ECON 340 EXAM 1 QUESTIONS AND VERIFIED
ANSWERS
What are some major arguments for and against an open trading system? - Answers -
Proponents of an open trading system maintain that free trade leads to lower prices, the
development of more efficient production methods, and a greater range of consumption
choices. Free trade permits resources to move from their lowest productivity to their
highest productivity. Critics of an open trading system maintain that import competition
may displace domestic firms and workers. It is also argued that during periods of
national emergency, it is in the best interests of a nation to protect strategic industries.
Identify the major fallacies of international trade - Answers - The chapter describes
three fallacies of international trade:
a.Trade is a zero sum activity
b.Imports reduce employment and burden the economy
c.Tariffs and quotas will save jobs and promote a higher level of employment
What do researchers have to say about the relation between a firms productivity and
exposure to global competition? - Answers - Researchers have found that global
competitiveness is a bit like sports. You get better by playing against folks who are
better than you. This means companies are exposed to intense global competition tend
to be more productive than those who aren't.
When is international trade an opportunity for workers? When is it a threat to workers? -
Answers - International trade benefits most workers, especially those in exporting
industries. In addition to providing them jobs and income, it allows them to shop for
consumption goods that are cheapest and of the highest quality. However, workers in
import-competing industries often feel threatened from competition of cheap foreign
labor.
Identify some of the major challenges confronting the international trading system. -
Answers - Among the challenges confronting the international trading system are
maintaining fair standards for labor and promoting environmental quality.
How did Smiths views on international trade differ from those of the mercantilists? -
Answers - The mercantilists maintained that government should stimulate exports and
restrict imports so as to increase a nation's holdings of gold. A nation could only gain at
the expense of other nations because not all nations could simultaneously have a trade
surplus. Smith maintained that with free trade, international specialization of resources
in production leads to an increase in world output which can be shared by both trading
, partners. All nations simultaneously can enjoy gains from trade in terms of production
and consumption.
What is meant by constant opportunity costs and increasing opportunity costs? Under
what conditions will a country experience constant or increasing costs? - Answers -
Constant opportunity costs refer to a situation where the cost of each additional unit of
one product in terms of another product remains the same. Constant costs occur when
resources are completely adaptable to alternative uses. Under increasing cost
conditions, a nation must sacrifice more and more of one product to produce each
additional unit of another product. Increasing costs occur when resources are not
completely adaptable to alternative uses.
What factors underlie whether specialization in production will be partial or complete on
an international basis? - Answers - Under constant opportunity cost conditions,
specialization is complete. A country can devote all of its resources to the production of
a good without losing its comparative advantage. Under increasing cost conditions,
specialization tends to be partial. As production costs rise with expanded production,
the home country eventually loses its comparative advantage.
What is it meant by the term Trade Triangle? - Answers - The trade triangle includes a
nation's exports, its imports, and international terms of trade.
Table 2.9 gives hypothetical export price indexes and import price indexes (2000 = 100)
for Japan, Canada, and Ireland. Compute the commodity terms of trade for each
country for the period 2000-2016. Which country's terms of trade improved, worsened,
or showed no change? - Answers - FORMULA: Terms of
Trade=EXPORT/IMPORTS*100
Japan's commodity terms of trade improved to 107. Canada's commodity terms of trade
remained constant at 100. Ireland's commodity terms of trade worsened to 88.
What is meant by the theory of reciprocal demand? How does it provide a meaningful
explanation of the international terms of trade? - Answers - The law of reciprocal
demand suggests that if we know the domestic demands expressed by both trading
partners for both products, the equilibrium terms of trade can be defined.
Explain how the international movement of products and the factor of inputs promotes
an equalization of the factor prices among nations. - Answers - The factor endowment
theory suggests that a capital abundant nation enjoys relatively cheap capital. It thus
specializes in and exports a capitalintensive good. This leads to increased demand for
capital, which forces up the price of capital and thus the price of the capitalintensive
good. The opposite occurs in the capitalscarce country. The basis for further
specialization and trade ceases when the capital prices and product prices in each
nation equate.
ANSWERS
What are some major arguments for and against an open trading system? - Answers -
Proponents of an open trading system maintain that free trade leads to lower prices, the
development of more efficient production methods, and a greater range of consumption
choices. Free trade permits resources to move from their lowest productivity to their
highest productivity. Critics of an open trading system maintain that import competition
may displace domestic firms and workers. It is also argued that during periods of
national emergency, it is in the best interests of a nation to protect strategic industries.
Identify the major fallacies of international trade - Answers - The chapter describes
three fallacies of international trade:
a.Trade is a zero sum activity
b.Imports reduce employment and burden the economy
c.Tariffs and quotas will save jobs and promote a higher level of employment
What do researchers have to say about the relation between a firms productivity and
exposure to global competition? - Answers - Researchers have found that global
competitiveness is a bit like sports. You get better by playing against folks who are
better than you. This means companies are exposed to intense global competition tend
to be more productive than those who aren't.
When is international trade an opportunity for workers? When is it a threat to workers? -
Answers - International trade benefits most workers, especially those in exporting
industries. In addition to providing them jobs and income, it allows them to shop for
consumption goods that are cheapest and of the highest quality. However, workers in
import-competing industries often feel threatened from competition of cheap foreign
labor.
Identify some of the major challenges confronting the international trading system. -
Answers - Among the challenges confronting the international trading system are
maintaining fair standards for labor and promoting environmental quality.
How did Smiths views on international trade differ from those of the mercantilists? -
Answers - The mercantilists maintained that government should stimulate exports and
restrict imports so as to increase a nation's holdings of gold. A nation could only gain at
the expense of other nations because not all nations could simultaneously have a trade
surplus. Smith maintained that with free trade, international specialization of resources
in production leads to an increase in world output which can be shared by both trading
, partners. All nations simultaneously can enjoy gains from trade in terms of production
and consumption.
What is meant by constant opportunity costs and increasing opportunity costs? Under
what conditions will a country experience constant or increasing costs? - Answers -
Constant opportunity costs refer to a situation where the cost of each additional unit of
one product in terms of another product remains the same. Constant costs occur when
resources are completely adaptable to alternative uses. Under increasing cost
conditions, a nation must sacrifice more and more of one product to produce each
additional unit of another product. Increasing costs occur when resources are not
completely adaptable to alternative uses.
What factors underlie whether specialization in production will be partial or complete on
an international basis? - Answers - Under constant opportunity cost conditions,
specialization is complete. A country can devote all of its resources to the production of
a good without losing its comparative advantage. Under increasing cost conditions,
specialization tends to be partial. As production costs rise with expanded production,
the home country eventually loses its comparative advantage.
What is it meant by the term Trade Triangle? - Answers - The trade triangle includes a
nation's exports, its imports, and international terms of trade.
Table 2.9 gives hypothetical export price indexes and import price indexes (2000 = 100)
for Japan, Canada, and Ireland. Compute the commodity terms of trade for each
country for the period 2000-2016. Which country's terms of trade improved, worsened,
or showed no change? - Answers - FORMULA: Terms of
Trade=EXPORT/IMPORTS*100
Japan's commodity terms of trade improved to 107. Canada's commodity terms of trade
remained constant at 100. Ireland's commodity terms of trade worsened to 88.
What is meant by the theory of reciprocal demand? How does it provide a meaningful
explanation of the international terms of trade? - Answers - The law of reciprocal
demand suggests that if we know the domestic demands expressed by both trading
partners for both products, the equilibrium terms of trade can be defined.
Explain how the international movement of products and the factor of inputs promotes
an equalization of the factor prices among nations. - Answers - The factor endowment
theory suggests that a capital abundant nation enjoys relatively cheap capital. It thus
specializes in and exports a capitalintensive good. This leads to increased demand for
capital, which forces up the price of capital and thus the price of the capitalintensive
good. The opposite occurs in the capitalscarce country. The basis for further
specialization and trade ceases when the capital prices and product prices in each
nation equate.
