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

allows trade to affect
income distribution.

Answer 3

specific factors model

Question 4

Assumptions of the Specific factor model:

Answer 4

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 5

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

Answer 5

(land and
capital)

Question 6

T or F

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

Answer 6

T

Question 7

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 7

Kambourov, Manovskii (2009) –

Question 8

The production function is
upward-sloping and what shape

Answer 8

concave

Question 9

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

Answer 9

F_ labor is relatively more mobile factor than capital.

Question 10

The shape of the production
function reflects the law of

Answer 10

diminishing marginal
returns.

Question 11

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

Answer 11

law of
diminishing marginal
returns

Question 12

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

Answer 12

law of
diminishing marginal
returns

Question 13

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

Answer 13

declines\

Question 14

Why is the production possibilities frontier curved?

Answer 14

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 15

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 15

F_maximize

Question 16

T or F

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

Answer 16

T

Question 17

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 17

F_ move from making food to
making cloth

Question 18

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 18

T

Question 19

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

Answer 19

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

Question 20

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

Answer 20

no real

Question 21

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 21

unaffected

Question 22

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

Answer 22

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

Question 23

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 23

Cloth output Rises

Food output falls

Question 24

T or F

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

Answer 24

T

Question 25

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

Answer 25

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

Question 26

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

Answer 26

export sector, import-competing sectors.

Question 27

Trade has ambiguous effects on

Answer 27

mobile factors

Question 28

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

Answer 28

“safety net”

Question 29

Trade shifts jobs from ______sectors to ____ sectors.

Answer 29

import-competing to export

Question 30

What is primarily a macroeconomic problem that rises during recessions.

Answer 30

Unemployment

Question 31

Workers migrate to wherever wages are ____

Answer 31

highest.

Question 32

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

Answer 32

distribution of income

Question 33

Real wages fall due to _____and rise due to ____

Answer 33

immigration , emigration

Question 34

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

Answer 34

Standard trade model

Question 35

Standard trade model is a general model that includes

Answer 35

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

Question 36

Assumption of standard trade model

Answer 36

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

Question 37

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

Answer 37

National relative supply functions

Question 38

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

Answer 38

An indifference curve

Question 39

Characteristics of IC

Answer 39

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

Question 40

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

Answer 40

are downward sloping

Question 41

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

Answer 41

that lie farther from the origin make consumers more satisfied

Question 42

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 42

become flatter when they move to the right

Question 43

is based on preferences and relative price of goods

Answer 43

Consumption choice

Question 44

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

Answer 44

F_ rises

Question 45

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 45

T

Question 46

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

Answer 46

terms of trade

Question 47

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

Answer 47

rise.

Question 48

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 48

higher relative price

Question 49

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

Answer 49

F_ Decreases

Question 50

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

Answer 50

Growth is usually biased:

Question 51

In_____ technological progress in one sector causes biased growth.

Answer 51

In the Ricardian model,

Question 52

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

Answer 52

In the Heckscher-Ohlin

Question 53

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

Answer 53

Export-biased growth

Question 54

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

Answer 54

Import-biased growth

Question 55

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

Answer 55

Export-biased growth

Question 56

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

Answer 56

Import-biased growth

Question 57

are taxes levied on imports

Answer 57

Import tariffs

Question 58

are payments given to domestic producers that export.

Answer 58

Export subsidies

Question 59

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

Answer 59

Import tariffs and export subsidies

Question 60

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

Answer 60

import tariff

Question 61

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 61

export subsidy

Question 62

The standard trade model predicts that

Answer 62

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 63

_____ 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 63

Export subsidies

Question 64

_______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 64

Import tariffs

Question 65

depicts different possible combinations of current output and future output.

Answer 65

intertemporal production possibility frontier,

Question 66

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

Answer 66

International borrowing and lending

Question 67

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

Answer 67

resources across countries.

Question 68

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

Answer 68

Heckscher-Ohlin theory

Question 69

assumptions in Heckscher-Ohlin Model

Answer 69

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 70

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

Answer 70

curved (bowed).

Question 71

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

Answer 71

isovalue line

Question 72

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

Answer 72

labor capital

Question 73

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 73

Stolper-Samuelson theorem

Question 74

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

Answer 74

Stolper-Samuelson theorem

Question 75

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 75

Rybczynski theorem

Question 76

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

Answer 76

t

Question 77

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

Answer 77

Heckscher-Ohlin theorem:

Question 78

The Heckscher-Ohlin model predicts that

Answer 78

– 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 79

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

Answer 79

t

Question 80

sub theories under h-o model

Answer 80

stolper samuelson rybczynski theorem factor price qualization