Multiple Choice

1.  Which theory states that a nation will tend to export commodities intensive in its relatively abundant and cheap factor?

A)    Heckscher-Ohlin theory

B)     Stolper-Samuelson theory

C)     Product cycle theory

D)    Intraindustry trade theory Answer:  A

2.  Which of the following is a part of the Heckscher-Ohlin model that states international trade will bring about equalization in the returns to homogeneous factors across nations?

A)    Factor-price equalization theorem

B)     Factor-proportions theory

C)     Factor-endowment theory

D)    Product cycle theory Answer:  A

3.  Which of the following states that a nation will export commodities intensive in its relatively abundant and cheap factor and that international trade brings about equalization in returns to      homogeneous factors across countries?

A)    Heckscher-Ohlin theory

B)     Stolper-Samuelson theorem

C)     Differentiated product theorem

D)    None of the above Answer:  A

4.  Which of the following is considered to be a short-run version of the factor price equalization theory?

A)    Economies of scale theory

B)     Intraindustry trade theory

C)     Specific factors theory

D)    Product cycle theory Answer:  C

5.  The ______________ hypothesizes that a portion of international trade is based on the introduction of new products or processes.

A)    specific-factors model

B)     technological gap model

C)     product cycle model

D)    real business cycle model Answer:  B

6.   The product cycle model was introduced by:

A)    Wassily Leontief

B)     Alfred Marshall

C)     Eli Heckscher

D)    Raymond Vernon Answer:  D

7.  Transportation costs include:

A)    freight charges.

B)     warehousing costs.

C)     costs associated with loading and unloading shipments.

D)    All of the above. Answer:  D

8.  According to the factor endowment theory, nations heavily endowed with labor will:

A)    import more labor intensive goods.

B)     export more labor intensive goods.

C)     have an absolute advantage in labor intensive goods.

D)    have a comparative advantage in capital intensive goods. Answer:  B

9.  Assume that Country A is relatively abundant in capital and relatively scarce in land.             According to the factor endowment theory, with free trade, the internal distribution of income in Country A will change in favor of:

A)    capital.

B)     land.

C)     both capital and land.

D)    neither capital nor land. Answer:  A

10.  Assume the cost of transporting computers from US to Japan is greater than the pre-trade price difference for computers between US and Japan.  Trade in computers between US and  Japan will:

A) be very profitable for both parties.

B) be a breakeven proposition for both parties.

C)  occur.

D)  not occur. Answer:  D

11.  Mexico is relatively abundant in labor, while Canada is relatively abundant in capital.  In      both nations, the production of televisions is relatively more capital intensive than the production of corn.  According to the factor endowment theory, Mexico will have a(n):

A)    absolute advantage in the production of corn and computers

B)     absolute advantage in the production of corn

C)     comparative advantage in the production of corn

D)    comparative advantage in the production of computers Answer:  C

12.  A product will be internationally tradable  as long as the pre-trade price differential between the trading partners is:

A)  equal to the transportation cost of the good

B)  greater than the transportation cost of the good

C)  less than the transportation cost of the good

D)  different than the transportation cost of the good Answer:  B

13.  With ______________, inputs increase proportionately more than the increase in output.

A)    Increasing returns to scale

B)     Decreasing returns to scale

C)     Constant returns to scale

D)    International returns to scale Answer:  B

14.  With ______________, inputs increase in direct proportion to the increase in output.

A)  increasing returns to scale

B)  decreasing returns to scale

C)  constant returns to scale

D)  international returns to scale Answer:  C

15.  With ______________, inputs increase proportionately less than the increase in output.

A)  increasing returns to scale

B)  decreasing returns to scale

C)  constant returns to scale

D)  international returns to scale Answer:  A

16.  Which of the following is not an element of the product cycle model?

A)  The implementation of measures to prevent price differences across markets

B)  Expansion of production for export

C)  The introduction of the product into the domestic market

D)  Standardization and beginning of production abroad through imitation Answer:  A

17.  Why should not be there a strong uniform international environmental standard?

A) No country will follow it

B) as countries grow richer, they will voluntarily adopt more “environmentally friendly” approaches

C) poorer nations do not lower their environmental standard to attract polluting firms from abroad

D) poorer nations do not use environmental policies to seek to offset the cost advantage that other countries might enjoy over them

Answer: A

True/False

18.  The Heckscher-Ohlin theory is often referred to as the factor-proportion theory. Answer:  True

19.  The Heckscher-Ohlin theory is often referred to as the factor-endowment theory. Answer:  True

20.  Increasing returns to scale refer to the production situation where inputs or factors of

production grow proportionately more than output.

Answer:  False

21. Non-traded goods and services are those that are not traded because of international barriers to entry, such as exorbitant import tariffs.

Answer:  False

22.  As a result of environmentalist efforts, for the past three decades polluting and dirty industry exports have expanded slower relative to clean industries and their exports.

Answer:  False

Essay

23.  Discuss the major points of the Heckscher-Ohlin theory, the objection to this theory posed by the Leontief paradox, and the counterargument to this objection.

Answer:  The H-O theory focuses on the difference in the relative abundance of factors of production in various nations as the most important determinant of the difference in relative commodity prices and comparative advantage.  This theory can ultimately be broken down into   two theorems, which are the H-O theorem and the factor-price equalization theorem.  The H-O    theorem says that if a particular factor of production is relatively abundant in one country, the country should produce and export commodities that are heavily dependent on that factor.  In turn, this country will likely import those commodities that have factors of production that are     relatively scarce within the country itself.  The second part of this theory, the factor-price equalization theorem, tells us that similar forms of labor and capital (factors of production) will   equalize, in terms of factor prices, as trade between these countries progresses.  The objection to this theory came about with the empirical testing done by Leontief in 1951.  What Leontief found, which would later become known as the Leontief paradox, was that in the U.S. import substitutes were more capital intensive than U.S. exports.  This, of course, contradicts what the    H-O theory purports to be the case.  However, the ‘paradox’ itself is not without its inadequacies. Instead of considering human capital and natural resources, which are completely legitimate factors of production, they are overlooked.  When this transgression is circumvented, and these   factors of production considered, the paradox is eliminated.

24. Show with a diagram how two countries with identical tastes but different factor endowments can benefit from trade.

Answer: In the following diagram it can be clearly shown that both countries will be on a lower  community indifference curve I1 if they do not resort to trade. In autarky, country A will produce and consume at point a and country B will produce and consume at point b. However, as soon as they open up trade, country A will partially specialize in Y, start producing at point d and consume at point E while country B will partially specialize in X, produce at point c and consume at point E. They will trade according to the international price reflected by the Ptt and both will be on a higher community indifference curve I2.

Y

Ptt

d

X