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Student Number: _________________ Student Name:___________________ Section:_________________________

Wilfrid LAURIER UNIVERSITY

Department of Economics EC239 Introduction to International Trade Midterm Examination March 2, 2010
Instructor: Sharif F. Khan

Time Limit: 1 Hour 15 Minutes Instructions:

Important! Read the instructions carefully before you start your exam. Mark your selections for PART A on the multiple choice answer card in PENCIL. If you make changes, be sure to erase completely. Please record your name, student number and class section on the multiple choice answer card. Hand in the card inside your answer booklet. Write your answers for Part B and Part C in the booklet provided. Please record your name, student number and class section on the answer booklet and on the exam question paper. Hand in the exam question paper inside the answer booklet.

Marking Scheme:
Part A [30 marks] Fifteen multiple-choice questions 2 marks each Part B [10 marks] Two of Three True/ False/Uncertain questions 5 marks each Part C [25 marks] One multi-part problem solving questions

Calculators: Non-programmable calculators are permitted

Page 1 of 7 Pages

Part A

Multiple-Choice Questions

[30 Marks]

Each question is worth 2 marks. There is no negative marking for wrong answers. Answer all questions on the multiple choice answer card in PENCIL. If you make changes, be sure to erase completely. Please record your name and student number on the multiple choice answer card. Hand in the card inside your answer booklet. To answer each question correctly, you have to choose the best answer from the given five choices. 1) The gravity model offers a logical explanation for the fact that 1) _______ A) Trade in services has grown faster than trade in goods. B) Intra-European Union trade exceeds International Trade of the European Union. C) Trade between Asia and the U.S. has grown faster than NAFTA trade. D) Trade in manufactures has grown faster than in agricultural products E) None of the above. 2) The gravity model suggests that over time 2) _______ A) trade between Earth and other planets will become important B) trade between neighboring countries will increase C) trade between all countries will increase D) world trade will eventually be swallowed by a black hole. E) None of the above. 3) Since World War II, the relative importance of raw materials, including oil, in total world trade 3) _______ A) decreased B) remained constant C) increased D) fluctuated widely with no clear trend E) both A and D above. 4) In the pre-World War I period, the United Kingdom exported primarily 4) _______ A) manufactured goods B) technology intensive products C) services D) primary products including agricultural E) None of the above.

Page 2 of 7 Pages

5) A country engaging in trade according to the principles of comparative advantage gains from trade because it 5) _______ A) is producing imports indirectly using fewer labor units. B) is producing imports indirectly more efficiently than it could domestically. C) is producing exports indirectly more efficiently than it could alternatively. D) is producing exports using fewer labor units. E) None of the above. 6) Given the following information:
Unit Labor Requirements Cloth Home 15 Foreign 2 Widgets 5 4

6) _______ A) Foreign has a comparative advantage in cloth. B) Home has a comparative advantage in both products. C) Home has a comparative advantage in cloth. D) Neither country has a comparative advantage. E) Foreign has a comparative advantage in widgets. 7) Continuing from Question #6, if the free-trade equilibrium price of widgets were 2 Cloths, then 7) _______ A) both countries could benefit from trade with each other. B) neither country could benefit from trade with each other. C) only Home could benefit from trade with Foreign. D) only Foreign could benefit from trade with Home. E) None of the above. 8) A nation engaging in trade according to the Ricardian model will find its consumption bundle 8) _______ A) on its production possibilities frontier. B) inside its trade-partner's production possibilities frontier. C) on its trade-partner's production possibilities frontier. D) inside its production possibilities frontier. E) outside its production possibilities frontier. 9) Assume that labor is the only factor of production and that wages in the United States equal $10 per hour while wages in Japan are $5 per hour. Production costs would be higher in the United States as compared to Japan if 9) _______ A) U.S. labor productivity equaled 50 and Japan's 30. B) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour. C) U.S. labor productivity equaled 50 and Japan's 20 units per hour. D) U.S. productivity equaled 30 units per hour whereas Japan's was 15. E) None of the above.

Page 3 of 7 Pages

10) If two countries in Autarky (not engaged in international trade) begin trading with other in a manner consistent with the Ricardian model of comparative advantage, then 10) ______ A) The amount of labor required to produce one unit of imports will decrease only in the relatively labor abundant country B) The amount of labor required to produce one unit of imports will decrease in both countries. C) The amount of labor required to produce one unit of both products will decrease in both countries. D) The amount of labor required to produce one unit of imports will decrease only in the relatively capital abundant country. E) None of the above. 11) Assume that only two countries, A and B, exist. Consider the following data:
Countries Factor Endowments Labor Force Capital Stock A 60 30 B 30 10

If the production of good S is labor intensive and the production of good T is capital intensive, then following the Heckscher-Ohlin Theory, 11) ______ A) country B will export good S. B) country A will export good S. C) both countries will export good T. D) country B will export good T. E) Insufficient information is given. 12) Continuing from Question #11, you now are told that the labor unions representing the workers in each of the two respective countries are considering lobbying against the opening of international trade between these two countries. Note that workers' income is derived solely from wages. 12) ______ A) This would be a good decision for both unions since trade hurts workers wherever they live. B) This would be a good decision from the viewpoint of workers in Country A since international trade helps the capitalists and hurts the workers in Country A. C) This would be a misguided decision from the viewpoint of the workers in both countries, since trade is always better than autarky. D) This would be a good decision from the viewpoint of workers in Country B since international trade helps the owners of capital and hurts the workers in Country B. E) None of the above.

Page 4 of 7 Pages

13) The Leontieff Paradox 13) ______ A) refers to the fact that Leontieff-an American economist-had a Russian name. B) refers to the finding that U.S. Exports were more capital intensive than its exports. C) still accurately applies to today's pattern of U.S. international trade. D) refers to the finding that U.S. exports were more labor intensive than its imports. E) refers to the finding that the U.S. produces outside its Edgeworth Box. 14) The Case of the Missing Trade refers to 14) ______ A) the fact that the Heckscher Ohlin theory predicts much less volume of trade than actually exists. B) the 9th volume of the Hardy Boys' Mystery series. C) the fact that world exports does not equal world imports. D) the fact that factor trade is less than predicted by the Heckscher-Ohlin theory. E) None of the above. 15) One way in which the Heckscher-Ohlin model differs from the Ricardo model of comparative advantage is by assuming that __________ is (are) identical in all countries. 15) ______ A) factor of production intensities B) factor of production endowments C) opportunity costs D) scale economies E) technology

Page 5 of 7 Pages

Part B

Short Questions

[10 marks]

Answer any two of the following three questions in the answer booklet. Each question is worth 5 marks. B1. Mexico and Brazil have very different trading patterns. Mexico trades mainly with the United States, Brazil trades about equally with the United States and with the European Union; Mexico does much more trade relative to its GDP. Explain these differences using the gravity model.

B2. Discuss the three reasons for which factor prices are not equalized in the real world.

B3. Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector (higher in some industries, lower in others), while the United States is still considerably more productive in the service sector. But most services are nontraded. Some analysts have argued that this poses a problem for the United Sates, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument?

Page 6 of 7 Pages

Part C

Problem Solving Questions

[25 marks]

Answer the following question in the answer booklet. Read each part of the question very carefully. Show all the steps of your calculations to get full marks. C1. Assume that there only two countries in the world Home and Foreign. Home has 2100 units of labor available. It can produce only two goods, apples and bananas, using labor as the only factor of production. In Home, the unit labor requirement in both apple and banana production is 3. On the other hand, Foreign has 700 units of labor available. It can also produce only two goods, apples and bananas, using labor as the only factor of production. Foreigns unit labor requirement in apple production is 4, while in banana production it is 1. a. Graph both Homes and Foreigns production possibility frontiers. Clearly label the axes and the curves, and identify the intercepts. [4 marks] b. Calculate the opportunity cost of producing apples in terms of bananas in both Home and Foreign. [2 marks] c. In the absence of trade, what would the price of apples in terms of bananas be in both countries? Why? [3 marks] d. Construct the world relative supply curve. Explain clearly the steps of deriving world relative supply curve in details. Illustrate it on a diagram. Clearly label the axes and the curve, and identify the intercepts and the critical points. [7 marks] Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples. e. Graph the world relative demand curve along with the world relative supply curve. Clearly label the axes and the curves, and identify at least four points through which the world relative demand curve will go through. [2 marks] f. What the free-trade equilibrium relative price of apples. Clearly show the equilibrium relative price of apples on the diagram you drew for part (e). [2 marks] g. Describe the pattern of specialization and trade. [2 marks] h. Discuss the division of the gains from trade between Home and Foreign. [3 marks]

Page 7 of 7 Pages