Question 1

The Bastable Test of the infant industry argument for protection asks whether:&#10;A) the short-run losses are less than the long-run gains.&#10;B) protection will actually help to build a profitable industry.&#10;C) foreign governments will retaliate with even larger tariffs.&#10;D) All of the above.&#10;E) None of the above.

Accepted Answer

The Bastable Test evaluates if the short-run costs of protecting an infant industry are outweighed by the long-term benefits once the industry matures and becomes competitive.

Question 2

Engel's law refers to:&#10;A) a relationship between supply and income, which states that food&#10;Supply will rise as income grows.&#10;B) a relationship between demand and income, which states that the income elasticity of food is low.&#10;C) a relationship between supply and income, which states that food supply will fall as income grows.&#10;D) a relationship between demand and income, which states that the income elasticity of food is high.

Accepted Answer

Engel's law states that as income rises, the proportion of income spent on food decreases. This means that the income elasticity of food is low, as demand for food does not increase at the same rate as income. Therefore, choice B is the correct answer.

Question 3

Import substitution was popular during the 1950s and into the early 1980s. Which of the following economist/statesmen was known for his support of the import substitution argument?&#10;A) Alexander Hamilton.&#10;B) Milton Friedman.&#10;C) John Maynard Keynes.&#10;D) Ra&#250;l Prebisch.

Accepted Answer

Raúl Prebisch, an Argentine economist and statesman, was a prominent supporter of the import substitution argument. He believed that developing countries should focus on developing their own industries rather than relying on imports from developed countries.

Question 4

In the two-sector learning-by-doing model of Grossman and Helpman (1990, 1991) with no technological transfers and international trade, countries with a comparative advantage in fast growing industries will:

A) have permanently faster rates of growth than countries with a comparative advantage in slow growing industries.
B) have temporarily faster rates of growth than countries with a comparative advantage in slow growing industries, but the differences in growth rates will eventually disappear.
C) have temporarily faster rates of growth than countries with a comparative advantage in slow growing industries, but the differences in growth rates will eventually disappear and will become stagnant as technological transfers erodes profit margins of the fast growing industry/country.
D) None of the above.

Accepted Answer

In the Grossman-Helpman model, countries with a comparative advantage in fast-growing industries will experience temporarily faster rates of growth due to learning-by-doing effects and the accumulation of knowledge. However, over time, these knowledge spillovers will lead to technological transfers to other countries, reducing the initial competitive advantage and eventually leading to convergence in growth rates. Therefore, option B is the most accurate. Option A is incorrect because it assumes permanently faster rates of growth, while option C is incorrect as it assumes stagnant growth rates, which is not a prediction of the model.

Question 5

The evidence suggests that import substitution policies caused:&#10;A) faster export, economic and total factor productivity growth.&#10;B) faster export growth, but slower economic and total factor productivity growth.&#10;C) slower export growth, but faster economic and total factor productivity growth.&#10;D) slower export, economic and total factor productivity growth.

Accepted Answer

Import substitution policies typically lead to slower export, economic, and total factor productivity growth because they focus on domestic industries' development at the expense of international trade and efficiency.

Question 6

In the two-sector learning-by-doing model of Grossman and Helpman (1990, 1991) with no technological transfers and international trade, countries with a comparative advantage in fast growing industries will:

A) have permanently faster rates of growth than countries with a comparative advantage in slow growing industries.
B) have temporarily faster rates of growth than countries with a comparative advantage in slow growing industries, but the differences in growth rates will eventually disappear.
C) have temporarily faster rates of growth than countries with a comparative advantage in slow growing industries, but the differences in growth rates will eventually disappear and will become stagnant as technological transfers erodes profit margins of the fast growing industry/country.
D) None of the above.

Accepted Answer

Countries with a comparative advantage in fast growing industries will have permanently faster rates of growth than countries with a comparative advantage in slow growing industries because the learning-by-doing effect will lead to a permanent increase in productivity in the fast growing industries.

Question 7

The terms of trade (ToT) refer to:&#10;A) the rate at which a country can exchange exports for imports in the world market.&#10;B) the rate at which one country's currency exchanges for another country's currency.&#10;C) the relative prices of goods in a country before it opens up to free trade.&#10;D) the amount of labor used to produce exports as compared to the amount of labor that would have been used to produce the goods imported.

Accepted Answer

The terms of trade (ToT) refers to the rate at which a country can exchange its exports for imports from other countries in the world market. It is the ratio of the prices of a country's exports to the prices of its imports. This ratio provides an indication of the volume of imports that a country can purchase with a given quantity of exports.

Question 8

Under certain circumstances, economic growth that increases an economy's capacity to export can trigger a worsening terms of trade that completely eliminates the welfare gains from the increased output and trade. This is called:

A) the Porter-Linder hypothesis.
B) the combinatoric growth hypothesis.
C) the Heckscher-Ohlin hypothesis.
D) the immizerizing growth hypothesis.

Accepted Answer

The immizerizing growth hypothesis suggests that under certain conditions, economic growth may result in a decline in a country's terms of trade to the extent that the welfare gains from the increased output and trade are completely eliminated. This occurs when the increased production leads to a surplus supply of goods, causing their prices to fall on the world market, and thus reducing the relative prices of the country's exports. As a result, the country may end up worse off than before, despite achieving higher levels of economic growth and export capacity.

Question 9

Hymans and Stafford (1995) present a model that illustrates how, under free trade, economic growth in a poor country can cause a decline in a rich country's welfare because:&#10;A) the poor and rich countries PPF curves and relative prices become increasingly similar.&#10;B) the poor and rich countries PPF curves and relative prices become increasingly dissimilar.&#10;C) the poor and rich countries compete for similar resources causing input prices to increase.&#10;D) the poor and rich countries actually increase their trade when the terms of trade in the rich country improve.

Accepted Answer

Under free trade, if the poor and rich countries' production possibility frontiers (PPF) and relative prices become increasingly similar, the rich country may lose its comparative advantage, leading to a decline in its welfare.

Question 10

Hymans and Stafford achieve their surprising result that a country that trades can suffer welfare losses because, in their two-country model, they assume that:&#10;A) the poor country discovers oil.&#10;B) the rich country increases the size of its government too much.&#10;C) the rich country stops investing altogether while the poor country increases investment.&#10;D) the poor country steals technology from the rich country.

Accepted Answer

In Hymans and Stafford's model, if the rich country stops investing while the poor country increases investment, it can lead to a situation where the rich country experiences welfare losses due to changes in trade dynamics and comparative advantages.

Question 11

According to material presented in Chapter 7, which focuses on the sectoral models of the economy, protection from imports can be justified if it:&#10;A) shifts a country's comparative advantage to products that improve the terms of trade.&#10;B) solicits retaliation from foreign governments.&#10;C) favors traditional industries.&#10;D) induces the government to favor the industries that innovated most in the past.

Accepted Answer

The answer of According to material presented in Chapter 7,...

Question 12

The term immizerizing growth applies to the case where:&#10;A) technological progress reduces the number of jobs and puts people out of work.&#10;B) investment increases output but reduces national welfare.&#10;C) trade restrictions push the economy back to its production possibilities frontier.&#10;D) economic growth makes people feel miserable.

Accepted Answer

The answer of The term immizerizing growth applies to the...

Question 13

One of the earliest proponents of infant industry protection was:&#10;A) Adam Smith.&#10;B) Alexander Hamilton.&#10;C) Alan Greenspan.&#10;D) Paul Krugman.

Accepted Answer

The answer of One of the earliest proponents of infant...

Question 14

The validity of the infant industry argument for protection depends on the following assumption, among others:&#10;A) The protected industry will eventually be the world's low cost producer.&#10;B) There is no market failure that prevents private individuals from carrying out investments in industries that have good prospects of gaining a comparative advantage in the future.&#10;C) The government has accurate information about future comparative advantage at home and abroad.&#10;D) There is foreign retaliation.

Accepted Answer

The answer of The validity of the infant industry argument...

Question 15

The criterion that an infant industry must eventually generate welfare gains that exceed the initial costs of protection, all properly discounted, is known as:&#10;A) the Bastable test.&#10;B) the Smith test.&#10;C) the Mill test.&#10;D) the First test.

Accepted Answer

The answer of The criterion that an infant industry must...

Question 16

Among the criteria that the infant industry argument for temporary protection must meet are:&#10;A) The industry to be protected eventually becomes competitive and gains a comparative advantage.&#10;B) The short run costs of protection are less than the discounted future benefits from enabling the industry to survive.&#10;C) There is some market failure that prevents private individuals from carrying out investments in industries that will become competitive in the future.&#10;D) All of the above.&#10;E) None of the above.

Accepted Answer

The answer of Among the criteria that the infant industry...

Question 17

Among the criteria that the infant industry argument for temporary protection must meet are:&#10;A) The industry to be protected will never gain a comparative advantage.&#10;B) The short run costs of protection are greater than the discounted future benefits from enabling the industry to survive.&#10;C) There are no market failures that prevent private individuals from carrying out investments in industries that will become competitive in the future.&#10;D) the government has accurate information about future comparative advantage at home and abroad, and it objectively acts on this information.

Accepted Answer

The answer of Among the criteria that the infant industry...

Deck 7: Multi-Sector Models and International Trade