2020 International Trade Tutorial Booklet With Answers

International Trade Tutorial Booklet
INTERNATIONAL TRADE
(ECON 1086- RMIT, Australia)

(ECON 1089- SIM, Singapore)
(ECON 1269- RMIT, Vietnam)
Tutorial questions
Note: Tutorials are for discussion, we will go over the questions in each tutorial, but
we would like for you to bring your own questions and present them to the class to
motivate discussion.
THIS IS THE BEST SOURCE OF QUESTIONS TO PREPARE YOU FOR THE

FINAL EXAM.
ADDITIONAL QUESTIONS WILL NOT BE PROVIDED.
IF YOU HAVE QUESTIONS PLEASE CONTACT YOUR LOCAL LECTURER.
1
TUTORIAL 1
MCQs
1. The most general description of globalization is

A. Large scale movement of labor across countries
B. Expanded economic interaction between countries
C. Large scale movement of goods across countries
D. Large scale movement of capital across countries
Answer: B
2. The definition of “openness” is

A. Sum of exports and imports as a percentage of GDP
B. Exports minus imports as a percentage of GDP
C. Exports plus imports as a percentage of the population.
D. Exports minus imports.
Answer: A
3. If the People’s Bank of China buys US Government Bonds, then from the US
point of view this would be called
A. Inward FDI
B. Outward FDI
C. Inward Portfolio Investment
D. Outward Portfolio Investment
Answer: C
4. “Offshoring” might not be necessary if a country allowed unrestricted

A. Immigration of labor
B. Emigration of labor
C. Inward FDI
D. Outward FDI
Answer: A
5. According to the lecture notes a new reason why global trade declined by 30%
after the 2009 international financial crisis is that
A. International FDI flows declined sharply
B. Countries are much more linked than before in terms of international supply
chains
C. The price of oil increased which grounded large number of container ships
D. Escalating trade wars much like 1930
2
Answer: B
Short answer questions (write a maximum of 100-150 words for each)
1. How do economists generally compare openness between two countries and why?
Openness is generally measured as the sum of exports and imports as a proportion of

GDP.
Exports are added to imports because we are interested in looking at the overall exposure
to international trade, not at whether the economy has a current account surplus or deficit.
We then divide by GDP (and multiply by 100) because economies are of different sizes,
so we need to divide by the size of the economy in order to make fair comparisons.
Consider two countries, A and B. A is double the size of B. If the volume of exports and
imports is the same for both countries, then we cannot say that there are both equally
exposed to trade. Openness in B is much bigger, that is, as a proportion of its total
economic activity, trade has a bigger role in country B than in A.
2. Globalization refers to many factors affecting modern society. However, economists

have more specific definitions of globalization. Explain what these are?
Globalization can point toward anything from watching movies made in India to eating
Sushi in Amsterdam. It can even explain things like a convergence of fashion across
countries.
These examples can often have an underlying economic process behind them. However,
economists particularly focus on factors such as trade (exports and imports), foreign
direct investment, offshoring and immigration. That is, economics deal with how
resources are used for production, so globalization from an economic standpoint deals
with how final products and services are transferred across countries and how the inputs
of production move across international lines.
3. Preferential trade agreements have become increasingly common in the international

trade system. Explain why, taking into consideration GATT/WTO.
Preferential Trade agreements (PTAs) have become increasingly common for a variety of
reasons. Arguably, one major factor driving this is the fact that the WTO has failed to
generate a consensus on what international trade looks like. As a result, countries resort
to bilateral agreements.
4. Discuss the future of preferential trade agreements and what additional factors they are
likely to incorporate.
3
To avoid a race to the bottom and a more fair international trade system, various nations
are incorporating other goals into PTAs. For instance, labor rights and wider development
outcomes have become central to the new PTAs. Uptake of these new agreements,
however, remains low.
4
TUTORIAL 2
MCQs
1. In free trade a country will not trade if
A. Autarky prices and free trade prices are the same.

B. Autarky prices are larger than free trade prices.
C. Autarky prices are smaller than free trade prices.
D. The absolute value of autarky prices are negatively correlated with free trade
prices.
Answer: A
2. The Ricardian Model suggests that international trade is determined by

A. Imperfect competition.
B. The demand side of the market.
C. The opportunity cost of producing goods.
D. The abundance of labour relative to capital within an economy.
Answer: C
3. Consider the Ricardian model with two countries, Home and Foreign, and two
goods, X and Y. If no country has absolute advantage in good X but Foreign country has
absolute advantage in good Y, we can conclude that:
A. There are no gains from trade.

B. Home country will export good X.
C. Foreign country will import good Y.
D. Foreign country can produce more of both goods under autarky.
Answer: B
4. In the Ricardian World, the statement "Relative to Australia, Singapore has a

lower opportunity cost of producing services in terms of manufacturing" is equivalent to
A. Australia has no comparative advantage over Singapore.
B. Singapore has an absolute advantage over Australia in services.
C. Australia has an absolute advantage over Singapore in manufacturing.
D. Australia has a comparative advantage over Singapore in manufacturing.
Answer: D
5
1. Consider two economies: ‘Papua New Guinea’ and ‘Vanuatu’ and two goods: Cassava
and Coffee. Imagine that 1 farmer in one season in Papua New Guinea can produce 1 unit
of cassava or 3 units of coffee, while 1 farmer in one season in Vanuatu can produce 2
units of cassava or of coffee. Explain the concept of comparative advantage in these
countries. What can you say about patterns of trade between these nations?
Comparative advantage (CA) is determined by opportunity costs. The opportunity cost of

producing 1 unit of cassava in Papua New Guinea (PNG) is 3 units of coffee, while the
opportunity cost of producing 1 unit of cassava in Vanuatu is 1 unit of coffee.
Thus, PNG has a high opportunity cost of producing cassava. Alternatively, we can say
that PNG has a lower opportunity cost in terms of coffee.
Comparative advantage is the ability of a given country to produce a good more

efficiently. A low opportunity cost implies efficiency. Consequently, in free trade PNG is
likely to export coffee. More exports of coffee from PNG will result in a decrease in the
price of coffee in Vanuatu. As a result, income from coffee production will be lower than
from Cassava production. Thus, Vanuatu has a CA in the production of cassava and will
export this good.
2. Following on from the previous question, what can you about farmer income in
autarky in Papua New Guinea? Remember to define autarky.
Autarky occurs in the absence of international trade. In autarky consumers in PNG

consume both domestically produced cassava and coffee. Income from each activity is
assumed to be equal to total revenue (𝐼𝐼 = 𝑃𝑃 × 𝑄𝑄). Let 𝑄𝑄 𝐶𝐶 be quantity of coffee and 𝑄𝑄 𝐾𝐾 be
the quantity of cassava.
We know that 𝑄𝑄 𝐶𝐶 = 3, so the income from coffee is 3𝑃𝑃𝐶𝐶 and the income from cassava is
𝑃𝑃𝐾𝐾 × 1 = 𝑃𝑃𝐾𝐾 . We also know that in autarky people consume both coffee and cassava.
For this to happen, producers need to be indifferent between growing both goods. (If not,
they would only grow one of the two). So income from growing coffee must be the same
as income from growing cassava or
𝐼𝐼 𝐶𝐶 = 𝐼𝐼 𝐾𝐾 ,
Alternatively, that equation suggests that 3𝑃𝑃𝐶𝐶 = 𝑃𝑃𝐾𝐾 .
So if 𝐼𝐼 𝐶𝐶 & 𝐼𝐼 𝐾𝐾 are both 100 and there are 50 farmers producing each, then GDP = 10,000.
3. Following on from the previous question, what can you about farmer income in free
trade in Papua New Guinea? Is this bigger or smaller than in autarky?
6
In free trade, PNG exports coffee and imports cassava. For that to be true, it must be the
case that the free-trade price of coffee is greater than the autarky price and vice-versa.
Moreover, if farmers export coffee, it should also be the case that the opportunity cost of
producing coffee falls. That is, income that farmers get from growing coffee must
increase relative to the income from growing cassava.
Consequently, 3𝑃𝑃𝐶𝐶 > 𝑃𝑃𝐾𝐾 or 𝐼𝐼 𝐶𝐶 > 𝐼𝐼 𝐾𝐾 .
A simple demand and supply diagram shows that when countries export a good, they
must supply more of this good, which means that more farmers are pulled out of cassava
and into coffee production. Figure 1 shows how the price increase in the coffee sector
increases supply. More supply results from more farmers growing coffee.
Simultaneously, less farmers are growing cassava. So, more people earn 𝐼𝐼 𝐶𝐶 than 𝐼𝐼 𝐾𝐾 . This
suggests that national income increases.
Figure 1: Free trade - Coffee and Cassava in PNG
7
TUTORIAL 3
1. Chocolate candy is a monopolistic competition industry in both the US and the EU.
Previously, neither the US nor the EU allowed imports of chocolate candy from each
other. Now both introduce free trade in chocolate candy. The result is that the demand
curve in the US will become
A. More elastic and so will the EU’s.
B. More elastic, and therefore, the EU’s less elastic.
C. Less elastic, and therefore, the EU’s more elastic.
D. Both (B) and (C) can be correct.
Answer: A
2. The production of home appliances is a monopolistic competitive industry in both the

US and China. Neither the US nor China allow the other’s appliances enter their
respective countries. However, if the US and China did establish free trade in appliances,
the consumers in both countries will
A. Pay a lower price and get a higher variety
B. Pay a lower price and get a lower variety
C. Pay a higher price and get a greater variety
D. Pay a higher price and get a lower variety
Answer: A
3. Japan imports $1 billion of garments from Indonesia, but does not export any to
Indonesia. The measure of the intra-industry trade is
A. 2
B. 1
C. 0.5
D. 0
Answer: D
4. In the Melitz model, firms

A. Produce differentiated products with heterogeneous costs
B. Produce homogeneous products with heterogeneous costs
C. Produce differentiated products with homogeneous costs
D. Produce homogeneous products with homogeneous costs
Answer: A
5. The reason why the most efficient firms in a Melitz industry make greater profits
under free trade is due to the fact that they
A. Have low marginal costs
B. Operate under increasing returns to scale
C. Have low export costs
8
D. Have low marginal costs and operate under increasing returns to scale
Answer: D
1. Explain the following sentence: “The concept of comparative advantage is not always
a useful explanation for international trade”.
Comparative advantage is useful at determining trade patterns in the presence of big

differences between countries. For example, a country with a large endowment of
workers may be able to produce labor intensive goods cheaper than a country with few
workers. This advantage in production can determine patterns of trade.
In practice, however, trade occurs between very similar countries, like Australia and New
Zealand or Germany and Belgium. Often trade between these nations cannot be explained
by comparative advantage because nations are importing or exporting very similar goods,
like cars or furniture.
Patterns of trade in these cases are determined by increasing returns to scale, which arise
from specializing in particular product types, like a specific car model. Hence, these
patterns of trade tend to arise in the presence of monopolistic competition.
2. Belgium and Germany are both major exporters of chocolate. Explain why consumers
in Germany are able to purchase chocolates from Belgium and vice-versa.
Intra-industry trade model explain product differentiation between firms in different

countries present consumers with greater variety. Demand for greater variety of goods is
a key driver of intra-industry trade.
Consumers in Germany are, therefore, likely to buy Belgium chocolates because they are
perceived as of different quality with different characteristics than the German kind. The
opposite is true in Belgium. Thus, trade allows firms to cater to the needs and tastes of a
wider variety of consumers.
3. Nigeria is keen to increase tariffs and non-tariff barriers to protect their local garment
manufacturing industry. Assuming that firms in Nigeria are heterogeneous, what are the
potential efficiency implications of this policy?
According to the Melitz model, trade raises industry productivity by increasing market
share of more productive firms at the expense of less productive firms. That is, greater
competition arising from trade means that the strongest firms will both survive and thrive.
9
Nigeria’s policy of raising tariffs and non-tariff barriers will decrease trade and therefore
decrease competition. Consequently, if the Melitz Effect holds, we could expect that this
policy decreases the average productivity of firms in Nigeria’s manufacturing sector.
10
TUTORIAL 4
1. Dell, an American company, and Acer, a Taiwanese company, make laptops.

According to the Cournot model, Dell will decide on how much to produce for the US
and Taiwanese markets respectively by
A. Making conjectures about what Acer will sell in the US and the Taiwanese markets
respectively.
B. Making conjectures about what prices Acer will charge in the US and the Taiwanese
markets respectively
C. Assessing cultural differences and similarities between Japan and Germany
D. Weighing its reputation in the two markets
Answer: A
2. If the good being sold in an international oligopolistic industry is homogeneous then

the best reason why a firm will have a greater market share in its home than a foreign
firm is
A. Lower labor costs
B. Transportation costs
C. Greater reputation
D. Nationalistic consumers in its home country
Answer: B
3. Consider two countries Home and Foreign both of which have at least one firm each
in an oligopolistic industry. The residual demand curve of the oligopolist in Home treats
A. The sales of the Foreign oligopolist in Home as a variable
B. The transportation cost to the Foreign oligopolist as a variable
C. Its own average cost as a variable
D. Its own sales in Home as a variable and the Foreign oligopolist’s sales in Home a
constant
Answer: D
4. The reaction function of an oligopolist is

A. The MR curve derived from its residual demand curve
B. The profit-maximizing outputs for different levels of transportation costs of its
foreign rival
C. The profit-maximizing outputs for different levels of its own marginal costs
D. The profit-maximizing outputs for different levels of sales of its foreign rival
Answer: D
11
1. Consider a world where there are only two major manufacturers of hover boards,
McFly, which is based in Australia and DocBrown, which is based in Singapore. The
hover boards are identical in every way. Describe the Australian market in Autarky.
Autarky occurs in the absence of trade. In this case, McFly is the only producer of hover
boards. It thus acts as a monopolist, which means that it pushes up prices and decreases
quantity to make a large profit.
2. Following on from the previous question and assuming a Cournot world, describe the
Australian market in free trade. Both countries have a 10% tariff on hover boards. What
happens to profits and consumer surplus?
Cournot assumes that firms compete on quantity. Trade liberalization leads to DocBrown
exporting hover boards to Australia. The 10% tariff imposed by Australia means that the
marginal cost faced by DocBrown is larger than the marginal cost faced by McFly.
Therefore, McFly will sell more in the Australian market than DocBrown. However, the
entrance of DocBrown into the market is likely to lead to an overall decrease in the price
faced by consumers. Consequently, consumer surplus will be larger (see Figure 1).
Figure 1: Change in Consumer surplus, autarky versus free trade
The effect on Profits, however, is negative. In Australia McFly is selling less at a lower
price, so profits from domestic sales fall. However, McFly is also exporting to Singapore!
McFly sells a few additional units in Singapore. Those additional units have a lower
profit because McFly consumers in Singapore have to pay a 10% tariff on hover boards.
It is likely that the additional sales to Singapore are greater than the sales lost in Australia
after the entrance of DocBrown, so quantity increases. However, we know that prices will
be lower in Singapore (like they are in Australia) and marginal cost is higher. The effect
of the latter two suggests that overall profist are likely to fall (see Figure 2).
12
Figure 2: Change in profit, autarky and free trade
3. Following on from the question 1 and assuming a Bertrand world, describe the market
in free trade. Both countries have a 10% tariff on hover boards. What happens to profits
and consumer surplus?
Betrand assumes that firms compete on price.
In autarky, both firms act as monopolists.
In free trade, both firms begin to lower down the price. Firms will continue to lower
down the price until they cannot any more.
The 10% tariff imposed by Australia means that the marginal cost faced by DocBrown is
larger than the marginal cost faced by McFly. So, DocBrown will only be able to lower
the price until P=MC+10%.
McFly knows this and will lower the price until P = MC + 9.99999%.
As a result, DocBrown leaves the market altogether. McFly slls its product at a much
lower price than the monopoly price, so consumers benefit. However, there is no trade.
13
TUTORIAL 5
1. In a Pure Specific Factors model

A. Factors are immobile within sectors
B. Factors are immobile between sectors
C. Factors are immobile both within and between sectors
D. Factors are immobile within countries
Answer B
2. There are two sectors: Cars (C) and Wheat (W). Capital (K) is specific to C and Land
(A) is specific to W. If the government imposes a tariff on the imports of W then
A. Both owners of KC and owners of AW will benefit
B. Only owners of AW will benefit
C. Only owners of KC will benefit
D. Neither owners of KC nor owners of AW will benefit
Answer: B
3. In the Mixed Specific-Factors Model, typically

A. L is mobile between sectors but K and A are immobile
B. L and K are mobile between sectors but A is immobile
C. K is mobile between sectors but L and A are immobile
D. L and A are mobile between sectors but K is immobile
Answer: A
4. In the Mixed Specific-Factors Model with two sectors Clothing (C) and Wine (W),
the government imposes a tariff on C. As a result, the change in the welfare of the
workers is ambiguous because
A. w increases; PC increases; PW decreases
B. w remains the same; PC increases; PW decreases
C. PW and w remain the same; PC increases
D. PW remains the same; w increases; PC increases, but more than the increase in w
Answer: D
14
1. Intel, a multinational technology company, has opened up a large manufacturing plant

in San Jose, the capital city of Costa Rica. Intel’s strategy is to bring new technology to
Costa Rica that complements machinery used in the manufacturing of computers, the
technology is such that any worker can use it, regardless of their level of education.
You’ve been asked by the government of Costa Rica to speak to San Jose city planners
about the potential implications that this may have to urbanization. Provide a brief
background theoretical analysis of the situation.
The Ricardo-Viner model or mixed-specific factors model can shed light on this
situation.
The entrance of Intel into the country is likely to increase the value of the marginal
product of labor in the manufacturing sector. This is likely to lead to an increase in
demand for workers, which translates into higher wages. The relatively higher wages in
this sector are likely to drive migration from the rural to the urban sector.
San Jose needs to be ready for a potential surge in migration. In particular it will need to
make sure that it has the infrastructure, housing and services provision necessary to
handle this.
2. Following on from the previous question, the government is worried about a potential
political backlash against Intel. What can you say about profits and wages to inform their
policies?
The entrance of intel into Costa Rica increases the value of the marginal product of
labour in the manufacturing sector. When workers become more productive, the income
accruing to capitalists increases.
The rise in the marginal product of labour also results in higher wages for manufacturing
workers as wages are naturally a function of productivity.
The rising wages in manufacturing drive migration into the city. This puts some
downward pressure on manufacturing wages, although ultimately the higher productivity
means that wages are likely to increase. As workers leave the agricultural sector, the
contraction in the supply of labour pushes up their wages.
The fall in the supply of agricultural workers coupled with higher wages means that
owners of land will have less output and ultimately less profit.
Costa Rica needs to be prepared for a potential political backlash coming from land
owners.
Figure 1 summarises these changes.
15
16
TUTORIAL 6
1. India has an area of 3.287 million sq. kilometers and a population of 1,198 million
while Spain has an area of .50 million sq. kilometers and a population of 44.5 million.
Then,
A. India is the land-abundant country
B. India is both the land-abundant and the labor-abundant country
C. Spain is the land-abundant country
D. Cannot tell because India has more land and labor than Spain does
Answer: C
2. An off-shore oil rig costs $27 million and it takes 10 workers to produce 100,000
barrels per annum. The value of the capital that 5 workers in the clothing industry need to
make 100,000 shirts per year is $45,000. Then
A. The oil industry is both more capital-intensive and labor-intensive than the clothing
industry
B. It is impossible to tell which industry is intensive in which factor because 100,000
barrels of oil cannot be compared to 100,000 shirts
C. The clothing industry is more capital-intensive
D. The oil industry is more capital-intensive
Answer: D
3. In Japan cars (C) are made K-intensively and artistic wall-hangings (W) L-
intensively. If over the next decade Japan accumulates capital but its labor force declines,
its
A. Output of C will increase and its output of W will decrease
B. Output of W will increase but less than the increase in C
C. Output of C will increase and the output of W will be unchanged
D. Output of C will increase but less than the increase in W
Answer: A
4. The Rybczinski Theorem states that

A. Each country exports the good which is intensive in the factor in which it is abundant
B. An increase in the supply of one factor will increase the output of the good that is
intensive in that factor, and a reduction in the output of the other good
C. In each country, the scarce factor’s income falls when trade opens in terms of both
goods and the abundant factor’s income rises in terms of both goods
D. If both countries produce both goods under free trade, then factor prices (such as
wages) will be equalized across countries by trade
Answer: B
17
5. The Heckscher-Ohlin Theorem states that

A. Each country exports the good which is intensive in the factor in which it is abundant
C. In each country, the scarce factor’s income falls when trade opens in terms of both
goods and the abundant factor’s income rises in terms of both goods.
D. If both countries produce both goods under free trade, then factor prices (such as
Answer: A
6. According to the Stolper-Samuelsson theorem

A. If both countries produce both goods under free trade, then factor prices (such as
C. Each country exports the good which is intensive in the factor in which it is abundant
D. In each country, the scarce factor’s income falls when trade opens in terms of both
goods and the abundant factor’s income rises in terms of both goods.
Answer: D
1. In Malawi, for every high school graduate there are 10 people that did not complete the
sixth grade. The government of Malawi has decided to unilaterally decrease tariffs to near
zero. What is likely to happen to wage inequality in Malawi? If the change in inequality
is opposite than expected, that does mean that the theory is wrong? Why or why not?
Malawi is relatively abundant in unskilled labor. So, hiring an unskilled worker is

relatively cheaper than hiring a skilled worker. So Malawi is better at producing unskilled
labor intensive goods than skilled labor intensive goods. So Malawi has a comparative
advantage in unskilled labor intensive goods.
This means that trade liberalization is likely to result in the country exporting unskilled
labor intensive goods. This is the Heckscher-Ohlin theorem.
Exporting unskilled labor intensive goods is going to lead to an increase in relative

demand for unskilled labor. This will drive relative unskilled wages up.
18
Consequently, inequality is likely to decrease. This is the Stolper-Samuelson theorem.
If inequality actually increases, it doesn’t mean that the theory is necessarily wrong.
Rather, it could be that other factors are affecting wages simultaneously. For example,
Malawi could have imported new technology that is complementary to skilled labor. New
technology would naturally lead to an increase in demand for skilled labor, thus
increasing inequality.
If inequality is increasing it means that the skill-enhancing trade effect is greater than the
Stolper-Samuelson effect, not that Stolper-Samuelson is wrong.
19
TUTORIAL 7
1. The import demand curve in the US is obtained as the

A. Demand curve of the US minus the rest-of-the-world demand curve
B. Demand curve of the US minus the rest-of-the-world supply curve
C. Demand curve of the US minus the supply curve of the US
D. Rest-of-the-world demand curve minus the supply curve of the US
Answer: C
2. The rest-of-the world export supply is obtained by taking the difference between the
A. Rest-of-the-world supply curve minus the demand curve of the US
B. Rest-of-the-world supply curve minus the rest-of-the-world demand curve
C. Rest-of-the-world supply curve minus the supply curve of the US
D. Demand curve of the US minus the supply curve of the US
Answer: B
3. If the US imposes a specific tariff on an imported good, it will result in the

A. New MD curve to lie inside and below the original MDUS
B. New XS curve to lie outside and below the original SUS
C. New XS curve to lie inside and above the original SROW
D. New MD curve to lie outside and above the original DROW
Answer: A
4. A country imposing a tariff can benefit in terms of social welfare if

A. The terms-of-trade benefit exceeds the sum of production and consumption distortion
loss
B. The tariff revenue exceeds the sum of production and consumption distortion loss
C. The consumer surplus loss is less than the producer surplus gain
D. The terms-of-trade benefit exceeds the consumer surplus loss
Answer: A
5. If a government set an import quota, then

A. The quota rent will be the same as the tariff revenue
B. The quota rent will be the same as the terms-of-trade benefit
C. Increase in the world price times the amount of post-quota imports
D. Decrease in the world price times the original imports
Answer: A
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6. The optimum tariff rate is given by the

A. Maximum difference between the tariff revenue collected on the one hand and the
sum of consumption and production losses on the other
B. Maximum difference between the terms-of-trade benefit on the one hand and the loss
of consumer surplus on the other
C. Maximum difference between the terms-of-trade benefit on the one hand and the sum
of consumption and production losses on the other
D. Minimum difference between the terms-of-trade benefit on the one hand and the sum
of consumption and production losses on the other
Answer: C
1. Russia is the 25th largest importer in the world. Most recent data indicates that its
imports are led by cars which represent around 4% of total imports. Imagine that the
Russian president has hired you as an advisor. He argues that as a large economy, Russia
could increase tariffs on cars and benefit its citizens. Is he right?
Russia is a very large economy. Consequently, if Russia decides to increase tariffs on

cars, then demand for cars in the world is likely to decrease. The decrease in demand for
cars is likely to decrease the price of cars internationally.
In other words, it is possible that Russians will be importing cars at cheaper prices. If
they do so, then they will gain a terms of trade benefit.
However, the tariff itself creates a distortion. As cars become more expensive within
Russia, demand for cars decreases, so consumers are worse off. Furthermore, the rise in
the price of cars in Russia incentivizes some producers to increase the supply of cars.
Thus, Russia is spending more resources making cars, which is inefficient. The sum of
these distortions is the deadweight loss.
Russia benefits if the terms of trade benefit is larger than the deadweight loss. This is
theoretically possible.
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TUTORIAL 8
1. Terms-of-trade externality occurs when a country imposes tariffs, and as a result, the
A. Exporting country forces the importing country to increase domestic prices
B. Importing country forces the exporting country to increase its own domestic prices
C. Exporting country raises its export prices
D. Importing country forces the exporting country to decrease its export prices
Answer: D
2. “Nash tariffs” occur when

A. Two countries agree to set exactly the same tariff rates on each other
B. Two countries set tariffs on each other unilaterally
C. Two countries set tariffs as agreed upon co-operatively through GATT
D. Two countries set tariffs such that their social welfare is greater than under free trade
Answer: B
3. By the Most Favored Nation clause, if the US charges a 5% tariff on Canadian

furniture, the US
A. Has to also charge a 5% tariff on furniture made in Thailand, a member of GATT like
Canada
B. Can charge less than 5% tariff on Thai furniture
C. Is free to charge any tariff rate on Thai furniture
D. Can charge up to 10% tariff on Thai furniture.
Answer: A
4. If France, a member of the EU, allows the import of cars Made in Germany, another
member of the EU, duty-free but charges a tariff on Japanese cars, it
A. Violates the MFN clause
B. Shows a cultural bias
C. Violates national treatment
D. Is following the principle of optimum tariffs
Answer: A
5. Dumping is defined by GATT when the exporter charges a price below “fair market
value” which can legally mean __________________ or ____________________.
A. Price charged by the importers in their own markets; marginal cost
B. Average Cost plus a markup yielding “reasonable” profits; marginal cost
C. Average Cost plus a markup yielding “reasonable” profits; price charged by the
exporters in their own markets
D. Marginal Cost; Average Cost at the Minimum Wage
22
Answer: C
6. If a pair of countries unilaterally choose environmental policies which affect their

trade policies, the result will be a
A. Free trade equilibrium
B. Cournot equilibrium
C. Nash equilibrium
D. Worsening of the environmental situations for each
Answer: C
7. Suppose that Russia gives greater weight to the welfare of the producers than the
consumers. Then if Russia blocked frozen chicken imports from the United States on
(sham) health grounds and the United States retaliated by banning Russian vodka, then in
Russia
A. The producer surplus gain of the frozen chicken industry will necessarily be less than
the loss of consumer surplus of chicken
B. The producer surplus gain of the vodka industry will be greater than the consumer
surplus loss of chicken
C. The producer surplus gain of the frozen chicken industry may be less than the
producer surplus loss of the vodka industry
D. The producer surplus loss of the vodka industry will be less than the loss of consumer
surplus of chicken
Answer: C
1. Russia is the 25th largest importer in the world. Most recent data indicates that its
imports are led by cars which represent around 4% of total imports. Japan’s main exports
are cars, many of which go to Russia. Japan imports as significant amount of oil from
Russia. Indeed, it is one of Russia’s main clients. If Russia imposes a tariff on cars, what
is Japan’s likely response and what is potentially wrong with that?
Russia and Japan are very large economies. Consequently, if both countries decide to
increase tariffs, then demand for cars and oil in the world is likely to decrease.
The decrease in demand for cars is likely to decrease the price of cars internationally.
Similarly, the decrease in demand for oil is likely to decrease the price of oil
internationally.
In other words, it is possible that Russians will be importing cars at cheaper prices. If
they do so, then they will gain a terms of trade benefit at the expense of Japan. (Japmn is
23
selling cars at a lower price). Similarly, it is possible that Japan will be importing oil at
cheaper prices. If they do so, then they will gain a terms of trade benefit at the expense of
Russia.
If these two forces cancel each other out, then both countries are just left with production
and consumption distortions or deadweight loss.
Consequently, retaliation from Japan means the Russian policies are unlikely to increase
national welfare. Japan takes a hit to retaliate against Russia, so both countries lose out.
24
TUTORIAL 9
1. The infant-industry argument implies that

A. Developing countries should export goods made in small scale industries
B. Developing countries should produce goods for which they need protection now but
will be internationally competitive in the future
C. Developing countries should produce goods which are new because industrialized
countries are already good at producing the older goods
D. Developing countries should follow free trade
Answer: B
2. The opposite of “export-led growth” is

A. Import-led trade
B. Import-Substitution Industrialization
C. Free trade
D. An optimum tariff policy
Answer: B
3. If Vietnam was trying to choose between developing the footwear industry, which it
naturally has a comparative advantage in, and the motor-cycle industry, the choice
amounts to choosing respectively between
A. High current income and low future income
B. Low current income and high future income
C. High current income but even higher future income
D. Low current income but even lower future income
Answer: C
4. A country will choose to exploit its current comparative advantage instead of

protecting an industry to promote future comparative advantage when
A. The interest rate is high
B. The interest rate is low
C. The growth rate of expertise is high
D. Time horizon of decision-making is long
Answer: A
25
1. Imagine that you work for the World Bank and you have been called to Namibia to aid
the new president of Namibia come up with a new international trade strategy. Namibia is
a small developing country in Africa, with a small manufacturing sector and a large
agricultural sector. You are told that the new government is interested in moving away
from agriculture and into manufacturing. The government wants to pursuit a policy of
import substitution industrialization. Explain what is import substitution industrialization
and how can it affect Namibia’s welfare. What role does learning by doing play and
when does it make sense for the government to interfere?
Import substitution industrialization will essentially require Namibia to impose tariffs or

quotas in the manufacturing sector. The tariffs will essentially incentivize local producers
to enter the market.
The theory suggests that in time, local producers will become productive. However, there
is no empirical evidence of that ever happening.
As a result, import substitution will only make manufacturing goods more expensive in
Namibia, thus lowering welfare.
2. What role does learning by doing play with import substitution?
Theoretically, import substitution would allow producers to learn by doing. The idea was
that by protecting an industry from competition, producers would get a chance to figure it
out.
In practice, however, the argument is somewhat flawed because if learning curves are
steep enough and if there is credit available, then private producers are likely to embark
on new initiatives on their own.
Overall, in this case, trade policy is not useful, unless there are significant learning by
doing externalities.
26
TUTORIAL 10
1. According to the Cournot model if Toyota and GM produced identical cars, had the
same marginal costs, and if the transportation costs between Japan and the US was zero,
then
A. GM’s sale will be in proportion to the US market relative to the Japanese market
B. Japanese sales will be higher than GM’s in the US because Japanese cars are more
fuel efficient
C. GM and Toyota will split the US market equally
D. GM and Toyota will charge the same price but their sales are not predictable by the
market
Answer: C
2. According to the Bertrand model, if Toyota and GM make identical cars at identical
marginal costs, and, in addition, we can assume no transportation costs and free trade
A. Toyota will charge a higher price and sell less in Japan
B. Toyota and GM will charge the same price in both the markets
C. GM will charge a higher price in the US but still sell more than Toyota because the
US is the larger market
D. Toyota and GM will split both the Japanese and the US market evenly, but be free to
charge different prices
Answer: B
3. According to the Bertrand model, if Toyota and GM make identical cars at identical
marginal costs, and no transportation costs, if there is a VER on Toyota then
A. Toyota will raise its price in Japan but GM will lower its price in Japan
B. GM will raise its price in the US, as will Toyota
C. GM will raise its price in the US, but Toyota will lower its
D. Both firms will still leave price equal to marginal cost in the US market
Answer: B
4. According to the “Stackelberg leader” model, if Toyota and GM make identical cars at
identical marginal costs, and no transportation costs, if there is a VER on Toyota then
A. Toyota and GM will choose prices simultaneously for the US market
B. Toyota will wait for GM to announce first what GM will charge for the US market
C. GM will wait for Toyota to announce first what Toyota will charge for the US market
D. Either GM or Toyota can be the price leader in the US
Answer: B
27
5. The common result in a Cournot model of duopoly, consisting of GM and Toyota,

from imposing a tariff on Toyota’s sales in the US or an export subsidy to GM to sell
in Japan
A. GM’s profits will increase and Toyota’s decrease
B. GM’s reaction function will move outward in both cases
C. Toyota’s reaction function will move inward in both cases
D. GM’s reaction functions will remain unchanged in both cases
Answer: A
1. Explain what happens in the presence of a tariff in a Cournot world with two countries
and two firms. What happens to domestic welfare?
The tariff increases the cost of exporting for the foreign firm. This gives more market
power to the domestic firm, which is able restrict output and charge higher prices.
Overall, this hurts consumer welfare. However, by pushing the foreign competitor out of
the domestic economy, the local producer’s surplus increases. The overall effect on total
welfare depends on which effect is bigger (see Figure 1).
Figure 1: Welfare after tariff, Cournot world
2. Explain what happens in the presence of a tariff in a Betrand world with two countries
and two firms. What happens to domestic welfare?
28
The tariff increases the cost of exporting. This raises domestic prices by the size of the
tariff. After fierce competition both firms charge at marginal cost plus the tariff. The
amount of output is restricted, which raises domestic producer surplus. However, the fall
in consumer surplus is larger, which leads to an overall deadweight loss (see figure 2).
Figure 2: Welfare after tariff, Bertrand world
29
TUTORIAL 11 (Chapters 11 &12)
1. According to traditional trade theory, if the US is skilled-labor abundant and China

unskilled-labor abundant, trade between the two will
A. Raise both wS and wU in the US
B. Raise wS/wU in the US
C. Lower wS/wU in the US
D. Lower both wS and wU in the US
Answer: B
2. According to the Feenstra-Hanson model, if the US is skilled-labor abundant and

China unskilled-labor abundant, trade between the two will
A. Decrease wS/wU in both China and the US
B. Increase wS/wU in both China and the US
C. Increase wS/wU in China but lower wS/wU in the US
D. Decrease wS/wU in China but raise wS/wU in the US
Answer: B
3. In a mixed specific-factors model, let there be two sectors, vegetable farming and
wheat farming, with LV and LW being the respective labor forces. If the country has
immigration and the immigrant workers can work as capably in vegetable farming as LV,
then
A. The demand for LV will remain unchanged, but the demand for LW will increase
B. The demand for LV will decrease, but the demand for LW will remain unchanged
C. The demand for LV will increase, but the demand for LW will remain unchanged
D. The demand for LV will remain unchanged, but the demand for LW will decrease
Answer: B
4. In a mixed specific-factors model let there be two sectors, horticulture and

construction. Let the value of the marginal product of labor curves in the two sectors be
denoted by MPLH and MPLC respectively. If there is immigration in the country and the
immigrant workers are complementary to the horticulture sector, then
A. The MPLH will remain unchanged but MPLC will decline
B. The MPLH will remain unchanged but MPLC will rise
C. The MPLH will decrease but MPLC will remain unchanged
D. The MPLH will increase but MPLC will remain unchanged
Answer: D
30
5. When immigrants enter a country, a monopolistically-competitive industry in the

immigrant-receiving country will experience
A. A contraction of each firm’s output and a lesser variety
B. A contraction of each firm’s output but a greater variety
C. An expansion of each firm’s output but a lesser variety
D. An expansion of each firm’s output and a greater variety
Answer: D
6. If the immigrant workers are considered substitutes of native-born-workers, the

immigration-receiving country will benefit because
A. The wage payments to the immigrant workers will be less than that paid to native-
born workers
B. Labor costs will fall in this country
C. The wage payments to the immigrant workers will be less than the increase in the
GDP due to immigration
D. The wage payments to the immigrant workers will now be added to the pre-
immigration GDP of the immigration-receiving country
Answer: C
1. Pauline and Mark are very worried about migration and offshoring. They think that
both will always and necessarily hurt domestic workers. Are they necessarily right?
Pauline and Mark are not necessarily right. To put it simply, whether migration and
outsourcing (or offshoring) lead to lower demand for domestic labor and, consequently,
lower wages will depend on whether foreign workers are substitutes or complements to
domestic labor. Both are theoretically plausible. Most empirical evidence points to a
complimentary effect.
31
QUESTIONS ABOUT LECTURE 12 (Chapter 14)
1. Let there be two sectors: export and import-competing. Globalization raises the price
of the exported good but lowers the price of the import-competing good. If for the
households the income effect is stronger than the substitution effect, then child labor will
A. Decrease in both the export and the import-competing sectors
B. Decrease in the export sector but increase in the import-competing sector
C. Increase in the export sector but decrease in the import-competing sector
D. Increase in both the export and the import-competing sectors
Answer: B
2. Most of the empirical work conclude that child labor is

A. Caused by poverty
B. Caused by a lack of schools
C. Caused by globalization
D. A sociological problem in that it depends on the attitude of the parents toward their
children’ work-leisure tradeoff
Answer: A
3. According to economic theory when multinational corporations employ “sweatshop”

labor in a developing country it will lead to a higher wage rate because the multinational
corporations
A. Bring more capital and technology into the country
B. Have to pay the same wage rate as their home country
C. Increase the demand for labor
D. Increase the supply of labor
Answer: C
1. Dr. Tim Lee is a leading activist against globalization. Dr. Lee argues that
globalization increases societal problems, such as child labor. He cites evidence from a
small developing economy in Africa where child labor increased after trade liberalization
7 years ago. This nation is now a major exporter of agricultural goods to Europe. Will the
experience of that nation be necessarily replicated in other parts of the world?
Theoretically, trade liberalization can increase or decrease child labor in the export sector
of a given country. We know that the increase in exports drives up demand for certain
goods, which leads to an increase in the price of those goods.
Household income is given by the price of the good times the amount of goods sold.
Thus, all things equal, an increase in the price drives up household income.
32
Households can respond to this in two ways. First, the greater income may serve as an
incentive for households to work more hours. That is, the opportunity cost of leisure time
(or not working) increases. We call this the substitution effect because households
substitute away from leisure time and into work.
Alternatively, households can reduce work if they feel that the higher price and income
allows them to meet a minimum substance standard with less work time. We refer to this
as the income effect because leisure time is a normal good and an increase in income
should lead to greater demand for leisure time.
As a result, the relationship between globalization and child labor is theoretically

ambiguous. Indeed, while Dr. Lee finds evidence that child labor increased following
trade liberalization in an African country, in class we discussed evidence from Vietnam
that shows the opposite. Perhaps Vietnamese households have, on average, a larger
preference for leisure time than their African counterparts. Policymakers may want to
investigate why that may be.
33

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International Trade Tutorial Booklet

(ECON 1086- RMIT, Australia)

THIS IS THE BEST SOURCE OF QUESTIONS TO PREPARE YOU FOR THE

ADDITIONAL QUESTIONS WILL NOT BE PROVIDED.

IF YOU HAVE QUESTIONS PLEASE CONTACT YOUR LOCAL LECTURER.

1. The most general description of globalization is

2. The definition of “openness” is

4. “Offshoring” might not be necessary if a country allowed unrestricted

Short answer questions (write a maximum of 100-150 words for each)

Openness is generally measured as the sum of exports and imports as a proportion of

2. Globalization refers to many factors affecting modern society. However, economists

3. Preferential trade agreements have become increasingly common in the international

1. In free trade a country will not trade if

A. Autarky prices and free trade prices are the same.

2. The Ricardian Model suggests that international trade is determined by

A. There are no gains from trade.

4. In the Ricardian World, the statement "Relative to Australia, Singapore has a

Short answer questions (write a maximum of 100-150 words for each)

Comparative advantage (CA) is determined by opportunity costs. The opportunity cost of

Comparative advantage is the ability of a given country to produce a good more

Autarky occurs in the absence of international trade. In autarky consumers in PNG

Consequently, 3𝑃𝑃𝐶𝐶 > 𝑃𝑃𝐾𝐾 or 𝐼𝐼 𝐶𝐶 > 𝐼𝐼 𝐾𝐾 .

Figure 1: Free trade - Coffee and Cassava in PNG

2. The production of home appliances is a monopolistic competitive industry in both the

4. In the Melitz model, firms

Short answer questions (write a maximum of 100-150 words for each)

Comparative advantage is useful at determining trade patterns in the presence of big

Intra-industry trade model explain product differentiation between firms in different

1. Dell, an American company, and Acer, a Taiwanese company, make laptops.

2. If the good being sold in an international oligopolistic industry is homogeneous then

4. The reaction function of an oligopolist is

Short answer questions (write a maximum of 100-150 words for each)

Figure 1: Change in Consumer surplus, autarky versus free trade

Figure 2: Change in profit, autarky and free trade

Betrand assumes that firms compete on price.

In autarky, both firms act as monopolists.

1. In a Pure Specific Factors model

3. In the Mixed Specific-Factors Model, typically

Short answer questions (write a maximum of 100-150 words for each)

1. Intel, a multinational technology company, has opened up a large manufacturing plant

Figure 1 summarises these changes.

4. The Rybczinski Theorem states that

5. The Heckscher-Ohlin Theorem states that

6. According to the Stolper-Samuelsson theorem

Short answer questions (write a maximum of 100-150 words for each)

Malawi is relatively abundant in unskilled labor. So, hiring an unskilled worker is

Exporting unskilled labor intensive goods is going to lead to an increase in relative

Consequently, inequality is likely to decrease. This is the Stolper-Samuelson theorem.

1. The import demand curve in the US is obtained as the

3. If the US imposes a specific tariff on an imported good, it will result in the

4. A country imposing a tariff can benefit in terms of social welfare if

5. If a government set an import quota, then

6. The optimum tariff rate is given by the

Short answer questions (write a maximum of 100-150 words for each)

Russia is a very large economy. Consequently, if Russia decides to increase tariffs on

2. “Nash tariffs” occur when

3. By the Most Favored Nation clause, if the US charges a 5% tariff on Canadian

6. If a pair of countries unilaterally choose environmental policies which affect their