ECON 340 EXAM 1&2 QUESTIONS AND VERIFIED
ANSWERS
50 years ago trade theory often discussed trade in raw materials like cotton or finished
goods like cars. How is international trade different today? - Answers - 1. Compostion of
goods and services in trade.
2.Liberization in trade
3.Trade agreements and partnerships of countries have changed a lot.
4.International trade has changed the compostion of output
5. International trade is now indicator of relationship between countries.
order how "globalized" the following things are: labor, goods, financial capital from most
globalized to least.
:Labor, goods, Financial Capital - Answers - 1. FC 2. Labor 3. Goods
Define comparative advantage in a sentence. - Answers - each nation gains by doing
things which they have a relative advantage.
What did Adam Smith believe international trade was based on? - Answers - -
ABSOLUTE Advantage
-Worlds wealth is NOT a fixed quantity
-increases general level of productivity within a country and increases world output.
Besides comparative advantage and the gains to welfare or
efficiency that come with it, what are 2 other advantages of free trade - Answers - -
Economics of scale
-Reduced costs
Why does the Mercantilist approach to trade not work in the long run? - Answers - -
Favorable trade balance only available in the short run.
-Opposite of free trade
-Restricts imports and protects domestic industry.
The US has a lot of capital relative to labor and Mexico has a lot of labor relative to
capital. What TYPES of goods would the US produce and what types would Mexico
produce? And why? - Answers - -US would produce airplanes/cars
-Mexico would produce textiles
-Airplanes/cars are capital intensive and textiles are labor intensive.
What should happen to the price of capital & labor in the United states when trade is
opened with Mexico? - Answers - -Price of capital goes up
-US price of labor does down
-price of labor in mexio goes up
, Under the reciprocal demand theory what types of countries gain more from trad -
Answers - -small countries
Most of what we can graph in this class are static examples. But there are also dynamic
gains from trade. What might two of those be as it pertains to specialization. - Answers -
-more efficient use of economy's resources.
-more variety of goods
When costs are increasing, with trade and specialization how is the end production
result different from the constant cost case as far as its predictions. - Answers - -NO
complete specialization
-each country specilizes only partially in the product of the good which it has a
comparative advantage.
What is the difference between external and internal economies of scale? - Answers - -
Internal (realted to particular firm)--> if firms gets bigger AVG costs will fall.
-External (particular # of firms in an industry)-->Costs fall when industry grows.
How are the theories of economies of scale and industrial policy related? - Answers - -
Industrial policy--> Gov. trying to create comparative advantage.
-Give room and time to develop economies of scale.
-Can give domestic companies an advantage or disadvantage.
What are the three ways a tariff is accessed. Tariff of $1 per hammer is an example of
one. - Answers - 1. Specific tariff
2. Ad valorem tarrif
3. Compound tariff
Assuming rich people own capital and poor people own labor, is
free trade good for rich or poor people in the United States? Why? - Answers - -Good
for rich
-Free trade causes price of capital to rise.
-If only own labor--> prive of labor falls.
List 3 DIFFERENT sources of comparative advantage besides the factor endowments
theory that we discussed in chapter 3. - Answers - 1. Economies of scale
2. Technology
3. Specific factor
List how globalized the regional trading agreements are from least to most.
-Common Market
-Customs Union
-Economic Union
-Free Trade Area - Answers - 1 Free Trade Area
2. Customs Union
ANSWERS
50 years ago trade theory often discussed trade in raw materials like cotton or finished
goods like cars. How is international trade different today? - Answers - 1. Compostion of
goods and services in trade.
2.Liberization in trade
3.Trade agreements and partnerships of countries have changed a lot.
4.International trade has changed the compostion of output
5. International trade is now indicator of relationship between countries.
order how "globalized" the following things are: labor, goods, financial capital from most
globalized to least.
:Labor, goods, Financial Capital - Answers - 1. FC 2. Labor 3. Goods
Define comparative advantage in a sentence. - Answers - each nation gains by doing
things which they have a relative advantage.
What did Adam Smith believe international trade was based on? - Answers - -
ABSOLUTE Advantage
-Worlds wealth is NOT a fixed quantity
-increases general level of productivity within a country and increases world output.
Besides comparative advantage and the gains to welfare or
efficiency that come with it, what are 2 other advantages of free trade - Answers - -
Economics of scale
-Reduced costs
Why does the Mercantilist approach to trade not work in the long run? - Answers - -
Favorable trade balance only available in the short run.
-Opposite of free trade
-Restricts imports and protects domestic industry.
The US has a lot of capital relative to labor and Mexico has a lot of labor relative to
capital. What TYPES of goods would the US produce and what types would Mexico
produce? And why? - Answers - -US would produce airplanes/cars
-Mexico would produce textiles
-Airplanes/cars are capital intensive and textiles are labor intensive.
What should happen to the price of capital & labor in the United states when trade is
opened with Mexico? - Answers - -Price of capital goes up
-US price of labor does down
-price of labor in mexio goes up
, Under the reciprocal demand theory what types of countries gain more from trad -
Answers - -small countries
Most of what we can graph in this class are static examples. But there are also dynamic
gains from trade. What might two of those be as it pertains to specialization. - Answers -
-more efficient use of economy's resources.
-more variety of goods
When costs are increasing, with trade and specialization how is the end production
result different from the constant cost case as far as its predictions. - Answers - -NO
complete specialization
-each country specilizes only partially in the product of the good which it has a
comparative advantage.
What is the difference between external and internal economies of scale? - Answers - -
Internal (realted to particular firm)--> if firms gets bigger AVG costs will fall.
-External (particular # of firms in an industry)-->Costs fall when industry grows.
How are the theories of economies of scale and industrial policy related? - Answers - -
Industrial policy--> Gov. trying to create comparative advantage.
-Give room and time to develop economies of scale.
-Can give domestic companies an advantage or disadvantage.
What are the three ways a tariff is accessed. Tariff of $1 per hammer is an example of
one. - Answers - 1. Specific tariff
2. Ad valorem tarrif
3. Compound tariff
Assuming rich people own capital and poor people own labor, is
free trade good for rich or poor people in the United States? Why? - Answers - -Good
for rich
-Free trade causes price of capital to rise.
-If only own labor--> prive of labor falls.
List 3 DIFFERENT sources of comparative advantage besides the factor endowments
theory that we discussed in chapter 3. - Answers - 1. Economies of scale
2. Technology
3. Specific factor
List how globalized the regional trading agreements are from least to most.
-Common Market
-Customs Union
-Economic Union
-Free Trade Area - Answers - 1 Free Trade Area
2. Customs Union
