Ch03 International Equilibrium.docx

CHAPTER 3 INTERNATIONAL EQUILIBRIUM MULTIPLE-CHOICE QUESTIONS 1. Which of the following is false concerning indifference curves? a. They illustrate how the nation ranks alternative consumption bundles b. Higher curves refer to more satisfaction c. They are negatively sloped, being bowed out away from the diagram’s origin d. They reflect the tastes and preferences of a consumer 2. The amount of one good that is just sufficient to compensate the consumer for the loss of some amount of another good is referred to as: a. Absolute cost b. Comparative cost c. Marginal rate of transformation d. Marginal rate of substitution 3. In autarky, the equilibrium relative price of one product in terms of another product for a country is determined by the: a. Production possibilities curve b. Community indifference curve c. Community indifference map d. Production possibilities curve and community indifference map 4. In general, as we move downward along a country’s community indifference curve, the marginal rate of substitution of one product for another product: a. Increases b. Decreases c. Remains constant d. None of the above 5. The introduction of community indifference curves into our trading example focuses attention on the nation’s: a. Income level b. Resource prices c. Tastes and preferences d. Productivity level 6. Introducing indifference curves into our trade model permits us to determine: a. Where a nation chooses to locate along its production possibilities curve in autarky b. The precise location of a nation’s production possibilities curve c. Whether absolute cost or comparative cost conditions exist d. The currency price of one product in terms of another product 7. The marginal rate of substitution is measured by the absolute value of the slope of a (an): a. Production possibilities curve b. Indifference curve c. Production possibilities curve d. Demand curve 8. In the absence of trade, a nation is in equilibrium where a community indifference curve: a. Lies above its production possibilities curve b. Is tangent to its production possibilities curve c. Intersects its production possibilities curve d. Lies below its production possibilities curve 9. The use of indifference curves helps us determine the point: a. Along the terms-of-trade line a country will choose b. Where a country maximizes its resource productivity c. At which a country ceases to become competitive d. Where the marginal rate of transformation approaches zero 10. With trade, a country will maximize its satisfaction when it: a. Moves to the highest possible indifference curve b. Forces the marginal rate of substitution to its lowest possible value c. Consumes more of both goods than it does in autarky d. Finds its marginal rate of substitution exceeding its marginal rate of transformation 11. Trade between two nations would not be possible if they have: a. Identical community indifference curves but different production possibilities curves b. Identical production possibilities curves but different community indifference curves c. Different production possibilities curves and different community indifference curves d. Identical production possibilities curves and identical community indifference curves 12. Given a two-country and two-product world, the United States would enjoy all the attainable gains from free trade with Canada if it: a. Trades at the U.S. rate of transformation b. Trades at the Canadian rate of transformation c. Specializes completely in the production of both goods d. Specializes partially in the production of both goods 13. John Stuart Mill’s theory of reciprocal demand best applies when trading partners: a. Are of equal size and importance in the market b. Produce under increasing cost conditions c. Partially specialize in the production of commodities d. Have similar taste and preference levels 14. The equilibrium prices and quantities established after trade are fully determinate if we know: a. The location of all countries’ indifference curves b. The shape of each country’s production possibilities curve c. The comparative costs of each trading partner d. The strength of world supply and demand for each good 15. “The equilibrium relative commodity price at which trade takes place is determined by the conditions of demand and supply for each commodity in both nations. Other things being equal, the nation with the more intense demand for the other nation’s exported good will gain less from trade than the nation with the less intense demand.” This statement was first proposed by: a. Alfred Marshall with offer curve analysis b. John Stuart Mill with the theory of reciprocal demand c. Adam Smith with the theory of absolute advantage d. David Ricardo with the theory of comparative advantage 16. Which of the following terms-of-trade concepts is calculated by dividing the change in a country’s export price index by the change in its import price index between two points in time, multiplied by 100 to express the terms of trade in percentages? a. Commodity terms of trade b. Income terms of trade c. Single factorial terms of trade d. Double factorial terms of trade 17. The best explanation of the gains from trade that David Ricardo could provide was to describe only the outer limits within which the equilibrium terms of trade would fall. This is because Ricardo’s theory did not recognize how market prices are influenced by: a. Demand conditions b. Supply conditions c. Business expectations d. Profit patterns 18. The use of indifference curves helps us determine the point: a. Along the production possibilities curve a country will choose b. At which a country maximizes its resource productivity c. At which a country ceases to become competitive d. Where the marginal rate of transformation approaches zero 19. Under free trade, Sweden enjoys all of the gains from trade with Holland if Sweden: a. Trades at Holland’s rate of transformation b. Trades at Sweden’s rate of transformation c. Specializes completely in the production of its export good d. Specializes partially in the production of its export good 20. Because the Ricardian trade theory recognized only how supply conditions influence international prices, it could determine: a. The equilibrium terms of trade b. The outer limits for the terms of trade c. Where a country chooses to locate along its production possibilities curve d. Where a country chooses to locate along its trade triangle 21. The terms of trade is given by the prices: a. Paid for all goods imported by the home country b. Received for all goods exported by the home country c. Received for exports and paid for imports d. Of primary products as opposed to manufactured products Given the terms of trade data in Table 3.1, answer Questions 22 through 24. Table 3.1.?Terms of Trade Export Price Index Import Price Index Country 1990 2003 1990 2003 Mexico 100 220 100 200 Sweden 100 160 100 150 Spain 100 155 100 155 France 100 170 100 230 Denmark 100 120 100 125 22. Referring to Table 3.1, which countries’ terms of trade improved between 1990 and 2003? a. Mexico and Denmark b. Sweden and Denmark c. Sweden and Spain d. Mexico and Sweden 23. Referring to Table 3.1, which countries’ terms of trade worsened between 1990 and 2003? a. Spain and Mexico b. Mexico and France c. France and Denmark d. Denmark and Sweden 24. Referring to Table 3.1, which country’s terms of trade did not change between 1990 and 2003? a. Spain b. Sweden c. France d. Denmark 25. Given free trade, small nations tend to benefit the most from trade since they: a. Are more productive than their large trading partners b. Are less productive than their large trading partners c. Have demand preferences and income levels lower than their large trading partners d. Enjoy terms of trade lying near the opportunity costs of their large trading partners 26. A terms-of-trade index that equals 150 indicates that compared to the base year: a. It requires a greater output of domestic goods to obtain the same amount of foreign goods b. It requires a lesser amount of domestic goods to obtain the same amount of foreign goods c. The price of exports has risen from $100 to $150 d. The price of imports has risen from $100 to $150 27. A term-of-trade index that equals 90 indicates that compared to the base year: a. It requires a greater output of domestic goods to obtain the same amount of foreign goods b. It requires a lesser amount of domestic goods to obtain the same amount of foreign goods c. The price of exports has fallen from $100 to $90 d. The price of imports has fallen from $100 to $90 28. The theory of reciprocal demand does not well apply when one country: a. Produces under constant cost conditions b. Produces along its production possibilities curve c. Is of minor economic importance in the world marketplace d. Partially specializes the production of its export good 29. The terms of trade is given by: a. (Price of exports/price of imports) – 100 b. (Price of exports/price of imports) + 100 c. (Price of exports/price of imports) ÷ 100 d. (Price of exports/price of imports) × 100 30. If Japan and France have identical production possibilities curves and identical community indifference curves: a. Japan will enjoy all the gains from trade b. France will enjoy all the gains from trade c. Japan and France share equally in the gains from trade d. Gainful specialization and trade are not possible 31. A rise in the price of imports or a fall in the price of exports will: a. Improve the terms of trade b. Worsen the terms of trade c. Expand the production possibilities curve d. Contract the production possibilities curve 32. A fall in the price of imports or a rise in the price of exports will: a. Improve the terms of trade b. Worsen the terms of trade c. Expand the production possibilities curve d. Contract the production possibilities curve 33. Under free trade, Canada would not enjoy any gains from trade with Sweden if Canada: a. Trades at the Canadian rate of transformation b. Trades at Sweden’s rate of transformation c. Specializes completely in the production of its export good d. Specializes partially in the production of its export good The next six questions are based on trade data for Canada as illustrated in Figure 3.1. The figure assumes that Canada attains international trade equilibrium at point C. Figure 3.1?Canadian Trade Possibilities 34. Consider Figure 3.1. In the absence of trade, Canada would produce and consume: a. 8 televisions and 16 refrigerators b. 12 televisions and 16 refrigerators c. 8 televisions and 12 refrigerators d. 12 televisions and 8 refrigerators 35. Refer to Figure 3.1. Canada has a comparative advantage in: a. Televisions b. Refrigerators c. Televisions and refrigerators d. Neither televisions nor refrigerators 36. Consider Figure 3.1. With specialization, Canada produces: a. 16 televisions b. 12 televisions and 8 refrigerators c. 8 televisions and 16 refrigerators d. 24 refrigerators 37. Consider Figure 3.1. With trade, Canada consumes: a. 12 televisions and 8 refrigerators b. 12 televisions and 16 refrigerators c. 8 televisions and 16 refrigerators d. 24 refrigerators 38. According to Figure 3.1, exports for Canada total: a. 16 refrigerators b. 8 refrigerators c. 12 refrigerators d. 16 refrigerators 39. According to Figure 3.1, imports for Canada total: a. 6 televisions b. 8 televisions c. 12 televisions d. 16 televisions 40. Concerning possible determinants of international trade, which are sources of comparative advantage? Differences in: a. Methods of production b. Tastes and preferences c. Technological know-how d. All of the above 41. Consider Figure 3.2. Given offer curves Brazil0 and Sweden0, the equilibrium terms of trade equal _____; at this terms of trade, Sweden __________ A0 tons of aluminum and __________ S0 tons of steel. a. tt1, imports, exports b. tt1, exports, imports c. tt0, exports, imports d. tt0, imports, exports Figure 3.2.?Offer Curves of Sweden and Brazil 42. Consider Figure 3.2. Brazil’s offer curve would shift from Brazil0 to Brazil1 if there would occur in Brazil a (an): a. Increased demand for steel b. Increased demand for aluminum c. No change in the demand for aluminum d. Decreased supply of steel 43. Consider Figure 3.2. Given Sweden’s offer curve Sweden0, suppose Brazil’s offer curve shifts from Brazil0 to Brazil1. This shift leads to a (an): a. Increase in the volume of trade and a worsening in Brazil’s terms of trade b. Increase in the volume of trade and an improvement in Brazil’s terms of trade c. Decrease in the volume of trade and an improvement in Brazil’s terms of trade d. Decrease in the volume of trade and a worsening in Brazil’s terms of trade 44. A (an) __________ shows the quantity of imports that a nation desires to purchase at various terms of trade and the quantity of exports that the nation will have to provide in order to obtain those imports at those prices. a. Indifference curve b. Offer curve c. Production possibilities curve d. Demand curve 45. The equilibrium international terms of trade is given by the intersection of two nation’s: a. Demand curves b. Indifference curves c. Offer curves d. Production possibilities curves 46. Refer to Figure 3.3. Given offer curves Korea0 and Germany0, the equilibrium terms of trade is denoted by _____. At this terms of trade, Germany __________ and __________. a. tt0, exports 25 tools, imports 37 radios b. tt0, imports 25 tools, exports 37 radios c. tt1, exports 20 tools, imports 35 radios d. tt1, imports 20 tools, exports 35 radios Figure 3.3.?Offer Curves of Korea and Germany 47. Refer to Figure 3.3. Given offer curves Korea0 and Germany0, at terms of trade tt1 there is a (an): a. Excess supply of radios which causes Korea’s terms of trade to improve b. Excess supply of radios which causes Korea’s terms of trade to worsen c. Excess demand for radios which causes Korea’s terms of trade to improve d. Excess demand for radios which causes Korea’s terms of trade to worsen TRUE-FALSE QUESTIONS T F 1. Modern trade theory recognizes that the pattern of world trade is governed by both demand conditions and supply conditions. T F 2. A nation achieves autarky equilibrium at the point where its community indifference curve is tangent to its production possibilities schedule. T F 3. In autarky equilibrium, a nation realizes the lowest possible level of satisfaction given the constraint of its production possibilities schedule. T F 4. In autarky equilibrium, a nation’s marginal rate of transformation (measured by the slope of its production possibilities schedule) exceeds the marginal rate of substitution (measured by the slope of its community indifference curve) by the largest possible amount. T F 5. A nation benefits from international trade if it can achieve a higher indifference curve than it can in autarky. T F 6. A nation realizes maximum gains from trade at the point where the international terms-of-trade line is tangent to its community indifference curve. T F 7. The Ricardian theory of comparative advantage could fully explain the distribution of the gains from trade among trading partners. T F 8. Because the Ricardian theory of comparative advantage was based only on a nation’s demand conditions, it could not fully explain the distribution of the gains from trade among trading partners. T F 9. Because the Ricardian theory of comparative advantage was based only on a nation’s supply conditions, it could only determine the outer limits within which the equilibrium terms of trade would lie. T F 10. The domestic cost ratios of nations set the outer limits to the equilibrium terms of trade. T F 11. Mutually beneficial trade for two countries occurs if the equilibrium terms of trade lies between the two countries’ domestic cost ratios. T F 12. Assume that the United States and Canada engage in trade. If the international terms of trade coincides with the U.S. cost ratio, the United States realizes all of the gains from trade with Canada. T F 13. Assume that the United States and Canada engage in trade. If the international terms of trade coincides with the Canadian cost ratio, the United States realizes all of the gains from trade with Canada. T F 14. If the international terms of trade lies beneath (inside) the Mexican cost ratio, Mexico is worse off with trade than without trade. T F 15. Although J. S. Mill recognized that the region of mutually beneficial trade is bounded by the cost ratios of two countries, it was not until David Ricardo developed the theory of reciprocal demand that the equilibrium terms of trade could be determined. T F 16. According to J. S. Mill, if we know the domestic demand expressed by both trading partners for both products, the equilibrium terms of trade can be defined. T F 17. The theory of reciprocal demand asserts that as the U.S. demand for Canadian wheat rises, the equilibrium terms of trade improve for the United States. T F 18. Assume that Canada has a comparative advantage in wheat and a comparative disadvantage in autos. As the Canadian demand for wheat increases, Canada’s equilibrium terms of trade improves. T F 19. The theory of reciprocal demand best applies when two countries are of equal economic size, so that the demand conditions of each nation have a noticeable impact on market prices. T F 20. The theory of reciprocal demand best applies when one country has a “large” economy and the other country has a “small” economy. T F 21. If two nations of approximately the same size and with similar taste patterns participate in international trade, the gains from trade tend to be shared about equally between them. T F 22. The expression “importance of being unimportant” suggests that if one nation is much larger than the other, the larger nation realizes most of the gains from trade while the smaller nation realizes fewer gains from trade. T F 23. Export-biased growth is based on an expansion of a resource, or an improvement in technology, used intensively in the production of an export commodity. T F 24. A country experiencing export-biased growth gains because it can produce more and because the international price rises for its export good. T F 25. Immiserizing growth occurs when export-biased growth generates an improving terms-of-trade effect that adds to the gains of increased output. T F 26. An improvement in a nation’s terms of trade occurs if the prices of its exports rise relative to the prices of its imports over a given time period. T F 27. If a country’s terms of trade worsen, it must exchange fewer exports for a given amount of imports. T F 28. If a country’s terms of trade improve, it must exchange more exports for a given amount of imports. T F 29. The terms of trade represents the rate of exchange between a country’s exports and imports. T F 30. Assume 1990 to be the base year. If by the end of 1997 a country’s export price index rose from 100 to 130 while its import price index rose from 100 to 115, its terms of trade would equal 113. T F 31. Assume 1990 to be the base year. If by the end of 1997 a country’s export price index rose from 100 to 140 while its import price index rose from 100 to 160, its terms of trade would equal 120. T F 32. Assume 1990 to be the base year. If by the end of 1997 a country’s export price index rose from 100 to 125 while its import price index rose from 100 to 125, its terms of trade would equal 100. T F 33. The commodity terms of trade are found by dividing a country’s import price index by its export price index. T F 34. For the commodity terms of trade to improve, a country’s export price index must rise relative to its import price index over a given time period. T F 35. For the commodity terms of trade to improve, a country’s import price index must rise relative to its export price index over a given time period. ANSWERS Answers to Multiple-Choice Questions 1. c 2. d 3. d 4. b 5. c 6. a 7. b 8. b 9. a 10. a 11. d 12. b 13. a 14. d 15. b 16. a 17. a 18. a 19. a 20. b 21. c 22. d 23. c 24. a 25. d 26. b 27. a 28. c 29. d 30. d 31. b 32. a 33. a 34. c 35. b 36. d 37. b 38. b 39. c 40. d 41. c 42. b 43. a 44. b 45. c 46. a 47. a Answers to True-False Questions 1. T 2. T 3. F 4. F 5. T 6. T 7. F 8. F 9. T 10. T 11. T 12. F 13. T 14. T 15. F 16. T 17. F 18. F 19. T 20. F 21. T 22. F 23. T 24. F 25. F 26. T 27. F 28. F 29. T 30. T 31. F 32. T 33. F 34. T 35. F