Exercises 1 1. The gains from foreign trade are normally maximized through (L1) A. a system of reciprocal tariffs. B.

monopolistic elements in product and factor markets. C. international specialization according to comparative advantage. D. self-sufficiency in production and consumption. 2. In international trade, dumping refers to (L1) A. environmental damage caused by trade. B. selling at artificially low prices in international markets. C. selling at artificially high prices in international markets. D. import restrictions. A tariff A. B. C. D. is a (L1) quota on imports. subsidy to exporters. tax on imports or exports. limit on the quantity of exports.

3.

4. Underdeveloped countries often try to justify tariff imposition on the basis of increased (L2) A. economic efficiency in resource allocation. B. consumption through lower product prices. C. economic growth through infant industry protection. D. growth through technological advances. 5. The current account in a countrys balance of payments accounting includes the sum of the countrys (L2) A. B. C. D. balance of trade and its capital account. statistical discrepancy and its flows of funds. net flows of payments for services and its balance of trade. net currency flows and its capital account.

6. A country that imports more than it exports definitely experiences a (L2) A. B. C. D. 7. balance of payments surplus. deficit in its national budget. loss of international power and prestige. balance of trade deficit.

An open- economy model is one that (L3) A. allows for trade among nations B. permits capital flow among nations C. encourages imports but not exports D. both a and b If two countries A and B produce steel and coffee with the following output figures (L3) Steel 20 30 Coffee 40 70

8.

Country A Country B A. B. C. D.

trade will not take place between them A will export steel and B will export coffee A will sell coffee to B but will not buy steel from A B will sell coffee to A but will not buy steel from A

9.

The balance of payment figure in 200X, Malaysia (L3) RM m +1177 +1560 +1192

Visible balance Invisible balance Balance for official financing

It is possible to conclude from these figures that in 200X there was A. B. C. D. 10. an unfavourable balance of trade a capital account deficit a current account deficit a fall in official reserves

Which of the following does not contribute to the current balance? (L3) A. B. C. D. Earnings from tourism. Overseas investment in Malaysias private sector Exports of machinery. Military expenditure overseas

11.

As a result of a tariff on an imported good, (L3) A. Domestic producers are better off because they sell more goods at the same price. B. Domestic producers are better off because they sell more goods at a higher price C. Domestic producers are better off because they sell the same quantity of goods at a higher price. D. Domestic consumers are better off because there are more domestically produced goods available.

Exercise 2

1.

Free trade is based on the principle of (L1) A. B. C. Comparative advantage Comparative scale Economies of advantage

D.

Production possibility advantage

2.

The terms of trade are (L1) A. B. C. D. provisions of international trade legislation. the rate at which goods will exchange for each other in trade. a country's marginal rate of transformation. established by the World Trade Organization [WTO].

3.

The terms of trade measure (L1) A. B. C. D. The income of one country compared to another The GDP of one country compared to another The quantity of exports of one country compared to another Export prices compared to import prices

4.

A deficit in a country's balance of trade occurs whenever (L2) A. money outflows from the country exceed its money inflows. B. the country imports more goods than it exports. C. its currency falls in value relative to other currencies. D. it abandons a fixed international gold standard.

5.

A tariff A. B. C. D.

levied as a percentage of the price of an imported good is a(n) (L2) scientific tariff. protective tariff. ad valorem tariff. substantive tariff.

6.

This table specifies pre-trade costs and suggests that Wonkland has a(n): (L2) A. absolute disadvantage in producing dishes. B. absolute advantage in the production of pots and pans. C. comparative advantage in the production of pots and pans. D. absence of incentives to trade because of absolute advantages in both goods.

7.

This table suggests that prior to trade, the opportunity cost of one pot or pan in Wonkland, is (L3) A. two sets of dishes. B. one set of dishes. C. 1/2 of a set of dishes. D. 1/3 of a set of dishes. 8. This table suggests that prior to trade, the opportunity cost of one set of dishes in Grindland is (L3) A. B C. D. 9. 3 pots or pans. 2 pots or pans. 4 pots or pans. 2.5 pots or pans.

If China could produce all goods at a lower cost per unit than the cost of producing the goods in the Malaysia, China would (L3) A. have a comparative advantage in everything. B. be self-sufficient because there would be no potential gains from trade. C. not trade at all with the United States. D. specialize in those goods in which it has a comparative advantage. An investment by an American designer in a textile mill in Madagascar is a (L3) A. deficit in the balance of payment accounts. B. merchandise import. C. capital export. D. credit in the current account of the U.S. balance of payments.

10.

11.

Which of the following changes would remedy a deficit in the balance of trade and to nhelp bring the current account into balance? A. B. C. D. An increase in imports An increase in exports An increase in invisible earnings A decrease in invisible earnings

Exercise 3 1. The ratio of a nation's average export prices relative to its average import prices is the nations (L1) A. B. C. D. 2. absolute advantage. comparative advantage. terms of trade. exchange rate.

Tariffs and import quotas tend to (L1) A. B. C. D. encourage specialization. increase the volume of trade. increase the gains from trade. reduce the volume of trade.

3.

A country that exports goods worth more than the value of its imports experiences (L1) A. B. C. D. increases in international political power. a balance of payments surplus. expanded standards of living. a balance of trade surplus.

4.

Monetary flows between countries are recorded in accounts called (L2) A. B. C. D. balance of trade accounts. international income accounts. international transaction accounts. balance of payments accounts.

5.

The gain from trade result from (L2) A. B. C. D. 6. specialization comparative advantage tariffs a and b are both correct

A country that exports goods worth more than the value of its imports experiences (L2) A. B. C. D. increases in international political power. a balance of payments surplus. expanded standards of living. a balance of trade surplus.

7.

An adverse change in the U.S. terms of trade occurs when (L3) A. B. C. D. the price of U.S. exports falls relative to the price of imports. it takes more foreign currency to buy dollars. U.S. economic growth is slower than for the rest of our trading partners. there is any change in the consumption possibilities frontier.

8.

This table specifies pre-trade costs and suggests that Wonkland has a(n) A. B. C. D. absolute disadvantage in producing dishes. absolute advantage in the production of pots and pans. comparative advantage in the production of pots and pans. absence of incentives to trade because of absolute advantages in both goods.

9. This table suggests that prior to trade, the opportunity cost of one pot or pan in Wonkland, is (L3) A. two sets of dishes. B. one set of dishes. C. 1/2 of a set of dishes. D. 1/3 of a set of dishes. 10. This table suggests that prior to trade, the opportunity cost of one set of dishes in Grindland is (L3) A. B. C. D. 11. 3 pots or pans. 2 pots or pans. 4 pots or pans. 2.5 pots or pans.

When a manufacturer sells goods abroad for less than the good costs to produce, which of the following is true? (L3) A. B. C. D. An embargo has been established . A quota has been established. The manufacturer is engaged in dumping. There has been an improvement in the terms of trade.

SHORT ESSAY 1. a. b. c. What is an open economy? (3 marks) Explain comparative advantage. (3 marks) State and explain three types of protectionism. (9 marks)

2. a. b. c. d. 3. a. b.

What is a nations balance of payment? (3 marks) What is its purpose? (3 marks) What is trade protection? (3 marks) Cite two of the specific arguments advanced in favour of protectionism.. State 3 ways to correct the balance of payment deficit. (3 marks) Write short notes on each of the following concepts i. Term of trade ii. Balance of trade iii.Balance of payment (2 marks) (2 marks) (2 marks)

a.

Briefly explain 2 trade barriers that are commonly used to control trade among nations. (6 marks)

DATA RESPONSE QUESTION 1. What do you understand by open economy b. List three (3) advantages of international trade (2 marks) (3 marks)

c.

The following questions are based on the production possibilities schedule for nation A and B. Country A B i) ii) Mangoes (tons) 100 700 Durians (tons) 1000 1200 (2 marks)

Define absolute advantages

Identify which country has absolute advantage in Mangoes and Durian production (2 marks) Calculate the opportunity cost of production for Mangoes and Durian for both country (8 marks) Show the output situation after specialization in the form of table (4 marks) What happen to world output ? (2 marks) How much the increase or decrease in output after the specialization? (2 marks) (2 marks)

iii)

iv) v)

d. e.

State two (2) types of trade restrictions

In your opinion, what will be the effect on the volume of international trade due to rising prices of oil (3 marks) (i) Explain the purpose of a countrys balance of payments statement. (3 marks) (ii) State what is shown by the current account in the balance of payment statement (5 marks)

2.

a.

b.

From the figures relating to country Zee Land for 2003 calculate: (i) (ii) (iii) the balance of trade the balance of payments on current account the balancing item (2 marks) (3 marks) (3 marks)

Zee Land, 2003 Visible exports Government transfers (net) Interest, profit and dividends (net) Net transactions in assets and liabilities Private transfers (net) Visible imports

RM m 15,886 +214 +1352 1290 -122 21120

c.

Explain what will happen to the total figures in the current account if the economy is experiencing : (i) a boom (4 marks) (ii) recession (4 marks)

d.

Explain two measures that a country may adopt in order to reduce a recurrent balance of payment deficit. (6 marks)