Question 1

According to the Ricardian Model of Comparative Advantage, which of the following statements is correct?

Accepted Answer

A country should specialize in producing the good for which it has the lowest opportunity cost.

Question 2

Suppose Country A can produce 10 units of cloth or 5 units of wine with one unit of labor, while Country B can produce 6 units of cloth or 3 units of wine with one unit of labor. According to the Ricardian Model, which good should Country A export?

Accepted Answer

Country A should export cloth because it has a comparative advantage in cloth.

Question 3

In the Specific Factors Model, which of the following is true when the price of the export good increases?

Accepted Answer

The return to the specific factor used in the export sector increases.

Question 4

Which of the following best describes the Heckscher-Ohlin Model's prediction about trade patterns?

Accepted Answer

Countries export goods that use their abundant factors intensively.

Question 5

If a country imposes a tariff on an imported good, what is the likely short-run effect on domestic producers and consumers of that good?

Accepted Answer

Domestic producers benefit and domestic consumers are worse off.

Question 6

Suppose the world price of steel is $$100 per ton. If a country imposes a 20 $$per ton tariff, what is the domestic price of steel after the tariff, assuming the country is a small open economy?

Accepted Answer

$120 per ton

Question 7

Which of the following equations represents the condition for equilibrium in the goods market in an open economy?

Accepted Answer

$$Y = C + I + G + NX$$

Question 8

In the context of imperfect competition and trade policy, what is a strategic trade policy?

Accepted Answer

A policy that aims to shift profits from foreign to domestic firms in industries with oligopolistic competition.

Question 9

According to the concept of terms of trade, which of the following best describes an improvement in a country's terms of trade?

Accepted Answer

The price of its exports rises relative to the price of its imports.

Question 10

If the production possibility frontier (PPF) of a country is linear, what does this imply about opportunity costs?

Accepted Answer

Opportunity costs are constant.

Question 11

Suppose two countries, Home and Foreign, both produce wheat and cars. Home is labor-abundant, and Foreign is capital-abundant. According to the Heckscher-Ohlin Model, which good is Home likely to export?

Accepted Answer

Wheat, if it is labor-intensive.

Question 12

Which of the following is a likely effect of trade liberalization in a developing country according to the Stolper-Samuelson theorem?

Accepted Answer

The real return to the abundant factor increases.

Question 13

A quota differs from a tariff in which of the following ways?

Accepted Answer

A quota sets a physical limit on imports, while a tariff imposes a tax on imports.

Question 14

If a country moves from autarky to free trade, what is the expected effect on consumer surplus and producer surplus in the import-competing sector?

Accepted Answer

Consumer surplus increases, producer surplus decreases.

Question 15

Which of the following best explains intra-industry trade between developed countries?

Accepted Answer

Product differentiation and economies of scale.

Question 16

Suppose the government subsidizes exports of a good. What is the likely effect on the world price and domestic price of the good in a small open economy?

Accepted Answer

The domestic price rises to the world price plus the subsidy, but the world price remains unchanged.

Question 17

Which of the following is a key assumption of the Specific Factors Model?

Accepted Answer

Some factors of production are immobile between sectors in the short run.

Question 18

If the Nash equilibrium in a trade policy game results in both countries imposing tariffs, what does this outcome illustrate?

Accepted Answer

A prisoner's dilemma, where both countries are worse off than if they had cooperated.

Question 19

Which of the following formulas correctly represents the opportunity cost of producing one unit of good X in terms of good Y in the Ricardian Model?

Accepted Answer

$$	ext{Opportunity Cost of X} = \frac{a_{LX}}{a_{LY}}$$

Question 20

Suppose a country faces increasing returns to scale in the production of a good. What is the likely effect of opening up to trade on the structure of that industry?

Accepted Answer

The industry will become more concentrated, with fewer, larger firms.

International Trade Theory and Policy: Syllabus and Study Guide

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