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Title Name amity assignment for MBA IB on International Economics and Policy
University AMITY
Service Type Assignment
Course MBA
Semister Semester-III-Int.Bus.. Cource: MBA
Short Name or Subject Code International Economics and Policy
Commerce line item Type Semester-III-Int.Bus.. Cource: MBA
Product Assignment of MBA Semester-III-Int.Bus.. (AMITY)

Solved Assignment


  Questions :-

International Economics & Policy

1 .        A century ago, most French imports came from relatively distant locations: North America, Latin America, and Asia. Today, most French imports come from European countries. How does this fit with the changing types of goods that make up world trade?      

2 .        Canada and Australia are mainly English-speaking countries with populations that are not too different in size (Canada is 60 percent larger.) But Canadian trade is twice as large, relative to GDP, as Australia´s. Why should this be the case?         

3 .        How does the fact that many goods are nontraded affect the extent of possible gains from trade?

4 .        Suppose that there are many countries capable of producing two goods and that each country has only one factor of production, labour. What could we say about the pattern of production and trade in this case?  

5 .        "The world´s poorest countries cannot find anything to export. There is no resource that is abundant - certainly nor capital or land, and in small poor nations not even labour is abundant." Discuss.       

6 .        In many developed countries, labour movements represent blue-collar workers rather than professionals and highly educated workers, and traditionally favour limits on imports from less-affluent countries. Is this a shortsighted policy or a rational one in view of the interests of union members? How does the answer depend on the model of trade?          

7 .        In some economies relative supply may be unresponsive to changes in prices. For example, if factors of production were completely immobile between sectors, the production possibility frontier would be right-angles, and output of the two goods would not depend on their relative prices. Is it still true in this case that a rise in the terms of trade increases welfare?    

8 .        It is just as likely that economic growth will worsen a country´s terms of trade as that it will improve them. Why, then, do most economists regard immeserizing growth, where growth actually hurts the growing country, as unlikely in practice?   

Case Detail: 

Another major reason that international trade may take place is the existence of economies of scale (also called increasing returns to scale) in production. Economies of scale means that production at a larger scale (more output) can be achieved at a lower cost (i.e. with economies or savings). When production within an industry has this characteristic, specialization and trade can result in improvements in world productive efficiency and welfare benefits that accrue to all trading countries. Trade between countries need not depend upon country differences under the assumption of economies of scale. Indeed, it is conceivable that countries could be identical in all respects and yet find it advantageous to trade. For this reason, economies of scale models are often used to explain trade between countries like the US, Japan and the European Union. For the most part these countries, and other developed countries, have similar technologies, endowments and to some extent similar preferences. Using classical models of trade (Ricardian, Heckscher-Ohlin), these countries would have little reason to engage in trade. And yet, trade between the developed countries makes up a significant share of world trade. Economies of scale can provide an answer for this type of trade. Another feature of international trade that remains unexplained with classical models is the phenomenon of intra-industry trade. A quick look at the aggregate trade data reveals that many countries export and import similar products. For example, the US imports and exports automobiles, it imports and exports machine tools, it imports and exports steel, etc. To some extent intra-industry trade arises because many different types of products are aggregated into one category. For example, many different types of steel are produced, from flat-rolled to specialty steels. It may be that production of some types of steel require certain resources or technologies in which one country has a comparative advantage. Another country may have the comparative advantage in another type of steel. However, since all of these types are generally aggregated into one export/import category, it could appear as if the countries are exporting and importing "identical" products when in actuality they are exporting one type of steel and importing another type.

  1. In perfect competition, firms set price equal to marginal cost. Why isn´t this possible when there are internal economies of scale?
  2. Give two examples of products that are traded on international markets for which there are dynamic increasing returns. In each of your examples, show how innovation and learning-by-doing are important to the dynamic increasing returns in the industry.
  3. There are shops in Japan that sell Japanese goods imported back from the United States at a discount over the prices charged by other Japanese shops. How is this possible?

Question No.  1           Marks - 10

In the long run, countries with faster inflation have had       

Options          

 appreciating currencies          

 no change in the value of their currencies     

 depreciating currencies         

 at some times and in some places, appreciating currencies, while at other times in other places, depreciating currencies.

Question No.  2           Marks - 10

Which of the following observations about a tariff is not true? A tariff:      

Options          

 is usually an ad valorem tax  

 can raise revenues for the imposing government      

 usually benefits domestic producers more than consumers  

 can be used to protect foreign industries

Question No.  3           Marks - 10

An economic transaction is recorded in the balance of payments as a debit if it leads to    

Options          

 a payment to foreigners        

 the receipt of payments from foreigners       

 an increase in foreign exchange reserves      

 neither an inflow or an outflow of value.

Question No.  4           Marks - 10

Which of the following is not recorded as a debit item in the U.S. balance-of-payments accounts?           

Options          

 U.S. grain company engages Russian ships to carry U.S. wheat to Russian ports.  

 the U.S. Treasury contributes $1 million to the United Nations Development Fund.         

 a French firm sells 25-year bonds, valued at $100 million, in the United States     

 a West German firm pays $3 million in interest to the holders of its bonds in the US.

Question No.  5           Marks - 10

Which of the following is true with respect to the infant industry argument for protection?           

Options          

 It does not refer to temporary protection to establish a domestic industry. 

 To be valid, the return to the grown-up industry need not be sufficiently high to repay for the higher prices paid by domestic consumers of the commodity during the infancy period.  

 It is inferior to an equivalent production subsidy to the infant industry.     

 None of the above.

Question No.  6           Marks - 10

The nationally optimal tariff hopes to take advantage of the idea that         

Options          

 you can increase domestic producers’ well-being by keeping foreign competition minimal

 you can limit imports and extract low import prices from  foreign suppliers if you are a major world buyer          

 you can gain optimal tariff revenues for public purposes by taxing foreign imports

 you can charge optimal (minimal) tariffs and encourage good will from trade partners, leading to tariff-free exports for domestic producers and workers

Question No.  7           Marks - 10

Intra industry trade is more likely to occur between 

Options          

 rich and poor countries         

 countries with high and similar income levels          

 developing countries             

 developed and developing countries

Question No.  8           Marks - 10

If the general level of prices in the United States increases relative to prices in Japan,        

Options          

 the value of the dollar will likely depreciate relative to the yen.      

 the value of the dollar will likely appreciate relative to the yen.      

 the value of the dollar will likely remain constant relative to the yen.         

 not enough information is given.

Question No.  9           Marks - 10

The organization responsible for mediating trade disputes is the      

Options          

 International Monetary Fund.           

 World Trade Organization.   

 World Bank. 

 The G-7 Countries.

Question No.  10         Marks - 10

The optimal monopoly markup is       

Options          

 higher with more elastic demand for cartel sales      

 higher with less elastic demand for cartel sales        

 lower with less elastic demand for cartel sales         

 higher with more elastic supply schedules

Question No.  11         Marks - 10

An international cartel that maximizes its profits is optimal for        

Options          

 the member countries and the world

 the member countries but not the world       

 the consuming countries and the world        

 no country at all

Question No.  12         Marks - 10

The characteristics of quotas and tariffs are described correctly by which of the following:           

Options          

 tariffs assure a certain final price for imports, but not as surely as a quota does.     

 quotas assure a certain limited quantity of imports, but not as well as a tariff does.           

 quotas assure a certain final price for imports better than a tariff does.       

 tariffs do not assure a certain limited quantity of imports as a quota does.

Question No.  13         Marks - 10

Intervention at the source of a distortion in resource allocation problems and the use of policy tools closest to the sources of the distortions is called     

Options          

 public policy 

 benefit/cost analysis  

 the specificity rule     

 resource allocation

Question No.  14         Marks - 10

The best and probably rarest way to allocate import licenses is        

Options          

 applying rational rather than arbitrary (bureaucratic) criteria to award import licenses on the basis of merit.         

 avoiding injustice and favoritism by granting the scarce and highly demanded licenses on a purely random basis (regarded as the “lottery effect” of license distribution).      

 inviting the countries or firms who want to sell the commodity in question to participate in a competitive auction to be held by the customs agency of the importing country for import licenses.          

 achieving equity by assigning fixed shares to firms according to the market shares they have previously enjoyed in the market in question.           

Question No.  15         Marks - 10

“When a country exports a commodity produced with intensive use of its abundant factor, that factor’s returns will rise.” This statement is           

Options          

 The Hecksher-Ohlin theory   

 the Stolper-Samuelson Theorem       

 The Leontief paradox           

 the modern trade theory       

Question No.  16         Marks - 10

“Countries export commodities produced through the intensive use of factors which they possess in abundance. Labor abundant countries export labor-intensive commodities and import capital-intensive commodities.” This statement is    

Options          

 Classical Smith/Ricardo trade theory           

 the Stolper-Samuelson Theorem       

 The Leontief paradox           

 None of the above

Question No.  17         Marks - 10

The best way to characterize monopolistic competition is     

Options          

 a product group of ten to fifteen firms         

 a product group of fifteen to twenty firms   

 a product group with the same demand curve          

 a product group which perceives no interdependence

Question No.  18         Marks - 10

Wine costs $10, cloth costs fr 30 and the dollar exchange rate is fr 6.   The wine price in terms of cloth is:           

Options          

 3 cloth           

 3 wine           

 2 cloth           

 5 wine

Question No.  19         Marks - 10

Economies of scale are more likely to occur in          

Options          

 a small scale textile industry 

 the footwear industry           

 the aircraft industry  

 small business

Question No.  20         Marks - 10

In a monopolistic competition model of trade           

Options          

 if two countries have the same overall capital labor ratio there is no trade  

 there are gains from trade from an increased variety of goods and large firm scale

 firms earn positive economic profits in the long run 

 factor endowments do not play any role in determining inter industry trade

Question No.  21         Marks - 10

In the Heckscher Ohlin model, international trade is based mostly on a difference in         

Options          

 technology    

 product differentiation         

 economies of scale    

 factor endowments   

Question No.  22         Marks - 10

Intra-industry trade (IIT) is   

Options          

 the result of nations following their comparative advantage.           

 the result of capital-intensive nations trading with labor-intensive nations. 

 trade among the various firms of a single industry in one country.  

 two-way international trade in very similar products.

Question No.  23         Marks - 10

Biased growth implies           

Options          

 trade patterns cannot change

 the growing economy will have increased willingness to trade        

 the growing economy will have decreased willingness to trade       

 either b or c could be true.

Question No.  24         Marks - 10

According to modern (“alternative”) trade theory,   

Options          

 trade depends on scale economies, not consumer preferences         

 trade depends on consumer preferences, not scale economies.        

 historical quirks can lead to external economies which promote trade advantages  

 trade patterns are unrelated to the industrial or market structures (monopolistic competition or oligopoly) of traded goods.

Question No.  25         Marks - 10

Ricardo explained the law of comparative advantage on the basis of          

Options          

 opportunity costs      

 the law of diminishing returns          

 economies of scale    

 the labor theory of value

Question No.  26         Marks - 10

In terms of international trade, a small nation is best described as one which          

Options          

 is of limited geographical size           

 is land-locked nation without sea ports        

 doesn’t have many sellers     

 has small numbers of buyers and sellers

Question No.  27         Marks - 10

The nationally optimal tariff hopes to take advantage of the idea that         

Options          

 you can increase domestic producers’ well-being by keeping foreign competition minimal

 you can limit imports and extract low import prices from  foreign suppliers if you are a major world buyer          

 you can gain optimal tariff revenues for public purposes by taxing foreign imports

 you can charge optimal (minimal) tariffs and encourage good will from trade partners, leading to tariff-free exports for domestic producers and workers

Question No.  28         Marks - 10

“When a country exports a commodity produced with intensive use of its abundant factor, that factor’s returns will rise.” This statement is           

Options          

 The Hecksher-Ohlin theory   

 the Stolper-Samuelson Theorem       

 The Leontief paradox           

 the modern trade theory

Question No.  29         Marks - 10

“In tests run in the late 1940s, it was discovered that the U.S. was actually exporting labor-intensive goods and importing capital-intensive goods.” This statement is           

Options          

 The Hecksher-Ohlin theory   

 the Stolper-Samuelson Theorem       

 The Leontief paradox           

 the modern trade theory

Question No.  30         Marks - 10

Which of the following statements is correct?          

Options          

 Real GDP is the total market value of the final goods and services produced in America for sale in a year valued in the prices of 1992.     

 Your buying stock in the stock market is an example of investment spending        

 Potential Real GDP is always greater than Equilibrium       

 Real GDP

Question No.  31         Marks - 10

The period of the business cycle in which real GDP is increasing is called the:        

Options          

 expansion      

 peak   

 recession        

 trough

Question No.  32         Marks - 10

Assume that, in the population, 95 million people worked for pay last week, 5 million people did not work for pay but had been seeking a job, 5 million people did not work for pay and had not been seeking a job for the past several months, and 45 million were under age 16.  The unemployment rate, given these numbers, is:       

Options          

 5%     

 8%     

 10%   

 20%

Question No.  33         Marks - 10

A type of unemployment in which workers are in-between jobs or are searching for new and better jobs is called _______ unemployment:       

Options          

 frictional        

 cyclical          

 structural       

 turnover 

Question No.  34         Marks - 10

Consider three consumer goods: 100 of Good A, 100 of Good B, and 100 of Good C.  In the base year, Good A sold at a price of $1, Good B sold at a price of $1, and Good C sold at a price of $1.  In the current year, Good A sold at a price of $3, Good B sold at a price of $5, and Good C sold at a price of $10.  The Consumer Price Index (CPI) for the current year is:  

Options          

 100    

 300    

 500    

 600

Question No.  35         Marks - 10

Which of the following is a "loser" from unexpected inflation?       

Options          

 workers with COLAs           

 the middle class        

 people who own Treasury Bills         

 people who own homes and have fixed-rate mortgages       

Question No.  36         Marks - 10

If the nominal interest rate on a checking account is 2% and the inflation rate is 3% this year, the real interest rate is:           

Options          

 5%     

 25      

 2/3%  

 –1%

Question No.  37         Marks - 10

Which of the following would cause the demand curve for automobiles to shift to the left?          

Options          

 an increase in the price of the automobiles   

 an increase in the interest rate paid to borrow money to pay for the automobile     

 an increase in buyers´ incomes          

 an increase in the cost of production of automobiles

Question No.  38         Marks - 10

Suppose it is announced that industry analysts are predicting that decreased oil supplies from Iraq will cause gasoline prices to rise, beginning next month.  In the current week, the announcement would:        

Options          

 shift the supply of gasoline right      

 shift the demand for gasoline right   

 shift the demand for gasoline left     

 have no effect on the demand or supply of gasoline

Question No.  39         Marks - 10

"At the price of $500, tickets for the Super Bowl are expensive.  Yet, the are long lines of people who wish to buy them.  Many people who desire tickets will not be able to find them." From this quote, we know that the price of Super Bowl tickets must be:  

Options          

 below equilibrium     

 above equilibrium      

 equal to equilibrium  

 None of the above

Question No.  40         Marks - 10

Assume that the market for computers begins in equilibrium.  Then, there is a decrease in a price of Pentium processors used in the production of computers.  When the new equilibrium is reached,    

Options          

 the price and quantity of computers will both have risen     

 the price and quantity of computers will both have fallen   

 the price of computers will have risen and the quantity will have fallen      

 the price of computers will have fallen and the quantity will have risen      

  Answers :-

International Economics & Policy

  1. A century ago, most French imports came from relatively distant locations: North America, Latin America, and Asia. Today, most French imports come from European countries. How does this fit with the changing types of goods that make up world trade?

Answer:-       

  1. Canada and Australia are mainly English-speaking countries with populations that are not too different in size (Canada is 60 percent larger.) But Canadian trade is twice as large, relative to GDP, as Australia´s. Why should this be the case?

Answer:-       

  1. How does the fact that many goods are nontrade affect the extent of possible gains from trade?

Answer:- Manufacturing plays a number of key roles in the economy. It offers good wages and excellent benefits to a larger share of workers with less than a college degree than does the rest of the economy. Manufacturing also provides good jobs with excellent wages and benefits to minority workers. Simultaneously, manufacturing employs more than twice as many scientists and engineers, as a share of employment, as does the rest of the economy. Finally, manufacturing is responsible for about two-thirds of private-sector research and development. As a result, manufacturing has historically enjoyed relatively high productivity growth, which has supported high wages and good benefits for its workers.

Most traded goods are manufactured products. In 2011, about 97.8 per cent of U.S. imports from and 66.7 per cent of U.S. exports to China were manufactured goods. Trade deficits displace or eliminate jobs, especially in manufacturing. This report takes our previous research on trade and manufacturing a step further and calculates what trade losses mean to the livelihoods of average workers, particularly the minority workers who make up a disproportionate share of jobs lost due to growing trade deficits. Growing U.S. trade deficits with China between 2001 and 2011 displaced a disproportionately large number of good jobs for minority workers—958,800 good jobs with excellent benefits, 35.0 per cent of total jobs displaced. Minorities suffered large trade-related wage losses of $10,485 per worker in 2011.

There was evidence of racial disparities in the wage data, controlling for differences in education levels. However, the jobs displaced by growing imports paid minority workers more than jobs in nontrade industries: 6.1 per cent more for Hispanics, 12.0 per cent more for blacks, 35.0 per cent more for Asians, 45.5 per cent more for “other” minority workers, and 25.5 per cent for all minority workers. Wages in the computer and electronic products sector are high, even higher than average manufacturing wages, and therefore they are also higher than wages in nontraded industries. Nearly three-fourths (74.3 percent) of the workers in this industry sector earned wages in the top half of the income distribution.

Well over three-fourths (81.1 per cent) of the jobs displaced in computer and electronic products by growing China trade deficits required some college or more education, and because of the very high wage premiums in this industry, these losses hit minority workers especially hard. Blacks working in computer and electronic products earned 15.9 per cent more and Asians earned 29.4 per cent more than workers of the same race/ethnicity in all manufacturing industries; blacks in this industry earned 29.3 per cent more and Asians earned 47.9 per cent more than workers of the same race/ethnicity in nontrade industries.          

It is important to note that the wage effects identified in this paper are purely the result of between-industry shifts in trade-related employment. Trade is also changing the composition of employment within industries. Though such within-industry shifts are not assessed in this report, they may mitigate some of the job losses among highly educated workers in many of the industries included in this study, especially the computer and electronic products industry, which has an especially important impact, as shown below. Bivens (2008) presents evidence and analysis and reviews literature showing that trade has increased the demand for college-educated labour within certain industries. Bivens’s analysis suggests that trade within industries such as computer and electronic products likely involves substantial “vertical specialization” in production, with labour-intensive activities such as computer assembly being shifted abroad while more skill- and capital-intensive activities such as semiconductor design and production of advanced integrated circuits are taking place in the United States. Such within-industry shifts can increase the demand for college-educated labour at home, relative to demand for workers with less education.

  1. Suppose that there are many countries capable of producing two goods and that each country has only one factor of production, labour. What could we say about the pattern of production and trade in this case?

Answer:- There are many countries capable of producing two goods and that each country has only one factor of production, labour. If there is a point on which most economists agree, it is that trade among nations makes the world better off. Yet international trade can be one of the most contentious of political issues, both domestically and between governments.

When a firm or an individual buys a good or a service produced more cheaply abroad, living standards in both countries increase. There are other reasons consumers and firms buy abroad that also make them better off—the product may better fit their needs than similar domestic offerings or it may not be available domestically. In any case, the foreign producer also benefits by making more sales than it could selling solely in its own market and by earning foreign exchange (currency) that can be used by itself or others in the country to purchase foreign-made products.

Still, even if societies as a whole gain when countries trade, not every individual or company is better off. When a firm buys a foreign product because it is cheaper, it benefits—but the (more costly) domestic producer loses a sale. Usually, however, the buyer gains more than the domestic seller loses. Except in cases in which the costs of production do not include such social costs as pollution, the world is better off when countries import products that are produced more efficiently in other countries.      

Trade contributes to global efficiency. When a country opens up to trade, capital and labour shift toward industries in which they are used more efficiently. That movement provides society a higher level of economic welfare. However, these effects are only part of the story.

Trade also brings dislocation to those firms and industries that cannot cut it. Firms that face difficult adjustment because of more efficient foreign producers often lobby against trade. So do their workers. They often seek barriers such as import taxes (called tariffs) and quotas to raise the price or limit the availability of imports. Processors may try to restrict the exportation of raw materials to depress artificially the price of their own inputs. By contrast, the benefits of trade are spread diffusely and its beneficiaries often do not recognize how trade benefits them. As a result, opponents are often quite effective in discussions about trade. The World Trade Organization (WTO) referees international trade. Agreements devised since 1948 by its 153 members (of the WTO and its predecessor General Agreement on Trade and Tariffs) promote non-discrimination and facilitate further liberalization in nearly all areas of commerce, including tariffs, subsidies, customs valuation and procedures, trade and investment in service sectors, and intellectual property. Commitments under these agreements are enforced through a powerful and carefully crafted dispute settlement process.

Under the rules-based international trading system cantered in the WTO, trade policies have become more stable, more transparent, and more open. And the WTO is a key reason why the global financial crisis did not spark widespread protectionism. However, as seen most recently with the Doha Round of WTO trade negotiations, the institution faces big challenges in reaching agreements to open global trade further. Despite successes, restrictive and discriminatory trade policies remain common. Addressing them could yield hundreds of billions of dollars in annual global benefits. But narrow interests have sought to delay and dilute further multilateral reforms. A focus on the greater good, together with ways to help the relatively few that may be adversely affected, can help to deliver a fairer and economically more sensible trading system.

5."The world´s poorest countries cannot find anything to export. There is no resource that is abundant - certainly nor capital or land, and in small poor nations not even labour is abundant." Discuss.

Answer:- In our modern world, wealth depends on trade, in goods or services. Trade depends on infrastructure, and infrastructure in turn depends on investment. This is the essence of development. The more ‘developed’ a country is, the more money it is capable of making. So in talking about poor countries, we are talking about Less Economically Developed Countries (LEDCs – This is a better term than ‘the developing world’, as some poor countries may not actually be developing, but standing still or even shrinking.) In asking ourselves why some countries are poor, what we need to work out is why they are not developing. And there are several reasons, with geographical, political, and cultural factors all coming in to play.

One of the most important factors in development is geography, where the country is in the world, and climate. It’s no coincidence that the poorest countries are in the tropics, where it is hot, the land is less fertile and water is scarcer, where diseases flourish. Conversely, Europe and North America profit from huge tracts of very fertile land, a temperate climate, and good rainfall. In extremes of climate, either hot or cold, too much energy goes into the simple business of survival for there to be much leftover energy for development. You have to work twice as hard to get enough to eat out of the ground, you have to irrigate where others can depend on rainfall. It may be too hot to work between 11 and 2, so you lose three hours out of every day. Rain patterns may give you a short growing season, while others can get two harvests in one year.

Every country has been dealt a hand in natural resources. It takes infrastructure to capitalise on these, but some places have a distinct advantage over others. Oil is the most obvious. Nobody is any doubt about how Saudi Arabia or UAE make their money. Among other advantages, gold and diamonds have helped South Africa build the most successful economy on the continent. These are all non-renewable resources – once they’re gone, they’re gone, but while stocks last there is wealth to be made. Besides these there are renewable resources – forests, fish, stocks that, if correctly managed, will refresh themselves. Much South American development has been based on the Amazon rainforest, in natural rubber and then timber. Finally, there is what is sometimes called ‘flow resources’. These are renewables that need no management, wind, tide and solar resources. The Earth Policy Institute describes the American Great Plains as ‘the Saudi Arabia of wind energy’, while sunshine-rich places like California, Sicily and Portugal are able to invest in solar power. No natural resource is a license to print money, and there are plenty of poor countries who are rich in resources, but it is a factor.

Discrimination

Sometimes there are social or cultural factors that hold back poor countries. Discrimination is one of these. If there are certain people groups that are discriminated against, the country’s overall productivity can suffer. This may be a tribe, a caste, a racial category or minority language group. I have already mentioned Cameroon, which has both French speaking and English speaking regions. All the infrastructure happens in the French speaking part. French speakers in Canada complain of the opposite. Welsh speakers in Britain, or Catalans in Spain, have historically faced similar problems. Racial discrimination may be an issue, excluding certain groups from economic activity, either deliberately or not. Racial minorities regularly have poorer exam results and economic prospects than the majority. More serious forms of exclusion would be apartheid South Africa, or the Asian communities driven out of Uganda under Idi Amin, which was disastrous for Uganda’s economy.

Population

Closely linked to this is the population issue. If women see staying at home and bringing up children as their chief role, they will have more children than those who work. There is nothing wrong with having lots of children, as long as you can provide for them. Jeffrey Sachs again: ‘With fewer children, a poor household can invest more in the health and education of each child, thereby equipping the next generation with the health, nutrition, and education that can lift living standards in future years.

  1. In many developed countries, labour movements represent blue-collar workers rather than professionals and highly educated workers, and traditionally favour limits on imports from less-affluent countries. Is this a short-sighted policy or a rational one in view of the interests of union members? How does the answer depend on the model of trade?

Answer:-

  1. In some economies relative supply may be unresponsive to changes in prices. For example, if factors of production were completely immobile between sectors, the production possibility frontier would be right-angles, and output of the two goods would not depend on their relative prices. Is it still true in this case that a rise in the terms of trade increases welfare?

Answer:-

  1. It is just as likely that economic growth will worsen a country´s terms of trade as that it will improve them. Why, then, do most economists regard mesmerizing growth, where growth actually hurts the growing country, as unlikely in practice?

Answer:-

Case Detail: 

Another major reason that international trade may take place is the existence of economies of scale (also called increasing returns to scale) in production. Economies of scale means that production at a larger scale (more output) can be achieved at a lower cost (i.e. with economies or savings). When production within an industry has this characteristic, specialization and trade can result in improvements in world productive efficiency and welfare benefits that accrue to all trading countries. Trade between countries need not depend upon country differences under the assumption of economies of scale. Indeed, it is conceivable that countries could be identical in all respects and yet find it advantageous to trade. For this reason, economies of scale models are often used to explain trade between countries like the US, Japan and the European Union. For the most part these countries, and other developed countries, have similar technologies, endowments and to some extent similar preferences. Using classical models of trade (Ricardian, Heckscher-Ohlin), these countries would have little reason to engage in trade. And yet, trade between the developed countries makes up a significant share of world trade. Economies of scale can provide an answer for this type of trade. Another feature of international trade that remains unexplained with classical models is the phenomenon of intra-industry trade. A quick look at the aggregate trade data reveals that many countries export and import similar products. For example, the US imports and exports automobiles, it imports and exports machine tools, it imports and exports steel, etc. To some extent intra-industry trade arises because many different types of products are aggregated into one category. For example, many different types of steel are produced, from flat-rolled to specialty steels. It may be that production of some types of steel require certain resources or technologies in which one country has a comparative advantage. Another country may have the comparative advantage in another type of steel. However, since all of these types are generally aggregated into one export/import category, it could appear as if the countries are exporting and importing "identical" products when in actuality they are exporting one type of steel and importing another type.

 

  1. In perfect competition, firms set price equal to marginal cost. Why this possible when isn’t there are internal economies of scale?

Answer:- When conditions of perfect competition hold, it has been proven that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium will be a Pareto optimum, meaning that nobody can be made better off by exchange without making someone else worse off.

Such markets are allocatively efficient, as output will always occur where marginal cost is equal to marginal revenue (MC = MR). But perfectly competitive markets are not necessarily productively efficient as output will not always occur where marginal cost is equal to average cost (MC = AC).

In perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost (P = MC). This implies that a factor´s price equals the factor´s marginal revenue product. It allows for derivation of the supply curve on which the neoclassical approach is based. This is also the reason why "a monopoly does not have a supply curve". The abandonment of price taking creates considerable difficulties for the demonstration of a general equilibrium except under other, very specific conditions such as that of monopolistic competition.

Real markets are never perfect, but range from close-to-perfect to very imperfect. Share and foreign exchange markets are commonly said to be the most similar to the perfect market. The real estate market is an example of a very imperfect market. In such markets, the Theory of the second best proves that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal. In economics, returns to scale and economies of scale are related but different terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable (chosen by the firm). The term returns to scale arises in the context of a firm´s production function. It explains the behavior of the rate of increase in output (production) relative to the associated increase in the inputs (the factors of production) in the long run. In the long run all factors of production are variable and subject to change due to a given increase in size (scale). While economies of scale show the effect of an increased output level on unit costs, returns to scale focus only on the relation between input and output quantities.

The laws of returns to scale are a set of three interrelated and sequential laws: Law of Increasing Returns to Scale, Law of Constant Returns to Scale, and Law of Diminishing returns to Scale. If output increases by that same proportional change as all inputs change then there are constant returns to scale (CRS). If output increases by less than that proportional change in inputs, there are decreasing returns to scale (DRS). If output increases by more than that proportional change in inputs, there are increasing returns to scale (IRS). A firm´s production function could exhibit different types of returns to scale in different ranges of output. Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high output levels, and constant returns at one output level between those ranges.

  1. Give two examples of products that are traded on international markets for which there are dynamic increasing returns. In each of your examples, show how innovation and learning-by-doing are important to the dynamic increasing returns in the industry.

Answer:- Market dynamics are pricing signals that are created as a result of changing supply and demand levels in a given market. Market dynamics describes the dynamic, or changing, price signals that result from the continual changes in both supply and demand of any particular product or group of products. Market dynamics is a fundamental concept in supply, demand and pricing economic models. As we move well into 2017, the price of oil remains volatile as markets digest the impact of a new U.S. administration, production cuts by OPEC and the geopolitics of Brexit. Like any other year, the price of crude oil is being driven by a variety of factors: public policy, relative supply and demand by region, the interaction of crude and refined product prices, perceptions of oil market reality as well as that reality itself, and corporate, institutional and consumer behaviour. Today, those factors are playing out in different ways around the globe; although they’re contributing to uncertainty, we’ve seen them put a firmer floor under the price of oil markets in recent months. Where the oil markets go from here remains to be seen, but there are a several variables to monitor, including:

The energy industry is laser-focused, So far the plans discussed include: creating U.S. jobs through increased shale production, increasing the U.S. energy output through ramping up production of oil, natural gas and other energy resources, and, importantly, a less constrained attitude toward the exports of energy resources. The export policies have already had a positive impact on the U.S. balance of payments and the dollar. How these plans continue to evolve under the new administration will shape the crude and refined oil markets on an international scale. The perception of a potentially inflationary global environment, combined with current interest rate policies, is yielding a strong financial interest in oil. Driven by concerns that we may see a return of inflation, market participants are turning to commodities to provide inflationary protection. With index-protected or linked bonds forming a major part of sovereign issuance, one might think there was plenty of protection available to asset-liability institutions like insurance and pension funds, but the fall in real interest rates has dragged down yields for those index-linked sovereign bonds and pushed up prices to the extent that they are also somewhat tied to the overall yield curve. That makes oil instruments relatively attractive as an alternative hedge against inflation, as oil prices typically pick up rapidly and early in inflationary cycles.

  1. There are shops in Japan that sell Japanese goods imported back from the United States at a discount over the prices charged by other Japanese shops. How is this possible?

Answer:-  The Japanese producers are price discriminating (“dumping”) across United States and Japanese markets, so that the goods sold in the United States are much cheaper than those sold in Japan. It may be profitable for other Japanese to purchase these goods in the United States, incur any tariffs and transportation costs, and resell the goods in Japan. Clearly, the price differential across markets must be nontrivial for this to be profitable. (i.e. the foreign and domestic markets are not sufficiently “segmented”). I have a little thing for fashion from Japan. Unfortunately most of the stuff is either not available in foreign countries at all or heavily overpriced. And that’s all because so many Japanese online shops don’t offer international shipping. It’s rare when one does, actually. This sucks because the good stuff is more than often sold exclusively in Japan. At least when it comes to Japanese brands. And don’t forget about all these exclusives…

But we’re lucky: Some business-minded fellows offer a service called “proxy buying”. These guys buy the desired items for you and then ship them to your place. All this for a fee but it’s still a lot cheaper than buying Japanese brands from the UK or US where prices tend to be astronomical. 70£ or 90$ for a Bape Tee against the 6,000¥ it costs in its origin country is just ridiculous. Or more graphical: 80€ against 50€, or 90$ against 60$. For the same product.

Of course you can always get hit by customs and if you add up duty fees and maybe a service charge for the proxy seller, the price difference might notbe that big. But usually it’s a lot cheaper buying directly from Japan. Not to speak of the fact that only a small portion of the Japanese brand’s output is available in the UK and US

Sometimes it’s even tough to find the right online shop inside Japan to order from. After all online shopping isn’t as popular in Japan as it is in the West (even if it’s getting more steam lately with thousands of people struggling to pay their bills from amazon and co).

Question No.  1           Marks - 10

In the long run, countries with faster inflation have had       

Options          

  1. Appreciating currencies
  2. No change in the value of their currencies
  3. depreciating currencies
  4. At some times and in some places, appreciating currencies, while at other times in other places, depreciating currencies.

Question No.  2           Marks - 10

Which of the following observations about a tariff is not true? A tariff:      

Options          

  1. is usually an ad valorem tax
  2. can raise revenues for the imposing government
  3. usually benefits domestic producers more than consumers
  4. can be used to protect foreign industries

Question No.  3           Marks - 10

An economic transaction is recorded in the balance of payments as a debit if it leads to    

Options          

  1. a payment to foreigners
  2. the receipt of payments from foreigners
  3. an increase in foreign exchange reserves
  4. neither an inflow or an outflow of value.

Question No.  4           Marks - 10

Which of the following is not recorded as a debit item in the U.S. balance-of-payments accounts?           

Options          

  1. S. grain company engages Russian ships to carry U.S. wheat to Russian ports.
  2. the U.S. Treasury contributes $1 million to the United Nations Development Fund.
  3. a French firm sells 25-year bonds, valued at $100 million, in the United States
  4. a West German firm pays $3 million in interest to the holders of its bonds in the US.

Question No.  5           Marks - 10

Which of the following is true with respect to the infant industry argument for protection?           

Options          

  1. It does not refer to temporary protection to establish a domestic industry.
  2. To be valid, the return to the grown-up industry need not be sufficiently high to repay for the higher prices paid by domestic consumers of the commodity during the infancy period.
  3. It is inferior to an equivalent production subsidy to the infant industry.
  4. None of the above.

Question No.  6           Marks - 10

The nationally optimal tariff hopes to take advantage of the idea that         

Options          

  1. you can increase domestic producers’ well-being by keeping foreign competition minimal
  2. you can limit imports and extract low import prices from foreign suppliers if you are a major world buyer 
  3. you can gain optimal tariff revenues for public purposes by taxing foreign imports
  4. you can charge optimal (minimal) tariffs and encourage good will from trade partners, leading to tariff-free exports for domestic producers and workers

Question No.  7           Marks - 10

Intra industry trade is more likely to occur between 

Options          

  1. rich and poor countries
  2. countries with high and similar income levels
  3. developing countries
  4. developed and developing countries

Question No.  8           Marks - 10

If the general level of prices in the United States increases relative to prices in Japan,        

Options          

  1. the value of the dollar will likely depreciate relative to the yen.
  2. the value of the dollar will likely appreciate relative to the yen.
  3. the value of the dollar will likely remain constant relative to the yen.
  4. not enough information is given.

Question No.  9           Marks - 10

The organization responsible for mediating trade disputes is the      

Options          

  1. International Monetary Fund.
  2. World Trade Organization.
  3. World Bank.
  4. The G-7 Countries.

Question No.  10         Marks - 10

The optimal monopoly mark-up is     

Options          

  1. higher with more elastic demand for cartel sales
  2. higher with less elastic demand for cartel sales
  3. lower with less elastic demand for cartel sales
  4. higher with more elastic supply schedules

Question No.  11         Marks - 10

An international cartel that maximizes its profits is optimal for        

Options          

  1. the member countries and the world
  2. the member countries but not the world
  3. the consuming countries and the world
  4. no country at all

Question No.  12         Marks - 10

The characteristics of quotas and tariffs are described correctly by which of the following

Options          

  1. tariffs assure a certain final price for imports, but not as surely as a quota does.
  2. quotas assure a certain limited quantity of imports, but not as well as a tariff does.
  3. quotas assure a certain final price for imports better than a tariff does.
  4. tariffs do not assure a certain limited quantity of imports as a quota does.

Question No.  13         Marks - 10

Intervention at the source of a distortion in resource allocation problems and the use of policy tools closest to the sources of the distortions is called     

Options          

  1. public policy  
  2. benefit/cost analysis
  3. the specificity rule
  4. resource allocation

Question No.  14         Marks - 10

The best and probably rarest way to allocate import licenses is        

Options          

  1. applying rational rather than arbitrary (bureaucratic) criteria to award import licenses on the basis of merit.
  2. avoiding injustice and favoritism by granting the scarce and highly demanded licenses on a purely random basis (regarded as the “lottery effect” of license distribution).
  3. inviting the countries or firms who want to sell the commodity in question to participate in a competitive auction to be held by the customs agency of the importing country for import licenses.
  4. achieving equity by assigning fixed shares to firms according to the market shares they have previously enjoyed in the market in question.

Question No.  15         Marks - 10

“When a country exports a commodity produced with intensive use of its abundant factor, that factor’s returns will rise.” This statement is           

Options          

  1. The Hecksher-Ohlin theory
  2. the Stolper-Samuelson Theorem
  3. The Leontief paradox
  4. the modern trade theory

Question No.  16         Marks - 10

“Countries export commodities produced through the intensive use of factors which they possess in abundance. Labor abundant countries export labor-intensive commodities and import capital-intensive commodities.” This statement is    

Options          

  1. Classical Smith/Ricardo trade theory
  2. the Stolper-Samuelson Theorem
  3. The Leontief paradox           
  4. None of the above
  5. The modern trade theory

Question No.  17         Marks - 10

The best way to characterize monopolistic competition is     

Options          

  1. a product group of ten to fifteen firms
  2. a product group of fifteen to twenty firms
  3. a product group with the same demand curve
  4. a product group which perceives no interdependence

Question No.  18         Marks - 10

Wine costs $10, cloth costs fr 30 and the dollar exchange rate is fr 6.   The wine price in terms of cloth is:           

Options          

  1. 3 cloth
  2. 3 wine
  3. 2 cloth
  4. 5 wine

Question No.  19         Marks - 10

Economies of scale are more likely to occur in          

Options          

  1. a small scale textile industry
  2. the footwear industry
  3. the aircraft industry
  4. small business

Question No.  20         Marks - 10

In a monopolistic competition model of trade           

Options          

  1. if two countries have the same overall capital labor ratio there is no trade
  2. there are gains from trade from an increased variety of goods and large firm scale
  3. firms earn positive economic profits in the long run
  4. factor endowments do not play any role in determining inter industry trade

Question No.  21         Marks - 10

In the Heckscher Ohlin model, international trade is based mostly on a difference in         

Options          

  1. technology
  2. product differentiation
  3. economies of scale
  4. factor endowments

Question No.  22         Marks - 10

Intra-industry trade (IIT) is   

Options          

  1. the result of nations following their comparative advantage.
  2. the result of capital-intensive nations trading with labor-intensive nations.
  3. trade among the various firms of a single industry in one country.
  4. two-way international trade in very similar products.

Question No.  23         Marks - 10

Biased growth implies           

Options          

  1. trade patterns cannot change
  2. the growing economy will have increased willingness to trade
  3. the growing economy will have decreased willingness to trade
  4. Either b or c could be true.

Question No.  24         Marks - 10

According to modern (“alternative”) trade theory,   

Options          

  1. trade depends on scale economies, not consumer preferences
  2. trade depends on consumer preferences, not scale economies.
  3. historical quirks can lead to external economies which promote trade advantages
  4. trade patterns are unrelated to the industrial or market structures (monopolistic competition or oligopoly) of traded goods.

Question No.  25         Marks - 10

Ricardo explained the law of comparative advantage on the basis of          

Options          

  1. opportunity costs
  2. the law of diminishing returns
  3. economies of scale
  4. the labor theory of value

Question No.  26         Marks - 10

In terms of international trade, a small nation is best described as one which          

Options          

  1. is of limited geographical size
  2. is land-locked nation without sea ports
  3. doesn’t have many sellers
  4. has small numbers of buyers and sellers

Question No.  27         Marks - 10

The nationally optimal tariff hopes to take advantage of the idea that         

Options          

  1. you can increase domestic producers’ well-being by keeping foreign competition minimal
  2. you can limit imports and extract low import prices from foreign suppliers if you are a major world buyer 
  3. you can gain optimal tariff revenues for public purposes by taxing foreign imports
  4. you can charge optimal (minimal) tariffs and encourage good will from trade partners, leading to tariff-free exports for domestic producers and workers

Question No.  28         Marks - 10

“When a country exports a commodity produced with intensive use of its abundant factor, that factor’s returns will rise.” This statement is           

Options          

  1. The Hecksher-Ohlin theory
  2. the Stolpher-Samuelson Theorem
  3. The Leontief paradox
  4. the modern trade theory

Question No.  29         Marks - 10

“In tests run in the late 1940s, it was discovered that the U.S. was actually exporting labor-intensive goods and importing capital-intensive goods.” This statement is           

Options          

  1. The Hecksher-Ohlin theory
  2. the Stolper-Samuelson Theorem
  3. The Leontief paradox
  4. the modern trade theory

Question No.  30         Marks - 10

Which of the following statements is correct?          

Options          

  1. Real GDP is the total market value of the final goods and services produced in America for sale in a year valued in the prices of 1992.
  2. Your buying stock in the stock market is an example of investment spending
  3. Potential Real GDP is always greater than Equilibrium
  4. Real GDP

Question No.  31         Marks - 10

The period of the business cycle in which real GDP is increasing is called the:        

Options          

  1. expansion      
  2. peak   
  3. recession
  4. trough

Question No.  32         Marks - 10

Assume that, in the population, 95 million people worked for pay last week, 5 million people did not work for pay but had been seeking a job, 5 million people did not work for pay and had not been seeking a job for the past several months, and 45 million were under age 16.  The unemployment rate, given these numbers, is:       

Options          

  1. 5%
  2. 8%
  3. 10%
  4. 20%

Question No.  33         Marks - 10

A type of unemployment in which workers are in-between jobs or are searching for new and better jobs is called _______ unemployment:       

Options          

  1. frictional     
  2. cyclical
  3. structural
  4. turnover

Question No.  34         Marks - 10

Consider three consumer goods: 100 of Good A, 100 of Good B, and 100 of Good C.  In the base year, Good A sold at a price of $1, Good B sold at a price of $1, and Good C sold at a price of $1.  In the current year, Good A sold at a price of $3, Good B sold at a price of $5, and Good C sold at a price of $10.  The Consumer Price Index (CPI) for the current year i    

Options          

  1. 100
  2. 300
  3. 500
  4. 600

Question No.  35         Marks - 10

Which of the following is a "loser" from unexpected inflation?       

Options          

  1. workers with COLAs
  2. the middle class
  3. people who own Treasury Bills
  4. people who own homes and have fixed-rate mortgages

Question No.  36         Marks - 10

If the nominal interest rate on a checking account is 2% and the inflation rate is 3% this year, the real interest rate is:           

Options          

  1. 5%
  2. 25
  3. 2/3%
  4. –1%

Question No.  37         Marks - 10

Which of the following would cause the demand curve for automobiles to shift to the left

Options          

  1. an increase in the price of the automobiles
  2. an increase in the interest rate paid to borrow money to pay for the automobile
  3. an increase in buyers´ incomes
  4. an increase in the cost of production of automobiles

Question No.  38         Marks - 10

Suppose it is announced that industry analysts are predicting that decreased oil supplies from Iraq will cause gasoline prices to rise, beginning next month.  In the current week, the announcement would:        

Options          

  1. shift the supply of gasoline right
  2. shift the demand for gasoline right
  3. shift the demand for gasoline left
  4. have no effect on the demand or supply of gasoline

Question No.  39         Marks - 10

"At the price of $500, tickets for the Super Bowl are expensive.  Yet, there long lines of people who wish to buy them.  Many people who desire tickets will not be able to find them." From this quote, we know that the price of Super Bowl tickets must be:  

Options          

  1. below equilibrium
  2. above equilibrium
  3. equal to equilibrium
  4. None of the above

Question No.  40         Marks - 10

Assume that the market for computers begins in equilibrium.  Then, there is a decrease in a price of Pentium processors used in the production of computers.  When the new equilibrium is reached,    

Options          

  1. the price and quantity of computers will both have risen
  2. the price and quantity of computers will both have fallen
  3. the price of computers will have risen and the quantity will have fallen
  4. the price of computers will have fallen and the quantity will have risen

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