Bus 313

Sample Midterm Exam with ANSWERS

PART I. Multiple Choice: Circle the single most correct answer for each of the following 12 questions. (2 points
each)
1. Which of the following is an example of an institution whose primary concern is global economic stability?
A. NAFTA (North American Free Trade Agreement)
B. Mekong River Commission
C. OPEC (Organization of Petroleum Exporting Countries)
D. IMF (International Monetary Fund)
E. Asian Development Bank
2. An
A. a
B. a
C. a
D. a
E. a

example of a foreign direct investment (FDI) would include

Chinese consumer buying an imported Japanese car.
U.S. couple buying land for their dream retirement home in Costa Rica.
U.S. mutual fund manager buying shares of stock in a Brazilian oil company.
U.S. firm expanding its U.S. operations.
wealthy Mexican buying U.S. Treasury bills.

3. Which of the following is TRUE?

A. Adam Smith proposed the theory of comparative advantage as the basis for trade in The Wealth of Nations.
B. Samuelson proposed the theory of absolute advantage as the basis for trade.
C. Absolute advantage is based on comparing the opportunity costs of trading partners.
D. Ricky Ricardo proposed the theory of comparative advantage.
E. The Ricardian model assumes labor is perfectly mobile.
4. When the
A. China is
B. China is
C. China is
D. China is
E. China is

United States gives MFN (most-favored nation) status to China, it means that
legally bound to reciprocate.
treated better than other U.S. trading partners.
treated the same as the best-treated U.S. trading partners.
treated worse than other U.S. trading partners.
better than all the nations in the WTO.

5. Which of the following is NOT a criticism of international institutions such as the IMF, the World Bank, or the
WTO?
A. Their decision making is biased in favor of underdeveloped nations and against the interests of nations
already industrialized.
B. They lack openness in their decision-making process.
C. They violate national sovereignty by imposing unwanted domestic policies.
D. They fail to understand the effects of their policies on the vulnerable.
E. They ignore potentially large adjustment costs for developing nations of implementing their policies.
6. Which of the following describes the asymmetry observed by economists in the incentives to support and
oppose trade policy?
A. The benefits of those seeking protection outweigh the costs imposed by the protection.
B. The benefits of protection are spread out over a large number of firms and industries, but the costs are
concentrated on consumers.
C. The benefits of policy are concentrated, and the costs are spread out over a large number of participants.
D. The costs of protection are concentrated on a few firms, and the benefits of protection are spread out over a
large number of consumers.
E. All of the above.

Table: Endowment of Labor and Capital (for questions 7 and 8)

7. Based on the table above, according to the Heckscher-Ohlin Theorem, U.S. exports should be goods that
A. use capital and labor in about equal proportions.
B. use either labor or capital input, depending on the good.
C. intensively use labor input.
D. intensively use capital input.
E. Not enough information to tell.
8. Based on the table above, according to the Stolper-Samuelson Theorem, the income distribution effects of free
trade in the United States are likely to favor
A. labor.
B. capital.
C. either capital or labor, depending on U.S. productivity.
D. neither capital nor labor.
E. Not enough information to tell.
9. In economic terms, tariffs are preferred to quotas because
A. tariffs are easier to administer.
B. domestic manufacturers gain more producer surplus.
C. there is less loss of consumer surplus.
D. quotas create a greater production inefficiency.
E. given the way quotas are usually administered, tariffs cause a smaller net national welfare loss.
10. In the mid- to late 1990s several successful computer technology related companies emerged in Silicon Valley in
California. This led anyone who wished to create a startup company to do so in Silicon Valley. The surge in the
number of startups led to a number of venture capital firms expanding their Valley offices. This in turn encouraged
more entrepreneurs to locate their startups there. According to new trade theory, this is an example of
A. Monopolistic competition.
B. Product differentiation.
C. External economics of scale.
D. All of the above.
E. None of the above.
11. When the Moen Company has Chinese manufacturers produce components for its American-assembled
faucet products, this is an example of
A. Off-shore outsourcing.
B. Intra-firm trade.
C. Domestic out-sourcing.
D. In-house manufacturing.
E. Inter-industry trade.
12. The logic of collective action means?
A. All participating countries in a regional trading agreement have to follow the same tariff schedule .
B. All participating countries in a regional trading agreement have to give each other the most-favored
nation treatment.
C. All participating countries in a regional trading agreement agree to follow the same arbitration
procedure.
C. The costs of tariff are borne by many people, but the benefits are concentrated in a few industries,
which have much greater incentives to lobby the congress.
E. None of the above is true.

Part II. Short Answers: Briefly answer the following two questions.
13. Suppose you work for an American automobile manufacturer that plans to shut down because it cannot
compete economically with foreign-based manufacturers. What arguments would you make to the American
government in support of trade barriers to protect your domestic Australian manufacturer, and hence preserve
your job? (8 pts)
14. Please list two possible legal procedures that American government can take if the foreign-based
manufacturers are suspected to practice unfair trading? Which legal procedures are applicable to what type of
unfair practice? What is the challenge and common practice in proving the wrong doing ? (8 pts)

Part III. Problems: Do each of the three problems below. Where appropriate, show your work to maximize
partial credit.
15. For the year 2012 the country of Bangladesh exported $19.9 billion in clothing products and imported
$0.3 billion of such products. (Data from the WTO.)
a. Use this information to calculate the index of intra-industry trade. (5 pts)
b. What does this index tell us in this case? (5 pts)

16. Suppose one unit of labor can produce the following goods in the following countries:
Singapore:
2 Pacemakers or
5 Flat screens
China:
1 Pacemakers or
3 Flat screens
a.

What country has an absolute advantage in producing flat screens? Explain your answer. (3 pts)

b. What is the opportunity cost of producing a flat screen in Singapore and indicate the units of measurement? (4
pts)

c. What is the opportunity cost of producing a flat screen in China and indicate the units of measurement? (4 pts)

d. Given your answers above, which country should specialize in flat screens and explain why? (4 pts)
China should specialize in flat screens since it has the lower opportunity cost (0.333 Pacemakers in

e. Regardless of how you answered the parts (a) (d), suppose that Singapore decides to specialize more in the
production of pacemakers by shifting 20 units of labor to pacemaker production away from flat screen production
while China decides to specialize more in the production of flat screens by shifting 35 units of labor to flat screen
production away from pacemaker production. What is the impact on world output of flat screens and
pacemakers? (5 pts)

f.

What will be the range of the trade price and indicate units of measurement? (4 pts)

17. See box, chart and below.

P ($ per scooter)
6000

The questions below relate to the following situation:

Assume that the graph at left (not drawn to scale)
shows the market for electric scooters in the U.S.
The domestic demand curve (D) has the following
equation: P = 6000 60Q
The domestic supply curve (S) has the equation: P =

Pt = 2700
k
Pw = 1800
500

500+ 50Q
When there is free trade, the price in the U.S. is
equal to the world price (Pw) of $1800. The U.S.
consumption of glasses is QT = 70 and the U.S.
domestic
is Q
D=26. a tariff of $900 per
If the U.S.production
government
imposes
scooter, the price rises to Pt = $2700. The U.S.
+
consumption of scooters Q T = 55 and the U.S.
+
domestic production is Q D = 44.

QD
Q D+
QT+
QT
Q of scooters
26
44
55
70
Use the information above to answer the following questions (read them carefully and show your work):
a. Calculate the values of Q and P where the demand and supply curves intersect. [Not shown on graph.] Indicate
units of measurement for your answers. (8 pts)
b. What was the market share of the importers at the world price ($1800) prior to the imposition of the tariff?
Indicate units of measurement. (2 pts)

c. By how much did the tariff reduce the U.S. consumer surplus? (Indicate units of measurement.) (6 pts)

d. What happened to national welfare in the U.S. as a result of the tariff? (Be as specific and as complete as
possible, including units of measurement.) (6 pts)