IAL P4 MCQ

UK exported £4.546 billion worth of goods and services to Saudi in 2016 while imported £900 million worth of oil from Saudi Arabia. The trade between the two countries grew by 8.1% as a result. The reason for trade between UK and Saudi Arabia is

• Differences in factor endowments

• Political reasons

• Economies of scale

• Overdependence between countries

Answer explanation

The reason for trade between UK and Saudi Arabia is due to differences in factor endowments, as UK exports goods and services while importing oil from Saudi Arabia.

Between 2000 and 2020 Pakistan's terms of trade decreased by 43.4%. Ceteris paribus, which one of the following factors is most likely to have caused this decrease in Pakistan's terms of trade?

• A higher rate of inflation in Pakistan relative to other countries

• The prices of imports into Pakistan increased at a faster rate than the prices of its exports

• An appreciation of Pakistan's exchange rate

• The prices of Pakistan's exports increased at a faster rate than the prices of its imports

Answer explanation

The decrease in Pakistan's terms of trade is most likely caused by the prices of imports into Pakistan increasing at a faster rate than the prices of its exports.

India specialises in services while China specialises in manufacturing.

If each country specialises and trades in the sector in which it has a comparative advantage, then which one of the following is likely to occur?

• An increase in world output

• A fall in exports and imports

• A fall in the standard of living

• An increase in absolute poverty

Answer explanation

Choosing to specialize in their comparative advantage sectors and trade will lead to an increase in world output, benefiting both India and China.

The diagram illustrates the imposition of a tariff. Which one of the following statements is true?

• Consumer surplus has increased by the area P1P2EF

• Government tax revenue is the area ABEF

• Net welfare loss areas are ABC and DEF

• Producer surplus has decreased by the area P1P2BA

Answer explanation

The correct statement is that the net welfare loss areas are ABC and DEF, as shown in the diagram.

The diagram illustrates the Lorenz curves of Country A and Country B. Which one of the following can be deduced from this chart?

• GDP per capita in Country B is higher than in Country A

• Income tax rates in Country B are higher than in Country A

• The Gini coefficient of Country A is larger than it is for Country B

• Income is more evenly distributed in Country A than in Country B

Answer explanation

The correct choice is that income is more evenly distributed in Country A than in Country B, as shown by the Lorenz curves.

Between 2007 and 2016, many transnational companies (TNCs) that were based in Venezuela left the country because of high levels of crime, the inability to repatriate profits and threats to private property rights.

Which of the following is likely to be the economic effect on Venezuela economy?

• There will be less tax revenue for the Venezuela government

• There will be less tax revenue for the Venezuela government

• The current account will improve

• The current account will improve

Answer explanation

The correct choice is 'There will be less tax revenue for the Venezuela government' as the departure of TNCs will lead to a decrease in tax revenue for the government.

The UK pound sterling exchange rate is allowed to float freely. The value of the pound sterling changed from £1 = $1.53 in January 2015 to £1 = $1.26 in January 2019.

This means that the value of pound sterling against the dollar has

• devalued

• revalued

• depreciated

• appreciated

Answer explanation

The correct answer is 'depreciated' because the value of pound sterling decreased against the dollar from £1 = $1.53 in January 2015 to £1 = $1.26 in January 2019.

In 2021 the US dollar appreciated by around 10% against the euro. Which one of the following factors is likely to have caused this appreciation of the US dollar?

• A decrease in confidence in the USA's economy by currency speculators

• A decrease in the USA's rate of economic growth

• An increase in capital flight out of the USA into the eurozone

• An increase in the USA's base interest rate relative to the eurozone

Answer explanation

An increase in the USA's base interest rate relative to the eurozone would likely cause the appreciation of the US dollar.

The table shows the maximum possible production of cars and lorries by Country A and Country B in a given year.

Which one of the following can be deduced from this table?

• Both countries will not benefit from specialisation and trade

• Country A has a comparative advantage over Country B in the production of cars and lorries

• Country B has an absolute advantage over Country A in the production of cars and lorries

• Country B has a lower opportunity cost of producing lorries whereas Country A has a lower opportunity cost of producing cars

Answer explanation

Country B has a lower opportunity cost of producing lorries whereas Country A has a lower opportunity cost of producing cars

Between September 2019 and September 2020, Australia’s export prices decreased by 9.9% and import prices decreased by 5.7%.

If September 2019=100, what was Australia’s terms of trade in September 2020?

• 57.58

• 95.55

• 104.66

• 173.68

Answer explanation

The terms of trade formula is Export Price Index divided by Import Price Index. Calculating for September 2020: (100 - 9.9) / (100 - 5.7) = 95.55