International Economics Review Questions 1. What is the difference between foreign direct investment and movements of portfolio capital? 2. What were the Mercantilists views on trade? 3. According to Adam Smith, what is the basis for trade and the structure of trade? How are the gains of trade generated? 4. Explain how a country can have an absolute disadvantage in the production of all goods, but still have a comparative advantage in the production of some goods 5. What is the basis for trade according to David Ricardo? How are the gains from trade generated? 6. With a constant level of world resources, international trade brings about an increase in total world output. Explain why this statement is true. 7. Graphically demonstrate how trade allows a country to consume at a point beyond its production possibilities frontier. 8. The following table shows the bags of flour and the bottles of wine that US and India can produce from one day of labor under four different hypothetical situations. For each case identify the commodity in which US and India have an absolute advantage or disadvantage. Flour (bags) Wine (bottles) a. From the table indicate for each case the commodity in which each country has comparative advantage or disadvantage b. Indicate for each case whether or not trade is possible and the basis for trade c. Suppose that in Case II, US exchanges 4 bags of flour for 4 bottles of wine with India. 1. How much does the US gain? 2. How much does India gain? 3. What is the range for the terms of trade for mutually beneficial trade? 4. How much would each country gain if they exchanged 4 bags of Flour for 6 bottles of Wine? 9. The following table shows the maximum output of Machines or Cloth that the US and India produce under constant cost conditions. Suppose that the terms of trade between the US is 1 Machine for 5 Yards of Cloth. Illustrate the trading possibilities curve for both countries. Assume that 2,000 Machines are traded for 10,000 yards of Cloth. Are the consumers in the US and India better off? If so, by how much? 1 2 3 2 2 2 2 1 4 Case I US India 1 4 Case II US India 1 4 Case III US India 1 4 Case IV US India 2 Cloth Machine US 30.000 5.000 India 12.000 3.000 10. What is a labor-intensive good? What is a labor abundant country? 11. Consider the following information on the factor endowments of two countries: Factor Endowments Labor Force Capital Stock Country B 30 million workers 200.000 machines Country C 15 million workers 400.000 machines a. Which country is relatively capital abundant? b. Which country is relatively labor abundant? c. Assuming that steel is capital intensive relative to textiles, which country will have a comparative advantage in the production of steel? Explain why. 12. Explain how international movement of goods tend to promote an equalization in factor prices 13. The factor-proportions theory demonstrates how international trade affects the distribution of income within a country. Explain why this statement is true 14. When trade begins, Country A imports textiles, the labor-intensive good. What does this imply about Country A’s factor endowments? Why? What is likely to be the effect of trade on wages in Country A? Why? What group of Country A would you expect to support free trade? Why? Who would oppose free trade in Country A? Why? 15. What is the Leontief paradox? 16. Distinguish between interindustry and intraindustry trade. 17. What is meant by economies of scale? Explain the difference between internal and external economies of scale 18. How can economies of scale be a basis for trade? 19. When trade begins, Country A imports textiles, the labor-intensive good. What does this imply about Country A’s factor endowments? Why? What is likely to be the effect of trade on wages in Country A? Why? What group of Country A would you expect to support free trade? Why? Who would oppose free trade in Country A? Why? 20. In what sense are international movements of the factors of production a substitute for international trade in goods? 21. What is the meaning of foreign direct investment? List some factors that induce companies to invest abroad 22. Explain the effects of foreign direct investment on the welfare of source country, host country and the world 23. Why do you think labor in the US would oppose US foreign direct investment abroad? 24. What are the motives for international migration of labor? Explain the effects of labor migration 25. Why are multinational corporations important? What are the reasons for their existence? 26. How would you define the word tariff? 27. What is ad valorem tariff and specific tariff? 28. Describe consumer and producer surplus 29. Define export subsidy and import quota 30. What is the difference between tariff and quota? 31. State the arguments for and against trade 32. Give a short description of the GATT and the WTO 33. List some trade policies of high performance Asian economies (HPAEs) 34. What is the anti-globalization movement about? 35. What is exchange rate? List the major participants in the foreign exchange market
