Study Guide: Midterm 1
Your NOTES! No really, your NOTES. Seriously, study your NOTES!
Your Homework. Please, please study your homework for the love of pete.
Trade under Supply and Demand
Equilibrium Price, Exports/Imports, Consumer and Producer Surplus
Adam Smith and Absolute Advantage
David Ricardo and Comparative Advantage
Trade under different labor productivity
Trade under constant cost (straight) PPFs
Terms of trade/Consumption Possibilities Frontier, Region of Mutual Advantage
Trade under “curvy” PPFs with Supply and Demand
Equilibrium relative prices, production and consumption calculation, gains from trade
Short run and long run effects of trade
Heckscher-Ohlin model
Stolper-Samuelson theory
Factor Price Equalization
Intra-Industry Trade
Gravity Model
Balanced vs. Biased growth
Rybczynski
Immersizing Growth
Growth and trade in reality, openness to trade
Book Questions and Essay Questions
Ch. 2: #11
Q2.1 Assume that there are only two countries in the world, Pacifica and Atlantica. Both countries produce and consume surfboards. The pre-trade price of surfboards in Atlantica is lower than the pre-trade price of surfboards in Pacifica. Draw a two-graph diagram to depict the Pacifica and Atlantica markets for surfboards illustrating the pre-trade price difference. Now assume that free trade opens up between Pacifica and Atlantica. Depict a plausible world price in the graphs. Using what you have learned about consumer and producer surplus, describe what happens to consumers and producers in each country as a result of the move to free trade. What happens to overall economic welfare in the two countries? Be sure to label and refer to the graphs in your answer.
Q2.2 What is the logic of producing winter clothing in countries whose residents have very little demand for such clothing?
Ch. 3: #8
Q3.1 Suppose labor productivity in France is such that one hour of labor is required to produce one gallon of wine while two hours of labor are required to produce one pound of cheese. Assuming the availability of 1 million labor hours, draw a constant cost production possibilities curve for France with cheese on the vertical axis and wine on the horizontal axis. If France has a comparative advantage in the production of wine, show where France will produce on its production possibilities curve. If the free trade price of wine is two pounds of cheese per gallon, draw a trade line and use it to illustrate how France can gain from trade.
Ch. 4: #3
Q4.1 Explain how tastes or preferences can reverse the predictions made by the Heckscher-Ohlin trade model so that, for example, labor-abundant countries import labor-intensive goods.
Ch. 5: #9
Q5.1 Hollywoodland, being self-sufficient in most products, trades only two goods with the Rest of the World (ROW), movies and automobiles. Both of these goods are produced using skilled labor (L) and capital (K) with the returns to capital assumed to be the interest rate (r) and the returns to skilled labor being the wage rate (w). The production of automobiles is capital intensive relative to the production of movies and Hollywoodland is skilled-labor abundant relative to the ROW.
- State the Heckscher-Ohlin Theorem and use it to predict the pattern of trade between Hollywoodland and the ROW.
- If the price of imports coming into Hollywoodland were to rise, what would happen to the factor returns in Hollywoodland? State the theorem used to come up with your answer and briefly, the intuition behind the theorem.
Q5.2Outsourcing, the exporting of jobs from one country to another, was not an issue when the factor-price-equalization theory was developed. Does the existence of outsourcing change the implications of the theory? Why or why not?
Ch. 6: #9 – FYI, the 13th edition of the text and the 14th edition have different questions that test the same concept.
Q6.1 What is intra-industry trade? Is intra-industry trade consistent with the predictions of the Heckscher-Ohlin theory? Clearly explain why it is or is not consistent with Heckscher-Ohlin.
Ch. 7: #9
Q7.1 Explain the connection between openness to trade and economic growth in a country.