4Econ 306 International EconomicsWinter Term 2008 First Midterm Jan 28th, 2008 DURATION: 80 MINUTES INSTRUCTOR: J Xu STUDENT NAME (PRINT): ___________________________STUDENT NUMBER:________________________________IMPORTANT INSTRUCTION1. PLEASE PRINT YOUR NAME AND WRITE YOUR STUDENT NUMBER.2. PLEASE RETURN BOTH YOUR ANSWER BOOKLET AND THIS QUESTION SHEET TOGETHER AT THE END OF EXAM.3. YOU ARE ASKED TO CLEARLY SHOW EACH STEP OF YOUR WORK WHEN YOU ANSWER THE QUESTIONS. THERE WILL BE NO MARK IF YOU ONLY PROVIDE THE FINAL ANSWER WITHOUT SHOWING YOUR STEPS OR WORK.4. YOUR ARE REQUIRED TO ANSWER ALL QUESTIONS IN THE BOOKLETS.5 THERE ARE THREE PARTS IN THIS EXAM. TEN MC QUESTIONS IN PART A, ONE SHORT ANSWER QUESTION IN PART B, AND TWO SHORT ESSAY QUESTIONS IN PART C. IN TOTAL 80 MARKS)GOOD LUCK!PART A MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. (2X10=20MARKS)1) The gravity model offers a logical explanation for the fact that 1) _______ A) trade in services has grown faster than trade in goods. B) Intra-European Union trade exceeds International Trade of the European Union. C) trade between Asia and the U.S. has grown faster than NAFTA trade. D) trade in manufactures has grown faster than in agricultural products. E) None of the above. 2) The two neighbors of the United States do a lot more trade with the United States than European economies of equal size. 2) _______ A) This contradicts predictions from gravity models. B) This is relevant to any inferences that may be drawn from gravity models. C) This is because these neighboring countries have exceptionally large GDPs. D) This is consistent with predictions from gravity models. E) None of the above. 3) Trade between two countries can benefit both countries if 3) _______ A) each country has a more elastic demand for the imported goods. B) each country exports that good in which it has a comparative advantage. C) each country enjoys superior terms of trade. D) each country has a more elastic supply for the exported goods. E) Both C and D. 4) In the Ricardian model, the Gains from Trade associated with the principle of Comparative Advantage depends on 4) _______ A) the trade partners must differ in technology or tastes. B) there may be no more trade partners than goods traded. C) there can be no more goods traded than the number of trade partners. D) All of the above. E) None of the above. 5) If a production possibilities frontier is bowed out (concave to the origin), then production occurs under conditions of 5) _______ A) increasing opportunity costs. B) decreasing opportunity costs. C) constant opportunity costs. D) infinite opportunity costs. E) None of the above. 6) In a two-country, two-product world, the statement "Germany enjoys a comparative advantage over France in autos relative to ships" is equivalent to 6) _______ A) France having a comparative advantage over Germany in ships. B) Germany having a comparative advantage over France in autos and ships. C) France having a comparative disadvantage compared to Germany in autos and ships. D) France having no comparative advantage over Germany. E) None of the above. 7) Suppose the United States' production possibility frontier was flatter to the widget axis, whereas Germany's was flatter to the butter axis. We now learn that the German mark sharply depreciates against the U.S. dollar. We now know that 7) _______ A) Germany has a comparative advantage in butter. B) the United States has a comparative advantage in butter. C) the United States has no comparative advantage D) Not enough information is given. E) None of the above. 8) In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the border would 8) _______ A) move the point of production along the production possibility curve. B) shift the production possibility curve outward, and increase the production of both goods. C) shift the production possibility curve outward and decrease the production of the capital-intensive product. D) shift the production possibility curve outward and decrease the production of the labor-intensive product. E) None of the above. 9) The Hechscher-Ohlin model states that a country will have a comparative advantage in the good or service whose production is relatively intensive in the ________ with which the country is relatively abundant. 9) _______ A) opportunity cost B) technology C) scale economy D) factor of production E) tastes 10) Given the information in the table above 10) ______ A) Home has a comparative advantage in cloth. B) Neither country has a comparative advantage. C) Foreign has a comparative advantage in both products. D) Foreign has a comparative advantage in cloth. E) Home has a comparative advantage in widgets. PART B SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) Refer to above figure. Two countries exist in this model, P and R. P is relatively labor (L) abundant, as is evident in the bottom right horizontal axis. If Country P were to be completely specialized in the labor-intensive product, Cloth (C), it would be producing at point 4. In fact, it produces both C and Food (F), at point 5. The (autarky) relative price of C (in terms of F) of Country P is at point 3; and of Country R at point 1. If trade were to open up between these two countries, which would export C and which would export F? Is this consistent with the Heckscher-Ohlin model? Explain. 11) _____________ PART C ESSAY. Write your answer in the space provided or on a separate sheet of paper. 12) An examination of the Ricardian model of comparative advantage yields the clear result that trade is (potentially) beneficial for each of the two trading partners since it allows for an expanded consumption choice for each. However, for the world as a whole the expansion of production of one product must involve a decrease in the availability of the other, so that it is not clear that trade is better for the world as a whole as compared to an initial situation of non-trade (but efficient production in each country). Are there in fact gains from trade for the world as a whole? Explain. 13) "A good cannot be both land- and labor-intensive." Discuss.