Deck 4: Extensions and Tests of the Classical Model of Trade

Question 1

In the monetized Classical model, if trade is not balanced, the international terms of trade will deteriorate for the country with the trade deficit. Explain why this is so.

Answer 1

not answered

Question 2

In the basic Classical model, only the limits to the international terms of trade can be specified. If the two country-two commodity model is monetized using an exchange rate and a wage rate for each country, the international terms of trade are implicitly specified. Explain why this is so.

Answer 2

not answered

Question 3

It is common to read statements to the effect that domestic inflation or production cost increases hinder our ability to export and also stimulate imports. Is this consistent with the Classical view of international trade? What effects would such an event have on the overall economy according to Classical thinking?

Answer 3

not answered

Question 4

In the three-country world in Question #19, which one of the following statements is TRUE?

A) Posttrade prices (terms of trade) of 1 wheat:2.5 clothing (or 1 clothing:0.4 wheat)Would give all the gains from trade to the United States.
B) Posttrade prices (terms of trade) of 1 wheat:3 clothing (or 1 clothing:? wheat) are Possible.
C) At posttrade prices (terms of trade) of 1 wheat:1.6 clothing (or 1 clothing:0.625 Wheat), England would export wheat and Spain and the United States would export clothing.
D) At posttrade prices (terms of trade) of 1 wheat:2.25 clothing (or 1 clothing:0.44 Wheat), Spain would export clothing and import wheat.

Question 5

In Question #11 above, suppose that one-half day of labor must be used to transport a Good internationally, no matter which good is considered and which country is doing the Exporting. With this addition of transportation costs, England will export good(s) __________ and will import good(s) __________.

A) A; B, C, D, and E
B) A and D; B, C, and E
C) A; B, C, and E
D) A; B and C

Question 6

The following Classical-type table shows the number of days of labor input required to obtain one unit of output of each of the two commodities in each of the three countries:
$\begin{array} { l l l } &\underline{ \text { clothing }} & \underline{\text { wheat }} \\\text { Spain } & 3 \text { days } & 6 \text { days } \\\text { United States } & 2 \text { days } & 5 \text { days } \\\text { England } & 4 \text { days } & 6 \text { days }\end{array}$

Given this information, the United States has an absolute advantage over Spain in

A) both goods, and the United States also has an absolute advantage over England in Both goods.
B) both goods, but the United States has an absolute advantage over England in neither Good.
C) neither good, but the United States has an absolute advantage over England in both Goods.
D) neither good, and the United States also has an absolute advantage over England in Neither good.

Question 7

Set up a Ricardo-type comparative advantage numerical example with two countries andtwo goods. Explain how trade between the two countries can benefit each of them in comparison with autarky. Then indicate a situation in which only one of the two countries would gain from trade and carefully explain why only one country gains.

Question 8

In a two-country Classical model of trade with many commodities, briefly explain what would happen to the structure of trade in each of the following cases:(a) an increase in wages in one country;
(b) a change in the exchange rate;
(c) an improvement in productivity (lowering of the labor requirements/product) in one
country; and
(d) an increase in transportation costs.

Question 9

You are given the following Classical-type table showing the output of 10 days labor in the production of each of the two commodities in each of the two countries. Assume that The U.K. worker's wage is £30 per day and that the fixed exchange rate is $2 = £1.
$\begin{array}{lll}&\underline{\text { Food }}&\underline{\text { Clothing }}\\\\\text { United States } & 30 \text { units } & 30 \text { units } \\\text { United Kingdom } & 20 \text { units } & 15 \text { units }\end{array}$

If trade is taking place between the two countries, what is the "upper limit" to the U.S.Worker's wage per day?

A) $30
B) $40
C) $90
D) $120

Question 10

In the context of the Classical (Ricardo) model, explain, for each of the following two statements, why the statement is either TRUE or FALSE.
(a) "If country A can produce all goods with less labor time per unit of
output than can country B, then there can be no reason for country A
to trade with country B - country A would always maximize its own
welfare by satisfying its consumption desires for all goods from its
own production."
(b) "If country I's workers have greater productivity in all industries
than country II's workers, then workers in country I will be paid a
higher wage rate than workers in country II."

Question 11

Given the following Classical-type table shows the number of days of labor input Required to obtain one unit of output of each of the three commodities in each of the two Countries:
$\begin{array} { l l l l } &\underline{ \text { good T }} & \underline{\text { good X} } & \underline{\text { good Y }} \\& & & \\\text { United Kingdom } & \text { 4 days } & \text { 5 days } & 3 \text { days } \\\text { United States } & 4 \text { days } & 4 \text { days } & \text { 2 days }\end{array}$
Suppose that the wage rate in the United Kingdom is £30 per day, the wage rate in the United States is $40 per day, and the exchange rate is £1 = $1. In this situation, the United Kingdom will

A) export good T and import goods X and Y.
B) export good Y and import goods T and X.
C) export goods T and X and import good Y.
D) export goods X and Y and import good T.

Question 12

You are given the following Classical-type table indicating the number of days of labor input needed to make one unit of output of each of the five commodities in each of the Two countries. Assume that the wage rate in England is £20 per day, that the wage rate in Portugal is 40 euros per day, and that the fixed exchange rate is £1 = 3 euros.
$\begin{array}{llllll}&\text { Good A } &\text { Good B } & \text { Good C }& \text { Good D } &\text { Good E }\\\hline\text { England } & 1 \text { day } & 5 \text { days } & 2 \text { days } & 1 \text { day } & 4 \text { days } \\\text { Portugal } & 4 \text { days } & 4 \text { days } & 1 \text { day } & 2 \text { days } & 5 \text { days }\end{array}$

With the given information, what will be the trade pattern if the two countries engage in Trade?

A) England will export good A and import goods B, C, D, and E.
B) England will export goods A and D and import goods B, C, and E.
C) England will export goods A, B, and E and import goods C and D.
D) England will export goods A, B, D, and E and import good C.

Question 13

In Question #15 above, if the U.S. wage rate is $40 per day and the exchange rate is £1 = $1, what is the upper limit to the wage rate in the United Kingdom that is consistent with Two-way trade between the countries?

A) £26? per day
B) £30 per day
C) £32 per day
D) £40 per day

Question 14

Suppose that, in a Classical model with two goods, Germany can produce 50 units of steel with one day of labor and 30 units of textiles with one day of labor; Switzerland can produce 45 units of steel with one day of labor and 45 units of textiles with one day of labor. If the exchange rate is fixed at 1 Swiss franc = 1 euro and if the Swiss wage rate is 10 francs per day, then, in trading equilibrium, German wages

A) must be greater than 10 euros per day.
B) must be less than 10 euros per day.
C) must be equal to 10 euros per day.
D) can be above, below, or equal to 10 euros per day - cannot be determined without More information.

Question 15

In the context of the Classical/Ricardo model, suppose that, in an industry X, the Productivity of U.S. workers is three times the productivity of Chinese workers. At the same time, suppose that the wage rate paid to Chinese workers is 20% of the wage rate paid to U.S. workers. In this situation, the unit labor cost of producing good X would be __________ in China than in the United States and therefore, in this two-country Classical/Ricardo context, __________.

A) lower; China would export good X to the United States
B) lower; the United States would export good X to China
C) higher; China would export good X to the United States
D) higher; the United States would export good X to China

Question 16

In the situation in Question #13 above, if trade is taking place, what is the "lower limit" to the U.S. worker's wage per day?

A) $30
B) $40
C) $90
D) $120

Question 17

(a) Explain the Dornbusch-Fischer-Samuelson (DFS) model of Classical-type trade between two countries in a very large number of goods. Be sure to describe why each curve slopes as it does, and indicate the trading pattern at the equilibrium position.
(b) Now suppose that, from your equilibrium position in part (a) above, there is a uniform improvement in labor productivity in one of the two countries in all industries. (You can choose either country.) Illustrate and explain what happens to the trading pattern and to relative wage rates. Then explain the impact of the productivity improvement on real income in each country.

Question 18

(a) Set up a Ricardo-type comparative advantage numerical example with two countries and two goods. Distinguish “absolute advantage” from “comparative advantage” in the context of your example. Then explain how trade between the two countries benefits each of them in comparison with autarky.

(b) For your numerical example in part (a) of this question, assign a wage rate to one of your countries and a fixed exchange rate between the two currencies. Then, using your wage rate and the exchange rate, indicate the upper and lower limits to the wage rate in the other country that are consistent with two-way trade between the countries, and explain why these are the upper and lower limits.

Question 19

In a five country-two commodity Classical model of trade, where the autarky price ratios in all five countries are different, can you conclude a priori that all five countries will desire to trade? Why or why not? Between which of the five countries is trade certain? What will determine which of the remaining countries will trade?

Question 20

In a Ricardo-type model, if Portuguese workers can produce three times as much wine per Day as English workers but only twice as much cloth per day as English workers, then, if Portuguese wages are 30 euros per day, the upper limit to English wages per day is __________. (Assume 1 euro = £1.)

A) £10
B) £15
C) £60
D) £90

Question 21

In the Dornbusch-Fischer-Samuelson model of Question #24 above, a rise in labor productivity in the home country would cause real national income to __________ in the home country and __________ in the foreign country.

A) increase; to decrease
B) increase; also to increase
C) decrease; to increase
D) decrease; also to decrease

Question 22

In the Dornbusch-Fischer-Samuelson model of Question #24 above, a shift in tastes and Preferences towards home country goods will cause the __________ schedule to pivot __________.

A) A; downward and to the left
B) A; upward and to the right
C) C; downward and to the right
D) C; upward and to the left

Question 23

In the Dornbusch-Fischer-Samuelson graph in Question #24 above, a good that is located On the horizontal axis to the left of the point directly below the intersection of the A curve With the C curve will be exported by the __________ country, and, for this good,
__________.

A) home; a₂/a₁ < W₁/W₂ (or a₁/a₂ > W₂/W₁)
B) home; a₂/a₁ > W₁/W₂ (or a₁/a₂ < W₂/W₁)
C) foreign; a₂/a₁ < W₁/W₂ (or a₁/a₂ > W₂/W₁)
D) foreign; a₂/a₁ > W₁/W₂ (or a₁/a₂ < W₂/W₁)

Question 24

Suppose that the wage rate in country A is three times the wage rate in country B. In this situation, in the context of the Classical/Ricardo trade model, country A would be able to export goods to country B in industries where

A) A's workers were less than one-third as productive as B's workers.
B) A's workers were equally as productive as B's workers.
C) A's workers were less than three times as productive as B's workers.
D) B's workers were less than one-third as productive as A's workers.

Question 25

In the Dornbusch-Fischer-Samuelson model of Question #24 above, a uniform
Improvement in labor productivity in all of the ome country's industries would shift the A schedule __________ and would lead to the export of a __________ number of goods By the home country than the number exported before the productivity improvement.

A) upward and to the right; greater
B) upward and to the right; smaller
C). downward and to the left; greater
D) downward and to the left; smaller

Question 26

Suppose that the labor requirements per unit of output in each of the two industries in Each of three countries are as follows:
$\begin{array} { l l l } & \underline{\text { Wheat }} & \underline{\text { Cloth} } \\\\\text { Spain } & \text { 2 days } & \text { 3 days } \\\text { France } & \text { 2 days } & \text { 2 days } \\\text { United States } & \text { 1 day } & \text { 3 days }\end{array}$
In this situation, with an international terms of trade of 1 cloth:2 wheat (or 1 wheat:½ cloth), __________ would export cloth and import wheat; if the terms of trade were, instead, 1 wheat:¾ cloth (or 1 cloth:1 wheat), __________ would export cloth and import wheat.

A) France and the United States; Spain
B) Spain and France; France
C) France and the United States; Spain and the United States
D) Spain and France; Spain and the United States

Question 27

Given the following Ricardo-type table showing the amount of labor input required to produce one unit of output of each of the two goods in each of the two countries:
$\begin{array} { l l l } &\underline{ \text { Wheat} } &\underline{ \text { Clothing} } \\\text { United Kingdom } & 6 \text { days } & 5 \text { days } \\\text { United States } & 4 \text { days } & 3 \text { days }\end{array}$
Suppose that the U.S. wage rate is $60 per day and that the exchange rate is $2 = £1 (or £0.5 = $1). In this situation, the lower limit for the U.K. wage rate in order to have two-way trade would be __________ per day.

A) £18
B) £20
C) £45
D) £50

Question 28

Given the following Classical-type table showing the number of days of labor input required to obtain one unit of output of each of the two commodities in each of the three countries:
$\begin{array}{lcc}&\underline{\text { wine}}&\underline{\text { clothing} }\\\text { Denmark } & 4 \text { days } & 6 \text { days } \\\text { Germany } & 3 \text { days } & 3 \text { days } \\\text { Portugal } & 5 \text { days } & 9 \text { days }\end{array}$
Which one of the following statements is correct?

A) If trade is taking place, Germany will always be exporting wine.
B) If trade is taking place, Denmark will always be exporting clothing.
C) If trade is taking place, Portugal will always be importing clothing.
D) If trade is taking place and the terms of trade are 1 clothing:1.6 wine, Germany will be Exporting clothing and Denmark and Portugal will be importing clothing.

Question 29

Given the following Classical-type table showing the fixed money prices of each good in each of the two countries:
$\begin{array} { l c c } & \underline{\text { Shoes } }&\underline{ \text { Wine} } \\\\\text { United States } & \text { \$20/pair } & \text { \$10/bottle } \\\text { Switzerland } & 100 \text { francs/pair } & 40 \text { francs/bottle }\end{array}$
If the exchange rate is flexible, the upper limit to the price of the dollar (i.e., the number of Swiss francs per dollar above which there is export of both goods by Switzerland) is

A) 5 francs = $1.
B) 4 francs = $1.
C) 0.25 francs = $1.
D) 0.20 francs = $1.

Question 30

Given the following Ricardo-type table showing the amount of labor input required to produce one unit of output of each of the two goods in each of the two countries:
$\begin{array}{lll}&\underline{\text { Shirts }}&\underline{\text { Machines }}\\\text { France } & 3 \text { days } & 5 \text { days } \\\text { Germany } & 2 \text { days } & 4 \text { days }\end{array}$

If the wage rate in France is €60 per day (i.e., 60 euros per day), what is the upper limit to the wage rate per day in Germany (which also uses the euro) that is compatible with two-way trade between the countries?

A) €40
B) €48
C) €75
D) €90

Question 31

In the table in Question #19 above, when trade is taking place among the three countries, __________ will always be exporting wheat and __________ will always be exporting clothing.

A) the United States; England
B) England; the United States
C) England; Spain
D) Spain; the United States

Question 32

You are given the following Dornbusch-Fischer-Samuelson (DFS) graph, where a₁ = the Labor-time needed per unit of output in any given industry in the home country, a₂ = the Labor-time needed per unit of output in any given industry in the foreign country, W₁ = The wage rate in the home country, and W₂ = the wage rate in the foreign country. The Exchange rate e is assumed = 1.

FIGURE 1
In this Dornbusch-Fischer-Samuelson graph, moving to the right along the A line indicates goods in which the __________ country has greater relative efficiency; further, The introduction of technical progress in the foreign country would, other things equal, be Reflected in __________ shift of the curve.

A) home; an upward
B) home; a downward
C) foreign; an upward
D) foreign; a downward