INTERNATIONAL ECONOMICS EXERCISES -2

1-The straight-line production possibilities curve

A) does not show increasing opportunity costs.
B) fails to reflect tradeoffs.
C) fails to benefit trading nations.
D) refutes the principles of comparative advantage.

2- Endowment of Labor and Capital

Based on Table 4.1, according to the Heckscher-Ohlin Theorem, U.S. exports should be
goods that
A) intensively use labor input.
B) intensively use capital input.
C) use capital and labor in about equal proportions.
D) use either labor or capital input, depending on the good.

3-The Heckscher-Ohlin Theorem predicts

A) who benefits and who loses from trade.
B) which factors are abundant.
C) the income distribution effects of trade.
D) which goods will be exported.

4-Which of the following is true?

A) Adam Smith proposed the theory of comparative advantage as the basis for trade in The
Wealth of Nations.
B) David Ricardo proposed the theory of absolute advantage as the basis for trade.
C) Absolute advantage is based on comparing the opportunity costs of trading partners.
D) The Ricardian model assumes labor is perfectly mobile.

5-If a country is currently producing at a production point such that the trade line has a slope
that is flatter than the slope of the PPC at the same point, then
A) the country can get greater gains from trade if it moves production away from the good on
the vertical axis.
B) the country can get greater gains from trade if it moves production toward the good on the
vertical axis.
C) the country cannot improve on its gains from trade.
D) There are no gains from trade in this example.

6-Which of the following is NOT a proposition of the Heckscher-Ohlin model?

A) A country has a comparative advantage in the production of that commodity which uses
more intensively the country's more abundant resource.
B) The effect of international trade is to tend to equalize factor prices between the trading
nations.
C) If the United States is a skilled labor abundant country, then the United States has a
comparative advantage in the production of goods that use skilled labor more intensively.
D) Countries will completely specialize in the product in which they have a comparative
advantage if free trade is allowed to occur.
7-
U.S. U.K
Wheat 12 6
Cloth 6 18

The table above shows United States and United Kingdom production of wheat (bushels per
hour) and cloth (yards per hour).
According to Adam Smith, which of the following is true?
A) The United States has an absolute advantage in the production of wheat.
B) The United States has an absolute advantage in the production of cloth.
C) There is no basis for trade between these countries.
D) The United States will gain more from trade than the United Kingdom.

8-Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is
natural resource intensive and computers are capital intensive, then
A) Chile will produce more computers after trade begins with Brazil.
B) Brazil will produce more timber after trade begins with Chile.
C) Chile will produce more timber after trade begins with Brazil.
D) Brazil will completely specialize in computers once trade begins with Chile.

U.S. U.K
Wheat 12 6
Cloth 6 18
9-The table above shows United States and United Kingdom production of wheat (bushels per
hour) and cloth (yards per hour).
In order for both countries to gain from trade, one bushel of wheat must trade for
A) between 6 and 18 yards of cloth.
B) between 1/2 and 2 yards of cloth.
C) between 1/3 and 3 yards of cloth.
D) between 1/2 and 1/3 yards of cloth.

10-Using the HO model, assume that the United States is capital abundant and Mexico is
labor abundant. If soybeans are capital intensive and avocados are labor intensive,
A) Mexico will produce more soybeans once trade is introduced.
B) the United States will produce more avocados once trade is introduced.
C) avocado prices in the United States will fall once trade begins.
D) soybean prices in Mexico will rise once trade begins.
11-The graph above shows the PPC for a country that can produce oil or televisions.
The straight line is the trade line and CPC if production is at Point A.
Which of the following is a true statement?
A) This country should produce relatively more oil and relatively fewer televisions.
B) This country should produce relatively more televisions and relatively less oil.
C) This country should produce more of both goods.
D) This country is producing the optimal mix of oil and televisions to maximize its income.

12-The graph above shows the PPC for a country that can produce oil or televisions.
The straight line is the trade line and CPC if production is at Point A.
Is this country producing the optimal mix of oil and televisions to maximize its income?
Carefully explain how you know.

13-If the price of a good rises, then the effect on the income of the factors that are used
intensively in its production will be
A) to raise income by an absolute amount that is less than the rise in prices.
B) to raise income by an absolute amount that is more than the rise in prices.
C) to raise income by a smaller percentage than the rise in prices.
D) to raise income by a greater percentage than the rise in prices.

14-After trade opens, the short run impact on the income of the specific factor that is
relatively scarce will be
A) a decrease in its income.
B) an increase in its income.
C) no change in its income.
D) indeterminate, income effects are not possible to know.

15-Output per Hour Worked

Based on Table 3.1, the opportunity cost of a pair of shoes in the United States is
A) three computers.
B) two computers.
C) one computer.
D) one-half computer.

16-Based on Table 3.1, the pre-trade relative price of a computer in Mexico is

A) three pairs of shoes.
B) one pair of shoes.
C) one-half pair of shoes.
D) one-third pair of shoes.

17-Based on Table 3.1, trade between the United States and Mexico will occur as long as the
relative price of shoes is between
A) three computers and one computer.
B) three computers and two computers.
C) one-half computer and one-third computer.
D) six computers and three computers.

18-Assume that both the United States and Germany produce beef and computers. The U.S.
can produce 200 computers or 1,000 pounds of beef per day. Germany can produce 500
computers or 250 pounds of beef per day.
What is the opportunity cost of beef and computer chips in each country? In which good does
each country have a comparative advantage? What is the range for mutually beneficial trade
in computers?