Chapter 7: International Factor Movements Multiple Choice Questions 1. Which of the following differs in its essential analytical framework?

A. International trade in goods B. International conflict resolution C. International trade in services D. International trade in factors of production . International !orrowing and lending Answer" B #. $he slope of the production function measures A. the physical increase in output as country grows. B. the dollar%value increase in output as a country grows. C. the increase in num!er of workers as immigration proceeds. D. the marginal product of la!or. . the marginal product of capital. Answer" D &. International free la!or mo!ility will under all circumstances A. increase total world output. B. improve the economic welfare of everyone. C. improve the economic welfare of workers everywhere. D. improve the economic welfare of landlords 'or capital owners( everywhere. . )one of the a!ove. Answer" *. If the world attained a perfect +eckscher%,hlin model e-uili!rium with trade. then A. workers in the la!or a!undant country would migrate to the capital a!undant country. B. workers in the la!or a!undant country would wish to migrate to the capital a!undant country. C. workers in the la!or a!undant country would have no desire to migrate to the capital a!undant country. D. workers in the capital a!undant country would wish to migrate to the la!or a!undant country. . workers in the capital a!undant country would migrate to the la!or a!undant country. Answer" C

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During the mass migration period of late 11th%early #2th centuries. A. wages rose in the origin countries and fell in the destination countries. B. wages fell in the origin countries and rose in the destination countries. C. wages generally rose faster in the origin countries. D. wages generally rose faster in the destination countries. . wages generally fell faster in the origin countries. Answer" C

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International !orrowing and lending may !e interpreted as one form of A. intermediate trade. B. inter%temporal trade. C. trade in services. D. unre-uited international transfers. . )one of the a!ove. Answer" B

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$he relative price of future consumption is A. the interest rate. B. unknown at any given time. C. the real interest rate. D. the relative interest rate. . )one of the a!ove. Answer" C

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A country that has a comparative advantage in future production of consumption goods A. will tend to !e an international !orrower. B. will tend to have low real interest rates. C. will tend to !e an international investor or lender. D. will tend to have good work ethics. . )one of the a!ove. Answer" A

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A 5.6. multinational corporation A. has a controlling share in a foreign su!sidiary and is not itself foreign controlled. B. is foreign controlled and has no controlling share in a foreign company. C. has a controlling share in a foreign su!sidiary and may itself !e foreign controlled !y a foreign company. D. is a 5.6. company whose ma7or markets are outside the 5nited 6tates. . )one of the a!ove. Answer" C

12. Why a good is produced in two different countries is known as the -uestion of A. internali8ation. B. vertical integration. C. e9ploitation. D. location. . )one of the a!ove. Answer" D 11. $he home location of most of the world:s large multinational companies is A. )orth America and urope. B. )orth America and Asia. C. urope and 6outh America. D. urope and Asia. . )one of the a!ove. Answer" A 1#. Which of the following !est refers to the outright construction or purchase a!road of productive facilities !y domestic residents? A. ;oreign direct investment B. <ortfolio Investment C. 6hort%term capital investment. D. =ong%term capital investment . )one of the a!ove. Answer" A

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1&. >ost direct investment in the 5nited 6tates has come from A. ?apan. B. Canada. C. Western urope. D. 6outh America. . Asia. Answer" C 1*. >ost 5.6. direct foreign investment occurs in A. communications. B. agriculture. C. petroleum. D. manufacturing. . )one of the a!ove. Answer" D 10. >ost foreign direct investment in the 5nited 6tates occurs in A. communications. B. agriculture. C. petroleum. D. manufacturing. . )one of the a!ove. Answer" D 13. >ultinational corporations may provide !enefits to their home countries for the following reasons e9cept which one? A. 6ecure raw materials for the source country B. Allow for e9ports of products. which involve company%specific trade secrets C. Allow domestic firms to secure timely deliveries of commodities or products. which do not en7oy a sta!le or deep market internationally D. 6hift home country technology overseas via licensing . )one of the a!ove. Answer" D

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14. $rade analysis involving multinational corporations differs from our conventional trade analysis !evause multinational corporation analysis involves A. a!solute cost differentials rather than comparative cost differentials. B. the international movement of factor inputs as well as that of finished goods. C. purely competitive markets rather than imperfectly competitive markets. D. portfolio investments rather than direct foreign investment. . )one of the a!ove. Answer" B 1/. Direct foreign investment may take any of the following forms e9cept A. investors !uying !onds of an e9isting firm overseas. B. the creation of a wholly owned !usiness overseas. C. the takeover of an e9isting company overseas. D. the construction of a manufacturing plant overseas. . )one of the a!ove. Answer" A 11. Which of the following could logically e9plain why foreign direct investment might !e attracted to the 5nited 6tates? A. 5.6. wage rates e9ceeding the productivity of 5.6. la!or B. 5.6. price ceilings that hold down the price of energy C. specially high price@earning ratios associated with the stock of 5.6. firms D. Anticipations of future reductions in 5.6. non%tariff !arriers . )one of the a!ove. Answer" B

#2. $he market power of an international company operating wholly owned su!sidiaries in the 5nited 6tates may lead to welfare losses for the 5nited 6tates unless offset !y cost reductions or positive e9ternalities. Which type of cost reduction would not lead to offsetting welfare gains for the whole 5.6. economy? A. ABD generating improved technolog. B. Introduction or development of more productive machinery C. )ew work rules promoting worker efficiency D. =ower wages e9tracted from workers . )one of the a!ove. Answer" D

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#1. >ultinational corporations A. increase the transfer of technology !etween nations. B. make it harder for nations to foster activities of comparative advantage. C. always en7oy political harmony in host countries in which their su!sidiaries operate. D. re-uire governmental su!sidies in order to conduct worldwide operations. . )one of the a!ove. Answer" A ##. American la!or unions have recently maintained that 5.6. multinational corporations have !een A. e9porting American 7o!s !y investing overseas. B. e9porting American 7o!s !y keeping investment in the 5nited 6tates. C. importing cheap foreign la!or !y shifting 5.6. investment overseas. D. importing cheap foreign workers !y keeping 5.6. investment at home. . )one of the a!ove. Answer" A #&. >ultinational corporations A. always produce primary goods. B. always produce manufactured goods. C. always produce services. D. may produce primary or manufactured goods. . )one of the a!ove. Answer" D #*. CCCCCCCCCCC refers to highly educated and skilled people who migrate from poor developing countries to wealthy industrial countries. A. Direct investment B. <ortfolio investment C. $ransfer pricing D. Brain drain . )one of the a!ove. Answer" D

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#0. International la!or mo!ility A. leads to wage convergence !y raising wages in destination country and lowering in source country. B. is in accordance with the specific factors model C. is in accordance with the +eckscher%,hlin factor proportions model. D. leads to wage convergence !y raising wages in source and lowering them in destination country. . is in accordance with scale economy model. Answer" D #3. In practice. international la!or mo!ility is A. a complete complement to trade flows. B. a partial complement to trade flows. C. a complete su!stitute for trade flows. D. a partial su!stitute for trade flows. . )one of the a!ove. Answer" D #4. If one o!serves that ?apan was traditionally a net foreign lender. one could conclude that relative to its international trade and financial partners A. ?apan:s inter%temporal production possi!ilities are !iased toward future consumption. B. ?apan:s inter%temporal production possi!ilities are larger than that of the other countries. C. ?apan:s inter%temporal production possi!ilities are !iased toward present consumption. D. ?apan:s inter%temporal production possi!ilities are not !iased. . )one of the a!ove. Answer" C #/. Aapidly growing developing countries tend to !e !orrowers on the international capital markets. ;rom this information we may surmise that they have a comparative advantage in A. capital goods. B. future income. C. disposa!le income. D. consumer goods. . present income. Answer" B

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#1. It may !e argued that theoretically. international capital movements A. tend to hurt the donor countries. B. tend to hurt the recipient countries. C. tend to hurt la!or in donor countries. D. tend to hurt la!or in recipient countries. . )one of the a!ove. Answer" C &2. $ransactions !etween !ranches of the same multinational corporations account for CCCCCCCC of 5.6. imports. A. one -uarter B. one third C. one half D. three -uarters . all Answer" C &1. $he shift of la!or%intensive assem!ly operations from the 5nited 6tates to >e9ican maqiladora may !e !est e9plained in terms of a theory of A. location. B. vertical integration. C. hori8ontal integration D. internali8ation. . )one of the a!ove. Answer" A &#. When comparing the 5nited 6tates to the 5nited Dingdom. !etween 11/0 and 1112. the relative growth of foreign%owned firms in manufacturing A. grew faster in the 5.D.. whose proportion of foreign%owned firms is larger. B. grew faster in the 5.6.. whose proportion of foreign%owned firms is larger. C. grew faster in the 5.6.. whose proportion of foreign%owned firms is smaller. D. grew faster in the 5.D.. whose proportion of foreign%owned firms is smaller. . )one of the a!ove. Answer" C

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&&. $he inflow of foreign direct investment into the 5nited 6tates has always !een perceived A. with trepidation. B. with resentment. C. with e-uanimity. D. with satisfaction. . )one of the a!ove. Answer" &*. $he purchase !y Eermany:s Daimler%Ben8 of America:s Chrysler corporation is generally viewed as A. direct foreign investment typical of trends in the 11/2s. B. a capital outflow from the 5nited 6tates. since Daimler%Ben8 FmilkedF the assets of Chrysler. C. a ma7or success story of glo!ali8ation. D. an e9ample of international vertical integration. . )one of the a!ove. Answer" &0. In a typical short%run production function. as la!or increases A. the marginal product of capital decreases. B. the overall product of la!or decreases. C. the average product of la!or decreases. D. the marginal product of la!or decreases. . )one of the a!ove. Answer" D &3. American la!or unions accuse 5.6. multinational corporations of all e9cept which? A. $hey en7oy unfair advantages in ta9ation. B. $hey e9port 7o!s !y shifting technology overseas. C. $hey e9port 7o!s !y shifting investment overseas. D. $hey operate at output levels where scale economies occur. . )one of the a!ove. Answer" D

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Essay Questions 1. $he +eckscher%,hlin model is famous for !eing elegant and mathematically sophisticated . yet failing to descri!e reality. ,ne manifestation of this fact is $refler:s Case of >issing $rade. 9plain what e9actly is missing. In what sense is it missing? +ow would you e9plain why it is missing? +ow can a rela9ation of the identical production functions e9plain the case of the missing trade?

Answer" $refler demonstrated that the actual volume of world trade is significantly less than that which would !e predicted !y the +eckscher%,hlin model. ,ne e9planation is that )orth%6outh trade is especially less than would !e predicted !y a factor proportions model. If technologies differ in the poorer countries. then it is possi!le that the cost of producing a product. which uses relatively much of their a!undant factor may still !e higher than the cost of producing it in the other country. #. Factor-intensity reversals descri!e a situation in which the production of a product may !e land%intensive in one country. and relatively la!or intensive in another ' at given relative wage levels(. ;or e9ample. cotton may !e land intensive in the 5.6.. and la!or intensive in gypt where land is relatively scarce and e9pensive. 6uppose factor-intensity reversals were common. +ow would that affect the conclusion that a country in which land is relatively scarce will not !e the country with a comparative advantage in the land%intensive product?

Answer" $he answer here is straightforward 'though it has various interesting implications(. In this case we cannot define or identify a product in terms of its relative factor intensity 'at all or any relative wage level(. $herefore. the +ecksher%,hlin $heorem is ipso%facto inapplica!le. &. Why is it that )orth%6outh trade in manufactures seems to !e consistent with the results or e9pectations generated !y the factor%proportions theory of international trade. whereas )orth%)orth trade is not?

Answer" $here is a clear difference in relative factor availa!ilities !etween )orth and 6outh countries. no matter how we define and measure the factors of production. +ence. the factor%proportions theory of trade may !e sensi!ly e9pected to e9plain the pattern 'though not the volume( of trade !etween these two groups of countries. +owever. the )orth )orth trade partners do not vary significantly in their relative factor availa!ilities. so that other forces. such as scale economies play a relatively large role in determining trade patterns.

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,ne of the commonly used assumptions in deriving the +eckscher%,hlin model is that tastes are homothetic. or that if the per capita incomes were the same in two countries. the proportions of their e9penditures allocated to each product would !e the same as it is in the other country. Imagine that this assumption is false. and that in fact. the tastes in each country are strongly !iased in favor of the product in which it has a comparative advantage. +ow would this affect the relationship !etween relative factor a!undance !etween the two countries. and the nature 'factor%intensity( of the product each e9ports? What if the taste !ias favored the imported good?

Answer" If in fact national tastes were strongly !iased in favor of the product in which the country en7oyed a comparative advantage. then we would e9pect a !ias in favor of re7ecting the +eckscher%,hlin $heorem in actual trade data. $he engine driving the +%, model is that a country should !e e9pected to have a relatively low cost of producing the good in which it has a comparative advantage. +owever. the respective demand forces would tend to raise the price of this good. so that the e9pected pattern would not generally !e o!served. +owever. if the tastes were !iased in favor of the imported good. then the predictions of the +eckscher%,hlin $heorem would !e e9pected to !e generally o!served. 0. Why do you suppose that 6outh%6outh trade does not conform in volume. !ut does conform in pattern with e9pectations generated !y the +eckscher%,hlin model?

Answer" $he pattern of trade is generally o!served to conform to the +eckscher%,hlin models e9pectations. $hat is. the developing countries tend to e9port la!or%intensive goods. such as te9tiles. and import capital%intensive goods such as machinery. $he volume however is -uite lower than what would !e e9pected from the )eoclassical model. $here are many possi!le reasons. such as financial crises necessitating premia in the financing of this trade.

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Quantitative/Graphing Problems 1. In +ome and ;oreign there are two factors of production. land and la!or. used to produce only one good. $he land supply in each country and the technology of production are e9actly the same. $he marginal product of la!or in each country depends on employment as follows" Number o !or"ers Employe# % ( & + , 7 * ) %' %% Marginal pro#uct o $ast !or"er &' () (* (7 ((, (+ (& (( (% ('

Initially there are 11 workers employed in +ome !ut only & workers in ;oreign. ;ind the effect of free movement of la!or from the high wage to the low wage country. When such economic migration ceases. what will !e the levels of production. real wages and the income of landowners in each country? Answer" $he total production in the world will increase. since the addition to production 'the marginal product of la!or( in the target country is larger for each worker than the loss of production 'also the marginal product of workers( in the emigration country. $he real wages will rise in the emigration country and fall in the immigration country. =andlord incomes will rise in the immigration country and fall in the emigration country.

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6uppose Australia. a land '.(%a!undant country and 6ri%=anka. a la!or'$(% a!undant country !oth produce la!or and land intensive goods with the same technology. ;ollowing the logic of the +eckscher%,hlin model from Chapter *. what will !e the incentive for migration once trade is esta!lished !etween these two countries? $hen. using the analysis in Chapter 0. show that a tariff !y one country will create an incentive for la!or migration. ;rom which country to which country will !e the migration? 9plain how you arrived at your answer.

Answer" ,nce trade is esta!lished. there is no longer any incentive for 'economic% !ased( immigration. since the real wages will !e e-uali8ed in !oth. If a tariff is esta!lished in Australia. then the price of the la!or intensive good will !e higher in Australia. as will !e the marginal product of la!or and hence the real wage of workers there. +ence. workers will immigrate from 6ri%=anka to Australia until the two domestic prices are e-uali8ed. &. 5se the diagram !elow derived from ;igure *%* to identify the pre%trade situation for Australia and 6ri%=anka. as discussed in -uestion # a!ove. Where on the ./$ a9is will you find each of the two countries? Which of the two countries has a higher relative wage. //r? Which product is the la!or intensive. and which is the land intensive one? 6how where the relative price of cloth to food will !e found once trade opens !etween these two countries. 6how where the relative wages of each will appear.

Answer" Gou will find 6ri%=anka to the left of Australia on the ./$ a9is. Australia has a higher relative wage. ;ood is the land intensive product. $he relative price <C@<; is found !etween the two autarkic prices. $he post trade relative wage is !etween the two autarkic ones on the vertical a9is.

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5sing the figure a!ove from -uestion &. demonstrate what happens to the composition of production 'that is -uantity of cloth per 1 unit of food( in Australia once trade is esta!lished !etween the two countries. Which country will e9port cloth? What happens to the relative income of workers in Australia as a result of trade? Does it increase or decrease? Would land owners in Australia lo!!y for or against free trade?

Answer" $he proportion of food to cloth will increase in the production of Australia 6ri =anka will e9port cloth. $he relative 'and real( incomes of workers will fall in Australia as a result of trade. =and ,wners in Australia should lo!!y in favor of trade. 0. Imagine that the relative capital a!undance of Australia was so much greater than that of 6ri%=anka. that we would have to locate Australia far to the right on the D@= a9is. If this were so far to the right that there was no area of overlap on the w@r a9is. then what product would Australia e9port? Is this answer different from that in -uestion * a!ove? Will the relative wages as calculated now !e the same or different from those calculated in -uestion *?

Answer" Australia would still e9port food. which is the same as in -uestion *. As a result of trade. wages will fall in Australia and will rise in 6ri%=anka. +owever. in this case. the wages in Australia will remain higher than in 6ri%=anka. creating an incentive for migration from the latter to the former country.

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