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Chapter5The StandardTrade Model■Multiple ChoiceQuestions
1.The concept“terms of trade/z meansathe amountof exportssold bya country.b the price conditionsbargained fbrin internationalmarkets.c the price of a countrys exports dividedby theprice of its imports.d thequantities ofimports receivedin freetrade.e None of the above.Answer:C
2.A countrycannot producea mixof productswith ahigher valuethan whereathe isovalue line intersectsthe production possibility frontier.b theisovalue lineis tangentto the production possibility frontier.c theisovalue lineis above the production possibility frontier.d theisovalue lineis belowthe production possibility frontier.etheisovalue lineis tangentwith theindifference curve.Answer:B
3.Tastes ofindividuals arerepresented byathe production possibility frontier.b theisovalueline.c theindifference curve.d the production function.e None of the above.Answer:C
4.If PC/PF were to increasein theinternational marketplace,thena all countries would be betteroff.b the terms of trade of cloth exportersimprove.c the terms of trade of food exportersimprove.d the terms of trade of all countriesimprove.e None of the aboveAnswer:B
2.If a country9s growthis biased in favor of its import,this shouldunequivocally improve its terms oftrade andits economic welfare.Discuss.Answer:Suppose Japanexperiences economic growth biasedin favor of itsimport substitutes.Forexample,assume thatJapan importscomponents andexports final goods,but thatit experiencesamajor growth in itscomponents manufacturesector.Since Japanis internationallya largecountryin thesemarkets,this wouldtend tohurt itscomponent suppliersterms of trade andhelpJapans.However,such abias ineconomic growthmay tend to lessenthe volumeofinternational trade.At anextreme,Japan maybecome anexporter ofcomponents and an importeroffinalgoods.If theresult is a lesseningof specializationand of the volumeof trade,then thiseffectwill lowerJapans welfareassociated withgains from trade.If anactual changein thepatternof comparative advantage occursa possibilitythis maycause dynamicdislocationswhose harmoverpowers staticgains fbra relativelylong periodof time.
3.It isimpossible fbreconomic growthin asmall countryto lowerthat countrys economic welfare,regardlessof thebias of the growth.Explain.Answer:This is a truestatement.The reasoneconomic growthmay hurta country is ifthe terms of tradeeffectcounters anddominates the growth effect.In thecase of the small country thereis notermsof tradeeffect.
4.At theconclusion ofWorld WarI,Germany,as apunishment,was obliged to makea largetransfer toFrancein theform ofreparations.Is itpossible that the actualreparations mayhave improvedGermany9seconomic welfareAnswer:Such aresult is not likely.However,theoretically,if Francesincome elasticityof demandfbrGermanys exportswas higher than Germanysincome elasticityof demandfbr itsownexportable,then thereal incometransfer associatedwith thesereparations mayhave improvedGermanys terms of trade,and improvedits balance of payments,thus helpingGermany inmannerunanticipated in the Treatyof Verssaille.Explain.
5.An export subsidy has the opposite effect on terms of trade to the effectof animport tariff.Domestically atariffwill raise theprice of theimport good,deteriorating the domestic terms of trade.A productionsubsidyfbr the export productwill lower the localprice of theexport good,lowering thedomestic terms of tradefbrthe country.Hence theexportsubsidyand theimport tariffhave the same effect.This analysisseems tocontradictthe firstsentence in this paragraph.Discuss thisparadox.Answer:While thisLerner equivalencemay welloccur domestically,internationally thetariff willimprovea countrys terms of trade.An exportsubsidy on the otherhand willin factlower theinternationalprice of the nowreadily availableexport good,hence hurtinga countrysterms oftrade.
6.If a countrys netbarter tenns of trade improve increase,it ispossible thatthis could decrease thevalue ofits exports demanded,and henceharm its economic welfare.Discuss thispossibility.What alternativemeasurefbr“terms of trade doesthis suggestAnswer:An“improvement“in the terms of trade occurswhen theprice of a countrysexports risesby morethan theprice of its imports.If demand for thiscountry sexports isinelastic,then thiscoulddecrease demandfbr its exports in the world.This istreated underthe topicsof theMarshal-Lerner conditionsfor theeffects ofa depreciationon thebalanceofpayments.Thissuggests thatwe maywish touse somekind ofincome terms of trade,“the wouldexplicitlyconsider bothchanges inrelative tradeablesprices,and alsoquantities ofexport thelatter notdealtwith by the netbarter terms of trade.■Quantitative/Graphing Problems
1.Albania refusedto engage in international trade forideological reasons.To maximizeitseconomic welfareit wouldchoose to produce at which point inthediagram aboveSuppose thePA/PB at point awas equalto
1.Given thisinformation,in whichgood Aor Bdoes Albania enjoy a comparative advantageNowthattheCold Waris over,Albania isinterested inobtaining economicwelfare gainsfromtrade.Therelevant internationalrelative priceis PA/PB=
2.Albania would therefore choose toproduce atwhichpoint，a,b orc Giventhis additionalinformation,in whichgood doesAlbaniaenjoya comparativeadvantageAnswer:Albania wouldchoosetoproduceatpoint a.With noreference toworld terms of trade,one cannotestablishAlbanias comparativeadvantage.Later,when Albaniadiscovers thatthe relative price of A equalstwice theprice of B,it knowsthatit has acomparativeadvantage inA.Therefore Albaniawould produceat productionpoint b.
2.Now,suppose thatthe relative priceof A is actually nothigherthanAlbanias autarkiclevel of1,but quitetheoppositee.g.PA/PB=
0.
5.Would Albaniastill beable togain fromtrade Ifso,where would be itsproductionpoint Giventhe informationin thisquestion,where isAlbanias comparativeadvantageAnswer:Yes.As longasthe worlds terms of trade differed fromthose ofAlbania,that countrystands togainfrom internationaltrade.In thisparticular case,its point of production with tradewould beatpoint c.
3.Suppose,as aresult ofvarious dynamicfactors associatedwith exposureto internationalcompetition,Albanias economygrew,and isnow representedby the rightmost production possibility frontierin theFigureabove.If itspoint ofproduction withtrade was point c,would youconsider this growth tobeexport-biased orimport biasedIf Albania were a large country with respectto the world trade ofA and B,how would this growth affect Albaniasterms of trade Itsreal incomeAnswer:If pointc isthe productionpoint withtrade,then Albaniahas acomparativeadvantagein goodB.Therefore,from theshape of the newproduction possibility frontier as compared to the originalone,this isclearly anexport-biased growth.This ceteris paribus wouldtend toworsen Albaniasterms of trade.The terms of tradeeffect would,again ceterisparibus,worsen itsreal income.However,the growthitself actsintheopposite direction.
4.Suppose,as aresult ofvarious dynamicfactors associatedwith exposureto internationalcompetition,Albanias economygrew,and isnow representedby therightmost productionpossibility frontierin theFigureabove.If itspointofproduction withtrade waspoint b,would youconsider thisgrowth tobeexport-biased orimport biasedIf Albaniawere a large countrywith respectto the world trade ofAand B,how wouldthisgrowthaffect Albaniasterms of trade Itsreal incomeWhat ifAlbaniawere a smallcountryAnswer:If theproductionwithtrade pointwaspointb,then theobserved growthisa case ofimport-biasedgrowth,and would improve Albaniasterms of trade.If Albaniawere asmall country,the worldsterms of tradewould notchange at all.In suchacase,economic growthwith noinduced changeinincome distributionswould alwaysincrease itsreal income.
5.Suppose Albaniais exporting product B,and experiencedeconomic growthbiasedin favor ofproduct Basseen inthe Figureabove.We arealso toldthat Albaniasnew consumption point isatpointd.Would youstillconsider the economic growth,which tookplace biasedin favorofBIf Albaniawere a large countryhowwouldthisgrowthaffectits terms of tradeAnswer:This isa relativelydifficult case.On theone hand,thegrowthis stilltechnically exportbiased.However,Albanias consumptionclearly shiftedin favorof itsimport product,A.In thiscase,thedeterioration inthe terms of tradewouldbemuch morepronounced thanbefore,and maylead toacase ofimmiserizing growth.However,for thisto occur,there musthave beena majorshift inthetaste patternsthe oldcommunity indifferencemap isnot longerapplicable.Therefore,whenwe tryto judgethe directionand magnitudeof thewelfare change,we arecomparing theoldversus newtaste preferences,which raisesthe classicindex numberproblem.
5.If PC/PF were to increase,the clothexporter wouldincrease thequantity of cloth exports,the clothexporter wouldincrease thequantity of clothproduced,the foodexporter wouldincrease thequantity offood exports.Both a andc.None of the above.Answer:B
6.If PC/PF were to increase,a worldrelative quantity of clothsupplied anddemanded wouldincrease.b worldrelative quantityof clothsupplied anddemanded woulddecrease.c worldrelative quantityofclothsupplied wouldincreases.d worldrelative quantityofclothdemanded woulddecrease.e None of the above.Answer:C
7.When theproductionpossibilityfrontier shiftsout relativelymore inone direction,we haveabiased growth.b unbiased growth.c immiserizinggrowth.d balancedgrowth.e imbalancedgrowth.Answer:A
8.Export-biasedgrowthin Country H willimprove the terms of trade of Country H.trigger anti-biasregulations of the WTO.worsen the terms of trade ofCountry Fthe tradepartner,improve the termsof trade ofCountryF.decrease economicwelfare inCountryH.Answer:D
9.Immiserizing growthislikely tooccur ifthe exportingcountry ispoor,likely tooccur ifthe exportingcountryisrich,likely tooccurwhen terms of tradechange,likely tooccur ifrelative suppliesare elastic.None of the above.Answer:Ezfvzvzxzvzx.abcdeXI\1/
10.If the U.S.Agency forInternational Developmenttransfers fundsto poorcountries inSub-Saharan Africa,this mustaworsen the U.S.terms of trade.b improve the U.S.terms of trade.c worsen theterms of trade of the African aid recipients.dimprove theterms of trade of the African aid recipients.e None of the above.Answer:E
11.If thepoor USAIDrecipient countrieshave ahigher marginal propensity to consume eachand everyproductthan doesthe United States,then suchaid willaworsen theU.S.terms of trade.b improve theU.S.terms of trade.c leavethe worldterms of trade unaffected.d worsen theterms of trade of bothdonor andrecipient countries.e None of the above.Answer:B
12.If theU.S.has ahigher marginal propensity to consume MPCimports ascompared toboth itsMPC forexportablesand nontradables,then suchaid willaworsen theU.S.terms of trade.b improve theU.S.terms of trade.c leavetheworldterms of trade unaffected.d worsentheterms of tradeof bothdonor andrecipient countries.e None of the above.Answer:B
13.If theU.S.a large country imposesa tariff on itsimported good,this willtend tohave no effect onterms oftrade.—improve theterms oftradeofallcountries.improve theterms oftradeof the United States.cause adeterioration ofU.S.terms oftrade.raisetheworld priceof thegood importedbythe United States.Answer:C
14.If theU.S.a large country imposesa tariffon itsimported good,this willahave no effect oneconomicwelfare.b improve theterms oftradeofallcountries.c improve the economicwelfare of theUnitedStates.d harmtheeconomicwelfare ofU.S/trading partners.e None of the aboveAnswer:Dz\\/\H7abcdezxz-zv
15.A countrywill beable to consume abundle whichisnotattainable solelyfrom domesticproduction onlyifthe worldterms oftradedifferfrom itsdomestic relative costs.the countryspecializes inone product.the countryavoids internationaltrade.theworldtermsoftrade equalthedomesticrelativecosts.None of the above.Answer:A
16.Terms oftrade refersto what goods areimported,whatgoodsare exported,the volumeoftrade,the pricesatwhich tradeoccurs.None ofthe above.Answer:D
17.If a countrys net-barter termsoftradeincrease improvewe knowfrom thisthat economicwelfareinthiscountryincreasesincreases,but onlyrelative tothat of its trade partnersis unchangeddecreases—None ofthe aboveAnswer:E
18.If pointsaandb areboth on theproductionpossibilityfrontierofacountry,then consumersare indifferentbetweenthe twobundles,producers areindifferent betweenthe twobundles.at anypoint intime,the countrycould produceboth.Both costthesame.The countrycould produceeither ofthe twobundles.Answer:E
19.If theeconomy isproducing atpoint aon itsproductionpossibilityfrontier,then all ofthecountrys workersarespecialized inone product.—all ofthe countyscapital is used fbrone product.all ofthe countysworkers areemployed.allof its capitalisused,but notefficiently.None ofthe above.Answer:Czxzxz-zxzxzfvzxzvzfvzxzxzvzxzxz\zvzvzx.abcdeabcdeabcdeabcdezx\I7\17\!7\n/\lz\nz\BJZ\17\17X/\17xzx7\17\1/X/\17x7x/abcdezfvzf\
20.If atpoint Aontheproductionpossibilityfrontier,and thecommunity indifferencecurve cutsthroughpoint afrom northwestto southeast,then theoptimal autarkyproduction bundleisa atpoint A.b to therightof pointA.c to the leftof pointA.dtothe northeast of pointA.etothe southwestof pointA.Answer:B
21.A bundleindicated bya pointtothenortheastoftheproductionpossibilityfrontierisa unattainableat apoint intime.b unattainableat apoint intime withoutinternationaltrade.c unattainableatapointintime withoutdomestic trade.d unattainableasaconsumptionpoint.e None ofthe above.Answer:B
22.If twocountries withdiminishing returnsand differentmarginal ratesof substitutionbetween twoproductsweretoengageintrade,thena theshapes oftheir respectiveproductionpossibilityfrontiers wouldchange.b the marginal ratesof substitutionof bothwould becomeequal.c thelarger ofthe twocountries woulddominate theirtrade.d thecountrywithrelatively elasticsupplies wouldexport more.e None ofthe above.Answer:B
23.If acountry beganexportingproduct Aandimporting productB,then,ascomparedtotheautarky notradesituation,themarginalcost ofproductAwilla increase.b decrease.c shiftoutward.d shiftinward.e None ofthe above.Answer:A
24.If,beginning froma freetrade equilibrium,the netbarter termsoftradeimprove foracountry,then itincreaseproduction of itsimport competing good.increase consumptionof itsexportgood.—increase thequantityof its imports.experience anexport-biased shiftin itsproductionpossibilityfrontier.None ofthe above.ZIVz\zx\7\|7\l7x7abcdez\z\
25.If asmall countryweretolevy atariffon its importsthen this would haveno effecton thatcountryseconomic welfare,increase thecountrys economicwelfare,decrease thecountryseconomicwelfare,change thetermsoftrade.Noneoftheabove.Answer:C
26.An increasein acountrys netcommodity termsoftradewill alwaysincrease thecountryseconomic welfare,increase thecountrys real income.—increase thecountrys quantityof exports.increase thecountrys productionof itsimportcompetinggood.Noneoftheabove.Answer:E
27.After WWI,Germany wasforced tomake largereparations-transfers ofreal income-to France.If themarginal propensity toconsumewas equalin bothcountries,and ifFrances demandwas biasedtowardfood relativeto Germany^demand patternthen we would expect to findthe worlds relative price fbrfood remainsunchanged.the worldsrelative pricefor foodincrease.theworldsrelativepricefor fooddecrease.theworldrelativepricefbr bothfood andnon-fbod rise.Noneoftheabove.Answer:B
28.If weadd toQuestion27that Franceexported manufactures,whereas Germanyexported food,then thereparationsfrom Germanyto Francewouldimprove Francesinternational termsoftrade.cause France9termsoftrade to deteriorate.—cause bothFrance andGermanys termsoftradetodeteriorate.cause bothFrance andGermanystermsoftradeto improve.Noneoftheabove.Answer:B
29.If acountry lentmoney toanother,this mustlower thetermsoftradeofthe recipientcountry,lower thetermsoftradeof bothcountries,improvethetermsoftradeofthe recipientcountry,improvethetermsof tradeofthedonor countryNoneoftheabove.z\zczxzfvzxz\zxzx/kabcdez-/Vzxzvzxabcde\17\!/\BZ\!/\!/xzxz\17abcdeZivXH7X/x7\7\7abcdezv\7\1/\
1730.During the19th Century,economicgrowthofthemajor tradingcountries wasbiased towardmanufacturesand awayfrom food.The less developed countriesof thattime werenet exportersoffood.From thisinformation,wewouldexpecttohave observedafalling termsoftradefbr theless developedcountries.b improvingrising termsoftradefbr theless developedcountries.c nochange atall inthetermsoftradeofthelessdevelopedcountries.d adecrease inthe relativepriceoffood.e Noneoftheabove.Answer:B
31.Immiserizing growthcould occurtoa poorcountry experiencingexport-biased economicgrowth.a poorcountry experiencingimport-biased economicgrowth.a poorcountry experiencinggrowthinits non-traded sector.a poorcountry experiencingcapital-intensive biasedgrowth.Noneoftheabove.Answer:A
32.A large country experiencingimport-biased economicgrowth willtend toexperiencea positivetermsoftrade.b deterioratingtermsoftrade.c improvingtennsoftrade.d immiserizingtermsoftrade.e Noneoftheabove.Answer:C
33.In theperiod precedingthe recentFinancial Crisisin Asia,the SouthEast Asiancountries werereceivinglarge inflowsof financialcapital.Following JohnMaynard Keynestheory,this shouldhave causedaa glutin theirbanking assetsituation.b animprovement in their termsoftrade.c deteriorationintheir termsoftrade.dafluctuation upwardand thendownward intheirtermsoftrade.e Noneoftheabove.Answer:B
34.If Sloveniaisasmallcountryin worldtrade terms,then ifit imposesa largeseries of tariffs onmany ofitsimports,this wouldahaveno effecton its termsoftrade.b improve its termsoftrade.c deteriorate its termsoftrade.ddecrease its marginalpropensitytoconsume.e Noneoftheabove.Answer:A/Vz/tv\-7\n/\lvabcdezfvz/\
35.If Sloveniaisa large countryin worldtrade,then ifit imposesalargeset of tariffs onmany ofits imports,this wouldhavenoeffectonitstermsoftrade.improveitstermsoftrade.—deteriorate itstermsoftrade.decrease itsmarginalpropensitytoconsume.Noneoftheabove.Answer:B
36.If Sloveniawere alargecountryin worldtrade,then ifit imposesalargeset of tariffs onits imports,thismustcause retaliation onthe part ofits trade partners.harm Sloveniasreal income.improve Sloveniasreal income.improvethereal incomeofitstrade partners.Noneoftheabove.Answer:E
37.If Sloveniawere alargecountryin worldtrade,then ifit institutedalargeset ofsubsidies forits exports,this musthavenoeffectonitstermsoftrade.improveitstermsoftrade.deteriorateitstermsoftrade.decreaseitsmarginalpropensitytoconsume.Noneoftheabove.Answer:C
38.If Sloveniawerealargecountryin worldtrade,then ifit institutedalargeset ofsubsidies forits exports,this mustcauseretaliationonthepartofitstradepartners.harm Sloveniasreal income.improve Sloveniasreal income.improvetherealincomeofitstradepartners.Noneoftheabove.Answer:D
39.If theUnitedStatesexports skilled-labor intensiveproducts andservices,then weshould expectunionsrepresenting skilledlabor tolobby in favorof tariffs.lobby againstthe impositionoftariffs.be indifferenttotheissue oftariffs.lobby infavorofimproved termsoftrade.Not enoughinformation.zf\zxzf\zxzxz\z\zczxzxzxz/vz/vzxz\abcdeabcdez/\/kabcde\17\BJZx7xzabcdezx\17X/\17\I7\7\z\JZXI/\17\17abcdeZivzxzv\zX/\»7\BI/\!/
40.If theUnitedStatesexports skilled-labor intensiveproducts andservices,then weshould expectunionsrepresenting unskilledlabor tolobbyinfavoroftariffs.lobby againstthe impositionoftariffs.—be indifferenttotheissue oftariffs.lobbyinfavorofimproved termsoftrade.Not enoughinformation.Answer:B
41.If athere areno internationalloans orcapital flows,then ifacountrystermsoftradeimprove,wewould findthata thevalue ofits exportsexceeds thevalue ofits imports.b thevalue ofits exportsbecomes lessthan that ofitsimports.c thevalue ofitsexportsexactly equals thatofitsimports.dthequantityofitsexportsequalsthatofitsimports.e Noneoftheabove.Answer:C
42.If theU.S.Agency forInternational Developmenttransfers fundsto poorcountries inSub-Saharan Africa,the conventionalassumption,following Keynesanalysis wouldpresume thatthiswouldtendtoworsentheU.S.termsoftrade.improvetheU.S.termsoftrade.worsenthetermsoftradeoftheAfricanaidrecipients.improvethetermsoftradeoftheAfricanaidrecipients.Noneoftheabove.Answer:A■Essay Questions
1.Other thingsbeing equal,a risein acountrystermsoftradeincreases itswelfare.What wouldhappen ifwerelax theceterisparibusassumption,and allowfor thelaw ofdemand tooperate internationallyAnswer:Let usassume thatthetermsoftradeor technicallythe netcommodity termsoftradeimprove,thus therelativepriceofacountrysexportsincrease.This would,logically,lead toa shiftawayby worldconsumers tosubstitute goods.If thedemandforacountrysexports iselastic,thequantity decreasewouldbeproportionally largerthantheper unitprice increase.This termoftrade effectwould actuallylowerthecountrys realincome andeconomicwelfare.zvz^zxzxz-z/\zx/kz\abcdeabcde\7\/xz\lzXI/\17\z\lv\!7。
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