Overview of all exam questions

2017 – 2018, PAFC08 & PEFC02, International Food Trade

The exam will contain only questions from the list below.

Material to be studied:
 Powerpoint presentations, available on Blackboard
 International Economics – 7th edition – Theo S. Eicher, John H. Mutti and Michelle H. Turnovsky –
2009 – ISBN 9780415772860 – Chapter 2 – 4 (IE)

Questions/problems regarding IE, Chapter 2

1. Who was the economist who thought of the concept of ‘absolute advantage’? In which year
approximately?
ADAM SMITH; 1776
2. What is meant with “absolute advantage”?
THE ARGUMENT THAT TRADE IS BASED ON ABSOLUTE DIFFERENCES IN COSTS. EVERY COUNTRY
CAN PRODUCE ONE OR MORE GOODS AT A LOWER COST THAN OTHER COUNTRIES WHICH
MEANS THAT THAT COUNTRY WILL BENEFIT FROM SPECIALIZING IN THESE GOODS AND HAS AN
ABSOLUTE ADVANTAGE.
3. See table 2.1 Which country will specialize in which product? Give your explanation.
ITALY WILL SPECIALIZE IN WINE AND SCOTLAND WILL SPECIALIZE IN CLOTH BECAUSE EACH
COUNTRY NEEDS LESS LABOR HOURS PER UNIT OF GOOD TO BE PRODUCED.
4. See table 2.1; what is the price of wine in Italy, what is the price of wine in Scotland
ONE BARREL OF WINE COSTS ONE FIFTH OF A BOLT OF CLOTH IN ITALY. ONE BARREL OF WINE IN
SCOTLAND COSTS FOUR TIMES AS MUCH AS A BOLT OF CLOTH.
5. Use the data of table 2.1; shift 600 days of labour from the production of the “inefficient good”
to the production of the efficient good in each country. Give the gain of the output for the world.

NEW NUMBERS:

ITALY SCOTLAND
WINE 620 -480
CLOTH -500 630
THE GAIN OF OUTPUT FOR THE WORLD WOULD ??????

6. Who is the economist who thought of the concept of ‘comparative advantage’? In which year
approximately?
DAVID RICARDO, 1817
DEFINITION COMPARATIVE ADVANTAGE: THE ARGUMENT THAT MUTUALLY BENEFICIAL
BALANCED TRADE IS POSSIBLE EVEN IF ONE COUNTRY HAS AN ABSOLUTE ADVANTAGE INALL
GOODS. IF THERE IS A DIFFERENCE IN THE RELATIVE COST OF TWO GOODS IN THE TWO
COUNTRIES, EACH COUNTRY WILL GAIN BY EXPORTING THE PRODUCT FOR WHICH IT HAS
COMPARATIVELY LOWER COSTS.
7. In table 2.3, which country has the comparative advantage and in which good? Explain your
answer.
 PORTUGAL HAS A COMPARATIVE ADVANTAGE IN WINE BECAUSE IT HAS TO SACRIFICE LESS TO
PRODUCE ONE BARREL OF WINE COMPARED TO ONE BOLT OF CLOTH. THE SAME APPLIES FOR
ENGLAND AND CLOTH AS IT HAS TO SACRIFICE LESS TO PRODUCE ONE BOLT OF CLOTH
COMPARED TO ONE BARREL OF WINE.
8. Explain why trade may be profitable using table 2.5.
PORTUGAL WOULD SPECIALIZE IN WINE BECAUSE THEY HAVE TO GIVEUP LESS THAN ENGLAND
TO PRODUCE THE SAME AMOUNT OF WINE. TO NOT INTERFERE WITH EACH OTHER, ENGLAND
WOULD THEN SPECIALIZE IN PRODUCING CLOTH AND TRADE BETWEEN BOTH COUNTRIES
WOULD BE PROFITABLE.
9. Between which values must the international price for wine be, using the data in table 2.3?
Explain your answer
THE INTERNATIONAL PRICE FOR WINE MUST BE BETWEEN THE TWO DOMESTIC PRICES. THE
DOMESTIC PRICE FOR WINE IN PORTUGAL IS 3/10= 0,33 CLOTH AND THE DOMESTIC PRICE FOR
WINE IN ENGLAND IS 2/4= =0.5 CLOTH. THAT MEANS THAT THE INTERNATIONAL PRICE MUST BE
BETWEEN 0.3 AND 0.5.
10. Explain figure 2.1
FIGURE 2.1 DESCRIBES THE SUPPLY-DEMAND REPRESENTATION OF THE MARKET FOR CLOTH. IT
SHOWS THE SITUATION FOR ENGLAND, THE WORLD AND GERMANY. ALL THREE GRAPHS SHOW
A DEMAND AND A SUPPLY CURVE FOR THE CERTAIN SITUATION. THE PRICES ARE ON THE LEFT
AND GO FROM 1.5 TO 2.0. FOR ENGLAND SPECIFICALLY, THE SUPPLY CURVE FROM 0 TO C0
SHOWS THE DOMESTIC DEMAND OF CONSUMERS FOR CLOTH. EVERYTHING THAT GOES BEYOND
THAT TO THE MAXIMUM OF CLOTH WILL BE EXPORTED BECAUSE IT EXCEEDS THE DOMESTIC
DEMAND. IF THE PRICE SHIFTS FROM 1.5 TO 1.7 THE DEMAND DECREASES AND THE EXPORT
INCREASES AS DEMONSTRATED BY THE DOTTED LINE.
FOR GERMANY, THE PRICE TO PRODUCE CLOTH IS 2.0 WHICH MEANS THAT THEY WILL IMPORT
THEIR CLOTH FROM ENGLAND BECAUSE IT IS NOT PROFITABLE TO PRODUCE IT DOMESTICALLY
AS IT IS MUCH CHEAPER IN ENGLAND.
THE WORLD-TRADE GRAPH SHOWS WHAT WOULD HAPPEN IF THE PRICE 1.7 IS AN EQUILIBRIUM
IN BOTH COUNTRIES AS THE DEMAND OF CLOTH GERMANY WANTS TO IMPORT IS THE EXACT
SAME AS THE SUPPLY THAT ENGLAND WANTS TO EXPORT.
11. In figure 2.1, if the price of cloth is lower than 2 meters of linen; where will cloth be produced?
Explain your answer.
THE CLOTH WILL BE PRODUCED IN ENGLAND BECAUSE THEY CAN PRODUCE IT WAY CHEAPER
AND IT IS NOT PROFITABLE FOR GERMANY TO PTODUCE IT DOMESTICALLY. INSTEAD; THEY WILL
IMPORT IT FROM ENGLAND.

Where will cloth be consumed? Explain your answer.

CLOTH WILL BE CONSUMED IN BOTH ENGLAND AND GERMANY AS LONG AS IT IS PRODUCED IN

ENGLAND. IF THE PRICE IS AT 1.7, GERMANY WILL CONSUME AS MUCH AS ENGLAND. WHEN THE
PRICE IS AT 1.5, ENGLAND WILL CONSUME MORE BECAUSE THE DOMESTIC DEMAND GOES UP
AND GERMANY WILL NOT BE ABLE TO IMPORT AS MUCH ANYMORE.
12. What effect does a decrease in the transport costs have on trade?
A DECREASE IN TRANSPORT COST MEANS THAT COUNTRIES ARE MORE WILLING TO IMPORT/
EXPORT, SO THE EFFECT WILL BE AN INCREASE IN TRADE.
13. What do you see happening with the price of transport in history? What caused this, at the end
of the 19th and the beginning of the 20th century?
DURING WW1, THE WORLD TRADE DRASTICALLY INCREASED DUE TO A DECREASE OF COAL AND
METAL-HULLED SHIPPING.
14. In a three goods – two country situations, where equation 2.4 is valid, on which good will country
A specialize. Explain.
WTF?
15. What trade pattern do you normally see in small countries? Same question for large countries.
SMALL COUNTRIES USUALLY EXPORT LARGE AMOUNTS OF A FEW GOODS AND WILL IMPORT
SMALLER AMOUNTS OF MANY GOODS. LARGE COUNTRIES EXPORT AND IMPORT LARGER
AMOUNTS.
16. For the empirical verification test by MacDougall, what were the findings? What do they
confirm?
RELATIVE LABOR COSTS DETERMINE THE PATTERN OF TRADE SUGGESTED BY THE CHAIN OF
COMPARATIVE ADVANTAGE. (COMP. ADV. HÄNGT VON LABOR COST AB)

 The summary of key concepts must be studied and understood.

 The case study need NOT be answered.
 From ‘questions for study and review’, all questions can be part of the test, sometimes in a
somewhat different shape.

Questions/problems regarding IE, Chapter 3

1. What is an Edgeworth-Bowley box? Give a short description
AN EDGEWORTH BOWLY BOX IS AN ANALYTICAL DIAGRAM THAT ALLOWS ONE TO
DEMONSTRATE THE EFFICIENT ALLOCATIONS OF GOODS BETWEEN INDIVIDUALS OR FACTORS OF
PRODUCTION BETWEEN INDUSTRIES. (SIMPLE: TRADE BETWEEN TWO INDIVIDUALS)
2. See figure 3.1 (it will be shown without the text below the figure). From points A, B, C and D ,
what is the point of highest utility. Which points have the same utility? Motivate your answer.
POINT D IS THE POINT OF HIGHEST UTILITY BECAUSE IT IS THE FARTHEST AWAY FROM THE
ORIGIN AND INDICATES THE HIGHEST WELFARE/ SATISFACTION AS IT IS THE MOST POSSIBLE
OUTCOME OF THE TWO GOODS. THE POINTS A,B AND C HAVE ROUGHLY THE SAME UTILITY
BECAUSE THEY´RE ON THE SAME CURVE AND ALL HAVE SIMILAR OPPORTUNITY COSTS FOR ONE
OR THE OTHER GOOD (SO THE SAME AMOUNT OF GOODS IN TOTAL, BUT WITH DIFFERENT
AMOUNTS OF BOTH GOODS EACH)
3. See figure 3.1 (it will be shown without the text below the figure). Describe what is meant with
ΔS/ΔN.
N IS THE AMOUNT OF NOODLES THAT NEED TO BE GIVEN UP IN ORDER TO REACH POINT B AND
S IS THE AMOUNT OF SHAMPOO THAT NEEDS TO BE ADDED TO REACH THE SAME LEVEL OF
SATISFACTION IN POINT B LIKE THE CONSUMER HAD IN POINT A
4. What is the reason that indifference curves are no straight lines, but convex to the origin?
AN INDIFFERENCE CURVE CANNOT BE STRAIGHT BECAUSE IT REPRESENTS TWO GOODS AND THE
SAME SATISFACTION LEVEL AT EVERY POINT ON THE CURVE. BUT DIFFERENT GOODS CAUSE
 DIFFERENT LEVELS OF SATISFACTION FOR A CONSUMER WHICH MEANS THAT THE AMOUNT OF
THE GOOD GIVEN UP IS A DIFFERENT AMOUNT THAN THE ADDED PRODUCT WHICH LEADS TO A
CURVE INSTEAD OF A STRAIGHT LINE.
5. Why can two indifference curves not intersect (cross each other)?
BECAUSE ONE INDIFFERENCE CURVE SHOWS THE SAME AMOUNT OF SATISFACTION OF THE
CUSTOMER AT EVERY POINT OF THE CURVE. THAT MEANS THAT A DIFFERENT INDIFFEENCE
CURVE SHOWS A DIFFERENT LEVEL OF SATISFACTION AND IF IT WOULD BE THE SAME
SATISFACTION; IT WOULD BE THE SAME CURVE. THEREFORE, THEY CANNOT CROSS.
6. Explain the upper box of figure 3.3. Oa = origin for consumer Anne, Ob = origin for consumer Ben
- ORIGIN FOR ANNE IS OA, ORIGIN FOR BEN IS OB (TURN BOOK AROUND)
- SHOWS TOTAL NOODLE AND SHAMPOO CONSUMPTION OF BOTH
- IDENTICAL CONSUMPTION PATTERNS (THEY HAVE THE SAME MRS- MARGINAL RATE OF
SUBSTITUTION)
- A3 RICHER THAN B1 AND THE OTHER WAY AROUND CAUSE EACH ARE FURTHER AWAY FROM
THE ORIGIN
- THEY MEET IN THE MIDDLE WHERE THE EQUILIBRIUM IS PLACED, WHICH IS ALSO THEIR
OPTIMUM CAUSE THEY HAVE THE SAME MRS AND BOTH CANNOT GET A HIGHER
SATISFACTION AT THE SAME TIME IF THEY TRADE
- THAT MEANS THAT THERE WILL BE NO TRADE IN THIS SITUATION AND IT IS CALLED
HOMOTHETIC
7. What is meant with homothetic?
AN INDIVIDUAL WHOSE INCOME DOUBLES/ HALFES THE CONSUMPTION OF BOTH NOODLES AND
SHAMPOO AT UNCHANGED PRICES.
8. Explain the central box of figure 3.3 (probably only this box will be put into the exam if I use this
question). Give a description about the shaded area in the middle of the graph.
- DIFFERENT ALLOCATION OF GOODS
- ANNE IS FURTHER AWAY FROM HER ORIGIN THAN BEN WHICH MEANS THAT SHE HAS A
HIGHER LEVEL OF SATISFACTION AND THEY DO NOT HAVE THE SAME MRS (A3)
- ANNE HAS MORE NOODLES AND BEN HAS MORE SHAMPOO IN THE EQUILIBRIUM POINT
- THEY WOULD GAIN FROM TRADE BECAUSE THEIR EQUILIBRIUM IS NOT AS HIGH (AS IT
COULD BE IN THE GREY AREA)
9. Explain the lower box of figure 3.3 (probably only this box will be put into the exam if I use this
question)
- DIFFERENT PREFERENCES; ANNE PREFERS NOODLES MORE CAUSE HER CURVE ON E IS MORE
STEEP
- POTENTIAL GAIN FROM TRADE (GREY AREA) BECAUSE OF DIFFERENT VALUATION OF GOODS
-> UNTIL INDIFFERENCE CURVES ARE TANGENT
10. Mention 5 of the 7 assumptions which are the basis for the models in chapter 3 and 4.
1. PERFECT COMPETITION (IN BOTH COMMODITY AND FACTOR MARKETS)
2. FIXED QUANTITIES OF THE FACTORS OF PRODUCTION
3. FOP ARE PERFECTLY MOBILE BETWEEN DIFFERENT INDUSTRIES OF ONE COUNTRY BUT
PERFECTLY IMMOBILE BETWEEN DIFFERENT COUNTRIES
4. A GIVEN, UNCHANGING LEVEL OF TECHNOLOGY
5. ZERO TRANSPORT COSTS AND OTHER BARRIERS TO TRADE
11. Define opportunity cost.
 THE COST OF ONE GOOD IN TERMS OF THE AMOUNT OF ANOTHER GOOD THAT COULD HAVE
BEEN PRODUCED WITH THE SAME FACTORS OF PRODUCTION. (WHAT YOU HAVE TO GIVE UP OF
ONE GOOD IN ORDER TO PRODUCE MORE OF THE OTHER)
12. Explain figure 3.4; describe what is meant with ΔW/ΔS and what the meaning is of points J, P and
K.
- FIGURE 3.4 SHOWS THE POSSIBLE COMBINATIONS OF WHEAT AND STEEL THAT CAN BE
PRODUCED WITH A FIXED AMOUNT OF LABOR IN GERMANY
- ALL POINTS ON THE CURVE SUM UP TO A 100, BUT EACH WITH A DIFFERENT COMBINATION
- P SHOWS ONE POINT ON THE LINE WHERE GERMANY PRODUCES 40 UNITS OF STEEL AND 60
UNITS OF WHEAT
- K IS AN INEFFICIENT POINT BECAUSE IT IS NOT ON THE LINE AND DOES NOT REPRESENT THE
HIGHEST POSSIBLE AND THEREFORE DESIRED OUTCOME THERE IS
- J SHOWS AN UNREACHABLE POINT BECAUSE IT IS OUTSIDE OF THE LINE AND IT IS NOT
POSSIBLE TO REACH THAT AMOUNT OF OUTCOME WITH THE FIXED AMOUNT OF LABOR
AVAILABLE
- DELTA S AND DELTA W SHOWS THE MARGINAL RATE OF TRANSFORMATION, WHICH MEANS
THAT IT SHOWS THE RATE AT WHICH THE GERMAN ECONOMY CAN TRANSFORM STEEL INTO
WHEAT
13. What is meant with Marginal Rate of transformation?
THE RATE AT WHICH AN ECONOMY CAN TRANSFORM ONE GOOD INTO ANOTHER BY MOVING
PRODUCTIVE RESOURCES FROM ONE INDUSTRY TO ANOTHER. EQUALS THE RATIO OF THE
MARGINAL COSTS OF THE TWO GOODS, WHICH EQUALS THE SLOPE OF THE PRODUCTION-
POSSIBILITY CURVE.
14. What is meant with Marginal Rate of substitution?
THE RATE AT WHICH AN INDIVIDUAL OR A GROUP OF PEOPLE WOULD BE WILLINGTO EXCHANGE
ONE GOOD FOR ANOTHER AND BE NO BETTER OR WORSE OFF. EQUALS THE RATIO OF THE
MARGINAL UTILITIES OF THE TWO GOODS, WHICH EQUALS THE SLOPE OF AN INDIFFERENCE
CURVE.
15. Suppose the Marginal Rate of Transformation is 1 ton of wheat per 1 ton of steel and the price of
steel in this two-good-economy is 2 tons of wheat, what will happen in such an economy?
THE COUNTRY WILL SHIFT ITS PRODUCTION TO STEEL AS IT IS THE MORE EXPENSIVE GOOD AND
MORE PROFIT CAN BE MADE THAN WITH WHEAT
16. See figure 3.5. Describe what will happen in point N.
- N LIES ON THE PPF WHICH MEANS THAT IT HAS THE SAME TOTAL OUTCOME AS P
- BUT, N IS CONNECTED TO THE FIRST INDIFFERENCE CURVE AND P IS CONNECTED TO THE
SECOND. THE SECOND INDIFFERENCE CURVE HAS A HIGHER SATISFACTION LEVEL BECAUSE IT
IS FURTHER AWAY FROM THE ORIGIN
- THEREFORE, GERMANY WILL SHIFT ITS RESOURCES MORE TO WHEAT AT POINT N SO IT CAN
REACH POINT P AND HAVE THE HIGHEST LEVEL OF SATISFACTION POSSIBLE
17. Explain figure 3.6; make clear how much of what good is exported and what is imported. Also
make clear what the point of production is and the point of consumption.
- THE GRAPH SHOWS THE GERMAN EQUILIBRIUM BEFORE AND AFTER TRADE
- THE FIRST LINE SW SHOWS THE EQUILIBRIUM AT P WITH THE INDIFFERENCE CURVE I2
(SITUATION BEFORE TRADE), THE PRODUCTION IS 40 STEEL AND 60 WHEAT
 - AFTER TRADE, THE EQUILIBRIUM IS T WITH INDIFFERENCE CURVE I4 WHICH REPRESENTS THE
HIGHEST POSSIBLE UTILITY THAT CAN BE REACHED
- AT T THE PRODUCTION IS AT 55 STEEL AND 90 WHEAT
- M WHEAT STANDS FOR IMPORT OF WHEAT WHICH IS 90 AND X STEEL STANDS FOR EXPORT
STEEL AND IS AT 55 TO 100: THAT MEANS THAT GERMANY IMPORTS 90 WHEAT AND exports
45 STEEL
- POINT OF PRODUCTION/ CONSUMPTION WHEAT: 0/90
- “ “ STEEL: 100/55
18. See figure 3.6. Demonstrate the gains from trade for Germany, by making a table [Hint: a table
like table 3.2. is mentioned here]
BEFORE TRADE:

PRODUCTION CONSUMPTION
WHEAT 60 60
STEEL 40 40

AFTER TRADE:

PRODUCTION -EXPORTS +IMPORTS =CONSUMPTION

WHEAT 0 -0 +90 90
STEEL 100 -45 +0 55

19. Explain table 3.3; what is the price of steel on the international market?
- THE TABLE SHOWS GAINS FROM TRADE FOR THE COUNTRIES FRANCE AND GERMANY AND
THE WORLD, MORE SPECIFICALLY PRODUCTION AND CONSUMPTION BEFORE AND AFTER
TRADE
- THE INTERNATIONAL RATES ARE 240 WHEAT AND 100 STEEL, SO 1 UNIT OF STEEL COSTS 2.4
UNITS OF WHEAT
20. Explain formula 3.3 (page 49) and make clear in which situation the formula is true.

21. Assuming that in figure 3.9 the scales of the axes are the same, which country has a comparative
advantage in which good? Motivate your answer.
- COUNTRY B PRODUCES THE SAME AMOUNT OF CLOTH, BUT MORE WHEAT, WHICH MEANS
THAT IT HAS A COMPARATIVE ADVANTAGE OVER A CONCERNING WHEAT.
- COUNTRY A IS COMPARABLY MORE EFFICIENT IN PRODUCING CLOTH THOUGH, WHICH
MEANS THAT IT HAS A COMPARATIVE ADVANTAGE OVER COUNTRY B IN CLOTH
22. Explain figure 3.9.
- LEFT GRAPH SHOWS EQUILIBRIUM BEFORE AND AFTER TRADE OF COUNTRY A AND THE
RIGHT ONE THE SAME OF COUNTRY B
- COUNTRY A HAS AN EQUILIBRIUM BEFORE TRADE AT P AND COUNTRY B AT P*. COUNTRY A
THEN SHIFTS PRODUCTION TO Q AND TRADES TO REACH V WHICH IS ON A HIGHER
INDIFFERENCE CURVE AND MEANS HIGHER UTILITY. COUNTRY B TRADES TO REACH J WHICH
IS ALSO ON A HIGHER INDIFFERENCE CURVE AND RESULTS IN HIGHER SATISFACTION.
- VS MEANS EXPORT OF CLOTH OF COUNTRY A AND SQ MEANS IMPORT OF WHEAT
- GH IN THE RIGHT GRAPH MEANS IMPORT OF CLOTH AND HJ MEANS EXPORT OF WHEAT
23. What are the effects of trade for the economies in a two country two goods model?
 - THE COUNTRIES CAN SPECIALIZE IN THE GOOD IN WHICH PRODUCTION THEY ARE
RELATIVELY ABUNDANT AND WILL GAIN FROM TRADE AS THEY CAN REACH A HIGHER TOTAL
OUTCOME AND THEREFORE HIGHER SATISFACTION
- TERMS OF TRADE INCREASES
- RELOCATION OF RESOURCES
- IMPROVEMENT OF ECONOMIC WELFARE
24. In which situation is formula 3.5 true?
IF THE SLOP OF TT IS THE SAME IN BOTH COUNTRIES
25. Explain formula 3.5.

26. What factors influence how the gains from trade are divided? Describe the effects.
- DEPENDS ON THE RATIO AT WHICH THE TWO GOODS ARE EXCHANGED (INTERNATIONAL
EXCHANGE RATIO INFLUENCES THE EXCHANGED QUANTITY OF PRODUCTS -> CAUSES
QUANTITY OF WHAT ONE COUNTRY WANTS TO EXPORT TO JUST EQUAL THE QUANTITY
WHAT ANOTHER COUNTRY WANTS TO IMPORT OF THAT GOOD
27. Explain figure 3.10
- P1 IS THE INTERNATIONAL EQUILIBRIUM PRICE (WHICH IS INFLUENCED BY COUNTRY A´S
AMOUNT OF EXPORTS XA AND COUNTRY B´S AMOUNT OF IMPORTS MB)
- MEANS THAT THE QUANTITY OF CLOTH THAT COUNTRY A SUPPLIES EQUALS THE AMOUNT
OF CLOTH THAT COUNTRY B DEMANDS
- THE DIFFERENCE BETWEEN THE INTERNATIONAL AND THE DOMESTIC PRICE OF COUNTRY B
IS WAY HIGHER THAN THE DIFFERENCE FOR COUNTRY A. THAT MEANS THAT COUNTRY B
BENEFITS MORE FROM TRADE AS THEY SAVE MORE MONEY BY IMPORTING THAN COUNTRY
A MAKES BY EXPORTING
28. Which lesson can be learnt from the Japanese example in the 19 th century about a small country
which opens up to trade?
- RADICAL ELIMINATION OF TRADE BARRIERS LEADS TO SHIFT IN RELATIVE PRICES
- EXPORTED GOODS CAN BE SOLD AT MUCH HIGHER WORLD PRICES AND IMPORTED GOODS
CAN BE BOUGHT AT LOWER/ FALLING PRICES
- TOT CAN BE IMPROVED AND PUSH A COUNTRY´S ECONOMY
29. What is an offer curve?
- ALSO KNOWN AS RECIPROCAL DEMAND CURVE
- A CURVE THAT ILLUSTRATES THE VOLUME OF EXPORTS AND IMPORTS THAT A COUNTRY
WILL CHOOSE TO UNDERTAKE AT VARIOUS TERMS OF TRADE
30. Explain figure 3.12 (the figure will be given without the title)
- OFFER CURVES FOR COUNTRIES A AND B
- 1 IS POINT WHERE A AND B AGREED ON VOLUMES OF WHEAT AND CLOTH TO BE
EXCHANGED AND ON THE EXCHANGE RATIO
- AT ANY OTHER EXCHANGE RATIO THERE IS NO SUCH AGREEMENT

 The summary of key concepts must be studied and understood.

 From the case study study question 2 need NOT be answered; all other questions can be part of
the test, sometimes in a somewhat different shape.
 From ‘questions for study and review’, questions 4 need NOT be answered; all other questions
can be part of the test, sometimes in a somewhat different shape.
 The appendix to the chapter needs NOT to be studied.

Questions/problems regarding IE, Chapter 4

1. What are two key ideas in which the Heckscher – Ohlin model differs from the approach in the
former chapter (the classical approach)? Describe the differences.
- LABOR FORCE INCREASES
- COUNTRY DOES NOT INFLUENCE WORLD PRICE
2. Mention two modifications which we can see in the H-O model, which are not present in the
classical model (page 68)
3. In the 2 * 2 * 2 model, what is the H-O model theorem? [answer to be found in Powerpoint of
lecture 7 or page 76 in the book]
A country will produce and export the good which is using intensively the production factor
Which it has in abundance
4. Which two building blocks must be added to the list of seven assumptions of the classical model
to arrive at the H-O model?
5. Explain figure 4.1, use the concept of “Marginal rate of substitution” in your explanation.
DID IIIT, SEE NOTES
6. What is an isoquant?
A GRAPH OF ALL POSSIBLE COMBOS OF INPUTS THAT RESULT IN THE PRODUCTION OF A GIVEN
LEVEL OF OUTPUT.
7. Explain figure 4.2, make clear which good, C or W, is labour intensive. Include the meaning of line
SR as compared to line MN.
- CHEESE IS LABOR-INTENSIVE, WHEAT IS LAND-INTENSIVE
- SEE NOTES
8. What is meant with factor-intensity reversal?
9. Explain figure 4.3 (figure will be given without title and without explanation)
10. In figure 4.3 are there constant rates of transformation? Motivate your answer. (Hint: look at the
production possibility curve and definition of ‘marginal rate of transformation’ at page 725)
11. What effect is there on the shape of the production-possibility curve from differences in factor
intensities?
12. See figure 4.4; which country has more land and which country has more labor, relatively
speaking?
SEE NOTES
13. See figure 4.4; explain which good will be exported by Denmark and which good will be exported
by the United States?
SEE NOTES
14. What does the H-O theory do better than the comparative advantage theory (page 75, bottom)?
15. Explain figure 4.5 (title will be given) and make clear in that explanation which good will be
exported by which country and which country is abundant in which production factor. It is given
that cheese is labour-intensive and wheat is land-intensive.
SEE NOTES
16. Look at table 4.1 (the table or lines from the table will be given). Which type of goods are likely to
be exported by “name of country from the table” to “name of another country from the table”.
Motivate your answer.
17. See figure 4.6 (will be given with title). Why does the amount of wheat produced decrease?
SEE NOTES
18. What is meant with the Rybczynski theorem?
19. What happens to trade if factor endowments become less similar? Motivate and give an
example.
20. Give three examples of how comparative advantages may change in the H-O model.
21. See table 4.2, showing information about the USA economy. Assuming the USA is labour-
abundant, give an example of an industry which is an export industry, also assuming the H-O
model is applicable. Motivate your answer.
22. Same as question 21, but then about import industry.
23. See table 4.2, what conclusion can be drawn, based on column 3 about ‘employee
compensation/full-time equivalent worker’?
24. What is the Stolper-Samuelson theorem?
THE STOLPER-SAMUELSON THEOREM STATES THAT A RISE IN THE PRICE OF EXPORTS WILL
BENEFIT THE ABUNDANT FACTOR AND HARM THE SCARCE FACTOR OF A COUNTRY
25. In a country which is labour abundant cheese is being exported. What will happen with the rent
price of land (the other production factor), if there is a liberalization of the trade? Motivate your
answer.
THE PRICE OF LAND WILL DECREASE BECAUSE THE COUNTRY WILL FOCUS EVEN MORE ON
PRODUCING CHEESE WHICH IS LABOR-INTENSIVE WHEN TRADE WILL BE LIBERALIZED. INSTEAD
OF PRODUCING THEIR OWN LAND-INTENSIVE GOODS, IT IS EASIER TO IMPORT WHICH IS WHY
THE OWN LAND IS NEEDED LESS. ?????
26. In the example used in the book about the USA (land abundant) and Denmark (labour abundant),
producing wheat (land intensive) and cheese (labour intensive), what happens to the prices of
the production factors, if we compare the no-trade situation to a situation in which trade exists?
THE PRICES OF THE GOODS WILL GO DOWN IF THERE IS TRADE BECAUSE THE DEMAND
INCREASES AND THE COUNTRIES CAN SPECIALIZTE IN THE GOOD IN WHOSE PRODUCTION THEY
ARE RELATIVELY ABUNDANT. IF THERE IS NO TRADE, THE COUNTRIES HAVE TO PRODUCE BOTH
GOODS THEMSELVES WHICH IS LESS EFFICIENT AS THEY ARE ABUNDANT IN ONE OF THE
FACTORS WHICH MEANS THAT THEY HAVE LESS OF BOTH PRODUCTS TO MEET THE DEMAND. ???
27. What conditions in the real world hinder an equal price for production factors in both countries.
Name two of them.
- TECHNOLOGY DOES NOT MOVE COSTLESSY FROM COUNTRY TO COUNTRY
- TRADE IS NOT FREE
28. How did the Stolper-Samuelson theorem work out in the USA and Europe?
29. What will be the short-run effect of free trade for the labor-intensive apparel industry in a
country where capital is abundant and labour is scarce.
30. Same as question 30, but now the intermediate run effect, where labor is mobile between the
two production sectors and capital will adjust slowly, but will remain industry specific.
31. Explain figure 4.9 (will be given without title)
SEE NOTES
32. What is meant with the label “the Dutch disease”?
33. Explain figure 4.10 (will be given with title)
SEE NOTES
34. What is meant with the term ‘resource curse’? Explain why a large amount of a resource can
result in a negative effect on the countries’ economy.
35. How does international trade act as a substitute for factor movements? Give your explanation.
36. Describe what is meant with the Leontief paradox.
37. What is meant with ‘missing trade’? What is the explanation for the ‘missing trade’?

 The summary of key concepts must be studied and understood.

 From the case study study questions 1 and 4 need NOT be answered; all other questions can be
part of the test, sometimes in a somewhat different shape.
 From ‘questions for study and review’, questions 7, 8 and 11 need NOT be answered; all other
questions can be part of the test, sometimes in a somewhat different shape.