producing at ________, then moving to ________ will cause utility to ________.

A) point c; point b; decrease
B) point b; point c; remain unchanged
C) point a; point b; increase
D) point a; point c; remain unchanged
E) point c; point b; increase

Question 10

If points A and B are two locations on a country's production possibility frontier, then

A) at any point in time, the country could produce both.
B) both bundles must have the same relative cost.
C) consumers are indifferent between the two bundles.
D) the country could produce either of the two bundles.
E) producers are indifferent between the two bundles.

Question 11

The meaning of "terms of trade" is

A) the amount of exports sold by a country.
B) the tariffs in place between two trading countries.
C) the quantities of imports received in free trade.
D) the price of a country's exports divided by the price of its imports.
E) the price conditions bargained for in international markets.

Question 12

If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the international marketplace, then

A) the country would import more cloth.
B) the food exporter will increase the quantity of food exported.
C) the cloth exporter will increase the quantity of cloth produced.
D) the cloth exporter will increase the quantity of cloth exported.
E) the cloth exporter will decrease the quantity of cloth exported.

Question 13

Refer to above figure. Now, suppose that the relative price of A is actually not higher than Albania's autarkic level of 1, but quite the opposite (e.g., PA/PB = 0.5). Would Albania still be able to gain from trade?
If so, where would be its production point?
Given the information in this question, where is Albania's comparative advantage?

Question 14

A country will be able to consume a combination of goods that is NOT attainable solely from domestic production if

A) the country avoids international trade.
B) the country specializes in one product.
C) the world terms of trade equal the domestic relative costs.
D) the world terms of trade differ from its domestic relative costs.
E) the country's domestic production value equals world relative value.

Question 15

Terms of trade refers to

A) what goods are exported.
B) the volume of trade.
C) the relative price at which trade occurs.
D) the tariffs applied to trade.
E) what goods are imported.

Question 16

Refer to above figure. Albania refused to engage in international trade for ideological reasons. To maximize its economic welfare it would choose to produce at which point in the diagram above?
Suppose the PA/PB at point a was equal to 1. Given this information, in which good (A or
B) does Albania enjoy a comparative advantage?
Now that the Cold War is over, Albania is interested in obtaining economic welfare gains from trade. The relevant international relative price is PA/PB = 2. Albania would therefore choose to produce at which point (a, b, or c)? Given this additional information, in which good does Albania enjoy a comparative advantage?

Question 17

Refer to the figure above, which shows a country's possible production possibility frontiers and indifference curves. If the country is producing at ________, then moving to ________ will cause utility to ________.

A) point c; point b; remain unchanged
B) point a; point b; increase
C) point c; point b; increase
D) point c; point b; decrease
E) point a; point c; remain unchanged

Question 18

A country cannot produce a mix of products with a higher value than where

A) the isovalue line is above the production possibility frontier.
B) the isovalue line is below the production possibility frontier.
C) the isovalue line is tangent with the indifference curve.
D) the isovalue line is tangent to the production possibility frontier.
E) the isovalue line intersects the production possibility frontier.

Question 19

Suppose that a country experiences growth strongly biased toward its export, cloth,

A) this will tend to leave the country's terms of trade unchanged.
B) this will tend to improve the country's terms of trade.
C) this will increase the price of cloth relative to the imported good.
D) this will tend to worsen the terms of trade for the country's trading partner.
E) this will tend to worsen the country's terms of trade.

Question 20

Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania's economy grew, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point c, would you consider this growth to be export-biased or import biased?
If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania's terms of trade?
Its real income?

Question 21

An import tariff will cause the terms of trade of the ________ country to ________ and will ________ the country.

A) importing; improve; benefit
B) importing; improve; harm
C) exporting; improve; benefit
D) exporting; improve; harm
E) importing; suffer; harm

Question 22

An increase in a country's net commodity terms of trade will

A) not always guarantee positive changes in the country's economy.
B) always increase the country's economic welfare.
C) always increase the country's real income.
D) never increase the country's quantity of exports.
E) always increase the country's production of its import competing good.

Question 23

An import tariff will cause the relative demand for ________ to ________ and the relative supply for ________ to ________.

A) exports; decrease; exports; increase
B) imports; increase; imports; decrease
C) exports; increase; exports; decrease
D) imports; decrease; imports; increase
E) exports; increase; imports; decrease

Question 24

If Slovenia is a small country in world trade terms, then if it imposes a large series of tariffs on many of its imports, this would

A) decrease its marginal propensity to consume.
B) deteriorate its terms of trade.
C) increase its exports.
D) have no effect on its terms of trade.
E) improve its terms of trade.

Question 25

If Slovenia were a large country in world trade, then if it imposes a large set of tariffs on its imports, this must

A) decrease the internal price of imports below the world market rate.
B) improve the real income of its trade partners.
C) harm Slovenia's real income.
D) improve Slovenia's real income.
E) cause retaliation on the part of its trade partners.

Question 26

Suppose Albania is exporting product B, and experienced economic growth biased in favor of product B as seen in the figure above. We are also told that Albania's new consumption point is at point d. Would you still consider the economic growth, which took place biased in favor of B?
If Albania were a large country how would this growth affect its terms of trade?

Question 27

If the U.S. (a large country) imposes a tariff on its imported good, this will tend to

A) cause a deterioration of U.S. terms of trade.
B) have no effect on terms of trade.
C) improve the terms of trade of all countries.
D) raise the world price of the good imported by the United States.
E) improve the terms of trade of the United States.

Question 28

If Slovenia were a large country in world trade, then if it instituted a large set of subsidies for its exports, this must

A) increase internal prices above the world market rate.
B) harm Slovenia's real income.
C) improve Slovenia's real income.
D) improve the real income of its trade partners.
E) cause retaliation on the part of its trade partners.

Question 29

If one observes that Japan was traditionally a net foreign lender, one could conclude that relative to its international trade and financial partners

A) Japan's intertemporal production possibilities are biased toward present consumption.
B) Japan's intertemporal production possibilities are not biased.
C) Japan preferred to consume beyond its production in the present.
D) Japan's intertemporal production possibilities are larger than that of the other countries.
E) Japan's intertemporal production possibilities are biased toward future consumption.

Question 30

If Slovenia were a large country in world trade, then if it instituted a large set of subsidies for its exports, this must

A) have no effect on its terms of trade.
B) harm world terms of trade.
C) harm its terms of trade.
D) decrease its marginal propensity to consume.
E) improve its terms of trade.

Question 31

The intertemporal tradeoff between present and future consumption is measured by the

A) nominal interest rate.
B) real interest rate.
C) terms of trade.
D) rate of economic growth.
E) inflation rate.

Question 32

International borrowing and lending may be interpreted as one form of

A) unrequited international transfers.
B) aid to offset trade advantages.
C) intertemporal trade.
D) intermediate trade.
E) trade in services.

Question 33

A fall in the real interest rate, all other things held constant, will cause a country's ________ to ________.

A) current consumption: decrease
B) welfare level; improve
C) current consumption: increase
D) terms of trade; worsen
E) terms of trade; improve

Question 34

An export subsidy will cause the relative demand for ________ to ________ and the relative supply for ________ to ________.

A) imports; decrease; imports; increase
B) exports; increase; imports; decrease
C) exports; increase; exports; decrease
D) exports; decrease; exports; increase
E) imports; increase; imports; decrease

Question 35

An export subsidy has the opposite effect on terms of trade to the effect of an import tariff. Domestically a tariff will raise the price of the import good, deteriorating the domestic terms of trade. A production subsidy for the export product will lower the local price of the export good, lowering the domestic terms of trade for the country. Hence the export subsidy and the import tariff have the same effect. This analysis seems to contradict the first sentence in this paragraph. Discuss this paradox.

Question 36

If a small country were to levy a tariff on its imports then this would

A) decrease the country's economic welfare.
B) change the terms of trade.
C) have no effect on that country's economic welfare.
D) raise prices on its exports in other countries.
E) increase the country's economic welfare.

Question 37

It may be argued that theoretically, international capital movements

A) tend to hurt the recipient countries.
B) tend to hurt labor in donor countries.
C) increase future production in donor countries.
D) tend to hurt the donor countries.
E) tend to hurt labor in recipient countries.

Question 38

Rapidly growing developing countries tend to be borrowers on the international capital markets. From this information we may surmise that they have a comparative advantage in

A) capital goods.
B) future income.
C) consumer goods.
D) present income.
E) disposable income.

Question 39

If Slovenia is a large country in world trade, then if it imposes a large set of tariffs on many of its imports, this would

A) increase its exports.
B) have no effect on its terms of trade.
C) harm its terms of trade.
D) improve its terms of trade.
E) decrease its marginal propensity to consume.

Question 40

An export subsidy will cause the terms of trade of the ________ country to ________ and will ________ the country.

A) importing; suffer; benefit
B) importing; improve; harm
C) exporting; suffer; harm
D) importing; suffer; harm
E) exporting; improve; benefit

Question 41

The intertemporal budget constraint is defined as:

A) V = DP + DF/(1 + r)
B) DP + DF(1 + r) = QP + QF(1 + r)
C) DP + DF/(1 + r) = QP + QF/(1 + r)
D) DF + DP/(1 + r) = QF + QP/(1 + r)
E) V = QP + QF/(1 + r)

Question 42

An increase in the real interest rate, all other things held constant, will cause a country's ________ to ________.

A) current consumption: increase
B) current consumption: decrease
C) terms of trade; improve
D) terms of trade; worsen
E) welfare level; improve

Question 43

Describe the nature of trade between two countries based on intertemporal comparative advantage.

Question 44

What is intertemporal comparative advantage?

Question 45

The price of ________ consumption in terms of ________ consumption is ________.

A) future; current; r
B) present; future; r
C) future; current; 1 + r
D) future; current; 1/(1 + r)
E) present; future; 1/(1 + r)