WorksheetsMultiple Choice Questions from Worksheet (Final)
Total questions: 148
Worksheet time: 1hrs 14mins
According to the Heckscher–Ohlin (H–O) model, what is the primary determinant of a country's comparative advantage?
Differences in labor productivity
Relative abundance of factors of production
The exchange rate
Government trade policies
In the 2x2x2 H–O model example, the United States is considered capital-abundant because:
It has a larger total stock of capital than Canada.
Its ratio of capital to labor (K/L) is higher than Canada's.
Its workers are more skilled than Canadian workers.
It produces more steel than Canada.
The Production Possibility Curve in the H–O model is convex because:
Resources are perfectly adaptable between industries.
The opportunity cost of producing one good increases as its production expands.
There is only one factor of production.
The model assumes constant returns to scale.
The Stolper–Samuelson theorem states that an increase in the price of a good will:
Benefit all factors of production equally.
Lower the income of the factor used intensively in its production.
Raise the income of the factor used intensively in its production.
Have no effect on income distribution.
In the short-run Specific Factors Model, which factor is typically considered "mobile"?
Land
Labor
Capital
Technology
The "resource curse" refers to the phenomenon where:
A country has no valuable natural resources.
An abundant resource hinders the development of other industries.
All countries inevitably deplete their natural resources.
Resource abundance always leads to strong institutions.
Empirical tests of the Heckscher–Ohlin model have yielded:
Universally successful and clear results.
Mixed and often difficult-to-interpret results.
Results that completely disprove the model.
Results that are only valid for the Ricardian model.
The Gravity Model of trade predicts that trade flows are primarily determined by:
Factor endowments and technology.
The product cycle stage.
The size of economies (GDP) and the distance between them.
Relative wage rates.
During the early stage of the product cycle, production is most likely to be located in:
Low-income countries with cheap labor.
Countries with abundant natural resources.
High-income countries with skilled labor and consumers.
Countries closest to raw materials.
The OLI theory explains why a firm would choose to:
Outsource all its production domestically.
Engage in trade rather than investment.
Invest abroad instead of just trading.
Specialize completely in one good.
Adam Smith’s main argument against mercantilism was that:
Imports drain a nation’s wealth
Trade is a zero-sum game
Voluntary trade benefits both parties
Gold reserves determine prosperity
According to Ricardo, trade is beneficial because
It maximizes government revenue
It allows specialization based on comparative advantage
It reduces total world output
It eliminates opportunity costs
In the Ricardian model, which assumption holds true?
Labor is mobile across countries
Labor is the only input
There are transport costs
Technology changes constantly
Absolute advantage refers to
Lower opportunity cost
Higher productivity per input
Lower trade prices
Equal output across countries
Comparative advantage exists when a country
Produces more of all goods
Has lower opportunity cost in producing a good
Has higher wages
Exports more than it imports
The slope of the PPC represents
Wage rate
Opportunity cost
Labor productivity
GDP growth
In autarky, a nation’s consumption is limited to
The CPC
Its PPC
The world price ratio
Both domestic and imported goods
The world trade price will settle
Below both countries’ opportunity costs
Between the two countries’ opportunity costs
Above both countries’ opportunity costs
Randomly
When trade begins,
Each country produces both goods equally
Each country specializes according to comparative advantage
Opportunity costs disappear
The PPC shifts inward
The consumption possibilities curve (CPC) shows
Production limits
Maximum consumption possible through trade
Technological change
Unemployment
A country with no absolute advantage can still gain from trade because
Trade equalizes wages
Comparative advantage still exists
It exports only services
Its opportunity cost is zero
Competitive advantage differs from comparative advantage when
Markets are perfectly competitive
Prices do not reflect true resource scarcity
There are no subsidies
There is free trade
Economic restructuring refers to
Shifts in industries due to trade
Price stabilization policies
GDP accounting adjustments
Exchange rate policies
Multiple choice: Trade adjustment assistance (TAA) is designed to
Subsidize exports
Compensate workers hurt by trade
Protect domestic monopolies
Encourage tariffs
Multiple choice: When subsidies lower production costs, a country may appear
Less competitive
More competitive despite lacking comparative advantage
To lose efficiency
To reduce exports
Fill in the blank: The demand for a particular input is sometimes referred to as (a) .
Fill in the blank: The problem of a single, valuable resource that crowds out the development of other economic activities is called a (a) .
Fill in the blank: The (a) model of trade was developed by Raymond Vernon.
Fill in the blank: OLI is an acronym for (a) .
Fill in the blank: Economists refer to the forces inside a country that cause people think about leaving as (a) .
Fill in the blank: Economists refer the forces that pull migrants to a particular place within a country as (a) .
Fill in the blank: In 1994, the first year of NAFTA, 17,000 workers qualified for (a) under the NAFTA provision.
Fill in the blank: The complete absence of trade is called (a) .
Fill in the blank: Consumption possibilities curve is abbreviated as (a) .
Fill in the blank: (a) refers to changes in the economy that may require some industries to grow and others to shrink or disappear altogether.
Fill in the blank: (a) refers to the rights of nations to be from unwanted foreign interference in their affairs.
Fill in the blank: Private markets often fail to supply optimal levels of public goods because of the problem of (a) .
Fill in the blank: WTO began in (a) and grew out of GATT.
Fill in the blank: Nondiscrimination is embodied in the concept of (a) .
Fill in the blank: The foundation of all WTO and GATT agreements are the principles of National treatment and (a) .
Fill in the blank: The Doha round proposed a (a) to consider trade issues of importance to developing countries.
Fill in the blank: The GATT functions through a series of (a) .
Fill in the blank: HIPC is the acronym for (a) .
Fill in the blank: In Latin America, the 1980s are known as the (a) .
Fill in the blank: RTA is the acronym of (a) .
True or False: Adam Smith supported mercantilism because it increased a nation's stock of gold.
True
False
True or False: Mercantilists believed exports should exceed imports.
True
False
True or False: Adam Smith viewed trade as a positive-sum game.
True
False
True or False: According to Smith, specialization increases productivity and innovation.
True
False
True or False: Ricardo showed that trade can be beneficial even if a country has no absolute advantage.
True
False
True or False: Labor immobility between countries is a basic assumption in the simple trade model.
True
False
True or False: In the Ricardian model, labor is the only input.
True
False
True or False: Absolute advantage depends on opportunity cost.
True
False
True or False: Comparative advantage depends on productivity differences alone.
True
False
True or False: Opportunity cost is what must be given up to produce one more unit of a good.
True
False
True or False: Production outside the PPC is impossible given available resources and technology.
True
False
True or False: Gains from trade occur when countries specialize according to comparative advantage.
True
False
True or False: Trade prices always lie between the opportunity costs of the two trading countries.
True
False
True or False: The CPC lies outside the PPC because trade expands consumption possibilities.
True
False
True or False: Economic restructuring may cause some industries to contract after trade liberalization.
True
False
True or False: Comparative advantage and competitive advantage are identical in all markets.
True
False
True or False: Subsidies can create artificial competitive advantages.
True
False
True or False: Trade adjustment assistance compensates industries harmed by protectionism.
True
False
True or False: Fairness and stability justify government programs to support displaced workers.
True
False
True or False: The primary purpose of the IMF is to provide long-term capital for economic development projects.
True
False
True or False: Institutions, as defined by economists, can be either formal or informal.
True
False
True or False: The World Trade Organization (WTO) was created directly at the Bretton Woods conference in 1944.
True
False
True or False: A customs union requires members to have a common external tariff on trade with non-members.
True
False
True or False: The principle of national treatment means that foreign goods must be treated the same as domestic goods once they enter a market.
True
False
True or False: The Doha Round of trade talks was widely considered a success, leading to.
True
False
Mark True or False: significant reductions in agricultural trade barriers.
True
False
Mark True or False: The number of votes a country has in the IMF is determined by the size of its economy through a quota system.
True
False
Mark True or False: Regional Trade Agreements are always consistent with the WTO's principle of nondiscrimination.
True
False
Mark True or False: An economic union involves the free movement of goods, services, labor, capital, and the harmonization of economic policies.
True
False
Mark True or False: The General Agreement on Tariffs and Trade (GATT) was replaced by the WTO and is no longer in effect.
True
False
Mark True or False: The World Bank's original intention was to help rebuild Europe after World War II.
True
False
Mark True or False: The principle of most‑favored‑nation status allows a country to apply different tariffs to different WTO members based on its own preferences.
True
False
Mark True or False: A free trade area eliminates tariffs on all goods and services among member countries.
True
False
Mark True or False: The Bretton Woods Conference was held with the goal of creating a more stable and prosperous world economy after the Great Depression.
True
False
Mark True or False: The IMF acts as an international lender of last resort for countries experiencing debt payment problems.
True
False
Mark True or False: All Regional Trade Agreements require 100% free trade with no exceptions for any products.
True
False
Mark True or False: The GATT works through a system of formal discussions known as "trade rounds."
True
False
Mark True or False: Public goods provided by international institutions are both excludable and rivalrous.
True
False
Mark True or False: The Uruguay Round of trade talks extended agreements into areas such as services and intellectual property.
True
False
Mark True or False: A common market includes a customs union and allows for the free movement of labor and capital.
True
False
Mark True or False: International economic integration is another term for economic globalization.
True
False
Mark True or False: The first major wave of globalization occurred between 1870 and 1913.
True
False
Mark True or False: The earlier wave of globalization was ended by World War I and the Great Depression alone.
True
False
Mark True or False: Economists measure international integration by looking at world trade, capital flows, migration, and price convergence.
True
False
Mark True or False: Since 1945, world production has grown much faster than world trade.
True
False
Mark True or False: In 1950, world exports were about 5.5% of world GDP.
True
False
Mark True or False: The trade‑to‑GDP ratio is calculated as exports divided by GDP.
True
False
Mark True or False: The trade‑to‑GDP ratio for most countries fell between 1913 and 1950.
True
False
Mark True or False: The trade‑to‑GDP ratio provides a direct measure of a country's openness to trade policies.
True
False
Mark True or False: International migration, relative to population, was larger before World War I than it is today.
True
False
Capital flows only involve the purchase of physical assets like factories.
True
False
Briefly state the core idea of the Heckscher–Ohlin trade model.
Countries export goods that intensively use their scarce factors of production
Countries export goods that intensively use their abundant factors of production
Trade patterns are determined solely by comparative advantage in labor productivity
All countries benefit only when they impose tariffs on imports
What is the key difference between the PPC in the Ricardian model and the PPC in the Heckscher–Ohlin model?
Ricardian PPC is bowed outward; Heckscher–Ohlin PPC is a straight line
Ricardian PPC is a straight line; Heckscher–Ohlin PPC is bowed outward
Both models have identical PPC shapes
Heckscher–Ohlin PPC is a vertical line while Ricardian PPC is horizontal
According to the Stolper–Samuelson theorem, what is the long‑run effect on wages in a capital‑abundant country when it opens to trade and exports capital‑intensive goods?
Real wages rise
Real wages fall
Nominal wages rise but real wages are unchanged
Wages are unaffected
Name one factor that complicates empirical testing of the Heckscher–Ohlin model.
Identical technologies across countries
Large sample sizes
Cross‑country differences in technology and factor quality
Perfect measurement of factor endowments
What two key variables does the Gravity Model use to predict the volume of trade between two countries?
Population size and exchange rate regime
Economic size (e.g., GDP) and distance between countries
Tariff rates and unemployment
Currency union membership and migration stocks
Describe the "late stage" of the product cycle in terms of production location and product characteristics.
Production returns to innovating country; product becomes highly customized
Production remains in high‑income countries; product quality rises sharply
Production shifts to lower‑cost countries; product is standardized and cost‑focused
Production stops; product exits the market
What does the "I" in the OLI theory stand for, and what does it mean?
Internationalization; choosing export markets
Internalization; keeping transactions within the firm
Integration; merging with local firms
Institutionalization; relying on government support
Provide one potential benefit of Global Value Chains (GVCs).
They force firms to produce every input domestically
They reduce specialization and slow productivity growth
They allow firms to specialize in tasks and improve efficiency
They eliminate the need for quality standards
Besides international trade, what is another major reason cited for the loss of manufacturing jobs in advanced economies?
Automation and technological change
Rising birth rates
Declining education levels
Higher corporate taxes
What are "demand‑pull" factors in the context of international migration?
Policies that discourage immigration
Conditions in source countries that push people to leave
Attractive wages and job opportunities in destination countries
Family ties that prevent moving
What does a trade‑to‑GDP ratio not capture well, and which example illustrates this limitation?
It fails to show tariff levels; example: Japan
It fails to measure absolute trade size and domestic market scale; example: a very small economy can have a high ratio
It fails to include services trade; example: the United Kingdom
It fails to reflect exchange rates; example: Canada
Why was international migration larger before 1950 than as of today?
Transportation was slower before 1950
Immigration policies were generally less restrictive and borders more open
Global wages were higher before 1950
There were fewer destination countries
Which pair lists two different industries that commonly receive FDI in KSA?
Petrochemicals and telecommunications
Textiles and small artisanal crafts
Subsistence agriculture and local street vending
Primary education and public libraries
State an example of a transaction cost.
The market price of a product
A brokerage or search cost incurred to find a trading partner
Government deficit spending
Consumer surplus
What do economists measure while observing international integration?
Changes in domestic birth rates
The degree of market integration via price convergence and cross‑border trade, capital, and labor flows
The number of political parties
Average household size
Define GDP.
The monetary value of all final goods and services produced within a country's borders in a given period
Total national wealth held abroad
Government expenditure on goods and services
The sum of all intermediate goods produced in a country
What is the relation of savings with capital flow?
Higher domestic savings tend to be associated with net capital inflows
Higher domestic savings tend to be associated with net capital outflows
Savings have no relation to capital flows
Savings only affect government debt
What are the two main characteristics of a public good in the context of international institutions?
Excludability and rivalry
Non‑excludability and non‑rivalry
High price and low elasticity
Divisibility and congestion
Name the five levels of economic integration in Regional Trade Agreements, from least to most complex.
Customs union → free trade area → common market → economic union → political union
Free trade area → customs union → common market → economic union → political union
Free trade area → common market → customs union → political union → economic union
Common market → customs union → free trade area → economic union → political union
What was the primary goal of the Bretton Woods Conference held in 1944?
To create a global military alliance
To establish a stable post‑war international monetary system and create institutions like the IMF and World Bank
To abolish gold as a monetary standard
To form a global customs union
What is the key difference between a free trade area and a customs union?
A free trade area has a common external tariff; a customs union does not
A customs union has a common external tariff; a free trade area does not
A free trade area requires free movement of labor; a customs union does not
A customs union eliminates internal tariffs only; a free trade area adds external tariffs
What are the two guiding principles of the GATT/WTO system?
Protectionism and reciprocity
Most‑Favored‑Nation (MFN) and national treatment
Capital controls and fixed exchange rates
Autarky and bilateralism
Using the concept of opportunity cost, why might a country import a good it can produce more efficiently in absolute terms?
Because imports are always cheaper regardless of opportunity costs
Because another country has a lower opportunity cost (comparative advantage), making specialization and trade welfare‑improving
Because domestic consumers prefer foreign goods
Because domestic production is impossible
Suppose the U.S. can produce 3 tons of steel or 2 loaves of bread per hour, and Canada can produce 1 ton of steel or 3 loaves of bread. Which country has the comparative advantage in steel, and why?
Canada, because it produces more bread
U.S., because its opportunity cost of steel is lower ( 32 loaf of bread vs. 3 loaves)
Neither, because opportunity costs are equal
Canada, because it produces less steel
Explain how trade can shift a country’s consumption from its PPC to a CPC beyond it.
By imposing tariffs on all imports
By specializing according to comparative advantage and trading to access a higher consumption possibility curve
By reducing domestic savings
By fixing the exchange rate
Select the statement that best describes the Heckscher–Ohlin core idea.
Countries export goods that intensively use their abundant factors and import goods that use their scarce factors.
Countries export goods that rely on their scarcest factors to balance trade deficits.
Trade patterns are driven only by differences in technology across countries.
Free trade guarantees that all countries run balanced trade at all times.
Which comparison correctly contrasts the production possibilities curve (PPC) in the Ricardian model with the Heckscher–Ohlin (H–O) model?
Ricardian PPC is linear due to constant opportunity costs; H–O PPC is concave because of diminishing returns and multiple factors.
Ricardian PPC is concave, while H–O PPC is always linear regardless of factors.
Both Ricardian and H–O PPCs are linear because opportunity costs are constant in each model.
Both Ricardian and H–O PPCs are concave because each model assumes diminishing returns to a single factor.
What does the Stolper–Samuelson effect predict in a capital‑abundant country?
Wages of the abundant factor (capital owners) rise, while the return to the scarce factor (labor) falls.
Wages of labor rise and returns to capital fall in all countries regardless of factor abundance.
Returns to both capital and labor increase equally with trade liberalization.
Trade has no effect on factor returns in the long run.
Identify the empirical complication noted for measuring factor endowments.
Factor endowments are hard to measure accurately (e.g., human capital differences).
Factor endowments are easily and precisely measured using tariff schedules.
Factor endowments can be ignored because they never affect trade outcomes.
Factor endowments are measured only by physical capital stocks and never by human capital.
Which pair lists the typical variables used in the Gravity Model of trade?
Economic size (GDP) and distance between countries.
Tariff rates and exchange rate volatility.
Population growth and unemployment rates.
Political regime type and labor union density.
In the late stage of the product cycle, what shift in production is expected?
Production shifts to lower‑cost developing countries while the product becomes standardized.
Production moves back to the innovating country to protect intellectual property.
Production ceases entirely as demand falls to zero.
Production remains in high‑cost countries due to brand loyalty.
In the OLI framework, what does the "I" stand for and why might firms choose it?
Internalization—firms keep operations inside the company when doing so reduces transaction costs or protects proprietary assets.
Intermediation—outsourcing activities to external agents to lower monitoring costs.
Integration—merging with competitors to increase market concentration.
Internationalization—expanding exports to avoid foreign direct investment.
What is a cited benefit of participating in global value chains (GVCs)?
Access to cheaper or higher‑quality intermediate inputs that boosts productivity.
Guaranteed elimination of trade imbalances between partner countries.
Permanent protection from foreign competition through tariffs.
Automatic increases in domestic employment in all sectors.
Which statement identifies another cause of job loss in manufacturing besides trade?
Technological change and automation reduce labor demand in manufacturing.
Rising unionization uniformly eliminates manufacturing jobs.
Increased tourism directly replaces factory work.
Higher education levels cause immediate layoffs in production lines.
Which factors are examples of demand‑pull migration drivers in host countries?
Conditions that attract migrants, such as high wages and labor shortages.
Strict border controls and limited work permits.
Declining wages and oversupply of labor.
High emigration taxes in the origin country.
Trade-to-GDP ratio omission: What important aspect of a nation’s commerce does the trade-to-GDP ratio fail to reflect, as illustrated by countries with massive internal commerce but low trade/GDP?
Domestic trade within the country
Foreign direct investment inflows
Exchange rate volatility
Cross-border services only
Migration before 1950: Which combination best explains why migration flows were boosted before 1950?
Fewer immigration restrictions and cheaper long-distance settlement opportunities
Higher tariffs and stricter passport requirements
Costly ocean travel and stronger border enforcement
Expanded welfare states and limited transportation networks
FDI in KSA industries: Which industries are highlighted as receiving major foreign direct investment in the Kingdom of Saudi Arabia?
Petrochemicals and tourism/hospitality
Agriculture and textiles
Education and healthcare
Domestic retail and real estate brokerage
Transaction cost example: Which of the following is an example of a transaction cost?
Costs of negotiating and enforcing a contract
Wages paid to production workers
Purchases of machinery for a factory
Corporate income taxes on profits
Economists’ measure of international integration: To gauge international integration, what do economists measure?
Cross-border flows of goods, services, capital, and people
Domestic retail sales of consumer goods
Government budget deficits and surpluses
Changes in population birth rates
GDP definition: Which statement correctly defines gross domestic product (GDP)?
The total market value of all final goods and services produced within a country in a given period
The total income of residents earned abroad during a decade
The sum of government expenditures and tax revenues in a year
The market value of intermediate goods used by domestic firms
Savings–capital flow relation: Which statement best describes the relation between national savings and international capital flows?
Countries with low savings borrow foreign capital, while high-saving countries export capital
High-saving countries import more consumer goods and borrow less capital
Low-saving countries accumulate large trade surpluses and export capital
Countries with high savings always experience currency depreciation
Public-good traits in international contexts: Which traits characterize public goods in providing international rules or stability?
Non-rivalry and non-excludability
Rivalry and excludability
Non-rivalry and excludability
Rivalry and non-excludability
RTA integration levels: What is the correct sequence of regional trade agreement integration levels?
Free trade area → Customs union → Common market → Economic union → Political union
Customs union → Free trade area → Economic union → Common market → Political union
Common market → Free trade area → Political union → Economic union → Customs union
Economic union → Political union → Common market → Free trade area → Customs union
Bretton Woods goal: What was the key goal of the Bretton Woods system established after World War II?
Create a stable post-war monetary system and promote global economic cooperation
Eliminate all tariffs among participating countries
Establish a single global currency managed by private banks
Nationalize gold reserves across all member states
FTA vs. customs union: What is the main difference between a free trade area and a customs union?
FTAs remove internal tariffs, while customs unions also share a common external tariff
FTAs adopt a common currency, while customs unions do not
Customs unions remove only agricultural tariffs, while FTAs remove all tariffs
Customs unions apply different external tariffs for each member, while FTAs share one
In a customs union, members adopt what policy toward nonmembers?
A common external tariff
Separate national tariffs
Free migration with nonmembers
A fixed exchange rate with nonmembers
Which principles are core to the GATT/WTO framework?
Most‑favored‑nation and national treatment
Import substitution and infant‑industry protection
Balanced trade and fixed exchange rates
Export subsidies and quotas
Why might a country import goods even when it has an absolute advantage in producing them?
Specializing where opportunity cost is lowest and importing the rest increases gains from trade
Imports allow governments to raise tariff revenue without efficiency costs
Countries import to avoid producing any goods domestically
Absolute advantage guarantees higher welfare only if all goods are produced domestically
Given the opportunity cost of producing steel is 32 bread in the U.S. and 3 bread in Canada, which country has the comparative advantage in steel?
The United States
Canada
Both countries equally
Neither country
What happens to a country’s consumption possibilities when it specializes and trades, relative to its production possibilities curve (PPC)?
It can consume beyond its PPC
It is constrained to consume exactly on its PPC
It must consume inside its PPC
Its PPC disappears and becomes irrelevant
6+7
67
6.7
677
67
