ECON Midterms Review

According to the Mercantilism, governments should:

subsidize and encourage exports

Most trading nations don’t completely specialize. Incomplete specialization is due mainly to:

Increasing opportunity cost

In a two country food model, if a country has an absolute advantage in the production of a certain good, it implies thatL

this country has higher labor productivity in the production of this good

The Heckscher Ohlin (OH) theorem explains patterns of trade between countries using:

abundance or scarcity of resources

When Wassily Leontief tested the predictions of the Heckscher Ohlin theory, he found that in 1947 in the US was exporting relatively labor intensive goods and importing relatively capital intensive goods. His finding

Contradicted the Heckscher Ohlin theory because the US was relatively capital abundant

Ready at Dawn Studios, a video game developer, opened a new studio in Irvine, California, which is home of Blizzard Entertainment, Obsidian Entertainment, and studios for over 20 other video game developers. This developer’s opening is an example of what?

External economies of scale

Supposed Disneyland opens its projects under DisneylandForward making additional themed areas inside the theme park. This expansion is an example of what?

Internal economies of scale

The US Office of the TRade Representative has said in its statements that Americans benefit from trade through more affordable goods and services and access to a wider variety of products. These benefits from trade are consistent with what theory trade?

New Trade Theory

The price of a Big Mac Switzerland in June 2024 was 7.10 francs, while the price of a Big Mac in the US was $5.69. The exchange rate implied by the law of one price applied to Big Macs was $0.80 /franc. The actual exchange rate was $1.12/franc. These facts suggest that:

the franc was overvalued versus the US dollar

Malaysia has a labor force 20,000,000 workers and 800,000 hectares or arable land, while Papua New Guinea has labor force of 3,000,000 people and 300,000 hectares of arable land. These facts suggest:

Malaysia is labor abundant and Papua is New Guinea is land abundant

As a result of the North American Free Trade Agreement (NAFTA), the US and Canada shifted toward free trade with Mexcio. Note: According to the data about factor endowments in class, the US and Canada are relatively abundant in skilled labor and relatively scarce in unskilled labor. According to the Stolper Samuelson Theorem, how is this shift affecting real wages of skilled labor in Mexico and the US?

The real wages of skilled workers would rice in the US and fall in Mexico

As a result of NAFTA, would you expect the price of sculptures, something that uses skilled labor intensively, to rise or fall in the US and Mexcio according to the Heckscher Ohlin trade theory?

The price of sculptures would rise in the uS and fall in Mexico

As a result of NAFTA, would you expect the price of sculptures, something that uses skilled labor intensively to rise or fall in the US and Mexico according to New Trade Theory?

The price of sculptures would fall in both countries

Why might consumers seem to benefit more from freer trade according to New Trade Theory rather than the Heckscher Ohlin Theory of tarde?

New Trade Theory predicts that consumers would have access to greater variety of products from freer trade

a. In sausages

b. 2 Million

c. 1.5 eggs/sausages

Table 1 given below shows the # of labor hours required to produce 1 barrel of oil and 1 troy oz of gold in Saudi Arabia and Zimbabwe. What’s the productivity of Zimbabwe in the production of gold?
a. Please consult Table 1 above. Which country has an absolute advantage in the production of which product?

0.025 troy oz/hr

a. Zimbabwe has an absolute advantage in the production of both products

The Stolper Samuelson theorem says whcih fo the following groups in a country would benefit form free trade?

owners of abundant factors of production

In the short run analysis of trade before factors of production are allowed to change industries and what they are producing, which of the following groups would benefit form free trade according to the Heckscher Ohlin theory?

Everyone in exporting industries

Laotina production of copper (C) and broadcasting equipment (B) is described by the following production possibility curve:

C = 50,000,000 - 100B
If the Laotian economy produces 300,000 units of broadcasting equipment, how much copper would Laos produce if it were to fully utilize its resources in production?

C=50,000,000 - 100(300,000)
C= 20,000,000

Laotian production of copper (C) and broadcasting equipment (B) is described by the following production possibility curve:
C = 50,000,000 - 100B
What’s the Laotian economy’s maximum possible production of broadcasting equipment?

0 = 50,000,000 - 100B
(100B = 50,000,000)/100
B=500,000

The factor price equalization theorem suggests that all factor prices, such as wages, for equally productive factors would become equal around the world. Why do factors prices not actually across the world in reality?

• It’s costly to transport products for trade

• Not all markets for products are perfectly competitive

• Government regulate and tax trade

Why might forcing exporting firms to petition their governments for the rights to import licenses be an inefficient way to administer a quota for the world as a whole?

The petitioning process will be costly, which lowers the producer surplus of the exporter

In response to President Trump’s wide ranging tariffs on Chinese imports imposed 2018 , China filed for mediation of the dispute. What organization typically mediates current trade disputes between countries?

World Trade Organization

The Common Market for Eastern and Southern Africa (COMESA), a regional trade bloc in Africa with 21 member states, has free trade with each other and common external tariffs. What type of trade bloc is COMESA?

Custom union

Which of the following statements about an export subsidy on a particular product is accurate?

An export subsidy reduces the a mount available in the domestic market of the exporting country and increase the amount imported by the foreign country

The impact on world welfare of an export subsidy and a countervailing duty (of the same size as the subsidy) is:

Zero

Between the end of World War II and 2016, what was the trend in the tariffs that countries have charged on products?

Tariffs have fallen across the world

Suppose Germany wants to impose a tariff on wine from France. Germany is a large market for wine and France threatens to retaliate by placing equally large tariffs on German car imports. What tariff should Germany set in this case to maximize the welfare of its society?

0% it should back down from imposing a tariff

President Trump announced a tax on imported washing machines in January 2018. In the first year of this new tax, the first 1.2 million washer imported into the US were subject to a 20% tax. All imports of washing machines beyond 1.2 million were subject to a 50% tax. What type of trade policy did President Trump announce?

Tariff rate quota

Which of the following actions might exporters of washing machines to the US take to avoid the effects of the washing machines import tax?

Relocate production of washing machines to the US to avoid tariff

Which of the following is a means of allocating importing licenses by assigning the licenses without competition, applications, or negotiations

Fixed favoritism

a. Under free trade the US imported ____ computers, but following the imposition of the quota the US began to import ____ computers

b. Please refer again Figure 1. The imposition of a quota on computers caused the surplus of the US consumers to ____ by _____

c. Please refer again Figure 1. Calculate the quota revenue of the US government if quota licenses are auctioned

200-100=100

190-120=70
a. 100,000; 70,000

(190)(2,400 - 2,000) + 0.5 (2,400 -2,000)(200-190)
7,600 + 2,000 =78

b. fall; $78 million

190 - 120 =70
2,400 -2,000 = 400
400 X 70 = 28 Million
c. 28 Million

How would the government revenue from a quota compare to the government revenue generated by a tariff that has the same effects as the quota on the quantity traded?

It would depend on how the quota is administered

How would the government revenue from a voluntary export restraint (VER) compare to the government revenue generated by a tariff that has the same effects as the VER on the quantity traded?

The VER revenue would be less than the tariff

How would the importer price from a quota compare to the importer price of a tariff that has the same effects as the quota on the quantity traded? Please assume the importer is a larger country in the market for the product.

The price with the quota would be equal to the price with the tariff

Which of the following refers to dumping?

Selling domestic goods in the international market at much lower price

Why might poorer countries have higher tariffs than richer countries?

Poorer countries use tariffs as an easy to monitor source of government revenue

a. The equilibrium quantity of televisions produced and sold is:
b. The equilibrium price of televisions is:

Ethiopia wants to limit palm oil imports to 100 tons, but government officials don’t know details about the current market conditions in the country, including the supply and demand curves in the market for palm oil. What would be the best tool that Ethiopia could use to guarantee that palm oil imports wouldn’t exceed 100 tons?

absolute quota

The tariff that will maximize the tax revenue for a large importing country is:

larger than the nationally optimal tariff but not infinite

In 2018, the European Union banned imports of meat from 2 large Brazilian meat companies after salmonella was detected, adn fraud was detected in laboratory certification of meat. What type of nontariff barrier to trade is this?

Product safety standard

a. Please refer to Figure 2. At the free trade price of $40, the consumer surplus in the importer equals?

b. Please refer to Figure 2 above. At the free trade price of $40, the producer surplus in the importer equals