Econ 380: International Economics

Fall 2000 WMU

Exam #1
Value: 100 points
Directions:
1)
2)
3)
4)
5)

Place your name and ID# on front page of blue book AND the top of this exam.
You must turn in the exam AND the blue book at the end of the exam.
Only answers placed in the blue book will be considered.
Please pay attention to the point values when allocating time.
You should have 4 pages to this exam.

Multiple Choice (10 questions 3 points apiece) Place your answer to the following
questions on the first page of the blue book.
Use the following chart to answer questions (1) (3).
Suppose that labor can produce flowers or candy in the US and Sweden. Below is the chart that
indicates how much 1 hour of labor can produce if it specializes in a particular good.

Flowers

Candy

United States

20

120

Sweden

10

30

1. Which of the following is true?

a.
b.
c.
d.
e.

US has an absolute advantage in flowers.

Sweden has a comparative advantage in flowers.
Sweden has a comparative advantage in candy.
Both (a) and (b).
None of the above.

2. Both countries would benefit if

a.
b.
c.
d.
e.

US produced both commodities and did not trade with Sweden.

Sweden produced both commodities and did not trade with the US.
the United States exported candy and imported flowers.
the United States exported flowers and imported candy.
None of the above.

3. There would be no international exchange rate that would permit mutually beneficial exchange
between the US and Sweden if the output/labor for candy in Sweden was, instead of 30:
a.
b.
c.
d.
e.

5
10
60
120
200

4. Suppose that there are two factors, land and capital, and that the US is relatively capital
abundant while Mexico is relatively land abundant. According to the H-O theory,
a.
b.
c.
d.

Mexican landowners should support Mexican-US free trade.

Mexican capitalists should oppose Mexican-US free trade.
US capitalists should support Mexican-US free trade.
all of the above.

5. If Canada imposes a tariff on bananas and if none are grown in Canada, this tariff has
a.
b.
c.
d.

only revenue effects.

only protective effects.
both protective and revenue effects.
neither revenue nor protective effects.

6. Many argue that there is ultimately no real difference between a tariff and quota both raise
price and lower the quantity imported. However, a domestic monopolist facing import
competition would
a.
b.
c.
d.

prefer a tariff to its equivalent quota.

prefer a quota to its equivalent tariff.
is indifferent between a tariff and an equivalent quota.
love free trade.

7. Suppose that the Honduran government is considering imposing a tariff on imported

computers (a K-intensive good). Realizing that Honduras is labor-abundant, and there are no
retaliatory tariffs placed on Honduran export goods, the Stolpher-Samuelson rule suggests that
the real income of Honduras
a. capital owners will rise.
b. capital owners will fall.
c. labor income will rise.
d. labor income will fall.
8. After a country moves from autarky to free trade, the welfare gains that trade brings to
consumers of the imported good are, in absolute terms,
a. larger than the welfare losses to domestic producers of that good.
b. smaller than the welfare losses to domestic producers of that good.
c. exactly equal to the welfare losses to domestic producers of that good.
d. immeasurable.
9. The difference between an import tariff imposed by a small country and a large country is that,
for a large importing country,
a.
b.
c.
d.

government revenue from the tariff is paid entirely by foreigners.

nation welfare always increases because of the tariff.
national welfare of the exporting country is reduced.
there is no loss in consumer surplus as a result of the tariff.

10. According to the product life cycle hypothesis,

a. when a new product is introduced, it usually requires highly skilled labor to be produced.
b. after the produce acquires mass acceptance and becomes standardized, it can often be
produced with unskilled labor.
c. After standardization, the country in which innovation occurred often runs a trade deficit
in regard to that good.
d. All of the above.

Short Answer Clearly label the start of each question in the blue book. You do not
have to answer these questions in order.
1. (13 points) Could two countries with identical abilities to produce (production
possibilities curves) and identical tastes (indifference curves) gain from trading with each
other? Explain how or why not. You must provide examples to defend your answer. List
all assumptions.
2. (13 points) In addition to the production and consumption deadweight losses that result
from the implementation of tariffs, what are other potential costs of tariffs? List and
define at least three examples.
3. (13 points) In the context of national welfare, prove free trade is preferred to autarky.
Provide graphical support to your answer.

Problems Clearly label the start of each question in the blue book. Answer all parts
of both problems, circling the answer to each part. Partial credit may be given for
each question, provided that your work is shown.
1. (12 points 3 points each) Suppose that both the US and Canada have the factor
endowments listed in the table below. Suppose that the production requirement for one
unit of steel is two machines and 8 workers, while the production requirement for one of
bread is one machine and 8 workers.

Capital
Labor

US
Canada
40 machines 10 machines
200 workers 60 workers

a. Which good, bread or steel, is relatively capital intensive in production? In Labor?

Show how you determine this.
b. Which country will export bread? Steel? Why? Show how you determined this.
c. Explain what happens to the returns of capital and labor in the US and Canada
after trade begins.
d. Suppose that the US wants to achieve import-replacing (anti-trade or ultra antitrade) growth. What change in its endowments would achieve this growth?

2. (18 points) Suppose that the world price for a good is 40, and the domestic demand
and supply curves are given by the following equations:
Demand:
P=80-2Q
Supply:
P=5+3Q
a. (3 points) How much is consumed? How much is produced domestically?
b. (3 points) What are the values of producer and consumer surplus?
c. (3 points) If a 10% tariff is imposed, by how much do consumption and domestic
production change?
d. (3 points) What is the change in consumer and producer surplus?
e. (3 points) How much revenue does the government earn from the tariff?
f. (3 points) What is the net national cost of the tariff?