chapter 3

Question 1

implied that international trade
makes every individual better off.

Answer 1

The Ricardian model

Question 2

Two main reasons why international trade has strong
effects on the distribution of income within a country:

Answer 2

1. Resources cannot move immediately or costlessly from
   one industry to another.
2. Industries differ in the factors of production they use

Question 3

Short-run consequences of international trade

Answer 3

Resources cannot move immediately or costlessly from one industry to another

Question 4

Long-run consequences of international trade

Answer 4

Industries differ in the factors of production they use.

Question 5

allows trade to affect
income distribution.

Answer 5

specific factors model

Question 6

Assumptions of the Specific factor model:

Answer 6

Two goods, cloth and food.

Three factors of production: labor (L), capital (K) and land (T
for terrain).

Perfect competition prevails in all markets.

Cloth produced using capital and labor (but not land).

Food produced using land and labor (but not capital).

Labor is a mobile factor that can move between sectors.

Land and capital are both specific factors used only in the
production of one good

Question 7

In specific factor model, there are two specific factors ________ which are permanently tied to particular sectors

Answer 7

(land and
capital)

Question 8

Economists usually think of factor specifity as a matter of______

Answer 8

time

Question 9

T or F

In specific factor model there is also no clear distinction between mobile and specific factor.

Answer 9

T

Question 10

Who said that a displaced worker who is re-employed in a different occupation suffers an 18% permanent drop in wages (on average), while only 6% drop if he does not switch occupations.

Answer 10

Kambourov, Manovskii (2009) –

Question 11

The production function is
upward-sloping and what shape

Answer 11

concave

Question 12

T or F
In SFM, Capital is relatively more mobile factor than labor

Answer 12

F_ labor is relatively more mobile factor than capital.

Question 13

The shape of the production
function reflects the law of

Answer 13

diminishing marginal
returns.

Question 14

Adding one worker to the production process (without increasing the amount of
capital) means that each worker has less capital to work with

Answer 14

law of
diminishing marginal
returns

Question 15

Because of the ________, each additional unit
of labor adds less output
than the last.

Answer 15

law of
diminishing marginal
returns

Question 16

The marginal product of labor therefore _________ as more
labor is used.

Answer 16

declines\

Question 17

indicates the allocation of labor.

Answer 17

Lower left quadrant

Question 18

quadrant shows the production function for cloth

Answer 18

Lower right

Question 19

shows the corresponding production function for food.

Answer 19

Upper left quadrant

Question 20

indicates the combinations of cloth and food that can be produced

Answer 20

Upper right quadrant

Question 21

Why is the production possibilities frontier curved?

Answer 21

1. Diminishing returns to labor in each sector cause the opportunity
   cost to rise when an economy produces more of a good
2. Opportunity cost of cloth in terms of food is the slope of the
   production possibilities frontier – the slope becomes steeper as an
   economy produces more cloth.

Question 22

T or F

In each sector, employers will minimize profits by demanding labor
up to the point where the value produced by an additional hour
equals the marginal cost of employing a worker for that hour.

Answer 22

F_maximize

Question 23

T or F

The two sectors must pay the same wage because labor can
move between sectors.

Answer 23

T

Question 24

t or f

If the wage were higher in the
cloth sector, workers would
move from making cloth to
making food until the wages
become equal

Answer 24

F_ move from making food to
making cloth

Question 25

T or F At the production point, the production possibility frontier must be tangent to a line whose slope is minus the price of cloth divided by that of food.

Answer 25

T

Question 26

What happens to the allocation of labor and the distribution of income when the prices of food and cloth change?

Answer 26

Two cases: 1. An equal proportional change in prices 2. A change in relative prices

Question 27

When both prices change in the same proportion, ______ changes occur.

Answer 27

no real

Question 28

The wage rate (w) rises in the same proportion as the prices, so real wages (i.e., the ratios of the wage rate to the prices of goods) are ________

Answer 28

unaffected

Question 29

What will happen to the real incomes of capital owners and landowners when an equal proportional change in prices happen

Answer 29

The real incomes of capital owners and landowners also remain the same

Question 30

When only PC rises, labor shifts from the food sector to the cloth sector what will happen to the output of cloth and food

Answer 30

Cloth output Rises Food output falls

Question 31

T or F The wage rate (w) does not rise as much as PC

Answer 31

T

Question 32

What is the economic effect of this price increase on the incomes of the following three groups?– Workers, owners of capital, and owners of land

Answer 32

Owners of capital are definitely better off. * Landowners are definitely worse off. * Workers: cannot say whether workers are better or worse off:

Question 33

Trade benefits the factor that is specific to the ______ of each country, but hurts the factor that is specific to the ______

Answer 33

export sector, import-competing sectors.

Question 34

Trade has ambiguous effects on

Answer 34

mobile factors

Question 35

Trade benefits a country by

Answer 35

expanding choices.

Question 36

Governments usually provide a ______of income support to cushion the losses to groups hurt by trade (or other changes).

Answer 36

“safety net”

Question 37

Trade shifts jobs from ______sectors to ____ sectors.

Answer 37

import-competing to export

Question 38

What is primarily a macroeconomic problem that rises during recessions.

Answer 38

Unemployment

Question 39

Workers migrate to wherever wages are ____

Answer 39

highest.

Question 40

International trade often has strong effects on the ______within countries - produces losers as well as winners.

Answer 40

distribution of income

Question 41

Income distribution effects arise for two reasons

Answer 41

Factors of production cannot move costlessly and quickly from one industry to another. Changes in an economy’s output mix have differential effects on the demand for different factors of production.

Question 42

Real wages fall due to _____and rise due to ____

Answer 42

immigration , emigration

Question 43

is a general model that includes Ricardian, specific factors, and Heckscher-Ohlin models as special cases.

Answer 43

Standard trade model

Question 44

Standard trade model is a general model that includes

Answer 44

Ricardian, specific factors, and Heckscher-Ohlin models as special cases.

Question 45

Assumption of standard trade model

Answer 45

Two goods, food (F) and cloth (C). Each country's PPF is a smooth curve.

Question 46

Differences in labor services, labor skills, physical capital, land, and technology between countries cause differences in production possibility frontiers.

Answer 46

Standard Trade Model

Question 47

A country’s PPF determines its

Answer 47

relative supply function.

Question 48

determine a world relative supply function, which along with world relative demand determines the equilibrium under international trade.

Answer 48

National relative supply functions

Question 49

What a country produces depends on the relative price of cloth to food PC /PF

Answer 49

Standard Trade Model

Question 50

______represents combinations of cloth and food that leave the consumer equally well off .

Answer 50

An indifference curve

Question 51

Characteristics of IC

Answer 51

are downward sloping that lie farther from the origin make consumers more satisfied become flatter when they move to the right

Question 52

Characteristic of IC that states if you have less cloth, then you must have more food to be equally satisfied.

Answer 52

are downward sloping

Question 53

characteristics of IC - they prefer having more of both goods.

Answer 53

that lie farther from the origin make consumers more satisfied

Question 54

what happens with indifference curve with more cloth and less food, an extra yard of cloth becomes less valuable in terms of how many calories of food you are willing to give up for it

Answer 54

become flatter when they move to the right

Question 55

is based on preferences and relative price of goods

Answer 55

Consumption choice

Question 56

T or F An economy that exports cloth is better off when the price of cloth falls relative to the price of food

Answer 56

F_ rises

Question 57

T or F A higher relative price of cloth means that more calories of food can be imported for every yard of cloth exported.

Answer 57

T

Question 58

The ______refers to the price of exports relative to the price of imports.

Answer 58

terms of trade

Question 59

When a country exports cloth and the relative price of cloth increases, the terms of trade______

Answer 59

rise.

Question 60

A_________ for exports means that the country can afford to buy more imports, an increase in the terms of trade increases a country’s welfare.

Answer 60

higher relative price

Question 61

T or F A decline in the terms of trade increases a country's welfare.

Answer 61

F_ Decreases

Question 62

it occurs in one sector more than others, causing relative supply to change.

Answer 62

Growth is usually biased:

Question 63

In_____ technological progress in one sector causes biased growth.

Answer 63

In the Ricardian model,

Question 64

In_____ model, an increase in one factor of production causes biased growth.

Answer 64

In the Heckscher-Ohlin

Question 65

Biased growth in the cloth industry (in either the home or foreign country) will _______ the price of cloth relative to the price of food and ______the terms of trade for cloth exporters

Answer 65

lower, lower

Question 66

Biased growth in the food industry (in either the home or foreign country) will _____ the price of cloth relative to the price of food and _____the terms of trade for cloth exporters.

Answer 66

raise, raise

Question 67

is growth that expands a country’s production possibilities dispro- portionately in that country’s export sector.

Answer 67

Export-biased growth

Question 68

is growth that expands a country’s production possibilities dispro- portionately in that country’s import sector.

Answer 68

Import-biased growth

Question 69

reduces a country’s terms of trade, reducing its welfare and increasing the welfare of foreign countries

Answer 69

Export-biased growth

Question 70

Iincreases a country’s terms of trade, increasing its welfare and decreasing the welfare of foreign countries

Answer 70

Import-biased growth

Question 71

are taxes levied on imports

Answer 71

Import tariffs

Question 72

are payments given to domestic producers that export.

Answer 72

Export subsidies

Question 73

drive a wedge between prices in world markets and prices in domestic markets.

Answer 73

Import tariffs and export subsidies

Question 74

When the home country imposes an _____, the terms of trade increase and the welfare of the country may increase.

Answer 74

import tariff

Question 75

When the home country imposes an _____, the terms of trade decrease and the welfare of the country decreases to the benefit of the foreign country.

Answer 75

export subsidy

Question 76

The standard trade model predicts that

Answer 76

an import tariff by the home country can increase domestic welfare at the expense of the foreign country. an export subsidy by the home country reduces domestic welfare to the benefit of the foreign country.

Question 77

_____ on a good decrease the relative world price of that good by increasing relative supply of that good and decreasing relative demand of that good.

Answer 77

Export subsidies

Question 78

_______on a good decrease the relative world price of that good (and increase the relative world price of other goods) by increasing the relative supply of that good and decreasing the relative demand of that good.

Answer 78

Import tariffs

Question 79

depicts different possible combinations of current output and future output.

Answer 79

intertemporal production possibility frontier,

Question 80

is intertemporal trade, where countries with profitable investment opportunities borrow funds today and repay lenders in the future, benefiting both borrowers and lenders.

Answer 80

International borrowing and lending

Question 81

In addition to differences in labor productivity, trade occurs due to differences in

Answer 81

resources across countries.

Question 82

argues that trade occurs due to differences in labor, labor skills, physical capital, capital, or other factors of production across countries.

Answer 82

Heckscher-Ohlin theory

Question 83

assumptions in Heckscher-Ohlin Model

Answer 83

Two-Factor Heckscher-Ohlin Model Two countries: home and foreign, both have the same technology Two goods: cloth (C) and food (F). Two factors of production: labor (L) and capital (K). The mix of labor and capital used varies across goods.– cloth is labor-intensive and food is capital-intensive The supply of labor and capital in each country is constant and varies across countries. In the long run, both labor and capital can move across sectors, equalizing their returns (wage and rental rate) across sectors.

Question 84

If producers can substitute one input for another in the production process, then the PPF is

Answer 84

curved (bowed).

Question 85

When the economy devotes more resources towards production of one good, the marginal productivity of those resources tends to be low so that the opportunity cost is .

Answer 85

high

Question 86

a line representing a constant value of production, V = PC QC + PF QF

Answer 86

isovalue line

Question 87

Production of cloth is relatively _ intensive, while production of food is relatively _intensive.

Answer 87

labor capital

Question 88

If the relative price of a good increases, then the real wage or rental rate of the factor used intensively in the production of that good increases, while the real wage or rental rate of the other factor decreases.

Answer 88

Stolper-Samuelson theorem

Question 89

Any change in the relative price of goods alters the distribution of income.

Answer 89

Stolper-Samuelson theorem

Question 90

If you hold output prices constant as the amount of a factor of production increases, then – the supply of the good that uses this factor intensively increases and – the supply of the other good decreases.

Answer 90

Rybczynski theorem

Question 91

t or f Trade in the Heckscher-Ohlin Model the countries are assumed to have the same technology and the same tastes.

Answer 91

t

Question 92

The country that is abundant in a factor exports the good whose production is intensive in that factor

Answer 92

Heckscher-Ohlin theorem:

Question 93

The Heckscher-Ohlin model predicts that

Answer 93

– owners of relatively abundant factors will gain from trade (skilled labor in USA) – owners of relatively scarce factors will lose from trade (unskilled labor in USA

Question 94

t or f Unlike the Ricardian model, the Heckscher-Ohlin model predicts that factor prices will be equalized among countries that trade

Answer 94

t