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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.
• 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
(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
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:
(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:
Steel Wood
Home 20 40
Foreign 10 5
(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: