REVIEW QUESTIONS FOR CHAPTER 1 AND 2

A. Short questions:
1. Why do countries need international trade?
2. What is Bilateral Trade Balance? Give examples for illustration. What are possible
problems of Bilateral trade? Explain.
3. List and explain possible trade barriers which could be implemented by a government.
4. Explain the difference between horizontal FDI and Vertical FDI. In what situation is
each type of FDI applicable?
5. What are objects of study of International Macroeconomics? Provide definition of
these objects.
6. How does exchange rate affect an economy? Provide examples for illustration.
7. What are reasons for international trade? Explain.
8. Explain the concepts: One-factor Economy; Marginal Product of Labor (MPL). Give
examples for illustration.
9. Explain the concepts: relative price, Production Possibility Frontier (PPF),
Opportunity Cost and Indifference Curve (U), A county’s Optimal Equilibrium (OE).
Draw figures of these concepts for PPF, U curves and the OE.
10. What is Term of Trade? Why the Terms of Trade in low and developing countries are
normally low as compared to that of develop countries?

B. Problem solving:
Given the following information about China and the Unites States (in one labor-hour):
China the U.S

5 8
Units of Cloth (C)
Units of Food 4 10 (F)

Using the comparative advantage:

a. Identify the pattern of trade between the two countries and condition for trade
b. Is there international trade between the two countries if the exchange rate is 1C = 2F?
c. Is there international trade between the two countries if the exchange rate is 1C = 1F?
d. If yes, identify how much each country would benefit from trade.