| In Smith’s absolute advantage theory of trade, | both countries will gain from trade if each exports that product for which it has lower labor costs |
| David Hume’s price-specie-flow doctrine demonstrates that | trade surpluses and the resulting revenue inflows will cause domestic prices to rise, making the trade surpluses temporary rather than permanent |
| Ricardo’s principle of comparative advantage shows that | even a country with no absolute cost advantage can gain from trade by exporting that product in which its absolute cost disadvantage is relatively least |
| If each worker in Argentina can produce either 3 bushels of wheat or 1 auto, and each worker in Brazil can produce either 4 bushels of wheat or 2 autos, | Brazil has absolute advantage in wheat and autos, but Argentina has a comparative advantage in wheat |
| In Question 4, a barter exchange rate that would bring about mutually beneficial trade between Argentina and Brazil is | 5 bushels of wheat for 2 autos |
| A central policy lesson of the principle of comparative advantage is that a nation gains from international trade | by gaining access to imports at lower opportunity costs than if it produced those goods domestically |
| With increasing rather than constant opportunity costs, trade between nations results in | incomplete specialization, with the opportunity cost of producing exports rising within each nation |
| Mill’s theory of reciprocal demand | showed how both demand and supply must be considered to determine the equilibrium terms of trade between two nations |
| If trade occurs between a larger and much smaller nation, | the smaller nation will get most gains from trade |
| Empirical studies of actual international trade patterns | provide partial support for Ricardo, but find his labor theory of value to have severe limitations |
| In the Heckscher-Ohlin factor endowment theory of comparative advantage, | a nation’s comparative advantage depends on how well endowed it is with specific factors of production such as labor and capital, relative to its trading partners |
| In the Heckscher-Ohlin theory, two nations have the potential for mutual gains from trade with each other if | their transformation schedules reflect different relative abilities to produce labor and capital-intensive goods, based on their relative resource endowments |
| If a labor-abundant nation trades freely with a capital-abundant nation, there will be a tendency for | wages to rise in the first nation relative to wages in the second nation |
| The empirical finding known as the Leontief paradox was that | U.S. exports were more labor-intensive than U.S. imports, even though the United States is regarded as a capital-abundant nation |
| Potential explanations for the Leontief paradox include all of the following except | the United States actually has a larger relative labor force than its major trading partners |
| According to the product life cycle model, | a new product initially produced in the United States may later be exported from developing nations to the United States, once it becomes a mature, standardized product |
| Linder’s overlapping demand theory of trade | maintains that manufactured goods are first produced for the home market, then exported to nations with similar levels of per capita GNP |
| The growing importance of intraindustry trade | often involves differentiated products in industries where economies of scale are present |
| Differences in environmental regulations between nations are most likely to affect production location and trade patterns when | the regulations deal with production pollution such as air pollutions from steel manufacturing |
| The existence of transportation costs in international trade | creates a gap between the prices of goods in the exporting nation and in the importing nation, and reduces the volume of trade |
| A nominal $1 tariff per pair of imported shoes is | a specific tariff |
| The benefit that a tariff providers for domestic firms to compensate for their inefficiency relative to foreign producers is the | protective effect |
| The increased profits that a tariff provides for domestic firms is the | redistributive effect |
| Foreign trade zones | enable domestic companies to defer duties on imported inputs until they are processed and shipped to market |
| A tariff quota | establishes a lower tariff on an initial quantity of imports, and a higher tariff on imports beyond that level |
| If small nation imposes a tariff (small-nation model), | the losses to domestic consumers exceed the gains to domestic firms and to the domestic government |
| If a large nation imposes a tariff (large-nation model), | the net loss to consumers may be less than the benefits from improved terms of trade |
| The effective tariff rate or effective rate of protection is | higher than the nominal tariff rate if nominal tariffs on inputs are lower than the tariff on imports of an industry’s final product |
| The argument that saving jobs at home requires tariffs to offset the advantages of lower wages in other countries | does not consider the impact of labor productivity differences of the potential for comparative disadvantage |
| “Fair” trade policies to create a “level playing field” | are designed to establish import barriers that are comparable to those imposed by a nation’s trading partners |
| A global import quota | creates uncertainty about market access for individual exporting nations |
| An import quota that reduces imports to the same level as would an equivalent ad valorem tariff will | most likely generate less government revenue than would the tariff |
| A nation that uses an import quota rather than an import tariff to protect its domestic industry will find that over time, as demand for this industry’s product increases, | price will rise more rapidly than with a tariff |
| In comparison with an import quota, a voluntary export restraint… | creates potential export opportunities for nonrestrained suppliers |
| A local content requirement | reduces imports by specifying that a minimum percentage of a product’s total value must be produced domestically |
| A domestic subsidy to enable an industry to compete against imports | avoids the deadweight consumer surplus loss of a tariff because it does not distort |
| A nation that uses an export subsidy will find that | its export volume will increase |
| A nation that reduces export prices to offset the effects of a domestic recession is engaging in | sporadic dumping |
| A nation that enables an emerging industry to sell exports at prices below production costs in order to weaken foreign competition is engaging in | predatory dumping |
| Nontarrif barriers include all of the following except | a corporate income tax |
| The Smoot-Hawley Act of 1930 | represented the highest tarrif levels in U.S. history |
| The rationale for a scientific tariff is to | raise import prices to the extent that foreign production costs are lower than domestic costs |
| The Reciprocal Trade Agreements Act of 1934 | made reductions in U.S. tariffs contingent on the willingness of trading partners to lower their tariffs |
| Compared with the Tokyo Round, the Uruguay Round of GATT negotiations focused primarily on | trade in professional services an agricultural products |
| The escape clause is part of trade remedy law designed to | provider temporary relief for workers and firms disrupted by reductions in tariffs or other trade barriers |
| A countervailing duty | protects firms from injury caused by foreign export subsidies |
| A Japanese government export subsidy would | create an overall welfare gain for the United States, as U.S. consumers would gain more than U.S. firms would lose |
| U.S. industrial policy includes all the following except: | nationalization of key industries such as steel |
| Strategic trade policy | often involves subsidies and other support for high-technology firms in concentrated industries |
| Economic sanctions against foreign nations are most successful | when influential groups within the target nation support the objectives of sanction-imposing government |
| Deteriorating commodity terms of trade refers to the contention that, for developing countries, | prices of their primary product exports have fallen over time relative to prices of their manufactured imports |
| Primary product prices tend to fluctuate significantly because | supply and demand are inelastic with respect to price |
| The manager of an international commodity buffer stock would be expected to | purchase commodities when price is below target level |
| Buffer stocks often have been excessive and costly to maintain because | target prices have exceeded equilibrium levels |
| Import substitution is a development strategy in which countries | use tariffs to promote domestic production of manufactured goods previously imported |
| Export promotion is a development strategy in which countries | try to industrialize by supporting manufactured products in which they have a potential comparative advantage |
| The United Nations Conference on Trade and Development | was established in the mid 1960’s as a forum to lobby for a new international economic order |
| The generalized system of preferences | involves a selective reduction of industrial nation tariffs on imports of manufactured goods from developing nations |
| The term “newly industrializing countries” refers to | a group of East Asian nations that have used export promotion strategies to support industrialization |
| OPEC’s ability to maintain a successful oil cartel depended on | the ability of OPEC to enforce production cutbacks among its members |
| A credit on the U.S. balance of payments will result if | Sony of Japan purchases computer software from Microsoft of the United States |
| A debit on the U.S. balance of payments will result if | Lloyds of London sells an insurance policy to Chrysler Corporation |
| The U.S. balance of payments impact of a $3,000 payment by an immigrant farm worker in the United States to family members in Mexico would be | a debit on the unilateral transfers account |
| The U.S. balance of payments impact of a $5 million profit repatriation payment by a subsidiary of IBM in France to its parent corporation in the United States would be | a credit under income receipts and payments, on the current account |
| The capital and financial account of the balance of payments includes all the following except | dividends and interest received from foreign investments |
| A current account balance-of-payments surplus implies an | excess of exports over imports of goods, services, and unilateral transfers |
| An outlaw of official reserve assets would be recorded as a | capital and financial account credit |
| The difference between a nation’s balance of payments and its balance of international indebtedness | reflects the difference between flow and stock concepts |
| A nation’s net foreign investment position will worsen or decline if it’s balance of payments shows a | current account deficit |
| A nation that wants to reduce its net indebtedness to other nations would be advised to | reduce its merchandise trade deficits |
| A preferential trading arrangement with free trade among members and different external tariffs set by each member is | a free trade area |
| A preferential trading arrangement with free trade among members, a common external tariff, and free movement of labor and capital among members is | a common market |
| A preferential trading arrangement with free trade among members and a common external tariff is | a customs union |
| Suppose that Country A has domestic firms that could supply its entire market for Product X at a price of $10, while Country B firms could supply Product X at $8 and Country C firms at $6. If Country A initially has a 50 percent tariff on imports of Product X and then forms a free trade area with Country B. | trade diversion and potential welfare losses for Country A will occur |
| In Question 4, suppose instead that Country A initially has a 100 per cent tariff on imports of Product X; if all other assumptions remain the same | trade creation and welfare gains for A will occur |
| Potential dynamic effects of economic integration include all the following except | trade creation because of importing from a more efficient partner country |
| The common agricultural policy (CAP) of the EU | protects EU farmers with variable levies and uses subsidies to finance the export of surplus produce |
| One historical example of movement toward a complete economic union is | the EC Masstricht Summit of 1991 |
| The North American Free Trade Agreement calls for | eventual free trade among Canada, Mexico, and the United States |
| Trade between Eastern European nations and Western nations frequently includes all of the following features except | exports and imports financed by payment in hard currencies such as U.S. dollars of Swiss francs |
