Economy and Foundations of Modern Trade Theories Multiple Choice Questions 1. A primary reason why nations conduct international trade is because: a)some nations prefer to produce one thing while others produce other things. b)resources are not equally distributed among all trading nations. c)trade enhances opportunities to accumulate profits. d)interest rates are not identical in all trading nations. 2. Free traders maintain that an open economy is advantageous in that it provides all of the following except a)increased competition for world producers. )a wider selection of products for consumers. c)the utilization of the most efficient production methods. d)relatively high wage levels for all domestic workers.

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3. International trade in goods and services tends to a)increase all domestic costs and prices. b)keep all domestic costs and prices at the same level. c)lessen the amount of competition facing home manufacturers. d)increase the amount of competition facing home manufacturers. 4. Technological improvements are similar to international trade since they both a)provide benefits for all producers and consumers. b)increase the nation's aggregate income. )reduce unemployment for all domestic workers. d)ensure that industries can operate at less than full capacity. 5. A sudden shift from import tariffs to free trade may induce short-term unemployment in: a)import-competing industries. b)industries that are only exporters. c)industries that sell domestically as well as export. d)industries that neither import nor export. 6. International trade tends to cause welfare losses to at least some groups in the country: a)The less mobile the country's resources. b)The more mobile the country's resources. c)The lower the country's initial living standard. ) The higher the country's initial living standard.

7. As a result of international trade, specialization in production tends to be: a)complete with constant costs - complete with increasing costs. b)complete with constant costs - incomplete with increasing costs. c)incomplete with constant costs - complete with increasing costs. d)incomplete with constant costs - incomplete with increasing costs. 8. If the international terms of trade settle at a level that is between each country's opportunity cost: a)there is no basis for gainful trade for either country. b)both countries gain from trade. )only one country gains from trade. d)one country gains and the other country losses from trade. 9. When a nation is in autarky and maximizes its living standards, its consumption and production points are: a)along the transformation curve. b)above the transformation curve. c)beneath the transformation curve. d)any of the above. Introduction to International Economics & Foundations of Modern Trade Theory Discussion Questions 1. If you are consulted by a dictatorial president of a closed economy, who is considering opening up the country, how would you advise the president. 2.

Maximum amount of steel or aluminum that Canada and France can produce if they fully use all the factors of production at their disposal with the best technology available to them is shown (hypothetically) in the table below. | |Canada |France | |Steel |300 |800 | |Aluminum |1200 |1600 |

Assume that production occurs under constant-cost conditions. In the absence of trade, assume Canada produces and consumers 400t of aluminum and 200t of steel, while France produces and consumes 600t of aluminum and 500t of steel. a) Determine the MRT of steel into aluminum for each country. a. According to the principle of comparative advantage, should the 2 countries specialize? b. If so, which product will each country produce? c. Will the extent of specialization be partial or complete? d.

Compared to the output of steel and aluminum that occurs under autarky, does specialization yield increase in total output? If so, by how much? b) Within what limits will the terms of trade lies if specialization and trade occur? Suppose Canada and France agree to the terms of trade ratio 1:1. Assuming also 500t of steel is traded for 500t of aluminum, a. Are Canadian consumers better off as a result of the trade? If so, by how much? b. Are French consumers better off too? If so, by how much? c. Will the two countries trade?

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