This is a rough version of the MCQ test in 2002

rmaUniversity of Cape Town

School of Economics

Economics - Eco324F: International tradeTEST 2 TRADE 04Mark for correct answer: 3Mark for incorrect answer: -1

Answer all questions

Time: 60 min.TEST SOLUTIONSWe do not give out test solutions. We also do not generally recommend that students spend too much time on old MCQ questions. We mostly do not set the same questions again. So it is much better to spend your study time reading the text book and approaching the tests/exam with an open mind. It may be useful to read through old MCQ questions/exam papers to see what form the questions can take. There are very useful summaries at the end of each chapter in the text as well as practice problems. There are also practice MCQ's on the Text Book web site. These can be marked on the site. If you wish to spend time on old questions, then you benefit most by figuring out the correct answer for yourself. And if you don't know the answer, consult your text book.

1. Japan and France have identical PPFs and identical community indifference curves. If production technology is characterised by constant returns to scale:

A. Japan will enjoy all the gains from tradeB. France will enjoy all the gains from trade

C. Gainful specialization and trade are not possible

D. Japan and France share equally in the gains from trade

2. In order for two countries to gain from specialization and trade:A. The opportunity cost of producing the goods to be traded must be different between the countries.

B. Each country must specialize in the production of the good for which it has a lower opportunity cost.

C. Each country must specialize in producing the good for which it has a comparative advantage.

D. All of the above.

3. If a nation does not have an absolute advantage in producing anything, it

A. has no comparative advantage either.

B. will have a comparative advantage in the activity in which it is least inefficient.

C. Will try to get along without trade.

D. Will export raw materials and import finished products.

The following diagram shows the PPF of Germany and South Africa. Assume that the Ricardian assumptions hold and that labour is the only factor. Each countrys endowment of labour is equal to 10. Use the diagram to answer questions 4 to 6.

4. Which of the following is correct

A. Germany has an absolute advantage in cars and beer, but a comparative advantage only in beer.

B. Germany has a comparative advantage in cars and no absolute advantage in beer.C. South Africa has no absolute advantage in either cars or beer, but a comparative advantage in beer.

D. South Africa has a comparative advantage in cars.

5. The international price of cars in terms of beer (Pcars/Pbeer) after trade liberalisation will be:A. (Pcars/Pbeer) > 20

B. (Pcars/Pbeer) < 1C. 1 < (Pcars/Pbeer) < 5

D. 4 < (Pcars/Pbeer) < 30

6. Let Qcars and Qbeer be the combined production of cars and beer, respectively, by Germany and South Africa. Which of the following correctly specifies the combined production of Germany and South Africa given possible relative prices:

A. If (Pcars/Pbeer) = 10 then Qcars = 0 and Qbeer = 0

B. If 5 < (Pcars/Pbeer) < 20 then Qcars = 4 and Qbeer = 30C. If 1 < (Pcars/Pbeer) < 5 then Qcars = 30 and Qbeer = 20D. If (Pcars/Pbeer) < 1 then Qcars = 34 and Qbeer = 0

The following table presents the labour hours required to produce one unit of manufacturing and agriculture in China and Russia. Production is characterised by constant returns to scale and community indifference curves are identical in both countries.

ChinaRussia

Manufacturing2hours/output4 hours/output

Agriculture4hours/ouput8hours/ouput

7. Which of the following statements regarding trade between Russia and China is correct under a free trade regime?A. There is no incentive to trade.

B. Russia has a comparative advantage in agriculture, exports agricultural goods and imports manufactured goods.C. China has a comparative advantage in agriculture, exports agricultural goods and imports manufactured goods.D. Russia imports manufacturing while China exports agriculture.The following table presents data on output per worker in South Africa and developed countries. Average wages are R10 in South Africa and R30 in Developed countries. Use the table to answer questions 8 to 10.

Output per worker (in Rands) in South Africa and developed countriesSouth AfricaDeveloped countries

Textiles24

Clothing45

Leather88

Chemicals1040

Iron 2010

Vehicles1590

8. South Africa has an absolute advantage in

A. All products

B. Textiles, clothing, leather, chemicals, vehiclesC. Iron D. None of the above are correct9. Given the data on output and the average wage rates, South Africa would export the following products to developed countries:

A. Textiles, clothing and leather

B. Chemicals, iron and vehicles

C. Chemicals and vehicles

D. Textiles, clothing, leather and iron10. Using the same output data, if COSATU could push the average wage in South Africa up to R20 while the average wage of R30 remains in developed countries, what would SA export to developed countries?A. Clothing, leather and ironB. Chemicals, vehicles and textilesC. Nothing changesD. Textiles, clothing, leather and iron

Use the following table to answer questions 11 to 16Assume a world with three economies characterized by the following:

South AfricaWonderlandBrazil

Endowments of labour15510

Endowments of capital302020

Two products are produced. The first, manufacturing, is produced using capital intensive production techniques while the second, agriculture, is produced using labour intensive production techniques. Both production processes are characterised by constant returns to scale.11. According to the Heckscher-Ohlin theorem, if South Africa and Wonderland engage in free trade:A. South Africa exports agriculture and imports manufacturing.

B. South Africa exports manufacturing and imports agriculture.C. South Africa exports both manufacturing and agriculture while Wonderland exports nothing.

D. There is no incentive to trade between South Africa and Wonderland.

12. According to the Heckscher-Ohlin theorem, if South Africa and Brazil engage in free trade:

A. South Africa exports agriculture and imports manufacturing.

B. South Africa exports manufacturing and imports agriculture.

C. South Africa exports both manufacturing and agriculture while Brazil exports nothing.

D. There is no incentive to trade between South Africa and Brazil.

13. According to the Stolper-Samuleson theorem if South Africa and Wonderland engage in free trade:

A. Factor prices of capital rise in both countriesB. Factor prices of capital rise in Wonderland, but fall in South Africa

C. Factor prices of capital fall in Wonderland, but rise in South Africa

D. Factor prices remain the same as there is no incentive to trade.14. After free trade with Wonderland, the price of manufactures in South Africa falls by 5% and the price of agriculture rises by 10%. Which of the following reflects the impacts on factor prices in South Africa:

A. Wages fall by more than 5% and the return to capital rises by more than 10%.B. Wages rise by more than 10% and the return to capital falls by more than 5%.C. Changes in the prices of goods have no impact on factor prices.D. Both wages and returns to capital rise in agriculture and fall in manufacturing.

15. According to the Rybczynski theorem if the labour endowment of Brazil increases, the following would happen:A. Brazils production of agriculture rises, but the production of manufacturing declinesB. Because of the magnification effect, % change in agricultural production is greater than % change in labour forceC. At constant world prices, wages and return to capital do not change in BrazilD. All of the above16. Which of the following statements regarding factor returns in South Africa and Brazil under autarky is correct:A. Wage/rental ratio is greater in South Africa than in BrazilB. Wage/rental ratio is smaller in South Africa than in BrazilC. South Africa and Brazil have the same wage/rental ratioD. It is impossible to say without knowing the exact prices of goods17. Assume that Country A, in the absence of trade, finds its self relatively abundant in labour and relatively scarce in land. The factor endowment theory reasons that with free trade, the internal distribution of national income in Country A will change in favour of:

A. labour

B. land

C. Both labour and land

D. Neither labour nor land18. Which of the following statements regarding an increase in labour in the Heckscher-Ohlin model and the Specific factor model (with labour as the only mobile factor) is correct?A. Wages fall in the Heckscher-Ohlin model, but stay the same in the Specific factor modelB. Wages stay the same in the Heckscher-Ohlin model, but fall in the Specific factor model

C. Wages fall in both the Heckscher-Ohlin model and the Specific factor model

D. Wages fall in the Heckscher-Ohlin model, but stay the same in the Specific factor model19. In the Specific factor model, how does trade affect the income of different factors?A. All factors gain from tradeB. Factors specific to exports lose and factors specific to import-competing sectors gainC. Mobile factors always lose while all specific factors always gain.D. Factors specific to exports gain and factors specific to import-competing sectors lose 20. Assume capital and land to be production specific factors. Labour is the only mobile factor. With prices of goods remaining constant, what happens if FDI increases the capital stock of the country?A. Wages rise and labour moves to the industry which uses capital as a specific factorB. Total returns to capital and land fall, while returns to labour riseC. All of the aboveD. None of the above21. With regard to Intra-industry trade, which of the following statements is correct?A. It can refer to a trade pattern where a country exports goods in which it does not have a comparative advantageB. It results from the assumption of monopolistic competition and economies of scaleC. Trade increases the variety of goods available to consumers in each countryD. All of the above22. Industries with internal economies of scale are characterised byA. Big firms and an imperfectly competitive market

B. A large number of small firms and a perfectly competitive market

C. A low number of small firms and a perfectly competitive market

D. Lower average costs of production the more firms there are in the industryUse the following diagram to answer questions 23 and 24

23. An import tax of t is imposed on world price PW. All tariff revenue earned by government is paid to consumers in the form of transfers. The net loss to society is

A. I

B. H+J

C. G+H+J

D. G+H+I+J

24. If government granted a lump sum, income tax financed, production subsidy to producers of value G+H rather than the tariff, the net welfare loss to society is

A. H+J

B. G+H+I+J

C. H

D. G+H

25. The free trade price of the final good (F) is R1000 and the prices of the two intermediate inputs (A and B) are A = R200 and B = R400. Tariffs are then imposed such that prices change as follows: F = R1400, A = R300, B = R600. The Effective Rate of Protection on good F is

A. 20%

B. 25%

C. 20%

D. 28,6%

Why does agriculture get so much attention, and cause so much conflict, within the WTO?Agriculture makes up only about 10 percent of world merchandise trade. However, agricultural markets are by far the most distorted, with high tariffs (some in excess of 1000 percent) and large subsidies given to farmers, especially in developed countries. Because agriculture was brought into negotiations under the General Agreement on Tariffs and Trade (or GATT, the predecessor to the WTO) only in the Uruguay Round (1986-1994), liberalization efforts in agriculture are far behind those in manufactured goods. Thus, much work remains to be done. Agriculture is also a highly politicized issue: many agricultural subsidies in developed countries encourage overproduction and thus depress world prices for certain commodities, causing damage to the exporting interests of other agricultural producers abroad. For the most part, developing countries have a comparative advantage in agricultural goods, so trade barriers prevent them from being able to access markets for their goods. This puts them at odds with powerful agricultural lobbies in some developed countries, who jealously guard the special attention their industry receives and make reform politically difficult.

Related Works:

Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers

Boxed In: : Conflicts Between U.S. Farm Policies and WTO Obligations

America's Bittersweet Sugar Policy

Grain Drain: The Hidden Cost of U.S. Rice Subsidies

Milking the Customers: The High Cost of U.S. Dairy Policies

Also see the CTPS issue page, "Agriculture."

Does free trade lead to a "race to the bottom" in global labor and environmental standards?

While this is a frequently heard complaint, there is no evidence of such a "race to the bottom." In fact, the opposite is true: expanding trade and rising incomes tend to promote higher social standards. As incomes rise in developing countries, their people and governments are able to devote more resources to protecting the environment and lifting labor standards, while an expanding middle class begins to expect and demand improvements in the environment and working conditions. Empirical evidence shows that as nations reach middle and upper income levels, their environmental policies and indicators improve. Working conditions also improve and rates of child labor fall. Foreign investment in developing countries contributes to this "race to the top" by creating better paying jobs and by "importing" better business practices and work rules. Contrary to the "race to the bottom" myth, low wages and lax environmental rules are not an irresistible magnet for foreign investment. Foreign investors seek property rights protection, a functioning legal system, a well-educated workforce, profitable markets, and sufficient infrastructure. That is why most of the world's foreign investment flows between rich, high-standard economies.

Related Works: Trade, Labor, and the Environment: How Green and Blue Sanctions Threaten Higher Standards

The Case for CAFTA

WTO Report Card III: Globalization and Developing Countries

Outsource, Outsource, and Outsource Some More

The Logic of Trade

Also see the CTPS issue page, "The Benefits of Globalization."

What are the benefits of free trade for the average person?

The historical record is very clear that free trade bestows many benefits to the average person. Those countries that lower trade barriers and open their markets enjoy higher economic standards of living. Consumers have access to a wider range of higher quality products at prices lower than they would otherwise pay. The average person also benefits in terms of wages and job opportunities. When labor and capital flow freely to the most productive areas of the economy, workers are employed in better, higher quality jobs with higher wages. While there are inevitable short-term transition costs in some sectors of the economy, the long-term benefits of free trade for all far outweigh such costs..

Related Works: Protectionism Hurts Consumers

WTO Report Card: America's Economic Stake in Open Trade

Trade, Jobs, and Manufacturing: Why (Almost All) US Workers Should Welcome Imports

The Blessings of Free Trade

Also see the CTPS issue page, "The Benefits of Globalization."

Does the trade deficit harm domestic economic performance?A trade deficit is not a threat to America's economic well-being. By virtually every measure--GDP growth, employment, industrial production, and poverty reduction--the US economy performs better when the trade deficit is rising than when it is falling. Trade deficits do not arise from unfair trade barriers abroad or uncompetitive industries at home, but from a net inflow of foreign capital. Foreign capital lowers domestic interest rates and funds new investment while imports lower prices and expand the choice and quality of products for consumers and producers. America's net international investment position, negative $1.5 trillion in 2000, is not unduly large when compared to the nation's GDP or net wealth. Seeking to cure the deficit with new trade barriers would only harm the economy without reducing the deficit.

Related Works: The Causes and Consequences of the US Trade Deficit

America's Maligned and Misunderstood Trade Deficit

What Should The Next President Do About the Record US Trade Deficit?

Stop Worrying About the US Trade Deficit

Also see the CTPS issue page, "The Trade Deficit and Imports."

Do imports destroy jobs?Imports do not cause a net loss of jobs in a nation's economy. Imports may displace some workers in less competitive industries, but the overall level of employment is determined by monetary policy, labor market flexibility and other non-trade factors. Thus, trade benefits an economy in the same way as technology, causing resources to shift to more productive sectors, raising overall living standards. For the overwhelming majority of American workers, imports raise real compensation by keeping prices down and stimulating domestic competition. Research shows that a rising level of imports to the United States usually signals the creation of more jobs, not the loss of jobs. Imports benefit American producers as well, providing capital equipment to make workers more productive and lower-cost inputs, such as steel, electronic components, and raw materials, that make their products more price-competitive in world markets.

Related Works: Trade, Labor, and the Environment: How Green and Blue Sanctions Threaten Higher Standards

Trade, Jobs, and Manufacturing: Why (Almost All) US Workers Should Welcome Imports

The Fundamental Freedom to Trade Steel Quotas Will Harm US Anti-dumping Law is Discriminatory

The Steel 'Crisis' and the Costs of Protectionism

Also see the CTPS issue page, "The Trade Deficit and Imports."

Is free trade a threat to the US manufacturing base?Free trade is a boon to the US manufacturing base, which is alive and thriving according to statistical evidence. Access to a greater supply of raw materials at lower prices enables US manufacturers to reduce costs and become competitive in markets around the world. Without such access, US manufacturers would have difficulty pricing competitively in markets with relatively lower incomes and currency values. The presence of foreign-produced finished manufactures in the US compels domestic industries to be innovative and efficient, both of which are keys to profitability and longevity. Statistically, in constant 1996 dollars, manufacturing's share of GDP has held steady at slightly over 17 percent between 1977 (a period of relatively high tariffs) and 1998. Between 1992 and 1999, when the overall economy grew by 29 percent, the Federal Reserve's index of manufacturing output increased by 42 percent!

Related Works:

Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade

Trade, Labor, and the Environment: How Green and Blue Sanctions Threaten Higher Standards

Trade, Jobs, and Manufacturing: Why (Almost All) US Workers Should Welcome Imports

WTO Report Card: America's Economic Stake in Open Trade

The Big Myth about US Manufacturing (Fortune)

Take the Manufacturing Quiz.Also see the CTPS issue page, "The Trade Deficit and Imports."

Is immigration bad for average Americans?Immigration has been good for the US economy and the average American worker. Foreign-born workers fill gaps in the labor force where demand is greatest, allowing US companies to produce more efficiently and to keep prices down. Immigrants increase the domestic demand for goods and services, creating employment opportunities for other American workers. Highly skilled immigrants have been especially important to America's high-tech sectors, creating new products and production methods, and allowing the industry to expand production and reach new markets abroad. Much of America's New Economy could not function without the contributions of foreign-born workers. According to a major study by the National Research Council, immigrants and their children pay more in taxes than they consume in government services. They contribute to the richness and wide appeal of American culture.

Related Works:

Willing Workers: Fixing the Problem of Illegal Mexican Migration to the United States

FAIR Ads Unfairly Blame Immigrants for Urban Sprawl, Traffic Jams

The H-1B Straitjacket: Why Congress Should Repeal the Cap on Foreign-Born Highly Skilled Workers

Cato Handbook for the 106th Congress: Immigration Immigration: The Demographic and Economic Facts

Also see the CTPS issue page, "Immigration."

Should the United States enact and enforce laws that aim to promote "fair trade" and create a "level playing field" for its workers and industries?While "fair trade" sounds good in theory, in practice, the term is really code for protectionism. Fair trade, as the term is now used, usually means government intervention to direct, control, or restrict trade. Fair trade means government officials decide what Americans should be allowed to buy and what prices they should be forced to pay. Other countries often have a comparative advantage over the United States in a particular industry. Attempts to "level the playing field" by subsidizing the US industry is really a tax on US consumers and only prolongs the economic woes of the industry in question.

Related Works:

Antidumping 101: The Devilish Details of "Unfair Trade" Law

The Myth of Fair Trade

The US Antidumping Law: Rhetoric versus Reality

Nailing the Homeowner: The Economic Impact of Trade Protection of the Softwood Lumber Industry (An example of a "fair trade" failure)

The Perpetual Steel Crisis

Also see the CTPS issue pages, "US Antidumping Law" and "Trade Politics."

Does the World Trade Organization undermine national sovereignty?As sovereign nations, WTO members share a common recognition that open markets are superior to protected markets. The WTO was established as an extension of this ideal to arbitrate disputes within the context of a set of rules created and agreed to by sovereign member nations. Excluded from WTO perusal are broad categories of trade restrictions, including those related to national security, public health and safety, conservation of natural resources, and banning imports made with forced or prison labor. Member nations are encouraged to abide by WTO rulings, which are rendered in cases where an arbitrated dispute settlement does not obtain. However, the WTO has no authority to force member nations to pay fines, change laws, revoke sanctions or do anything. By contrast, national sovereignty is threatened in the absence of WTO rules, where market barriers or sanctions by one country against another are more likely.

Related Works:

WTO Report Card II: An Exercise or Surrender of US Sovereignty The Myth of Surrendered Sovereignty

Also see the CTPS issue page, "The World Trade Organization."

Are unilateral sanctions effective foreign policy tools?More often than not, unilateral sanctions end up achieving the opposite of what their authors intend by making the target country more self-sufficient and strengthening its resolve to continue objectionable policies. Examples abound: from Cuba to Iran to Burma, sanctions have failed to achieve the goal of changing the behavior or the nature of target regimes. At the same time, sanctions have deprived American companies of international business opportunities, punished domestic consumers, and hurt the poor and most vulnerable in the target countries. Given this record of failure, unilateral sanctions should be used sparingly by U.S. policymakers.

Related Works:

Cato Handbook for the 106th Congress: Sanctions

Economic Casualties: How U.S. Foreign Policy Undermines Trade, Growth, and Liberty (March, 1999)

Going Alone on Economic Sanctions Hurts US More than Foes

What's Wrong with Trade Sanctions?

Also see the CTPS issue page, "Unilateral Sanctions."BeerBeer

2030

South AfricaGermany

CarsCars

ComputersComputers

30

4

Q2

Q3

S

Q4

PW

PW (1+t)

Q1

D

HB

GA

J

I