Practice Midterm

Section ____________________Student Name__________________________________
ECON 3 Fall 2015A
FIRST MIDTERM EXAMINATION
There are 25 True/False questions worth 2 points each, 1 short answer question
worth 20 points and 3 short answer questions worth 10 points each, for a total of 100
points. Budget your time in each section accordingly. For the short answer section, feel
free to comment and explain answers in bullet points rather than in well-crafted essays.
(i.e. Im more interested in the substance and content of your answer than in the style you
present it.) Please write legibly.
True/False: Use computer scantron. Fill A for True. B for False (2 pts each):
Questions 1-9: Refer to our class discussions and presentation of empirical evidence
that actually characterizes what goes on in the world.
1. Like migration, trade in goods has been an important part of international commerce
for centuries.
2. Countries with higher wage rates cannot be successful exporters on the world market.
3. Trade between developed nations does not conform in pattern with the predictions
generated by the Heckscher-Ohlin model.
4. During the first stages of development, the carbon dioxide emissions per unit of output
increase as the country becomes richer.
5. The workers displaced by import competition represent a large percentage of total
number of workers displaced.
6. The increase in the educational attainment in the U.S. during the last decades has
widened the wage gap between skilled workers and unskilled workers (i.e. college wage
gap).
7. Nestle (a Swiss multinational producer of foods and drinks) builds a new production
factory in Bulgaria to produce Kit Kat chocolate bars. This is an example of foreign
direct investment.
8. An industry is characterized by scale economies, and exists in two countries. Should
these two countries engage in trade then consumers in both countries would have more
varieties and higher prices.
9. Free trade is beneficial only if your country is productive enough to stand up to foreign
competition.

Questions 10 ~ 19: Consider the following Ricardian model with 2 countries
Labor Supply
Rice
Olives
Japan
50
4 workers
8 workers
Italy
200
2 workers
3 workers
Questions 10 ~ 13: Suppose both Japan and Italy are in autarky.

10. Japan has absolute advantage in rice.
11. Japan has comparative advantage in rice.
12. The price of olives relative to rice is lower in Japan than in Italy.
13. Japan is more productive in olives than Italy.
For Questions 14 ~ 19 suppose Japan and Italy engage in free trade (with each
other). In moving from autarky to free trade,
14. The price of olives relative to rice decreases in Japan.
15. The output of olives decreases in Japan.
16. Japanese workers have higher wages than Italian workers.
17. The price of rice relative to olives cannot exceed 2/3.
18. In Italy, the production of olives exceeds the consumption of olives.
19. Japanese workers are better off.
Questions 20 ~ 25: consider the following Heckscher-Ohlin model. U.S. and Canada
produce aircrafts and cars using capital and labor. Aircrafts are capital intensive
and cars are labor intensive. The U.S. is endowed with $450 million worth of capital
and 150 million workers. Canada is endowed with $250 million worth of capital and
125 million workers. Technology is identical in both countries. Labor and capital
are mobile across industries. Assume perfectly competitive product and factor
markets.
20. The autarky price of cars to aircrafts is lower in the U.S.
21. Under autarky, Canadian workers have relatively lower wages than the U.S. workers
in the cars industry.
22. In moving from autarky to free trade, the price of cars to aircraft increases in Canada.
23. In moving from autarky to free trade, the Canadian workers in the car industry are
better off, but the American workers in the aircraft industry are worse off.
24. In moving from autarky to free trade, wage to rental rate increases in the U.S.
25. In moving from autarky to free trade, capital owners are worse off in Canada.

Short Answer 1 (20 points): Ricardian Model
Chile and Honduras are producing bananas and apples. Chile has 400 workers and
Honduras has 200 workers. The following table provides information on the number of
workers needed in each country to produce one unit of each good.
Bananas
Apples
Honduras
10 workers
40 workers
Chile
4 workers
2 workers
(a) What country has absolute advantage in producing apples? (1 point)
(b) What country is more productive in producing bananas? (1 point)
(c) Fill in the following table (4 points):

Opportunity cost of:
Bananas in terms of Apples
Apples in terms of Bananas
Honduras
Chile

(d) Draw the Production Possibilities Frontier for Chile. Carefully label the axes and
specify the slope of the PPF. (6 points)
(e) What should Chile specialize in producing? (1 point)
(f) What should Honduras specialize in producing? (1 point)

(g) Suppose the free trade price of bananas in terms of apples is 3/2. Show graphically
that trade is beneficial to Honduras. Carefully label the axes and specify the slope of the
PPF and CPF. (6 points)
Short Answer 2 (10 points): Discuss two distinct policy tools to reduce the incidence of
child labor in developing countries. Briefly describe the policy tools and the advantages
or disadvantages. In your opinion, which policy can be more effective?

Short Answer 3 (10 points): Many people believe that the goal of international trade
should be to create jobs. Consequently, when they see workers laid off due to a firms
inability to compete against cheaper and better imports, they assume that trade must be
bad for the economy. Do you agree or disagree with this statement? Why, or why not?
Short Answer 4 (10 points): The table below shows productivity for five goods in two
countries:
Turnips (pound/hr)
Pianos (piano/hr)
Nicotine patches (packets/hr)
Fish netting (yards/hr)
Olive Oil (ounces/hr)
Camelot
20
30
60
60
70
Arendale
10
10
15
40
50
Ratio
(1) For each good, calculate the ratio of productivities in Camelot to that in Arendale and
record it in the far right column. (2 points)
(2) List the goods that Camelot has absolute advantage in. Explain (2 points)
(3) Can you predict the pattern of trade? Explain. (4 points)
(4) Which country has a higher standard of living? (2 points)

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Section ____________________Student Name__________________________________

ECON 3 Fall 2015A

FIRST MIDTERM EXAMINATION

Section ____________________Student Name__________________________________

Questions 10 ~ 13: Suppose both Japan and Italy are in autarky.

Section ____________________Student Name__________________________________

Section ____________________Student Name__________________________________

(a) What country has absolute advantage in producing apples? (1 point)

(b) What country is more productive in producing bananas? (1 point)

(c) Fill in the following table (4 points):

Section ____________________Student Name__________________________________

(e) What should Chile specialize in producing? (1 point)

(f) What should Honduras specialize in producing? (1 point)

Section ____________________Student Name__________________________________

Section ____________________Student Name__________________________________

Section ____________________Student Name__________________________________

Section ____________________Student Name__________________________________

(3) Can you predict the pattern of trade? Explain. (4 points)

(4) Which country has a higher standard of living? (2 points)

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