Exam 7: Growth and Trade Part II: Trade Policy

Assume that a capital-abundant country trades only two goods with the rest of the world, medical equipment and corn. Medical equipment is relatively capital-intensive. According to the Rybczynski theorem, the relative price of the goods remaining unchanged, an increase in the country's endowment of capital will cause the output of medical equipment to _____ and the output of corn to _____.

Both the Heckscher-Ohlin theory and comparative advantage based on technological differences assume that the techniques of production in various countries do not change over time.

In international trade jargon, an economy is said to be a large country if:

The impact of economic growth on a country's willingness to trade is determined solely by the extent of the shift of its production-possibility curve.

Increases in a country's endowments of factors of production increase current output, but do not contribute to long-run economic growth.

In Heckscher-Ohlin theory, differences in _____ across countries are considered to be the basis for comparative advantage.

The Heckscher-Ohlin theory suggests that research and development activity is most likely to be concentrated in countries which:

Suppose a large country experiences economic growth which results in an increased willingness to trade. The country's terms of trade will _____ because the increase in demand for imports will cause the price of its exports to _____ relative to the price that it has to pay for its imports.

Suppose country X partially specializes in the production of only two goods, food and clothing. At the initial free trade equilibrium, the country produced 40 units of food and 20 units of clothing. At the same time10 units of food were exported and 10 units of clothing were imported by country X. Now suppose a technological innovation in country X leads to a balanced growth while leaving the relative prices of food and clothing unchanged in the international market. Production of food in country X rises to 50 units and that of clothing rises to 25 units. If consumption of food, on the other hand, rises to 42 units, we can most reasonably conclude that the:

In a country that produces only wine and guns, which of the following is least likely to lead to biased growth?

Country X produces two goods, guns and roses, using labor and land. Assume that production of guns is relatively labor-intensive and production of roses is relatively land-intensive. Suppose a large number of workers from a neighboring country migrate to country X. Carefully explain all the predictions of the Rybczynski theorem' about the changes in output of both guns and roses in country X. Be certain to explain any shifts in resources from one industry to the other.

Suppose the United States exports capital-intensive goods like construction equipment to the rest of the world and imports clothing, a labor-intensive good. Both the goods use capital and labor as their only inputs. Recently the capital endowment of the U.S. has increased substantially, but the size of the labor force has remained unchanged. A)What is the effect of the change in endowment on the shape and position of the production-possibility curve of the U.S.? Illustrate your answer with the help of a suitable diagram. B)What is the effect of such changes in factor endowment on the actual production quantities of the two goods in the United States, assuming the product price ratio remains unchanged in the international market? Explain and illustrate graphically. C)What is the effect of such changes in factor endowment on the United States' willingness to trade?

The Dutch disease refers to a situation in which new production of a natural resource results in deindustrialization.

When a small, initially closed country engages in free trade:

Which of the following is true of product cycle hypothesis?

New technology developed by a multinational corporation in one of its research facilities in a leading developed country can be transferred within the corporation to the affiliates in other developed countries, but not to the affiliates in developing countries.

Which of the following is most unlikely to lead to a reversal of a country's trade pattern?

Technology-based comparative advantage:

_____ first presented the product cycle hypothesis.

The Rybczynski theorem suggests that development of new natural resources in a country: