Institute of Business Administration, Karachi

Name:
International Trade ERP ID:
Spring 2017
First Midterm - Practice

This exam contains 6 pages (including this cover page) and 3 problems. Check to see if any pages
are missing. Enter all requested information on the top of this page.

You may not use your books or notes on this exam. Calculators are allowed but mobile phones are
strictly forbidden.

The following rules apply:

• Please write the answers in the space provided.

• Organize your work and label your answers properly, in a reasonably neat and co-
herent way. Work scattered all over the page without a clear ordering will receive no credit.

• Please attempt all questions. Even if your answer is incorrect you will receive partial
credit in Questions 2 and 3. Any sheets provided for rough work must be submitted with this
exam paper.

• Multiple Choice Questions: Make sure you clearly circle the correct answer with a blue or
a black pen. If you circle multiple answers, you will be awarded zero credit. Answers marked
with a pencil will not be accepted.

GOOD LUCK!
International Trade First Midterm - Practice - Page 2 of 6

1. (30 points) Multiple Choice Questions

Select the best possible answer for each question. Make sure you clearly circle only one option.
(a) The World Trade Organization, South Asian Free Trade Agreement and North American
Free Trade Agreement are examples of
A. organizations that promote peace between member countries
B. trade agreements that lead to reductions in trade barriers
C. monetary coordination agreements between member countries
D. exchange rate control agreements between member countries
(b) The General Agreement on Tariffs and Trade (GATT) existed between
A. 1948 and 1995 as a predecessor to the World Trade Organization
B. 1945 and 1980 as a predecessor to the World Trade Organization
C. 1948 and 1995 as part of the United Nations
D. 1948 and 1995 as a predecessor to the World Bank
(c) If there are no disparities in wages between countries, then
A. trade will be harmful to the country with a larger population
B. trade will be harmful to the country with a smaller population
C. trade is likely to be beneficial to both countries
D. trade is likely to be harmful to both countries
(d) We conduct an empirical analysis and find that the value of trade is proportional to the
distance of two countries. This result fits the
A. gravity model.
B. Ricardian model.
C. Specific factor model.
D. None of the above as the countries have different sizes.
(e) The gravity model predicts that the United States will trade
A. more frequently with Canada and Mexico than other countries
B. more frequently with Ireland, Netherlands and Belgium than other countries in
Europe
C. more frequently with France, Germany and the United Kingdom than other
countries in Europe
D. both (A) and (C)
(f) Primary products including agriculture
A. were the main exports of the United States prior to World War I
B. are the main exports of several less developed countries today
C. are the main exports of United States and the United Kingdom today
D. both (A) and (B)
(g) United Arab Emirates, Saudi Arabia and Kuwait can be classified
A. as top five export destinations for Pakistani products
B. as non OPEC members
C. as top import supplying markets of Pakistan.
D. None of the above
International Trade First Midterm - Practice - Page 3 of 6

(h) It is possible that Pakistan may have comparative advantage in but may have
absolute advantage in .
A. only one good; both goods
B. both goods; only one good
C. both goods; both goods
D. None of the above
(i) In which of the following models do we assume labor to be the only factor of production,
differences across countries in productivity of labor and perfectly competitive markets?
A. Ricardian model
B. Specific-factors model
C. Gravity model
D. None of the above
(j) Labor is a mobile factor and land and capital are fixed factors are assumptions of the
A. Ricardian model
B. Gravity model
C. both (A) and (B)
D. none of the above
(k) Trade is beneficial to both countries if they export the products in which they have a
comparative advantage is the main principle of the
A. Gravity model
B. Heckscher-Ohlin model
C. Ricardian model
D. All of the above
(l) Suppose we have two products, food and beverages. Assuming that there is trade between
Home and Foreign, Foreign will export beverages if
A. the unit labor requirement in Home for beverages is 2 and for food is 5. The
unit labor requirement in Foreign for beverages is 3 and for food is 8.
B. the unit labor requirement in Home for beverages is 2 and for food is 2. The
unit labor requirement in Foreign for beverage is 2 and for food is 1.
C. the unit labor requirement in Home for beverages is 2 and for food is 7. The
unit labor requirement in Foreign for beverages is 1 and for food is 4.
D. both (A) and (C)
(m) In the specific factor model
A. land and capital are treated as specific factors and labor as mobile.
B. land, capital and labor are treated as specific factors
C. land, capital and labor are treated as mobile factors
D. land is treated as specific factor and capital and labor as mobile factors.
(n) Assuming that capital is specific to mobile phones and land is specific to sugarcane, which
dynamics in the price levels will cause the wages to decrease but the production of sugar-
cane and mobile phones to remain constant?
A. A 5% decrease in the price of sugarcane only
B. A 5% decrease in the price of mobile phones only
International Trade First Midterm - Practice - Page 4 of 6

C. A 5% increase in the prices of both goods

D. none of the above
(o) If free trade prices equal pre-trade prices
A. there will be minimal benefit from trade
B. there will be substantial benefit from trade as free trade will cause domestic
prices to diverge
C. there will be substantial benefit from trade regardless of the price differentials
D. none of the above
(p) If those who gain from trade have less lobbying power than their opponents
A. there is likely to be bias against free trade
B. there is likely to be a strong support for free trade
C. there is likely to be import tariffs imposed which will restrict free trade
D. both (A) and (C)
(q) Relative costs instead of unit costs are used to calculate comparative advantage in:
A. Ricardian model
B. Specific Factor model
C. Heckscher Ohlin model
D. none of the above

2. (a) (5 points) (i)List three of the top five products exported from Pakistan (as mentioned in
class).
Answer:

(ii)List three of the top five products imported into Pakistan (as mentioned in class).
Answer:

(b) (5 points) Consider the gravity equation.

(i) Which variables are likely to increase export flow? Which variables are likely to de-
crease export flow?
(ii)Do you expect Pakistan’s trade pattern to closely follow the gravity equation?
Answer: Yes or No (Please circle the correct answer)
International Trade First Midterm - Practice - Page 5 of 6

(ii) List two countries in the EU for which you would expect the gravity equation to predict
greater trade flow with Pakistan than the actual values reported.
Answer:

(c) (5 points) Consider the following unit labor requirements:

Steel Wood
Home 20 40
Foreign 10 5

(i)What is the opportunity cost of steel in terms of wood in Home?

Answer:

(ii) Considering the assumptions of the Ricardian model, what is upper limit of world
price equilibrium of wood?
Answer:

(d) (5 points) Suppose an hours labor produces 5 kilos of cherries and 3 kilos of strawberries
in New Zealand and 10 units of cherries and 8 kilos of strawberries in the United Kingdom.
State which country will export cherries and which country will export strawberries given
both countries have a comparative advantage in the production of at least one good.
Answer:
International Trade First Midterm - Practice - Page 6 of 6

3. Consider two countries, Home and Foreign that produce goods 1 and 2. Good 1 uses labor and
capital. Good 2 uses labor and land. Initially, both countries have the same supply of land,
labor and capital and the price of the two goods is the same in both countries. The supply of
capital decreases in Home as there is a civil strife that destroys many factories. The domestic
price of good 1 rises in Home. This change shifts the production curve for good 1 and the
associated marginal product of labor curve. No changes occur to the production and marginal
labor curve for good 2. The country is initially in a state of autarky and opens up to free trade
after the civil strife.

(a) (2 points) Which country will have higher prices for good 1 relative to good 2 in free
trade? Explain. Assume prices in Home and in Foreign are not equal.
Answer:

(b) (3 points) Show how a decrease in the supply of capital in Home affects its production
possibility frontier.
Answer:

(c) (3 points) Determine which country will export which good after opening up for trade.
Answer:

(d) (3 points) Describe how opening up of trade will affect all three factors (land, labor and
capital) in both countries in terms of their real returns.
Answer: