Chapter 11: Controversies in Trade Theory 1. The existence of positive externalities due to the impossibility of full appropriability A.

Supports the conclusions of the Heckscher-Ohlin model. B. e!ects the usefulness of "overnment protectionism. #. Supports the concept that the "overnment should support only hi"h tech industries. $. %rovides support for "overnment protectionism. &. 'one of the above. Ans(er) $ *. The +nited States A. $oes not provide more support for ,$ as compared to other forms of investment. B. %rovides support for ,$ by imposin" hi"h tariffs on ,$ intensive products. #. %rovides support for ,$ by providin" direct subsidies for such activities. $. %rovides support for ,$ throu"h tax le"islation. &. 'one of the above. Ans(er) $ -. The Brander-Spencer model identified market failure in certain industries due to A. +nfair competition. B. .ildcat destructive competition. #. &nvironmental ne"ative externalities associated (ith pollution. $. /imited competition. &. 'one of the above. Ans(er) $ 0. 1n the Brander-Spencer model the subsidy raises profits by more than the subsidy because of A. The 2multiplier2 effect of "overnment expenditures. B. The military-industrial complex. #. The for(ard and back(ard linka"e effects of certain industries. $. The deterrent effect of the subsidy on forei"n competition. &. 'one of the above. Ans(er) $

3. #riticisms of the Brander-Spencer model include all except (hich of the follo(in"4

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A. B. #. $. &.

The problem of insufficient information. The problem of likely forei"n retaliation. The problem of harm to interests of consumers. The problem of adverse effects of trade policy politics. 'one of the above.

Ans(er) # 5. 6apan7s protection of its semiconductor 8 A9: producers is today seen as an ob!ect lesson in A. Ho( strate"ic plannin" may backfire and cause a lar"e (aste of resources. B. Ho( externalities may be successfully exploited by protectionist policies. #. Ho( excess returns may be successfully exploited by protectionist policies. $. Ho( "overnment intervention may create a meanin"ful comparative advanta"e. &. 'one of the above. Ans(er) A ;. 1n today7s (orld markets< poor developin" countries tend to rely primarily on exports of A. A"ricultural products. B. %rimary products. #. 9ineral products. $. 9anufactured products. &. 'one of the above. Ans(er) $ =. 1n the second half of the 1>>?s a rapidly "ro(in" movement focused on the harm caused by international trade to A. /and o(ners in poor countries. B. #apital o(ners in rich industriali@ed countries. #. /and o(ners in rich industriali@ed countries. $. %roduction (orkers in both rich and poor countries. &. 'one of the above. Ans(er) $

>. The icardian model of comparative advanta"e lends support to the ar"ument that A. Trade tends to (orsen the conditions of unskilled labor in rich countries.

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B. #. $. &.

Trade tends to (orsen the conditions of o(ners of capital in rich countries. Trade tends to (orsen the conditions of (orkers in poor countries. Trade tends to (orsen the conditions of (orkers in rich countries. 'one of the above.

Ans(er) & 1?. The Heckscher-Ohlin< factor-proportions model lends support to the ar"ument that A. Trade tends to (orsen the conditions of unskilled labor in rich countries. B. Trade tends to (orsen the conditions of o(ners of capital in rich countries. #. Trade tends to (orsen the conditions of (orkers in poor countries. $. Trade tends to (orsen the conditions of (orkers in rich countries. &. 'one of the above. Ans(er) A 11. 9ost developin" countries oppose includin" labor standards in trade a"reements because A. They believe this (ould involve a loss of their national soverei"nty. B. They believe this (ould limit their ability to export to rich markets. #. They believe this (ould create an uneven playin" field. $. 9ultinational corporations control them. &. 'one of the above. Ans(er) A 1*. Aree trade and "lobali@ation is "enerally ar"ued A. To cause a de"radation in the (orld7s environment. B. To improve the environment by correctin" for distortions caused by import competin" policies. #. To help spread the best of each country7s culture< so as to uplift "lobal cultural standards. $. To help each country safe"uard the best of its o(n culture. &. 'one of the above. Ans(er) A

1-. 1f firms in an industry are "eneratin" kno(led"e that other firms can use (ith payin" for it< this industry is characteri@ed by A. Social costs that exceed private costs.

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B. #. $. &.

Social benefits that exceed private benefits. Social costs that exceed social benefits. %rivate benefits that exceed social benefits. 'one of the above.

Ans(er) B 10. 1t is ar"ued that hi"h-tech industries typically "enerate ne( technolo"ies but cannot fully appropriate the commercial benefits associated (ith their inventions or discoveries. 1f this is true then in order to maximi@e a countries real income< the "overnment should A. Tax the hi"h-tech firms. B. Subsidi@e the hi"h-tech firms. #. %rotect the hi"h-tech firms. $. Both B and # &. 'one of the above. Ans(er) B 13. 1n effect< the +.S. does subsidi@e hi"h-tech firms by subsidi@in" ,$. This is done throu"h A. The bud"et of the $epartment of &ducation. B. Systematic protection throu"h the levyin" of tariffs. #. Systematic protection throu"h the establishment of 'TBs. $. elatively accelerated 2depreciationB of ,$ investment in the Aederal tax codes. &. 'one of the above. Ans(er) $ 15. The best economic case one can make for an active industrial policy involves A. The national security ar"ument. B. The technolo"ical spillover ar"ument. #. The environment preservation ar"ument. $. The hi"h value added ar"ument. &. 'one of the above. Ans(er) &

1;. Spencer and Brander7s model hi"hli"hts the existence of A. Aircraft industries.

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B. #. $. &.

&xcess returns present in hi"hly competitive markets. &xcess returns< or rents< available in non-competitive markets. The futility of "overnment bureaucrats7 attempts to build an airplane. 'one of the above.

Ans(er) # 1=. Spencer and Brander7s model hi"hli"hts the conventional assumption that A. Covernment involvement in business or in the economy tends to fail. B. Covernment subsidies tend to (aste taxpayer7s money. #. Covernment subsidies cannot create a successfully competin" export. $. Covernment tends to distort (hen it displaces Adam Smith7s Invisible Hand. &. 'one of the above. Ans(er) & 1>. The reason Airbus succeeded in the Brander Spencer example is that A. Boein" made the first move in this strate"ic "ame. B. &uropeans tend to be better strate"ists than corn-fed Americans. #. The airbus actually (as a better plane than the Boein" ;0;. $. +.S. la(s actually prohibit +.S. exporters from bribin" forei"n officials. &. 'one of the above. Ans(er) & *?. The reason Airbus succeeded in the Brander Spencer example is that A. The &uropean "overnment made an explicit subsidy offer< but the +.S. "overnment did not. B. Airbus7 prices (ere better (hen ad!usted for Duality and (arranty services. #. Boein" traditionally refused to undertake any exchan"e rate risk in its transactions. $. The +.S. acted in accordance (ith its ideolo"ical reliance on market solutions< (hereas the &uropeans i"nored market and technolo"ical factors. &. 'one of the above. Ans(er) A

*1. The ar"ument that strate"ic plannin" is not likely to be practical due to insufficient information means that

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A. B. #. $. &.

Because of trade secrets< the "overnment does not kno( true cost relationships in any "iven industry. 1f the "overnment had all the relevant information in a "iven industry then it could decide (hether a subsidy (ould enhance the public7s (elfare. &ven if the "overnment had all the relevant information in a "iven industry< it still could not decide (hether a subsidy (ould enhance the public7s (elfare. $ue to recent cuts in the $epartment of the #ensus7 samplin" bud"ets< industry surveys are no lon"er reliable< so that there is no (ay to determine if a subsidy is in the public7s interest. 'one of the above.

Ans(er) # **. The invocation of beggar-thy-neighbor ar"uments (ith respect to industrial policies A. Stren"thens the ar"ument for subsidies. B. 9akes sense if the international Eeynesian multipliers exceed unity. #. Applies only to rich countries most of (hose trade partners are very poor countries. $. .eakens the ar"ument for subsidies. &. 'one of the above. Ans(er) $ *-. The belief that +.S. subsidies (ill evoke forei"n repercussions is called the FFFFFFFF ar"ument. A. Technolo"ical spillover B. Aorei"n multiplier C. Beggar-thy-neighbor $. %ositive externality &. 'one of the above. Ans(er) #

*0. .hen 6apan7s 91T1 89inistry of 1nternational Trade and 1ndustry: focused resources on the semiconductor industry< this (as seen as a typically successful 6apanese

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foray into a ne( dynamic strate"ic sector. The results< as vie(ed by the late 1>>?s A. 6ustified this vie(. B. /ed to similar structurin" of industrial policy in the +.S. #. /ent support to the Brander - Spencer model. $. Helped shift the focus of economists a(ay from 6apanese-style industrial policy. &. 'one of the above. Ans(er) $ *3. /o( (a"es and poor (orkin" conditions in many of the +.S.7 trade partners A. %rove that the gains-from-trade ar"uments of the icardian model are false. B. 9ay be a fact of life< but economists don7t care. #. Are facts emphasi@ed by +.S. labor in its contract ne"otiations. $. %rove that the gains-from-trade ar"uments of the icardian model are true. &. 'one of the above. Ans(er) # *5. The fact that clothin" sold in .al-9art are produced by very poorly paid (orkers in Honduras< is a fact that if taken into account A. .ould prove to economists that the icardian model of comparative advanta"e is false. B. .ould prove to economists that the eDual-value in trade concept summed up in the trade trian"les is incorrect. #. %roves to economists that trade is a ne"ative sum "ame. $. %roves to the Anti-Clobali@ation 9ovement that trade is a ne"ative sum "ame. &. 'one of the above. Ans(er) $

*;.

.hen the .TO met in Seattle to initiate a further move to(ards free international trade< thousands of activists met

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A. B. #. $. &.

1n order to promote the .TO7s "oals of 2Trade - not Aid2. 1n order to laud the .TO policy orientation (hich (ould bust local monopolies and therefore help ordinary relatively poor consumers every(here. 1n order to laud the .TO policy of disallo(in" "overnment s(eetheart deals< (hich typically meant that corrupt "overnments subsidi@ed their inla(s7 con"lomerates on the backs of poor taxpayers. 1n order to support the .TO efforts of brin"in" about a universal shift of resources in poor countries to hi"her efficiency and productivity uses< (hich (ould raise the real incomes of everyone. 'one of the above.

Ans(er) & *=. .hen one applies the Heckscher-Ohlin model of trade to the issue of trade-related income redistributions< one must conclude that 'orth South trade< such as +S.9exico trade< A. 9ust help lo( skill (orkers on both sides of the border. B. 1s likely to hurt hi"h-skilled (orkers in the +.S. #. 1s likely to hurt lo(-skilled (orkers in the +.S. $. 1s likely to hurt lo(-skilled (orkers in 9exico. &. 'one of the above. Ans(er) # *>. The evidence usually cited to prove that "lobali@ation hurts (orkers in developin" countries A. 1s inconclusive due to poor statistical desi"n of the underlyin" samples. B. 1s inconclusive due to the poorly funded #entral Statistical Office of 9exico. #. 1s inconclusive due to the ambi"uous theoretical implications of the findin"s. $. 1s conclusive. &. 'one of the above. Ans(er) #

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Aaced (ith the evidence of poor (orkin" conditions and lo( (a"es in the border maquiladoras< &conomists

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A. B. #. $. &.

Shru" their shoulders and i"nore the issue. A"ree that trade theory is thus proven hollo( and internally inconsistent. Ar"ue that +.S. consumers should not consume lettuce. Ar"ue that the poor conditions and lo( (a"es are actually improvements for the 9exican (orkers< and may be cited as gains-from-trade. 'one of the above.

Ans(er) $ -1. The proposal that trade a"reements should include a system (hich monitors (orker conditions and make the results available to consumers in the rich importin" country A. 1s consistent (ith the Invisible Hand paradi"m. B. 1s consistent (ith the market failure approach. #. 1s consistent (ith the icardian theory of comparative advanta"e. $. 1s consistent (ith the scale economies approach to trade theory. &. 'one of the above. Ans(er) B -*. /abor standards in trade are typically opposed by most developin" countries (ho believe that they (ill be used A. To further neo-imperialist colonial exploitation. B. To char"e these countries (ith crimes a"ainst child-labor standards at the Ha"ue. #. As a protectionist tool by import-competin" producers in industrial countries. $. As a means of spreadin" +.S. #orporate Galues and destroyin" local cultures. &. 'one of the above. Ans(er) # --. The .TO seems at times to be interferin" in domestic policy since A. The line bet(een domestic policies and de factor protectionism is often fu@@y. B. 1t is a supra-national or"ani@ation (ith the po(er to overturn "overnments. #. 1t determines (hich nations may trade (hat (ith (hom. $. 1t punishes nau"hty nations. &. 'one of the above. Ans(er) A -0. The Shipbreakers of Alan" are

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A. B. #. $. &.

A metaphysical representation of the .TO< derivin" from &d"ar ice Burrou"hs7 Princess of Mars. An early version of the ussian 1ce-breaker of the Dnieper- lang class. A capital-intensive industry. #ompetin" (ith capital-intensive industries in countries outside of 1ndia. 'one of the above.

Ans(er) $ -3. The Shipbreakers of Alan" utili@e much labor and little capital< thereby supportin" the applicability of the A. Aactor proportions explanation of the sources of comparative advanta"e. B. Specific factor theory of comparative advanta"e. #. 9onopolistic competition theory of comparative advanta"e. $. Scale economies theory of comparative advanta"e. &. 'one of the above. Ans(er) A -5. The Shipbreakers of Alan" arouse the ire of Creenpeace because of A. 1ndia7s non-repentant nuclear stance. B. 1ndia7s import-competin" industriali@ation policies. #. The difficulty of avoidin" ship accidents bet(een Creenpeace7s sailboat and the reconstructed #ontainer ships of Alan". $. The lar"e amount of pollution associated (ith the operations at Alan". &. 'one of the above. Ans(er) $ -;. The Shipbreakers of Alan" represent a perfect example of ho( a developin" country can apply the principles of the Heckscher-Ohlin model< since A. Shipbreakin" is "enerally considered to be a capital-intensive operation and 1ndia< bein" a lar"e country has much capital. B. Shipbreakin" is a labor-intensive operation in 1ndia< and 1ndia has many (orkers since it is such a lar"e country. #. Shipbreakin" is a labor-intensive operation in 1ndia< and 1ndia7s availability of capital per (orker is less than that of its trade partners. $. Shipbreakin" is a capital-intensive operation else(here in the (orld< and therefore represents a case of a factor intensity reversal. &. 'one of the above. Ans(er) #

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Essay Questions 1. 1t may be ar"ued that 6apan7s explicit promotion of its microchip industry (as an excellent example of successful industrial policy. .hat criteria (ould you apply to determine (hether such a policy is or is not successful4 6ud"in" from your o(n stated criteria< (as 6apan7s exercise sucessful4 .hy or (hy not4 .hat information (ould a "overnment reDuire in order to increase the probability that its industrial policy (ould promote lon" term self-"enerated economic "ro(th4 Ans(er) 1t is ar"ued that 6apan7s subsidies to its nascient microchip industry (as an important factor in puttin" 6apan on the (orld map in this area. Ho(ever< a minimal criteria for a successful industrial policy (ould be that the infant industry mature< and that it prove to be a profitable area of the country7s comparative advanta"e. 1n this case< one mi"ht ar"ue that the latter part of the above statement (as not fulfilled< since the microchip industry (as adopted by so many countries< that it became a 2commodity2. That is< it became a product (ith a very lo( profit mar"in< (hich (as not really a "ood use of 6apan7s resources< "iven their alternative uses. *. 1n recent cases< the +.S. placed Duotas or protectionist tariffs on imported steel and imported microchips. 1n both cases the dama"e to 2do(nstream2 industries (as obvious to all and relatively easy to Duantify and demonstrate. Assumin" that the +.S. la(makers are not plain dumb< (hy did they enact these protectionist policies4 Ans(er) The system by (hich these protectionist policies are set into la( is biased in favor of the producers of import competitive "oods. Other sectors of the economy that may be affected are not parties in the petitions made to the 1T# seekin" redress. -. The +.S. is probably the most open international market amon" the industriali@ed countries. .hat then does the +.S. have to "ain by !oinin" the .TO4 Ans(er) There are t(o ans(ers. Airst< the +.S. exporters stand to "ain profitable markets if forei"n protectionism in areas of +.S. comparative advanta"e 8 e.". soy: is removed due to .TO efforts. The second is that the .TO offers the +.S. "overnment administration a counter(ei"ht to re"ional and sectoral interests demandin" protection. 1t is al(ays politically easier to brin" about more efficient resource allocations of the complaints of the losers may be deflected by the presence of a bindin" treaty (ith an international or"ani@ation 82out hands are tied2:.

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0. 1t has been claimed that the #hinese burst of moderni@ation (hich has been propellin" its manufactured exports throu"hout the (orld at an unprecedented rate< is made possible by the use of slave 8penal: labor. 1f this is true should #hina have been accepted as a full fled"ed member of the .TO4 .hy 8or (hy not:4 Ans(er) 1f the ans(er to &ssay Huestion I- is correct< then it follo(s that the ans(er here is Jes. 3. 1t is still the conventional (isdom in the +.S. that compliance (ith 'AATA reDuirements is havin" a deleterious effect on +.S. hi"h(ay safety standards< on +.S. pollution and other environmental standards< and on +.S. !obs. .hat facts (ould proponents of an expansion of 'AATA 8e.". to include all of #entral and South American countries: need to marshall in order to convince you4 Ans(er) The ans(er is sub!ective. %resumably the ans(er should include reasonable and ob!ective counter-factual scenarios 8(hat (ould be the !ob or pollution situation (ith and (ithout 'AATA:.

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Graphic/Numerical Problems 1. Suppose Airbus is set to produce the aircraft before Boein". .hich company (ill enter the market4 Ans(er) Airbus (ill produce and Boein" (ill not.

*. Suppose both "overnments offer their respective company a subsidy of K08million:. Ans(er) Only Airbus (ill produce since it kno(s that the subsidy (ould not be sufficiently lar"e to entice Boein" to also enter the market. -. Suppose both "overnments offer their respective company a K1? million subsidy. Ans(er) Both companies (ould enter the market< since each kno(s that re"ardless of the other7s decision< it (ill make some profit here. 0. Suppose the +.S. "overnment 8but not &urope: offers a K1? million subsidy4 Ans(er) 1n this case Airbus (ould decide not to enter the market since it kno(s Boein" (ill< and that therefore its o(n production (ill entail a loss of K3 million. 3. Ho( could the +.S. "overnment !ustify its decision to offer a subsidy to a profitable and successful business4 Ans(er) 1t could point out that this K1? million pump-primin" expenditure results in a profit of K11? million. 1f Boein" paid a mar"inal income tax of *?L< this (ould net the "aovernment K33 million< (hich is more than 3 times the ori"inal subsidy< so that the decision may be !ustified not only in terms of benefitMcost considerations< but even in terms of pure bud"etary terms.

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