Trade Policy and Economic Development
Midterm Exam
Course Introduction
Trade Policy and Economic Development explores the relationship between government trade policies and economic growth, focusing on how tariffs, quotas, trade agreements, and other measures impact development in both developed and developing countries. The course examines key theories of international trade, the implications of protectionism versus free trade, and the roles of global organizations such as the WTO. Through case studies and empirical analysis, students gain insight into the complexities of designing effective trade policies to promote sustainable economic growth, reduce poverty, and foster structural transformation in the global economy.
Recommended Textbook
International Economics 11th Edition by Dominick Salvatore
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21 Chapters
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Page 2
Chapter 1: Introduction
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Q1) Identify some of the criticisms of the anti-globalization movement.
Answer: Increased world income inequality,child labor,environmental pollution.
Q2) The gravity model of international trade predicts that trade between two nations is larger
A)the larger the two nations
B)the closer the nations
C)the more open are the two nations
D)all of the above
Answer: D
Q3) Identify some of the topics that international economics studies
Answer: The basis and gains from trade,the reasons and effects of protectionism,the flow of international payments,exchange rate systems and determination,macroeconomic policy in an open economy.
Q4) The 2008 and 2009 financial and economic crisis began in
A)U.S.subprime housing mortgage markets
B)Chinese export markets
C)The Japanese stock market
D)Russian foreign exchange markets
Answer: A
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Chapter 2: The Law of Comparative Advantage
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Q1) In trade between a small and a large nation:
A)the large nation is likely to receive all of the gains from trade
B)the small nation is likely to receive all of the gains from trade
C)the gains from trade are likely to be equally shared
D)we cannot say
Answer: B
Q2) With one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input).The range of mutually beneficial trade between nation A and B is:
A)3Y < 3X < 5Y
B)5Y < 3X < 9Y
C)3Y < 3X < 9Y
D)1Y < 3X < 3Y
Answer: C
Q3) The Mercantilists did not advocate:
A)free trade
B)stimulating the nation's exports
C)restricting the nations' imports
D)the accumulation of gold by the nation
Answer: A
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Chapter 3: The Standard Theory of International Trade
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Q1) What is meant by gains from specialization? How is this shown in the context of production possibilities (ppf)and indifference curves?
Answer: Gains from specialization in the context of production possibilities and indifference curves is shown by a nation's ability to achieve a higher level of satisfaction (on an indifference curve beyond the ppf)than would be possible without the change in the composition of national production caused by trade.
Q2) If a nation has a steeper indifference curve relative to that of another nation it means that
A)it has stronger tastes and preferences for good Y
B)it has stronger tastes and preferences for good X
C)it has a higher opportunity costs for good Y
D)it has a higher opportunity costs for good X
Answer: B
Q3) Carefully explain what an indifference curve is.
Answer: An indifference curve show various combinations of commodity consumption that yield the same level of satisfaction.It is convex to the origin due to the diminishing returns associated with the consumption of more of one commodity relative to another.
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Chapter 4: Demand and Supply, offer Curves, and the
Terms of Trade
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Q1) All other things equal,if a nation's terms of trade deteriorate,to maintain the same quantity of imports,the nation
A)will have to export a greater quantity of goods.
B)will have to export a smaller quantity of goods.
C)could increase or decrease its exports.
D)will have to accept a lower standard of living.
Q2) The offer curve of a nation shows:
A)the supply of a nation's imports
B)the demand for a nation's exports
C)the trade partner's demand for imports and supply of exports
D)the nation's demand for imports and supply of exports
Q3) At a relative commodity price above equilibrium
A)the excess demand for a commodity exceeds the excess supply of the commodity
B)the quantity demanded of imports exceeds the quantity supplied of exports
C)the world price of the commodity will fall
D)the excess demand for the commodity will increase.
Q4) Explain the effect of changes in petroleum prices on the terms of trade and relative export prices for the United States in recent years.
Q5) Carefully define an offer curve and explain how it is derived.
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Chapter 5: Factor Endowments and the Heckscher-Ohlin
Theory
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Q1) The United States can be characterized as relatively capital abundant and labor scarce.Thus,according to the H-O model,
A)social welfare in the United States will be reduced by trade.
B)wages in the United States will be reduced by trade.
C)the return on capital in the United States will be reduced by trade.
D)capital-labor ratios in will be changed by trade.
Q2) When w/r falls,L/K
A)falls in the production of both commodities
B)rises in the production of both commodities
C)can rise or fall
D)is not affected
Q3) According to the factor price equalization theorem,a nation that has a relative capital abundance should specialize in goods that are ______ intensive resulting in an increase in the price of ______.
A)capital;capital
B)capital;labor
C)labor;capital
D)labor;labor
Q4) List three possible explanations for the Leontief paradox
Q5) Define and explain factor intensity reversal
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Chapter 6: Economies of Scale, imperfect Competition, and International Trade
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Q1) a)Explain why the Heckscher-Ohlin trade model needs to be extended.
b)Indicate in what important ways the Heckscher-Ohlin trade model can be extended.
c)Explain what is meant by differentiated products and intra-industry trade.
Q2) Offshoring refers to
A)the purchase of parts and components from overseas to reduce production costs.
B)a firm producing parts in its own plants abroad.
C)importing final consumer goods instead of purchasing them domestically.
D)technology transfer from one country to another.
Q3) A footloose industry is one in which the product:
A)gains weight in processing
B)loses weight in processing
C)does not change weight in processing
D)could increase,decrease,or have no change in weight in processing.
Q4) A developed and developing nation are most likely to engage in
A)inter-industry trade based on economies of scale
B)intra-industry trade based on economies of scale
C)inter-industry trade based on comparative advantage
D)intra-industry trade based on comparative advantage
Q5) Define and explain economies of scale.
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Chapter 7: Economic Growth and International Trade
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Q1) Doubling the amount of L and K under constant returns to scale does all of the following except:
A)doubles the output of the L-intensive commodity
B)doubles the output of the K-intensive commodity
C)leaves output unchanged.
D)leaves the shape of the production frontier unchanged
Q2) What does the Rybczynski theorem postulate?
Q3) A shift in a nation's offer curve toward the axis measuring the exportable commodity tends to ____________ trade at constant prices,and __________ the nation's terms of trade.
A)expand,improve
B)expand,decrease
C)decrease,improve
D)decrease,decrease
Q4) Empirical studies have generally shown that most of the real per capita income increase in industrialized countries is due to
A)capital accumulation
B)population growth
C)technical progress
D)infrastructure improvements
Page 9
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Chapter 8: Economic Growth and International Trade
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Q1) Using the concept of effective protection,explain how and why tariffs tend to vary with the level of processing of goods (that is,raw materials,intermediate goods,and finished goods).
Q2) The imposition of an import tariff by a nation results in:
A)an increase in relative price of the nation's import commodity
B)an increase in the nation's production of its importable commodity
C)reduces the real return of the nation's abundant factor
D)all of the above
Q3) The imposition of an import tariff by a nation can be represented by a rotation of the:
A)nation's offer curve away from the axis measuring the commodity of its comparative advantage
B)the nation's offer curve toward the axis measuring the commodity of its comparative advantage
C)the other nation's offer curve toward the axis measuring the commodity of its comparative advantage
D)the other nation's offer curve away from the axis measuring the commodity of its comparative advantage
Q4) Under what conditions can a tariff improve a nation's welfare?
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) Adjustment to any shift in the domestic demand or supply of an importable commodity occurs:
A)in domestic price with an import quota
B)in the quantity of imports with a tariff
C)through the market mechanism with an import tariff but not with an import quota
D)all of the above
Q2) An import quota does all of the following except:
A)increases the domestic price of the imported commodity
B)reduces domestic consumption
C)increases domestic production
D)increases domestic social welfare
Q3) The WTO was established during the
A)Kennedy Round
B)Uruguay Round
C)Tokyo Round
D)Doha Round
Q4) What is dumping and what are its various forms?
Q5) What is an infant industry,and why would a country want to protect it?
Q6) What is a quota and how does it compare to the economic effects of a tariff?
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) Which of the following is not a trading bloc or agreement including some South American countries?
A)MERCOSUR
B)ASEAN
C)FTAA
D)CACM
Q2) Which is a stumbling block to successful economic integration among groups of developing nations?
A)benefits are not evenly distributed among nations
B)many developing nations are not willing to relinquish part of their newly-acquired sovereignty to a supranational community body,as required for successful economic integration
C)the complementary nature of their economies and competition for the same world markets for their agricultural exports
D)all of the above
Q3) Discuss the attempts at economic integration in developing countries.Why have these attempts been less successful than in developed countries?
Q4) What is the theory of second best?
Q5) What is trade diversion?
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Chapter 11: International Trade and Economic Development
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Q1) Developing nations often experience wildly fluctuating export prices for their primary products because of:
A)inelastic and stable demand and supply
B)elastic and unstable demand and supply
C)inelastic and unstable demand and supply
D)elastic and stable demand and supply
Q2) In most developing countries,import substitution policies have resulted in A)optimal use of excess supplies of labor.
B)industries that are over-capitalized.
C)rapid economic growth.
D)more rapid growth than export-oriented policies.
Q3) During the 1950's,1960's and 1970's the predominant growth strategy for developing nations was one of
A)import substitution
B)export orientation
C)communism
D)none of the above
Q4) Why did developing nations that switched from a policy of import substitution to a policy of export promotion generally grow faster during the past decade?
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) What are the basic motives for international portfolio investments?
Q2) International capital flows
A)increase world social welfare.
B)increase the welfare of the host country but not the investing country.
C)increase the welfare of the investing country but not the host country.
D)decrease world social welfare.
Q3) Which of the following is not a beneficial effect of direct investments on the investing country:
A)the transfer of technology
B)higher profits
C)risk diversification
D)avoids the possible loss of export markets
Q4) Portfolio theory tells us that by investing in securities with yields that are inversely related over time:
A)a given yield can be obtained at a smaller risk
B)a higher yield can be obtained for the same level of risk
C)a two-way capital flow may be required to achieve a balanced portfolio
D)all of the above
Q5) Discuss the motives for international labor migration.
Q6) What are the primary reasons for the existence of multinational corporations? Page 14
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Chapter 13: Balance of Payments
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Q1) What is meant by autonomous transactions?
Q2) The payment of a dividend by an American company to a foreign stockholder represents:
A)a debit in the U.S.financial account
B)a credit in the U.S.financial account
C)a credit in the U.S.official reserve account
D)a debit in the U.S.current account
Q3) Which of the following is false?
A)A credit transaction leads to a payment from foreigners
B)A debit transaction leads to a payment to foreigners
C)A credit transaction is entered with a negative sign
D)Double-entry bookkeeping refers to each transaction entered twice.
Q4) The receipt of an interest payment on a loan made by a U.S.commercial bank to a foreign resident is entered in the U.S.balance of payments as a:
A)credit in the financial account
B)credit in the current account
C)credit in official reserves
D)debit in unilateral transfers
Q5) Carefully define the balance of payments.
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) Spot currency transactions must settle within
A)two business days
B)one week
C)one month
D)one year
Q2) Hedging refers to:
A)the acceptance of a foreign exchange risk
B)the covering of a foreign exchange risk
C)foreign exchange speculation
D)foreign exchange arbitrage
Q3) What is arbitrage and how does it impact the exchange rate across foreign exchange markets?
Q4) Which is not a function of the foreign exchange market?
A)to transfer funds from one nation to another
B)to finance trade
C)to diversify risks
D)to provide the facilities for hedging
Q5) Discuss the reasons for the existence and growth of Eurocurrency markets
Q6) What is the principle function of foreign exchange markets?
Q7) Explain what carry trade is.
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Chapter 15: Exchange Rate Determination
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Q1) According to the portfolio balance approach,an increase in the expected appreciation of the foreign currency leads domestic residents to increase:
A)the demand for domestic money
B)the demand for the domestic bond
C)the demand for the foreign bond
D)the risk premium
Q2) Which of the following statements is true with respect to the monetary approach to the balance of payments:
A)the interest differential in favor of the dollar equals the expected rate of appreciation of the euro
B)the interest differential in favor of the dollar equals the expected rate of depreciation of the dollar
C)the interest differential in favor of the pound equals the expected rate of depreciation of the pound
D)all of the above
Q3) If the United States rate of inflation is 2% and the German rate of inflation is 5%,what would relative purchasing power parity predict about the value of the euro relative to the dollar,all other things equal?
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Chapter 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange
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Q1) Research on the relationship between elasticities and the current account balance suggests that,for the United States,currency depreciation would result in:
A)a significant improvement in the current account balance.
B)no change in the current account balance.
C)a small improvement in the current account balance.
D)a worsening of the current account balance.
Q2) Which of the following statements is not true with regard to the price-specie-flow mechanism:
A)relies on the quantity theory of money
B)requires that nations allow their money supply to rise when the nation has a surplus in its balance of payments and to fall when the nation has a deficit
C)requires that the price elasticity of demand for imports and exports be equal to zero
D)it was introduced by David Hume to show the futility of the mercantilists' prescription that a nation should attempt to continuously accumulate gold
Q3) Explain the meaning of the J-curve effect and exactly how it works.
Q4) Explain why currency pass-through is not likely to be complete.
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Chapter 17: The Income Adjustment Mechanism and Synthesis
of Automatic
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Q1) Why is the foreign trade multiplier smaller in a large nation relative to small nation?
Q2) One disadvantage facing a freely flexible exchange rate system is that is can cause A)overshooting
B)competitive devaluations
C)hedging
D)loss of monetary policy control
Q3) What are some of the disadvantages of a freely flexible exchange rate system with respect to the adjustment process?
Q4) When S exceeds I,an open economy has a trade:
A)surplus
B)deficit
C)equilibrium
D)any of the above
Q5) In the Keynesian model,in short-run equilibrium,the trade balance must be A)positive.
B)equal to zero.
C)negative.
D)could be positive,negative,or equal to zero.
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Chapter 18: Open-Economy Macroeconomics: Adjustment Policies
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Q1) The IS curve is negatively sloped because:
A)the higher is the rate of interest the smaller is the quantity of money demanded for speculative purposes
B)higher rates of interest lead to greater capital flows
C)at lower interest rates the levels of investment and national income are higher
D)at lower interest rates the level of national income is lower
Q2) To correct a balance of payments deficit and inflation a nation requires:
A)contractionary fiscal policy and easy monetary policy
B)contractionary fiscal policy and tight monetary policy
C)expansionary fiscal policy and tight monetary policy
D)any of the above depending on the level of inflation and the size of the initial deficit
Q3) Use a Swan diagram to identify a point at which a nation has domestic unemployment and a trade surplus.What combination of policies should be used to restore balance?
Q4) Use graph to illustrate the effect of perfect capital mobility under fixed and flexible exchange rate regimes.
Q5) What is meant by a three market balance equilibrium?
Q6) What are direct controls?
Page 21
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Chapter 19: Prices and Output in an Open Economy:
Aggregate Demand and Aggregate Supply
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Q1) Why is monetary policy ineffective under a fixed exchange rate system?
Q2) In general,as the economy expands or contracts over the business cycle
A)prices change rapidly
B)prices remain unchanged except in a recession
C)prices remain unchanged until the economy reaches full employment
D)prices change,but slowly
Q3) Which of the following is a correct statement about the effects of monetary and fiscal policies?
A)Monetary policy is effective under a fixed exchange rate regime,but not under flexible rates.
B)A monetary shock will shift the aggregate demand curve in the same direction,whether exchange rates are fixed or flexible.
C)A real shock will shift the aggregate demand curve under fixed but not flexible exchange rates.
D)Monetary policy can always be used to correct real shocks,whether exchange rates are fixed or flexible.
Q4) What is the natural level of output?
Q5) How does an increase in government expenditure impact aggregate demand?
Q6) What conditions lead to the stagflationary environment of the 1970s?
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Coordination
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Q1) International macroeconomic policy coordination has become more useful and essential in recent decades because:
A)the interdependence among countries has increased
B)the volume of trade has grown more rapidly than GNP
C)of the large increase in international capital flows
D)all of the above
Q2) Carefully explain the costs and benefits of a flexible exchange rate regime.
Q3) The policy of intervention in the foreign exchange market to smooth out short-run fluctuations in exchange rates is called:
A)crawling peg
B)adjustable peg
C)leaning against the wind
D)managed float
Q4) International policy coordination may help avoid
A)beggar-thy-neighbor policies
B)competitive devaluations
C)retaliatory behavior
D)all of the above
Q5) What is a currency board? Page 23
Q6) Carefully explain the costs and benefits of a flexible exchange rate regime.
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Chapter 21: The International Monetary System:
Past,present,and Future
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Q1) The Bretton Woods System:
A)allowed nation to change their par values when facing fundamental disequilibrium
B)allowed nations to change their par values when facing a temporary disequilibrium
C)did not allow nations to change their par exchange rates under any circumstance
D)allowed only deficit nations to change their par values,but not surplus nations
Q2) The interwar period was characterized by:
A)the operation of the gold standard
B)chaotic conditions in international trade and finance
C)free trade
D)stabilizing international capital flows
Q3) The present international monetary system is a:
A)gold standard
B)flexible exchange rate system
C)managed exchange rate system
D)a target zone system
Q4) What are the most serious economic problems facing the world today?
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