INTL TRADE EXAM 1

If a foreign resident buys a good or service from someone in the United States, what is it for the U.S.?

A U.S. export

If Mexican tourists visit the Grand Canyon and spend money in the U.S., what type of trade is this?

An export of services

Are purchases of stocks and bonds considered international trade flows of goods and services?

No. Stocks and bonds are financial/capital flows.

What is the difference between a country's total exports and total imports called?

The trade balance

What does "value added" mean in international trade?

The value of the final exported product minus the value of imported inputs

Why can a bilateral trade deficit overstate the actual trade gap?

Because some of the value of an imported product may come from inputs imported from other countries

What was NAFTA?

A free-trade area between the United States, Canada, and Mexico

What is it called when imports are greater than exports?

A trade deficit

What is the best measure of how open a country is to international trade?

Trade-to-GDP ratio = (Exports + Imports) / GDP

A country has GDP of $10 trillion and total trade of $2 trillion. What is its trade-to-GDP ratio?

20%

Why might a U.S. company establish a manufacturing plant in a developing country?

To take advantage of lower production costs, especially lower wages

What is the flow of investment/capital across national borders called?

Foreign direct investment (FDI)

What is an import quota?

A limit on the quantity of a good that may be imported

GDP = $500 billion and trade-to-GDP ratio = 38%. What is total trade?

$190 billion

What is a tax placed on imported goods called?

A tariff

What is horizontal FDI?

When a firm performs the same type of production in another country

Compared with international trade, how is international migration generally treated?

Migration is more controlled and regulated

What was the second "golden age" of international trade?

The period after World War II, when international trade expanded rapidly

What happened to world trade after 1945?

It grew more rapidly than before World War II

Where do most foreign direct investment flows originate?

High-income/OECD countries

What are major reasons countries trade with each other?

Differences in technology, resources, and location/proximity can create reasons for trade

If MPL of tennis rackets = 5 and there are 100 workers, what is the maximum number of rackets that can be produced?

500 tennis rackets

What was the main basis of David Ricardo's model of international trade?

Differences in technology/productivity

According to Ricardo, when can countries gain from trade?

When they specialize in and export goods in which they have a comparative advantage

What does comparative advantage mean?

Having a lower opportunity cost of producing a good than another country

What does the PPF look like in the basic Ricardian model?

A straight line because opportunity costs are constant

In the Ricardian model, what determines the slope of the PPF?

The negative ratio of the marginal products of labor in the two goods

Can international trade allow a country to produce outside its PPF?

No. But trade can allow the country to consume outside its PPF

If production is 60 chemicals and 20 clothing, but consumption is 40 chemicals and 60 clothing, what does the country export?

Chemicals

In that same situation, what does the country import?

Clothing

Production changes from 40 chemicals/60 clothing to 60 chemicals/20 clothing along the trade line. What is the international price of one chemical?

2 units of clothing per chemical

A country tends to export a good when its relative price is _____ than in another country.

Cheaper

U.S. output per worker: apparel = 100,000 and wheat = 200,000. China: apparel = 10,000 and wheat = 5,000. Who has the absolute advantage?

The United States has an absolute advantage in both goods

Using those U.S./China productivity numbers, which good does the U.S. have a comparative advantage in?

Wheat

Using those productivity numbers, what would the United States export?

Wheat

Home can make 0.5 ton of corn or 1 ton of wheat per day. What is the opportunity cost/price of 1 ton of corn?

2 tons of wheat

A PPF has a maximum of 200 cloth or 400 wheat. If no cloth is produced, how much wheat can be produced?

400 units of wheat

With a maximum of 200 cloth or 400 wheat, what is the opportunity cost of 1 cloth?

2 units of wheat

What do higher indifference curves represent?

Higher levels of consumer satisfaction/utility

On the Assignment 1 indifference-curve graph, which point provides consumers the highest utility?

Point C

On the Assignment 1 graph, which point represents the no-trade/home equilibrium?

Point A

Germany has MPLc/MPLb = 2/5, while China has MPLc/MPLb = 1. What should Germany specialize in?

Beer; Germany has the comparative advantage in beer and should export it

Why are wages equal across industries within a country in the basic Ricardian model?

Because workers can freely move between industries

When would two countries have no basis for trade in this simple model?

When they have identical preferences and identical production possibilities

What happens when countries reach the same relative prices for traded goods?

They reach international trade equilibrium

Why does specialization according to comparative advantage raise total production?

Resources are directed toward their highest-productivity uses

What is absolute advantage?

The ability to produce more output with the same resources, or the same output with fewer resources

What is the major difference between absolute and comparative advantage?

Absolute advantage = higher productivity; comparative advantage = lower opportunity cost

Does a country need an absolute advantage to benefit from trade?

No. Comparative advantage is what determines gains from specialization and trade

What factors are related to a worker's real wage in the Ricardian framework?

The worker's productivity and the value/prices of the goods that wage can purchase

Does international trade necessarily make every worker and resource owner better off?

No. Trade can create gainers and losers

What is a "specific factor" of production?

A factor that is tied to one industry and cannot freely move to another industry

What is the major trade conclusion of the specific-factors model?

Trade creates gains for some resources and losses for others

Which factor is usually specific to agriculture in this model?

Land

Which factor is usually specific to manufacturing?

Capital

Which factor is mobile between agriculture and manufacturing?

Labor

With diminishing marginal returns, what shape does the PPF have?

It is bowed outward from the origin

At equilibrium, what relationships describe the slope of the PPF?

It is related to the ratio of marginal products, relative prices, and the slope of the highest attainable indifference curve

If a country has a comparative advantage in agriculture and trade opens, what happens to the agricultural good's price?

Its relative and nominal price rise

If wages are lower in agriculture than manufacturing, where will workers move?

From agriculture to manufacturing

What happens to MPL in manufacturing as more workers move into manufacturing?

MPL decreases because of diminishing marginal returns

What happens to MPL in agriculture as workers leave agriculture?

MPL increases

What does "real wage" mean?

The purchasing power of a worker's wage

What does the slope of the PPF depend on in the two-sector specific-factors model?

The ratio of the marginal products of labor in the two sectors

What equation determines a competitive worker's wage?

W = P × MPL

Wage = $20 and price of manufacturing = $50. What is manufacturing MPL?

0.4 units per hour

If the price of manufactured goods rises, what happens to manufacturing wages?

They increase

If the price of manufacturing rises, does capital move from agriculture into manufacturing?

No. Capital is a specific factor

In competitive equilibrium, how do wages compare between industries when labor can move freely?

Wages become equal across industries

Agriculture MPL = 5 and agricultural price = $10. What is the agricultural wage?

$50

Manufacturing MPL = 3 and manufacturing price = $10. What is the manufacturing wage?

$30

If agricultural wage = $50 and manufacturing wage = $30, where will workers move?

From manufacturing to agriculture

If the agricultural price falls to $5 while agricultural MPL = 5, what is the agricultural wage?

$25

If Home has a comparative advantage in manufacturing, what happens to the real wage of workers after trade opens?

Workers may be better or worse off overall: real wage rises in terms of the agricultural/imported good but falls in terms of the manufactured/exported good

Home manufacturing price = $5 and agriculture price = $3. What is Home's relative price of manufacturing?

About 1.66 agricultural goods

Home's manufacturing/agriculture relative price is 5/3 while Foreign's is 7/3. Who has comparative advantage in manufacturing?

Home, because manufacturing is relatively cheaper there

Using those prices, what does Home export?

Manufactured goods

Using those prices, what does Foreign export?

Agricultural goods

Price per bicycle = $20 and wage = $40. What is MPL?

2 bicycles per worker

When is mobile labor especially likely to gain from trade?

When workers spend a large portion of their income on the imported good

Why can labor's gain from trade be ambiguous?

The wage may buy more of one good but less of the other

What is Trade Adjustment Assistance?

A program that provides assistance to workers who lose jobs because of import competition

If an industry's relative price increases and that industry expands, what happens to the factor specific to that industry?

The specific factor gains

Why does the specific factor in an expanding industry gain?

More mobile labor enters the industry, making the specific factor more productive/valuable

If Home has a comparative advantage in agriculture, what happens to landowners after trade?

Landowners gain

If Home has a comparative advantage in agriculture, what happens to the return on manufacturing capital?

It falls

If Home has a comparative advantage in manufacturing, what happens to the return on land?

It decreases

Which specific factor loses from international trade?

The factor specific to the import-competing industry

Which specific factor gains from international trade?

The factor specific to the export industry

Why might farmers support import quotas or agricultural trade restrictions?

To restrict foreign competition and protect the income/returns of landowners and farmers

What happens to an export industry's output when trade opens?

It expands

What happens to an import-competing industry's output when trade opens?

It contracts

When an export industry's price rises, what happens to labor demand in that industry?

Labor demand increases

What happens to labor as an export industry expands?

Labor moves toward the export industry

What happens to MPL in the expanding export industry as more labor enters it?

The MPL of labor falls because of diminishing returns

What happens to MPL in the contracting import industry as labor leaves it?

The MPL of labor rises

What is the key difference between the Ricardian model and the specific-factors model regarding gains from trade?

Ricardian model: the country gains overall and labor can move freely. Specific-factors model: trade creates distributional winners and losers

In the specific-factors model, does the specific factor itself move into another industry when its industry performs poorly?

No. By definition, it is stuck in that sector

What determines which industry a country exports from?

The industry in which the country has a comparative advantage

What is the biggest idea to remember from the specific-factors model?

Trade benefits the specific factor in the export industry, hurts the specific factor in the import industry, and has an ambiguous effect on mobile labor