Ecn 160 midterm exam winter 2014 solution

ECN 160A International Microeconomics
Midterm Exam
Winter 2014

I. Multiple Choice (5pts each)
Please write the appropriate answer to each question on a scantron form.

1. What country was the world’s largest exporter of goods in 2009?
A) China
B) Germany
C) the United States
D) Japan
E) None of the above

2. “Vertical FDI” refers to
A) direct investment between industrialized countries.
B) direct investment for the purpose of avoiding trade barriers.
C) direct investment for the purpose of locating production in low-wage countries.
D) direct investment undertaken in order to draw on indigenous technical expertise.
E) none of the above.

3. Analysis of wages and output in Miami following the Mariel boatlift in 1980
A) supports the Rybczinski Theorem.
B) supports the Stolper-Samuelson Theorem.
C) supports the Heckscher-Ohlin Theorem.
D) shows that immigration has little effect on labor markets.
E) none of the above.

4. Most migration takes place
A) with people moving from poor to rich countries.
B) with people moving between rich countries.
C) with people moving from rich to poor countries.
D) with people moving between poor countries.
E) None of the above.

5. In 1950, Raúl Prebisch and Hans Singer hypothesized that the price of primary commodities would
A) increase over time.
B) increase relative to manufactured goods due to growing scarcity.
C) decrease over time.
D) decrease relative to manufactured goods.
E) be more volatile than the price of manufactured goods.

6. Diminishing marginal returns to capital means that:
A) the marginal product of labor declines as the amount of labor used in a sector increases.
B) the marginal product of capital declines as the amount of capital used in a sector increases.
C) the marginal product of capital declines as the amount of labor in a sector increases.
D) the marginal product of labor declines when the amount of capital combined with labor in a sector increases.
E) none of the above.

7. In the specific factors model, real wages
A) increase in terms of the import good.
B) increase in terms of the export good.
C) stay exactly the same.
D) unambiguously increase.
E) none of the above.

8. In the Heckscher-Ohlin model, when countries begin to trade,
A) the labor-to-capital ratio falls in both industries the labor-abundant country.
B) the capital-to labor ratio increases in the capital-abundant country.
C) the marginal product of labor falls in the labor-abundant country.
D) the marginal product of capital increases in the labor-intensive industry and decreases in the capital-intensive industry.
E) none of the above.

9. Leontief
A) found that the least capital abundant countries export the most labor-intensive goods.
B) conjectured that developing countries eventually would experience a declining terms of trade.
C) found that Europe had comparative advantage in both labor- and capital-intensive goods.
D) found that the U.S. exported more capital-intensive goods than it imported.
E) ignored differences in production technologies in his analysis.

II. Answer the following. Show all work.
1. (15pts) Refer to the following table and assume that the total labor supply in Taiwan is 4 and the total labor supply in Vietnam is 8.
Taiwan Vietnam
Telephones produced per worker 10 5
Number of radios produced per worker 50 10
a. What is the opportunity cost of 1 unit of telephones in terms of radios in Taiwan? In
b. Which country has absolute advantage in the production of telephones? Which country has comparative advantage in the production of telephones? Explain.
c. What is the real wage in Taiwan in terms of radios? What is the real wage in Vietnam in terms of telephones?
d. If the two countries begin to trade, what will Taiwan produce and how many?

2. (10pts) Use the information given here to answer the following questions:
Sales revenue = PM x QM = 150
Payments to labor = W x LM = 100
Payments to capital = RK x K = 50
Sales revenue = PA x QA = 150
Payments to labor = W x LA = 50
Payments to land = RT x T = 100
Holding the price of the manufactured good constant, suppose the increase in the price of the agricultural good is 10% and the increase in the wage is 5%.
a) Determine the impact of the increase in the price of the agricultural good on the rental rate for land (RT) and the rental rate for capital (RK).
b) Explain what has happened to the real rental rate for land and the real rental rate for capital.

3. (15pts) Belgium is relatively well endowed with skilled workers compared with China, which is relatively well endowed with unskilled workers. Assume that the production of pharmaceutical products intensively uses skilled workers and the production of toys intensively uses unskilled workers.
a) Which country would you expect to have a higher relative wage in skilled labor with no trade?
b) Which country has the higher relative price of pharmaceutical products under autarky? Why?
c) Under free trade, which country experiences an increase in the relative wage of skilled workers? Explain.
d) Suppose that China began pouring enormous amounts of money into education, increasing the fraction of skilled workers in its labor force. What would happen to Belgium’s gains from trade? Why?

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