Chapter 8 The Environment and Development 17) SCARCITY RENT - The premium or additional rent charged
for the use of a resource or good that is in fixed or limited
1) GLOBAL WARMING – Increasing average air and ocean
temperatures. Used in reference to the trend that began in
the mid-twentieth century and attributed largely to human
industrial, forestry, and agricultural activities emitting
greenhouse gases.
2) CLIMATE CHANGE – Nontransient altering of underlying
climate, such as increased average temperature, decreased
annual precipitation, or greater average intensity of droughts
or storms.
3) Used in reference to the impact of the global warming
phenomenon. Note the distinction between changes in
weather (which varies within a climate) and changes in
climate that alter underlying probabilities of weather
outcomes.
4) ENVIRONMENT ACCOUNTING - The incorporation of
environmental benefits and costs into the quantitative
analysis of economic activities.
5) ENVIRONEMNTAL CAPITAL – The portion of a country’s
overall capital assets that directly relate to the environment—
for example, forests, soil quality, and ground water.
6) SUSTAINABLE DEVELOPMENT – A pattern of
development that permits future generations to live at least
as well as the current generation, generally requiring at least
a minimum environmental protection.
7) SUSTAINABLE NET NATIONAL INCOME (NNI*) - An
environmental accounting measure of the total annual
income that can be consumed without diminishing the overall
capital assets of a nation (including environmental capital).
8) ENVIRONMENTAL KUZNETS CURVE - graph reflecting the
concept that pollution and other environmental degradation
first rises and then falls with increases in income per capita.
There is evidence that this holds for some pollutants, such
as sulfur dioxide and particulate matter in the air, but not for
others, such as emissions of greenhouse gases.
9) BIOMASS FUELS - Any combustible organic matter that
may be used as fuel, such as firewood, dung, or agricultural
residues.
10) DESERTIFICATION - The transformation of a region into
dry, barren land with little or no capacity to sustain life without
an artificial source of water.
11) SOIL EROSION - Loss of valuable topsoils resulting from
overuse of farmland, and deforestation and consequent
flooding of farmland.
12) DEFORESTATION - The clearing of forested land either for
agricultural purposes or for logging and for use as firewood.
13) TOTAL NET BENEFIT - The sum of net benefits to all
consumers.
14) MARGINAL COST - The addition to total cost incurred by the
producer as a result of increasing output by one more unit.
15) PRODUCER SURPLUS – Excess of what a producer of a
good receives and the minimum amount the producer would
be willing to accept because of a positive-sloping marginal
cost curve.
16) CONSUMER SURPLUS – Excess utility over price derived
by consumers because of a negative-sloping demand curve.
supply.
18) PRESENT VALUE - The discounted value at the present
time of a sum of money to be received in the future.
19) MARGINAL NET BENEFIT – The benefit derived from the
last unit of a good minus its cost.
20) PROPERTY RIGHTS – The acknowledged right to use and
benefit from a tangible (e.g., land) or intangible (e.g.,
intellectual) entity that may include owning, using, deriving
income from, selling, and disposing.
21) COMMON PROPERTY RESOURCE - A resource that is
collectively or publicly owned and allocated under a system
of unrestricted access, or as self-regulated by users.
22) EXTERNALITY - Any benefit or cost borne by an individual
economic unit that is a direct consequence of another’s
behavior.
23) INTERNALIZATION - The process whereby external
environmental or other costs are borne by the producers or
consumers who generate them, usually through the
imposition of pollution or consumption taxes.
24) PUBLIC GOOD - An entity that provides benefits to all
individuals simultaneously and whose enjoyment by one
person in no way diminishes that of another.
25) PUBLIC BAD - An entity that imposes costs on groups of
individuals simultaneously. Compare with public good.
26) FREE-RIDER PROBLEM – The situation in which people
can secure benefits that someone else pays for.
27) CLEAN TECHNOLOGIES – Technologies that by design
produce less pollution and waste and use resources more
efficiently.
28) PRIVATE COSTS - The direct monetary outlays or costs of
an individual economic unit.
29) POLLUTION TAX - A tax levied on the quantity of pollutants
released into the physical environment.
30) SOCIAL COST - The full cost of an economic decision,
whether private or public, to society as a whole.
31) ABSORPTIVE CAPACITY – The capacity of an ecosystem
to assimilate potential pollutants.
32) GREENHOUSE GASES – Gases that trap heat within the
earth’s atmosphere and can thus contribute to global
warming.
33) BIODIVERSITY - The variety of life forms within an
ecosystem.
34) GLOBAL PUBLIC GOOD – A public good, whose benefits
reach across national borders and population groups.
35) DEBT-FOR-NATURE SWAP – The exchange of foreign
debt held by an organization for a larger quantity of domestic
debt that is used to finance the preservation of a natural
resource or environment in the debtor country.
 CHAPTER 8
D 1. A major cause of environmental degradation
in developing countries is:
(a) population growth.
(b) rural poverty.
(c) rapid urbanization.
(d) all of the above.
C 2. Sustainable development means
(a) emphasizing the role of the market.
(b) emphasizing the role of government.
(c) meeting the present generation's needs
without compromising the needs of future
generations.
(d) maintaining output growth at a constant rate.
D 3. Which of the following environmental
problems are largely caused by persistent
poverty?
(a) Deforestation.
(b) Soil erosion.
(c) Ground water contamination.
(d) All of the above.
B 4. Which of the following conditions is violated
if there is a free rider problem?
(a) universality
(b) exclusivity
(c) transferability
(d) enforceability
B 5. A major cause of environmental degradation
in developing countries is
(a) debt for nature swaps.
(b) poverty.
(c) a lack of public transportation.
(d) land reform.
A 6. The "cost of rainforest preservation" can be
lowered for developing countries by
(a) the development of alternative rainforest
products.
(b) research on agriculture in rainforest soils.
(c) encouraging rainforest settlement of the poor.
(d) subsidies for activities like cattle raising.
D 7. Debt-for-nature swaps are most generally
(a) beneficial only to the developing country.
(b) beneficial only to the developed country.
(c) beneficial only to the bank which can write off
the debt.
(d) beneficial to all countries.
C 8. A resource that is publicly owned and
allocated under a system of unrestricted access
is known as
(a) a socialist resource.
(b) a collective resource.
(c) a common property resource.
(d) a transferable resource.
A 9. The portion of a country's overall assets that
is directly related to the environment, such as
forests and soil quality, is known as
(a) environmental capital.
(b) debt for nature swaps.
(c) protected areas.
(d) common property assets.
B 10. The free rider problem is a situation in
which
(a) effluents such as CFCs combine with ozone
and decrease concentrations of that protective
chemical.
(b) one agent secures benefits that others pay
for.
(c) there are excessive subsidies given to
polluting buses or other forms of mass transit.
(d) perfect property rights exist.
A 11. International resources shared by all
countries such as oceans and air are known as
(a) global commons.
(b) free rider problems.
(c) nonrenewable resources.
(d) cooperative resources.
B 12. The annual income that can be consumed
without diminishing the total capital assets of a
nation is
(a) purchasing power parity income.
(b) sustainable national income.
(c) environmental capital stock.
(d) per capita income.
C 13. An example of a biomass fuel is
(a) coal.
(b) nuclear fuel.
(c) manure.
(d) oil.
C 14. Which of the following conditions does not
characterize perfect property rights markets?
(a) universality
(b) exclusivity
(c) sustainability.
(d) enforceability.
B 15. In what way do developing countries make
the largest contribution to the global
concentrations of greenhouse gases?
(a) vehicle emissions.
(b) deforestation.
(c) mining.
(d) irrigation.
 CHAPTER 9 Development Policymaking and the Roles
of Market, State and Civil Society
1) ECONOMIC PLANNING - A deliberate and
conscious attempt by the state to formulate
decisions on how the factors of production will be
allocated among different uses or industries, thereby
determining how much of total goods and services
will be produced in one or more ensuing periods.
2) ECONOMIC PLAN – written document containing
government policy decisions on how resources will
be allocated among various uses so as to attain a
targeted rate of economic growth or other goals over
a certain period of time.
3) COMPREHENSIVE PLAN – An economic plan that
sets targets to cover all the major sectors of the
national economy.
4) PARTIAL PLAN – A plan that covers only a part of
the national economy (e.g., agriculture, industry,
tourism).
5) PLANNING PROCESS - The procedure for drawing
up and carrying out a formal economic plan.
6) ECONOMIC INFRASTRUCTURE - The capital
embodied in roads, railways, waterways, airways,
and other forms of transportation and
communication plus water supplies, electricity, and
public services such as health and education.
7) MARKET FAILURE – phenomenon that results from
the existence of market imperfections (e.g.,
monopoly power, lack of factor mobility, significant
externalities, lack of knowledge) that weaken the
functioning of a market economy.
8) AGGREGRATE GROWTH MODEL – A formal
economic model describing growth of an economy in
one or a few sectors using a limited number of
variables.
9) INPUT-OUTPUT MODEL (INTERINDUSTRY
MODEL) – A formal model dividing the economy into
sectors and tracing the flow of interindustry
purchases (inputs) and sales (outputs).
10) PROJECT APPRAISAL – The quantitative analysis
of the relative desirability (profitability) of investing a
given sum of public or private funds in alternative
projects.
11) COST-BENEFIT ANALYSIS – A tool of economic
analysis in which the actual and potential private and
social costs of various economic decisions are
weighed against actual and potential private and
social benefits.
12) SOCIAL PROFIT – The difference between social
benefits and social costs, both direct and indirect.
13) SHADOW PROCES (ACCOUNTING PRICES) –
Prices that reflect the true opportunity costs of
resources.
14) MARKET PRICES - Prices established by demand
and supply in markets.
15) EXCHANGE RATE – Rate at which the domestic
currency may be converted into (sold for) a foreign
currency such as the U.S. dollar.
16) RENT SEEKING - Efforts by individuals and
businesses to capture the economic rent arising
from price distortions and physical controls caused
by excessive government intervention, such as
licenses, quotas, interest rate ceilings, and
exchange control.
17) SOCIAL RATE OF DISCOUNT – The rate at which
a society discounts potential future social benefits to
find out whether such benefits are worth their
present social cost.
18) NET PRESENT VALUE – The value of a future
stream of net benefits discounted to the present by
means of an appropriate discount (interest) rate.
19) INTERNAL RATE OF RETURN – The discount rate
that causes a project to have a net present value of
zero, used to rank projects in comparison with
market rates of interest.
20) GOVERNMENT FAILURE - A situation in which
government intervention in an economy worsens
outcomes.
21) POLITICAL WILL - A determined effort by persons
in political authority to achieve certain economic
objectives through various reforms.
22) PATH DEPENDENCY - A condition in which the
past condition of an individual or economy,
measured by the level of one or more variables,
affects future conditions.
23) NONGOVERNMENTAL ORGANIZATIONS
(NGOs) – Nonprofit organizations often involved in
providing financial and technical assistance in
developing countries.
24) VOLUNTARY FAILURE – The inability of
nongovernmental organizations and the citizen
sector more broadly to efficiently achieve social
objectives in their areas of supposed comparative
advantage.
25) CORRUPTION - The appropriation of public
resources for private profit and other private
purposes through the use and abuse of official
power or influence.
 CHAPTER 9 C 9. A shadow price is:
(a) the price in the previous period.
D 1. Development plans have often failed because (b) the price in the next period.
(a) they have been insufficiently specific about projects. (c) the social value of a good or service.
(b) they have overlooked noneconomic considerations. (d) the market value of a good or service.
(c) they have been overambitious. (e) none of the above.
(d) all of the above.
(e) none of the above. D 10. Which of the following is a reason for the failure
of development plans?
C 2. Sectors where the development process leads to (a) unreliable data.
a more rapid expansion of demand than supply in (b) unanticipated economic disturbances.
goods or factor markets are known as (c) lack of political will.
(a) the crisis in planning. (d) all of the above.
(b) input-output analysis. (e) none of the above.
(c) bottlenecks.
(d) infant industries. B 11. Which of the following is not a rationale for
development planning?
A 3. The price reflecting the true social opportunity (a) capital market failures.
costs of a resource is known as (b) rent seeking behavior.
(a) a shadow price. (c) attitudinal or psychological impact.
(b) an equilibrium price. (d) all are rationales for development planning in
(c) a world price. developing countries.
(d) a price index.
B 12. If the incremental capital output ratio is 3 and the
D 4. Which of the following factors has led to poor plan ratio of saving to national income is 9%, according to
performance? the Harrod-Domar model the growth rate of income is
(a) unanticipated changes, such as in terms of trade. (a) zero.
(b) corruption of government officials. (b) 3%.
(c) foreign firms are less subject to the constraints of (c) 6%.
the plan than domestic ones. (d) 12%
(d) all of the above.
(e) none of the above. A 13. If the population growth rate is 2%, the
incremental capital output ratio is 3, the saving ratio is
A 5. An example of an institutional requirement for the 24% and the depreciation rate is 5%, the rate of growth
operation of effective private markets is of income per person is
(a) enforcement of contracts. (a) 1%.
(b) the ability of government to correctly project trends. (b) 2%.
(c) the ability of advertisers to influence consumers. (c) 3%.
(d) all of the above (d) 5%.
(e) 8%.
A 6. An example of a market-facilitating legal practice
is C 14. If the population growth rate is 2%, the
(a) clearly established property rights. incremental capital output ratio is 3, the saving ratio is
(b) corruption of government officials. 24%, and the depreciation rate is 5%, the rate of growth
(c) extensive licensing requirements for starting firms. of income is
(d) all of the above. (a) 1%.
(e) none of the above. (b) 2%.
(c) 3%.
C 7. A plan that sets targets to cover all major aspects (d) 5%.
of the national economy is known as a/an _____ plan: (e) 8%.
(a) interindustry
(b) complete A 15. In Ecuador, as a share of a firm's revenue, the
(c) comprehensive cost of bribes is highest for
(d) economic (a) micro enterprises.
(b) small enterprises.
B 8. Which of the following is a rationale for (c) medium enterprises.
development planning? (d) large enterprises.
(a) government failure.
(b) market failure.
(c) failure of consumers to understand their
preferences.
(d) all of the above are rationales for development
planning.
(e) none of the above are rationales for development
planning.
CHAPTER 10 INTERNATIONAL TRADE THEORY AND
DEVELOPMENT STRATEGY
1. GLOBALIZATION - The increasing integration of
national economies into expanding international
markets.
2. WORLD TRADE ORGANIZATION - Geneva-based
watchdog and enforcer of international trade
agreements since 1995; replaced the General
Agreement on Tariffs and Trade (GATT).
3. GENERAL AGREEMENT ON TARIFFS AND
TRADE (GATT) - An international body set up in
1947 to explore ways and means of reducing tariffs
on internationallybtraded goods and services;
replaced in 1995 by the World Trade Organization.
4. PRIMARY PRODUCTS - Products derived from all
extractive occupations—farming, lumbering, fishing,
mining, and quarrying, foodstuffs, and raw
materials.
5. EXPORT DEPENDENCE - A country’s reliance on
exports as the major source of financing for
development activities.
6. CURRENT ACCOUNT - The portion of a country’s
balance of payments that reflects the market value
of the country’s “visible” (e.g., commodity trade) and
“invisible” (e.g., shipping services) exports and
imports.
7. CAPITAL ACCOUNT - The portion of a country’s
balance of payments that shows the volume of
private foreign investment and public grants and
loans that flow into and out of the country.
8. FREE TRADE - The importation and exportation of
goods without any barriers in the form of tariffs,
quotas, or other restrictions.
9. INCOME ELASTICITY OF DEMAND - The
responsiveness of the quantity of a commodity
demanded to changes in the consumer’s income,
measured by the proportionate change in quantity
divided by the proportionate change in income.
10. PRICE ELASTICITY OF DEMAND - The
responsiveness of the quantity of a commodity
demanded to a change in its price, expressed as the
percentage change in quantity demanded divided by
the percentage change in price.
11. EXPORT EARNINGS INSTABILITY - Wide
fluctuations in developing country earnings on
commodity exports resulting from low price and
income elasticities of demand leading to erratic
movements in export prices.
12. COMMODITY TERMS OF TRADE - The ratio of a
country's average export price to its average import
price.
13. PREBISCH-SINGER HYPOTHESIS - The
argument that the commodity terms of trade for
primary-product exports of developing countries
tends to decline over time.
14. BARTER TRANSACTION - The trading of goods
directly for other goods in economies not fully
monetized.
15. COMPARATIVE ADVANTAGE - Production of a
commodity at a lower opportunity cost than any of
the alternative commodities that could be produced.
16. SPECIALIZATION - Concentration of resources in the
production of relatively few commodities.
17. ABSOLUTE ADVANTAGE - Production of a
commodity with the same amount of real resources
as another producer but at a lower absolute unit
cost.
18. FACTOR ENDOWMENT TRADE THEORY - The
neoclassical model of free trade, which postulates
that countries will tend to specialize in the
production of the commodities that make use of their
abundant factors of production (land, labor, capital,
etc.).
19. FACTOR PRICE EQUALIZATION - In factor
endowment trade theory, the proposition that
because countries trade at a common international
price ratio, factor prices among trading partners will
tend to equalize.
20. NORTH-SOUTH MODELS - Trade and
development theories that focus on the unequal
exchange between the North developed countries
and the South developing countries in an attempt to
explain why the South gains less from trade than the
North.
21. VENT-FOR-SURPLUS THEORY OF
INTERNATIONAL TRADE - The contention that
opening world markets to developing countries
through international trade allows those countries to
make better use of formerly underutilized land and
labor resources so as toproduce larger primary-
product outputs, the surpluses of which can be
exported.
22. SYNTHETIC SUBSTITUTES - Commodities that
are artificially produced but can be substituted for
the natural commodities (e.g., manufactured rubber,
cotton, wool, camphor, and pyrethrum).
23. PRODUCT STYLE - the progressive replacement of
more developed countries by less developed
countries in the production of manufactures of
increasing complexity.
24. RETURN TO SCALE - How much output expands
when all inputs are proportionately increased.
25. MONOPOLISTIC MARKET CONTROL - A situation
in which the output of an industry is controlled by a
single producer (or seller) or by a group of producers
who make joint decisions.
26. OLIGOPOLISTIC MARKET CONTROL - A
situation in which a small number of rival but not
necessarily competing firms dominate an industry.
27. INCREASING RETURNS - A disproportionate
increase in output that results from a change in the
scale of production.
28. PRODUCT DIFFERENTIATION - Attempts by
producers to distinguish their product from similar
ones through advertising or minor design changes.
29. RISK - A situation in which the probabilities of the
various possible outcomes are known, but the actual
outcome is not known.
30. UNCERTAINTY - A situation in which neither the
actual outcome nor even the precise probabilities of
the various possible outcomes are known.
31. GROWTH POLES - Regions that are more
economically and socially advanced than others
around them, such as urban centers versus rural
areas or highway corridors in developing countries.
32. INDUSTRIAL POLICY - Deliberate effort by
governments to guide the market by coordinating
and supporting specific industrial activities.
33. TARIFF - A fixed-percentage tax on the value of an
imported commodity levied at the point of entry into
the importing country.
34. QUOTA - a physical limitation on the quantity of any
item that can be imported into a country.
35. SUBSIDY - A payment by the government to
producers or distributors in an industry for such
purposes as preventing the decline of that industry,
expanding employment, increasing exports, or
reducing selected prices paid by consumers.
36. GAINS FROM TRADE - The increase in output and
consumption resulting from specialization in
production and free trade with other economic units,
including persons, regions, or countries.
37. BALANCED TRADE - A situation in which the value
of a country’s exports and the value of its imports
are equal.
38. ENCLAVE ECONOMIES - Small, economically
developed regions in developing countries in which
the remaining areas have experienced much less
progress.
39. FOREIGN- EXCHANGE EARNINGS - The sum
total of all foreign currency receipts less
expenditures during a given fiscal year.
40. OUWARD-LOOKING DEVELOPMENT POLICIES
- Policies that encourage exports, often through the
free movement of capital, workers, enterprises, and
students; a welcome to multinational corporations;
and open communications.
41. INWARD-LOOKING DEVELOPMENT POLICIES -
Policies that stress economic self-reliance on the
part of developing countries, including domestic
development of technology, the imposition of
barriers to imports, and the discouragement of
private foreign investment.
42. IMPORT SUBSTITUTION - A deliberate effort to
replace consumer imports by promoting the
emergence and expansion of domestic industries.
43. EXPORT PROMOTION - Governmental efforts to
expand the volume of a country’s exports through
increasing export incentives, decreasing
disincentives, and other means in order to generate
more foreign exchange and improve the current
account of its balance of payments or achieve other
objectives.
44. INTERNATIONAL COMMODITY AGREEMENT - A
formal agreement by sellers of a common
internationally traded commodity (e.g., coffee,
sugar) to coordinate supply to maintain price
stability.
45. MULTIFIBER ARRANGEMENT (MFA) - A set of
nontariff quotas established by developed countries
on imports of cotton, wool, synthetic textiles, and
clothing from individual developing countries.
46. TRADE DEFICIT - An excess of import
expenditures over export receipts measured on the
current account.
47. INFANT INDUSTRY - A newly established industry,
usually protected by a tariff barrier as part of a policy
of import substitution.
48. OFFICIAL EXCHANGE RATE - Rate at which the
central bank will buy and sell the domestic currency
in terms of a foreign currency such as the U.S.
dollar.
49. FREE-MARKET EXCHANGE RATE - Rate
determined solely by international supply and
demand for domestic currency expressed in terms
of, say, U.S. dollars.
50. OVERVALUED EXCHANGE RATE -An official
exchange rate set at a level higher than its real or
shadow value.
51. NONTARIFF TRADE BARRIER - A barrier to free
trade that takes a form other than a tariff, such as
quotas or (possibly arbitrary) sanitary requirements.
52. NOMINAL TRADE OF PROTECTION - An ad
valorem percentage tariff levied on imports.
53. EFFECTIVE RATE OF PROTECTION - The degree
of protection on value added as opposed to the final
price of an imported product—usually higher than
the nominal rate of protection.
54. VALUE ADDED - Amount of a product’s final value
that is added at each stage of production.
55. EXCHANGE CONTROL - A governmental policy
designed to restrict the outflow of domestic currency
and prevent a worsened balance of payments
position bycontrolling the amount of foreign
exchange that can be obtained or held by domestic
citizens.
56. DUAL EXCHANGE RATE (PARALLEL
EXCHANGE RATE) - Foreign exchange-rate
system with a highly overvalued and legally fixed
rate applied to capitaland intermediate-goods
imports and a second, illegal (or freely floating) rate
for imported consumption goods.
57. DEVALUATION - A lowering of the official
exchange rate between one country’s currency and
all other currencies.
58. DEPRECIATION (OF CURRENCY) - The decline
over time in the value or price of one currency in
terms of another as a result of market forces of
supply and demand.
59. FLEXIBLE EXCHANGE RATE - The exchange
value of a national currency that is free to move up
and down in response to shifts in demand and
supply arising from international trade and finance.
60. MANAGED FLOAT - A fluctuating exchange rate
that allows central bank intervention to reduce
erratic currency fluctuations.
61. WAGE-PRICE SPIRAL - A vicious cycle in which
higher consumer prices (e.g., as a result of
devaluation) cause workers to demand higher
wages, which in turn cause producers to raise prices
and worsen inflationary forces.
62. UNDERVALUED EXCHANGE RATE - An official
exchange rate set at a level lower than its real or
shadow value.
63. TRADE OPTIMISTS - Theorists who believe in the
benefits of free trade, open economies, and
outward-looking development policies.
64. TRADE PESSIMISTS - Theorists who argue that
without tariff protection or quantitative restrictions on
trade, developing countries gain little or nothing from
an exportoriented, open-economy posture.
65. NEW PROTECTIONISM - The erection of various
nontariff trade barriers by developed countries
against the manufactured exports of developing
nations.
66. TRADE LIBERALIZARION - Removal of obstacles
to free trade, such as quotas, nominal and effective
rates of protection, and exchange controls.
67. INDUSTRIALIZATION STRATEGY APPROACH -
A school of thought in trade and development that
emphasizes the importance of overcoming market
failures through government policy to encourage
technology transfer and exports of progressively
more advanced products.
68. ECONOMIC INTEGRATION - The merging to
various degrees of the economies and economic
policies of two or more countries in a region.
69. ECONOMIC UNION - The full integration of two or
more economies into a single economic entity.
70. REGIONAL TRADING BLOC - An economic
coalition among countries within a geographic
region, usually characterized by liberalized internal
trade and uniform restrictions on external trade,
designed to promote regional economic integration
and growth
71. CUSTOMS UNION - A form of economic integration
in which two or more nations agree to free all internal
trade while levying a common external tariff on all
nonmember countries.
72. FREE-TRADE AREA - A form of economic
integration in which free trade exists among member
countries, but members are free to levy tariffs on
nonmember countries.
73. COMMON MARKET - A form of economic
integration in which there is free internal trade, a
common tariff, and the free movement of labor and
capital among partner states.
74. AUTARKY - A closed economy that attempts to be
completely self-reliant.
75. TRADE CREATION - Shift, upon formation of a
customs union, in the location of production from
higher-cost to lower-cost member states.
76. TRADE DIVERSION - Shift, upon formation of a
customs union, of the location of production of
formerly imported goods from a lower-cost
nonmember state to a higher-cost member nation.
77. URUGUAY ROAD - A round of a General
Agreement on Tariffs and Trade negotiations,
started in Uruguay in 1986 and signed in 1994,
designed to promote international free trade.
 CHAPTER 10 (d) barter trade.

C 1. The ratio of a country's average export price to its
average import price is
(a) its absolute advantage.
(b) its comparative advantage.
(c) its terms of trade.
(d) its exchange rate.
C 2. According to the Prebisch-Singer thesis
(a) demand for primary products has steadily fallen.
(b) profits of primary producers have steadily fallen.
(c) primary producers' terms of trade have steadily fallen.
(d) prices of primary products have risen over time.
A 3. The purpose of commodity buffer stocks is
(a) to moderate price fluctuations.
(b) to raise commodity prices.
(c) to encourage commodity substitution.
(d) to guarantee national security.
C 4. Developing countries might be unable to respond smoothly to
changing international price signals because of
(a) a lack of government regulation.
(b) an abundance of skilled labor.
(c) inelastic supply curves.
(d) limited foreign exchange.
D 11. Which of the following statements is true?
(a) larger countries (in terms of size) tend to be more open
(in terms of larger share of exports in GDP) than smaller
countries and developing countries tend to be less open than
developed economies.
(b) larger countries (in terms of size) tend to be less open (in
terms of lower share of exports in GDP) than smaller
countries and developing countries tend to be less open than
developed economies.
(c) larger countries (in terms of size) tend to be more open
(in terms of larger share of exports in GDP) than smaller
countries and developing countries tend to be more open
than developed economies.
(d) larger countries (in terms of size) tend to be less open (in
terms of lower share of exports in GDP) than smaller
countries and developing countries tend to be more open
than developed economies.
C 12. The dependence on the export of one or two primary
products for a majority of the revenue from exports is most severe
in countries in
(a) South Asia.
(b) East Asia.
(c) Sub Saharan Africa.
(d) Latin America.

A 5. Autarchy as used in the text refers to C 13. The real price trendline for non fuel primary commodities
(a) an economy that does not trade. from 1960-2005 has been
(b) an economy that trades primary products in exchange for (a) Unchanged
manufactures. (b) Steadily increasing
(c) developing country dictatorships. (c) Steadily decreasing
(d) the caste system and related social structures. (d) First decreased and then increased.

D 6. Which of the following is an argument in favor of the A 14. The nominal rate of protection shows the extent to which
liberalization? the domestic price of imported goods exceeds
(a) Increased technical efficiency. (a) what the price would be without tariffs.
(b) Accelerated technical progress. (b) the cost of intermediate inputs.
(c) Decreased shortages of foreign exchange. (c) the social opportunity costs of the good.
(d) All of the above. (d) the no-trade equilibrium price.
(e) both (a) and (b) are correct.
D 15. The effective rate of protection is
A 7. Which of the following is an argument in favor of trade (a) value added with protection divided by value added
liberalization? without protection.
(a) Increased investment. (b) value added with protection.
(b) Infant industry. (c) value added without protection.
(c) Fluctuating export earnings. (d) (value added with protection minus value added without
(d) Increased government revenue. protection) divided by value added without protection.

B 8. Which of the following is an argument in favor of A 16. The average level of effective protection has exceeded 300%
interventionist trade policies? for which of the following countries?
(a) Cheaper capital goods. (a) Pakistan and Uruguay.
(b) Declining terms of trade. (b) Argentina and Brazil.
(c) Decreased losses from rent-seeking activities. (c) Philippines and Mexico.
(d) All of the above. (d) India and China.
(e) None of the above.
D 17. An economic community
B 9. Guiding the market through strategic coordination of business (a) attempts to raise prices by restricting quantity.
investments to increase export market shares is known as (b) seeks to stabilize commodity prices.
(a) development planning. (c) seeks concessional loans.
(b) industrial policy. (d) imposes a common external tariff.
(c) shifting terms of trade. (e) none of the above.
(d) all of the above.
(e) none of the above. B 18. The long-run social benefits of infant industry protection are
more likely to be realized if
A 10. The opening of export markets for primary products can (a) investors believe that tariff barriers are permanent.
provide employment for previously underutilized land and labor. (b) investors believe that tariff barriers are transitory.
The term for this is (c) tariff barriers increase over time.
(a) vent for surplus. (d) tariff barriers are replaced with quotas over time.
(b) comparative advantage.
(c) Prebisch-Singer thesis.
E 19. Which of the following factors makes the success of
economic integration more likely?
(a) Nationalism.
(b) Desire for prestige projects.
(c) Diverse economic systems.
(d) All of the above.
(e) None of the above.
A 20. Why is it impossible that all industries in a developing
country qualify as infant industries?
(a) You cannot have a comparative advantage in everything.
(b) You cannot have an absolute advantage in everything.
(c) This would violate international law.
(d) This would reduce the terms of trade.
B 21. Which of the following is not a reason why the prospects for
the further expansion of developing country commodity exports
are likely to be limited?
(a) Low income elasticities for these products.
(b) Low likelihood of development of further synthetic
substitutes.
(c) Continued agricultural protection despite trade
agreements.
(d) Declining terms of trade.
(b) depreciated.
(c) overvalued.
(d) undervalued.
A 29. In most less developed countries, the initial target of import
substitution is to promote domestic production of
(a) consumer goods.
(b) food and other agricultural goods.
(c) capital goods.
(d) manufactured intermediate goods.
D 30. Which of the following is not an argument in favor of export
promotion over import substitution?
(a) international competition compels domestic producers to
become more efficient.
(b) exposure to world markets provides greater opportunities
to learn new technologies.
(c) producing for export permits greater specialization and
economies of scale.
(d) outward-looking development promotes larger firms.

D 22. Which of the following is a major argument of trade

pessimists?
(a) Increased productivity of developed country agriculture.
(b) Increased efficiency in industrial use of raw materials.
(c) Protectionism against labor-intensive manufactures.
(d) All of the above

C 23. Which of the following is a major argument of trade

optimists?
(a) Industrial policy can increase productivity of developing
country manufacturing efficiency.
(b) New synthetic substitutes are constantly being
discovered and improved.
(c) Developing country efficiency would improve with trade
liberalization.
(d) All of the above.

B 24. Which of the following countries provides the best example

of a successful import substitution development strategy?
(a) Chile.
(b) Taiwan.
(c) Argentina.
(d) Botswana.

A 25. Which of the following is a nontariff barrier policy tool?

(a) Sanitary regulations.
(b) Average duties.
(c) Phased liberalization.
(d) Ad valorem tax.

D 26. Nontariff barriers

(a) decrease foreign exchange earnings.
(b) reduce the quantity of goods exported.
(c) lower the effective price received for exports.
(d) all of the above.

B 27. The most important role of the World Trade Organization is

(a) to promote market oriented economic policies.
(b) to settle trade disputes.
(c) to provide development assistance.
(d) to help countries choose the appropriate level of a tariff
or quota.

D 28. If the equilibrium exchange rate is 15 pesos per dollar and

the central bank fixes the exchange rate
at 17 pesos per dollar then we can conclude that the peso is
(a) appreciated.