This exam consists of 12 multiple-choice questions and 2 problems. Each multiple choice is worth 2.5 points for a total of 30 points in this section. Answer each multiple-choice question by picking the best option and writing it in the space provided below each question. The point value of the problems are written next to them. Concentrate and think your answers through. All the best.

1. You have the following information for the Ricardian model of trade:

			Steel		Wheat


	Japan		5		15

	USA		10		5

What is the relative price of steel in autarky in Japan?

a. ½

b. 2

c. 1/3

d. 3

Answer:

2. Use the information given in question 1. In addition suppose that Japan and USA both have 60 laborers.

What is the quantity of wheat produced in Japan in autarky?

a. 12

b. 6

c. 4

d. We cannot say without more information about the structure of preferences in Japan

Answer:

3. Consider the information in questions 1 and 2. If trade is opened up between USA and Japan, then the two countries will obviously specialize according to comparative advantage.

Which of the following statements is true?

a. In free trade USA will produce 12 units of wheat

b. In free trade USA will produce 12 units of steel

c. In free trade USA will produce 6 units of steel

d. In free trade USA will produce 6 units of wheat.

Answer:

4. Consider the information given in questions 1,2 and 3. Which of the following statements true?

a. In free trade Japan will produce 12 units of wheat

b. In free trade Japan will produce 12 units of steel

c. In free trade Japan will produce 6 units of wheat

d. In free trade Japan will produce 6 units of steel

Answer:

5. Suppose good x is capital intensive relative to good y and country A is capital abundant relative to country B. According to the Heckscher-Ohlin model of trade (which assumes increasing costs resulting in a concave production possibility frontier)

a. Country A will export x

b. Country A will export y

c. Country B will export x

d. Country A will completely specialize in good x

Answer:

6. Suppose country A is capital abundant compared to country B. Also suppose that good x is capital intensive relative to good y. According to the Stolper-Samuelson theorem, when country A moves from autarky to free trade,

a. Labor benefits

b. Capital benefits

c. The effect on labor is ambiguous

d. Free trade is optimal, both labor and capital benefit.

Answer:

7. Commodity y is said to be capital intensive relative to commodity x if

a. More K is used in the production of y than x

b. Less L is used in the production of y than x

c. A lower K/L ratio is used in the production of y than x

d. A higher K/L ratio is used in the production of y than x

Answer:

8. In the simple Ricardian model of trade, in autarky equilibrium,

a. Production is determined by comparative advantage

b. Relative prices are determined by unit input requirements in the two sectors

c. Countries tend to specialize in the production of a single good

d. All of the above

Answer:

9. Consider the following information

			

			Cotton		Automobiles


	Mexico		10		25

	Argentina	20		20

Which of the following statements is true?

a. Mexico has absolute but not comparative advantage in Cotton

b. Mexico has absolute and comparative advantage in cotton

c. Mexico has neither absolute nor comparative advantage in cotton

D.Argentina has absolute advantage in cotton

Answer:

10. The marginal product of labor in a good x is defined as the extra amount of output that can be produced by using one more unit of labor.

What is the marginal product of labor in cotton in Mexico in autarky?

a. 1/10

b. 10

c. 10/25

d. 2.5

Answer:

Questions (11) and (12) refer to the following information:

Assume that Colombia is labor abundant, Brazil is capital abundant, the calculator industry is capital intensive and the airplane industry is labor intensive. Labor is mobile between the two industries within each country but capital is immobile in the short run. We are right now concerned with the short run.

11. Assume that you live in Colombia. What is the effect of moving from autarky to free trade (in the short run) on capital owners in the Calculator industry?

a. The nominal returns to capital increases

b. The nominal returns to capital decreases

c. There is no effect on the returns to capital

12. Assume that you live in Colombia. What is the effect of moving from autarky to free trade

(In the short run) on capital owners in the airplane industry?

a. The nominal returns to capital increase

b. The nominal returns to capital decrease

c. The nominal returns to capital are unaffected

Part II: Problems:

Consider the following information:

Country A’s labor endowment = 320 units

Country B’s labor endowment = 400 units

		X	Y

Country A	8=aLX	16=aLY
Country B	10=bLX	8=bLY

a. Draw the production possibilities frontier for each country. Be sure to label carefully.

b. Which country has absolute advantage in which good and why? What would the theory of absolute advantage predict about the direction of trade?

c. If free trade according to absolute advantage were allowed what degree of productive specialization would occur? How much of each good would be produced?

d. Now suppose a_LY changes from 16 to 4. Which country has absolute advantage in which good now and why?

e. Which country has comparative advantage in which good now and why? If free trade were to take place according to comparative advantage what can we say about the direction of trade? How much of each good would be produced?

Draw a NEAT diagram and clearly explain the difference between (1) the gains from exchange and (2) the gains from specialization. Assume a straight line production possibilities frontier i.e. assume that opportunity costs are constant as in the simple Ricardian model. Write as much or as little as you think you need to write to show me that you know what the difference is. Please make sure the diagram you draw is neat and clear.

(10 points)