Name:_______________________________
VASSAR COLLEGE DEPARTMENT OF
ECONOMICS
ECONOMICS 248A , FALL 1999
INTERNATIONAL TRADE AND THE WORLD
FINANCIAL SYSTEM
Midterm Examination
ANSWER ALL QUESTIONS
Max
Part One - Multiple Choice, 2 points per question.
Part I
40
1.
21
20
22
20
23
10
24
10
Which of the followingis not a feature that distinguishes international trade from domestic trade?
(a)
International trade involves the exchange of currencies.
(b)
International trade faces a greater immobility of factors.
(c)
International trade is subject to a greater degreeof legislated restrictions.
(d)
International trade is the result of specialization.
Score
2.
In 1996 the major trading partner of the U.S. was
(a)
Mexico.
(b)
Germany.
(c)
Japan.
(d)
Canada.
(e)
The United Kingdom.
3.
If there isonly one factorof production usedin producing two commodities, then the transformation function (productionpossibilities frontier) is
(a)
a straight line.
(b)
convex to the origin.
(c)
concave to the origin.
(d)
none of the above.
4.
Without international trade, equilibrium is obtained when
(a)
the transformation curve (PPF) intersects a community indifference map.
(b)
the transformation curve (PPF) is tangent to a community indifference map.
(c)
the marginal rate of substitution > the marginal rate of transformation.
(d)
the marginal rate of substitution < the marginal rate of transformation.
5.
Trade between two nations may the result of
(a)
different factor endowments.
(b)
differential efficiency in factor use.
(c)
different tastes in consumption.
(d)
all of the above.
6.
Automobile manufacturing is capital intensiveandrugmanufacturing is laborintensive. The U.S. has 100 millionworkers and $3,000 billionof capital.
Peru has 20 millionworkers and $400billion ofcapital. According tothefactor proportions theory this implies that:
(a)
the U.S. will specialize in producing automobiles, and Peru in producing rugs.
(b)
the U.S. will specialize in producing rugs, and Peru in producingautomobiles.
(c)
neither country will specialize or tradewiththe other.
(d)
none of the above.
7.
If country A is labor intensive and country B is capital intensive, then, with the onset of trade
(a)
wages will FALL in country A, and the return to capital will RISE in country B, until equilibrium is reached.
(b)
wages will RISE in country A, and the return to capital will FALL in country B, until equilibrium is reached.
(c)
wages will RISE in country A, and the return to capital will RISE in country B, until equilibrium is reached.
(d)
wages will FALL in country A, and the return to capital will FALL in country B, until equilibrium is reached.
Total
100
8.
The main empirical finding that led to the articulation of the Leontief paradoxwas:
(a)
thecapital/laborratioof U.S. imports was greater than thatof U.S. exports
(b)
the output of theU.S. agricultural sector was greater than that of theU.S. manufacturingsector.
(c)
U.S. farmers earn more than U.S. factory workers
(d)
the capital/labor ratio U.S. exports was greater than that of U.S. imports
9.
The Leontief paradoxmay be explainedbyconsideringthat:
(a)
U.S. labor is more highly skilled than foreign labor
(b)
U.S. exports are moreskill intensivethan U.S. imports
(c)
a large part of U.S. imports are natural-resource-intensive
(d)
all of the above
(e)
none of the above
10.
If the domestic price of a good rises by the full extent ofa newlyimposedtariff we can infer:
(a)
the importing country is large.
(b)
theimportingcountryis small.
(c)
the government does not earn any revenue fromthe tariff.
(d)
consumption will increase after the tariff is imposed.
11.
Thegrowth of automobile exports betweendeveloped countriesis an example of:
(a)
intra-industry trade.
(b)
the factor proportions hypothesis.
(c)
inter-industry trade.
(d)
the Leontief paradox.
12.
Suppose there is a 10% import duty on pocket calculators, but no import duty on the components used in their manufacture. If domestic calculator
manufacturers use 75%importedparts, then the effectiveprotective rate of thetariffis
(a)
40%.
(b)
10%.
(c)
2.5%.
(d)
7.5%.
13.
An optimal tariff exists when
(a)
real incomechanges exceedterms of trade effects.
(b)
terms of trade effects equal real income effects.
(c)
terms of trade effects exceed real income changes.
(d)
the tariff rate equalizes home and foreign labor costs.
14.
In general empirical studieshave foundthat thecost per jobsaved by protectionis
(a)
equal to the wages paid to the workers.
(b)
less than the wages paid the workers.
(c)
greater than the wages paid the workers.
(d)
equal to the unemployment benefits that would have beenpaid to the workers.
15.
Dumping, in the trade context, may be defined as
(a)
selling to foreign purchasers at below the domestic price for an identical good.
(b)
destroying excess commodity production by tipping it in the sea.
(c)
selling a goodin aforeignmarket atlessthan its production cost.
(d)
(a) or (c)
16.
The U.S. tariff reached its highest level in
(a)
1890.
(b)
1910.
(c)
1930.
(d)
1950.
17.
The impact of the Tokyo and Uruguay Rounds on LDCs is thought to be
(a)
positive, because the gains from nonreciprocal lower tariffs outweigh the losses resulting from erosion of margin of preference.
(b)
negative, because the gains from nonreciprocal lower tariffs are less than the losses resulting from erosion of margin of preference.
(c)
positive becauseboth nonreciprocal tariff cuts and lower margins assist LDC exports.
(d)
negative because both lower tariffs and lower preference margins hurt LDC exports.
18.
Persistent dumping as profit-maximizing behavior requires
(a)
separable markets with a lower elasticity of demand abroad than at home.
(b)
integrated markets with a higher elasticity of demand at home than abroad.
(c)
separable markets with a higher elasticity of demand abroad than at home.
(d)
integrated markets with a lower elasticity of demand abroad than at home.
19.
Current U.S. tax law
(a)
credits in full taxes paid to foreign governments to the maximum rate of U.S. corporate taxation.
(b)
allows firms to deduct foreign taxes as costs.
(c)
does not allowfirms either cost deductions or tax credits.
(d)
allows firms to credit half of the foreign taxespaid.
20.
Fromthepoint of viewof the national interest foreign investmentwill only be beneficialif
(a)
net-of-tax returns abroad exceed net-of-tax returns at home.
(b)
gross returns abroad exceed net-of-tax returns at home.
(c)
net-of-tax returns abroad exceed gross returns at home.
(d)
gross returns abroad exceed gross returns at home.
21. 20 points.
The above diagram shows two economies A and B, both of which produce a commodity,
with B producing at a lower cost than A. Label the diagram to show:
i.
The price in Economy A in the absence of trade (Pa)
ii.
The price in Economy B in the absence of trade (Pb)
All barriers to trade are removed between the two economies. Label and clearly show:
iii.
A’s import demand schedule, Id a
iv.
B’s export supply schedule, Esb
v.
The common world price under free trade, WP.
vi.
B’s exports under free trade, Xb.
vii.
A’s imports under free trade, Ma.
Now A imposes a tariff off magnitude T.
viii.
Label the price in country following the tariff, PaT.
ix
.
x.
Label the price in country B following the tariff, PbT
xi.
Label A’s imports under the tariff, MaT.
xii
Shade and label ) CS the deadweight loss experienced by A’s consumers.
Label B’s exports under the tariff, XbT.
xiii
Shade and label ) PS the deadweight loss suffered by B’s producers.
xii.
Is A small or a large country in this context? Explain why.
xiii.
Can the tariff T imposed by A be an optimal tariff. Explain why.
22. 20 points
Consider the above diagram for commodity X and Country U. In the absence of any trade the
domestic price is Pd and the domestic output is Qd. The world price of the good is WP.
i.
How much does U import from ROW.
ii.
How much does U produce itself.
U imposes a tariff of magnitude T, and the price in U rises to Pt.
iii.
Is U a small country or a large one. Why?
iv.
How much does U now produce.
v.
What is the gain in producers surplus for U’s manufacturers.
vi.
How much revenue is taken by U’s finance authorities.
vii.
What is the deadweight loss of the tariff.
viii.
Define what the equivalent quota would be.
ix.
What is the quota rent.
x.
Name two groups who might receive the quota rent.
Now consider X to be a normal good and suppose income rises in U by a substantial amount
xi.
What curve shifts in the above diagram. Show it.
xii.
Show the new equilibrium price under assuming the tariff is unchanged.
xiii.
Show the new government revenue.
xiv.
Has the deadweight increased or decreased.
xv.
If a quota had been in effect not a tariff would the deadweight loss change. How.
23. (10 points)
Nokia is a far eastern country, small relative to the world market, that assembles cell phones using
imported parts. The phones sell internationally for $1000). The necessary imported parts cost
$500.
Initially Nokia has no trade restraints on the import of cell phones.
i.
If one dollar is equal to two nokies (the currency of Nokia), what is the domestic price of
cell phones.
ii.
How much per phone can go to domestic value added (the sum of profits, rents and wages)
in Nokia.
Under pressure from manufacturers the government imposes a 30% tariff of finished phones, while
leaving parts untariffed.
iii.
What will be the new price of phones in Nokia?
iv
What will be the new international price of phones?
v.
What will be the new level of domestic value added?
vi.
What is the effective rate of protection of domestic value added?
vii.
In an attempt to stimulate a parts industry the government imposes a 100% tariff on the parts
used in phones, but does not put a tariff on finished phones. What now is the effective rate
of protection on the value added in cell-phone manufacture?.
24. (10 points)
If Britain were to produce enough wheat to satisfy its domestic needs it would be at price of
Pd. The lowest cost producer defines the world price WP, but Britain’s European neighbors
can produce at P. Say Britain imposes at tariff of size T on imports from all sources.
i.
Where do Britain’s imports originate.
ii.
What is the price of wheat in Britain.
iii.
What would be the deadweight loss of this tariff.
Now Britain joins the EU, and her European neighbors have access to her market tariff free.
iv.
What is the price of wheat in Britain?
v.
How much wheat is grown in Britain?
vi.
What is the distance BG called?
vii.
Show is the distance GH called?
viii.
Label the “consumption effect.”
ix.
What are total imports into the UK.
x.
Is the new customs union associated with a higher or lower deadweight loss compared to
the situation where everyone pays the same tariff, T.