yellow=A SECOND MIDTERM EXAM

Economics 452 International Trade Theory and Policy Fall 2015

SPECIFIC FACTORS MODEL

1-4. OECD countries have more capital relative to land than the rest of
the world (ROW), Capital is specific to producing manufactures, land
is specific to agriculture, and labor is mobile across the two sectors.

1. Who in OECD countries clearly benefits from allowing international

trade?
a) workers
b) capital owners
c) land owners
d) both a) and b)
e) both a) and c)

2. Who in the ROW clearly benefits from allowing international trade?

a) workers
b) capital owners
c) land owners
d) both a) and b)
e) both a) and c)

3. Who in OECD countries is clearly hurt by allowing international

trade?
a) workers
b) capital owners
c) land owners
d) both a) and b)
e) both a) and c)

4. Who in the ROW is clearly hurt by allowing international trade?

a) workers
b) capital owners
c) land owners
d) both a) and b)
e) both a) and c)

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HECKSCHER-OHLIN MODEL
5-8 Textile production relatively intensively uses labor to land compared
to agriculture in both countries. The United States is relatively
abundant in land to labor compared to China.

5. The United States has comparative advantage in

a) agriculture
b) textiles
c) agriculture and textiles
d) agriculture and sometimes textiles
e) textiles and sometimes agriculture

6. Under free trade, the United States exports

a) agriculture
b) textiles
c) agriculture and textiles
d) agriculture and sometimes textiles
e) textiles and sometimes agriculture

7. China has comparative advantage in

a) agriculture
b) textiles
c) agriculture and textiles
d) agriculture and sometimes textiles
e) textiles and sometimes agriculture

8. Under free trade, China exports

a) agriculture
b) textiles
c) agriculture and textiles
d) agriculture and sometimes textiles
e) textiles and sometimes agriculture

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9-12 Oil production relatively intensively uses land to labor compared to
oat production. Saudi Arabia has more acres of land per capita than
the United States. Assume the countries share the same technology
and the same relative demand for oil. Both countries produce both
goods.

9. Under autarky, land would be __________ relative to labor in Saudi

Arabia relative to the United States.
a) more expensive
b) less expensive
c) equally expensive
d) a) or c)
e) b) or c)

10. Under free trade, land would be __________ relative to labor in

Saudi Arabia relative to the United States.
a) more expensive
b) less expensive
c) equally expensive
d) a) or c)
e) b) or c)

11. In the United States, who would object to free trade?

a) workers
b) landlords
c) both workers and landlords
d) neither workers nor landlords
e) depends on spending patterns

12. In Saudi Arabia, who would object to free trade?

a) workers
b) landlords
c) both workers and landlords
d) neither workers nor landlords
e) depends on spending patterns

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INTERTEMPORAL TRADE
13-16. For any real interest rate r, the United States produces a larger
relative supply of current to future than China and consumes the
same relative demand of current to future as China.

13. The real interest rate in the United States would _____ due to
intertemporal trade with China.
a) rise
b) fall
c) stay the same
d) fall or stay the same
e) cannot tell from the information provided

14. The real interest rate in China would _____ due to intertemporal
trade with the United States.
a) rise
b) fall
c) stay the same
d) rise or stay the same
e) cannot tell from the information provided

15. The intertemporal budget constraint for the United States is:
a) (1 + r) QC + QF = (1 + r) DC + DF
b) QC + QF/(1 + r) = DC + DF/(1 + r)
c) DF - QF = (1 + r)(QC - DC)
d) all of the above
e) none of the above

16. Under intertemporal trade, China _______ the United States and the
United States ________ China.
a) loans money to, loans money to
b) loans money to, borrows money from
c) borrows money from, loans money to
d) borrows money from, borrows money from
e) cannot tell from the information provided

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FACTOR PROPORTIONS MODEL PROBLEMS
Producing one yard of cloth requires 3 workers and 2 capital, while
producing one pound of food requires 1 workers and 3 capital. Both
countries have 168 workers; the United States has 210 capital, while the
rest of the world (ROW) has 336. The price of food is always $63/pound;
the price of cloth is $84/yard in the United States in autarky and $126/yard
in all countries under free trade.

17. Comparing relative factor abundance across countries:

a) ROW has more capital per unit of labor than Home.
b) Home has more capital per unit of labor than ROW.
c) Home and ROW have the same capital per unit of labor.
d) Home has more labor per unit of capital than ROW.
e) both a) and d)

18. Comparing the relative intensity of factor use across goods:

a) Cloth production uses more capital per unit of labor than food.
b) Cloth production uses more labor per unit of capital than food.
c) Food production uses more capital per unit of labor than cloth.
d) Food production uses more labor per unit of capital than cloth.
e) both b) and c)

19. The pattern of comparative advantage is:

a) Home has comparative advantage in food.
b) Home has comparative advantage in cloth.
c) ROW has comparative advantage in cloth.
d) ROW has comparative advantage in food.
e) both b) and d)

20. The pattern of trade is

a) Home exports cloth and imports food.
b) Home exports food and imports cloth.
c) ROW exports cloth and imports food.
d) ROW exports food and imports cloth.
e) both a) and d)

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21. The labor constraint is
a) 3QC + QF = 168
b) 2QC + 3QF = 336
c) 2QC + 3QF = 210
d) 3QC + QF = 210
e) none of the above

22. The labor constraint is a straight line with food endpoint ___ and
slope ___ (with cloth on the horizontal axis).
a) 168/3, -1/3
b) 168, -3
c) 210, -3/2
d) 70, -2/3
e) none of the above

23. The U.S. capital constraint is

a) 3QC + QF = 168
b) 2QC + 3QF = 336
c) 2QC + 3QF = 210
d) 3QC + QF = 210
e) none of the above

24. The U.S. capital constraint is a straight line with food endpoint ___
and slope ___ (with cloth on the horizontal axis).
a) 168/3, -1/3
b) 168, -3
c) 210, -3/2
d) 70, -2/3
e) none of the above

25. Which factor constraint is more steeply downward sloping (with cloth
on the horizontal axis)?
a) food
b) labor
c) capital
d) cloth
e) cannot tell from the information provided

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26. Why? Because producing a yard of cloth uses more _____ than
producing a pound of food.
a) labor per unit of capital
b) capital per unit of labor
c) labor
d) capital
e) none of the above

27. The U.S. production bundle that fully employs both factors is ___
yards of cloth and ___ pounds of food.
a) 24, 96
b) 42, 42
c) 24, 24
d) 96, 24
e) none of the above

28. The ROW capital constraint is

a) 3QC + QF = 168
b) 2QC + 3QF = 336
c) 2QC + 3QF = 210
d) 3QC + QF = 210
e) none of the above

29. The ROW capital constraint is a straight line with food endpoint ___
and slope ___ (with cloth on the horizontal axis).
a) 168/3, -1/3
b) 168, -3
c) 112, -2/3
d) 70, -2/3
e) none of the above

30. The ROW production bundle that fully employs both factors is ___
yards of cloth and ___ pounds of food.
a) 24, 96
b) 42, 42
c) 24, 24
d) 96, 24
e) none of the above

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31. Comparing the relative production across countries:
a) ROW produces more food per yard of cloth than Home.
b) Home produces more food per yard of cloth than ROW.
c) ROW produces more cloth per pound of food than Home.
d) Home produces more cloth per pound of food than ROW.
e) Both a) and d)

32. The pricing equation for food is

a) 3w + 2r = 84
b) w + 3r = 63
c) w + 3r = 84
d) 3w + 2r = 126
e) none of the above

33. The pricing equation for food is a straight line with rent endpoint ___
and slope ___ (with wage on the horizontal axis).
a) 21, -1/3
b) 42, -1/3
c) 63, -3/2
d) 84, -3/2
e) none of the above

34. U.S. pricing equation for cloth in autarky is

a) 3w + 2r = 84
b) w + 3r = 63
c) w + 3r = 84
d) 3w + 2r = 126
e) none of the above

35. The pricing equation for cloth in U.S. autarky is a straight line with
rent endpoint ___ and slope ___ (with wage on the horizontal axis).
a) 21, -1/3
b) 42, -1/3
c) 63, -3/2
d) 84, -3/2
e) none of the above

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36. Which pricing equation is more steeply downward sloping (with wage
on the horizontal axis)?
a) cloth
b) food
c) labor
d) capital
e) cannot tell form the information provided

37. Why? Because producing a yard of cloth uses more _____ than
producing a pound of food.
a) capital per unit of labor
b) labor per unit of capital
c) capital
d) labor
e) none of the above

38. U.S. factor prices in autarky are wage ____ and rent ____.
a) 9, 36
b) 36, 9
c) 15, 18
d) 18, 15
e) none of the above

39. The pricing equation for cloth under free trade is

a) 3w + 2r = 84
b) w + 3r = 63
c) w + 3r = 84
d) 3w + 2r = 126
e) none of the above

40. The pricing equation for cloth in U.S. under free trade is a straight
line with rent endpoint ___ and slope ___ (with wage on the
horizontal axis).
a) 21, -1/3
b) 42, -1/3
c) 63, -3/2
d) 84, -3/2
e) none of the above

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41. The factor prices under free trade are wage ____ and rent ____.
a) 9, 36
b) 36, 9
c) 15, 18
d) 18, 15
e) none of the above

42 Comparing the U.S. relative factor prices, the wage relative to rent
under free trade is ______ it was in autarky.
a) higher than
b) lower than
c) the same as
d) higher than or the same as
e) lower than or the same as

43. The proportional change in the wage is

a) 100%
b) 50%
c) 0%
d) -20%
e) none of the above

44. The proportional change in the rent is

a) 100%
b) 50%
c) 0%
d) -20%
e) none of the above

45. The proportional change in the price of cloth is

a) 100%
b) 50%
c) 0%
d) -20%
e) none of the above

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46. Comparing these proportional changes, the proportional change in
the _____ is greater than the proportional change in the _______ is
greater than zero is greater than the proportional change in _____.
a) rent, price of cloth, wage
b) price of cloth, wage, rent
c) wage, rent, price of cloth
d) wage, price of cloth, rent
e) none of the above

47 In the United States, owners of which factor would oppose a free

trade agreement?
a) labor
b) capital
c) both capital owners and labor owners (workers)
d) no one would object
e) cannot tell from the information provided

48 How can this group be identified in autarky? They

a) own the country’s relatively abundant factor
b) own the country’s relatively scarce factor
c) are specific to the import competing sector
d) are specific to the export sector
e) none of the above

49. Why does this group object to international trade? Because

a) their real income decreases
b) their factor income declines relative to the price level
c) the purchasing power of their income falls
d) all of the above
e) none of the above

50 In the rest of the world, owners of which factor would oppose a free
trade agreement?
a) capital
b) labor
c) both capital owners and labor owners (workers)
d) no one would object
e) cannot tell from the information provided

11
yellow=A SECOND MIDTERM EXAM SOLUTIONS
Economics 452 International Trade Theory and Policy Fall 2015

SPECIFIC FACTORS MODEL

1b Who in OECD countries clearly benefits from allowing international
trade? capital owners
2c Who in the ROW clearly benefits from allowing international trade?
land owners
3c Who in OECD countries is clearly hurt by allowing international
trade? land owners
4b Who in the ROW is clearly hurt by allowing international trade?
capital owners

HECKSCHER-OHLIN MODEL
5a The United States has comparative advantage in agriculture
6a Under free trade, the United States exports agriculture
7b China has comparative advantage in textiles
8b Under free trade, China exports textiles

9b Under autarky, land would be less expensive relative to labor in

Saudi Arabia relative to the United States.
10c Under free trade, land would be equally expensive relative to labor in
Saudi Arabia relative to the United States.
11b In the United States, who would object to free trade? landlords
12a In Saudi Arabia, who would object to free trade? workers

INTERTEMPORAL TRADE
13a The real interest rate in the United States would rise due to
intertemporal trade with China.
14b The real interest rate in China would fall due to intertemporal trade
with the United States.
15d The intertemporal budget constraint for the United States is: (1 + r)
QC + QF = (1 + r) DC + DF , QC + QF/(1 + r) = DC + DF/(1 + r), and DF -
QF = (1 + r)(QC - DC) so all of the above.
16c Under intertemporal trade, China borrows money from the United
States and the United States loans money to China.

1
FACTOR PROPORTIONS MODEL PROBLEMS
Producing one yard of cloth requires 3 workers and 2 capital, while
producing one pound of food requires 1 workers and 3 capital. Both
countries have 168 workers; the United States has 210 capital, while the
rest of the world (ROW) has 336. The price of food is always $63/pound;
the price of cloth is $84/yard in the United States in autarky and $126/yard
in all countries under free trade.

17e Comparing relative factor abundance across countries: ROW has

more capital per unit of labor than Home and Home has more labor
per unit of capital than ROW.
18e Comparing the relative intensity of factor use across goods: Cloth
production uses more labor per unit of capital than food and food
production uses more capital per unit of labor than cloth.
19e The pattern of comparative advantage is: Home has comparative
advantage in cloth and ROW has comparative advantage in food.
20e The pattern of trade is: Home exports cloth and imports food and
ROW exports food and imports cloth.

21a The labor constraint is 3QC + QF = 168

22b The labor constraint is a straight line with food endpoint 168 and
slope -3 (with cloth on the horizontal axis).
23c The U.S. capital constraint is 2QC + 3QF = 210
24d The U.S. capital constraint is a straight line with food endpoint 70 and
slope -2/3 (with cloth on the horizontal axis).
25b Which factor constraint is more steeply downward sloping (with cloth
on the horizontal axis)? labor
26a Why? Because producing a yard of cloth uses more labor per unit of
capital than producing a pound of food.
27b The U.S. production bundle that fully employs both factors is 42
yards of cloth and 42 pounds of food.

28b The ROW capital constraint is 2QC + 3QF = 336

29c The ROW capital constraint is a straight line with food endpoint 112
and slope -2/3 (with cloth on the horizontal axis).
30a The ROW production bundle that fully employs both factors is 24
yards of cloth and 96 pounds of food.
31e Comparing relative production across countries: ROW produces

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 more food per yard of cloth than Home and Home produces more
cloth per pound of food than ROW.

32b The pricing equation for food is w + 3r = 63

33a The pricing equation for food is a straight line with rent endpoint 21
and slope -1/3 (with wage on the horizontal axis).
34a U.S. pricing equation for cloth in autarky is 3w + 2r = 84
35e The pricing equation for cloth in U.S. autarky is a straight line with
rent endpoint 42 and slope -3/2 (with wage on the horizontal axis) so
none of the above.
36a Which pricing equation is more steeply downward sloping (with wage
on the horizontal axis)? cloth
37b Why? Because producing a yard of cloth uses more labor per unit of
capital than producing a pound of food.
38d U.S. factor prices in autarky are wage 18 and rent 15.

39d The pricing equation for cloth under free trade is 3w + 2r = 126
40c The pricing equation for cloth in U.S. under free trade is a straight
line with rent endpoint 63 and slope -3/2 (with wage on the horizontal
axis).
41b The factor prices under free trade are wage 36 and rent 9.
42a Comparing the U.S. relative factor prices, the wage relative to rent
under free trade is higher than it was in autarky.

43a The proportional change in the wage is 100%

44e The proportional change in the rent is -40% (none of the above)
45b The proportional change in the price of cloth is 50%
46d The proportional change in the wage is greater than the proportional
change in the price of cloth is greater than zero is greater than the
proportional change in the rent.

47b U.S. owners of capital would oppose a free trade agreement.

48b How can this group be identified in autarky? They own the country’s
relatively scarce factor.
49d This group objects to international trade because their real income
decreases, their factor income declines relative to the price level, and
the purchasing power of their income falls (all of the above).
50b ROW owners of labor would oppose a free trade agreement.