Summary of Unit 1: International Trade and Business

This chapter covers the fundamental concepts of international trade, trade theories,
determinants of exports and imports, trade protectionism, and economic integration. It
explores how global trade operates, the advantages and disadvantages of free trade, and
policies that influence trade between nations.

Key Topics Covered:

1. Determinants of Exports and Imports

● Exports are influenced by factors such as production levels, GDP growth, exchange
rates, government policies, industrialization, skilled labor force, and foreign direct
investment (FDI).
● Imports depend on national income levels, industrialization, natural calamities,
government policies, and exchange rates.

2. The Production Possibility Curve (PPC)

● PPC represents alternative production possibilities given limited resources.

● It illustrates trade-offs between producing different goods and how economies allocate
resources efficiently.
● Economic growth shifts the PPC outward, increasing production capacity.

3. Trade Theories

● Adam Smith's Absolute Advantage Theory: Countries should specialize in producing

goods they are most efficient in.
● David Ricardo's Comparative Advantage Theory: Countries benefit from trade by
producing goods with the lowest opportunity cost.
● J.S. Mill’s Reciprocal Demand Theory: The pattern of trade is determined by both
supply and demand in international markets.

4. Terms of Trade (ToT)

● Measures the ratio of export prices to import prices.

● Several methods include Gross Barter ToT, Net Barter ToT, and Income ToT.
● A higher ToT indicates more favorable trade conditions for a country.

5. Trade Protectionism vs. Free Trade

● Free Trade: No restrictions on imports and exports, leading to increased efficiency and
global economic cooperation.
● Protectionism: Uses tools like tariffs, quotas, subsidies, and exchange controls to
safeguard domestic industries.
● Arguments for protectionism include supporting infant industries, job protection, and
economic self-sufficiency, but it can lead to diplomatic tensions and inefficiencies.
6. Trade Barriers

● Tariffs: Taxes on imported goods.

● Quotas: Limits on import quantities.
● Exchange Controls: Restrictions on currency usage for trade.
● Dumping: Selling products at artificially low prices in foreign markets.

7. Economic Integration

● Different levels of integration:

○ Preferential Trade Agreements (PTAs) – Reduced tariffs between nations.
○ Free Trade Agreements (FTAs) – No tariffs on trade within member nations.
○ Customs Unions – Common external tariffs on non-member countries.
○ Common Markets – Free movement of goods, services, and labor.
○ Economic Unions – Unified fiscal and monetary policies (e.g., the European
Union).
● Benefits of Economic Integration:
○ Increases trade, specialization, economies of scale, and investment.
○ Creates job opportunities and improves competitiveness.
○ Encourages technology transfer and regional cooperation.
● Challenges of Economic Integration:
○ Unequal distribution of benefits.
○ Political conflicts and sovereignty concerns.
○ Trade diversion (shift from efficient to less efficient trade partners).

8. International Monetary Policies

● Exchange Rate Determination: Exchange rates affect international trade by making

exports/imports cheaper or more expensive.
● Balance of Payments (BoP): Tracks a country’s economic transactions with the rest of
the world.
● Capital Markets and Foreign Investments: The rise of global financial markets has
increased foreign investments, impacting trade and economic growth.

Conclusion
This chapter highlights the importance of trade in economic development and the role of
government policies in shaping international trade relationships. While free trade fosters
economic efficiency, protectionist measures can safeguard domestic interests. Economic
integration and international monetary policies significantly impact global trade dynamics.

Section 1: Determinants of Exports and Imports

1. Which of the following factors positively influences a country's exports?
a) Low production levels
b) High GDP growth
c) Strong import dependence
d) High inflation
 2. A depreciation in a country's exchange rate will generally lead to:
a) A decrease in exports
b) An increase in imports
c) An increase in exports
d) No impact on trade
3. What role does industrialization play in exports?
a) It reduces export potential
b) It increases export capabilities
c) It makes imports cheaper
d) It discourages FDI inflows
4. How do government policies impact imports?
a) Import restrictions reduce dependency on foreign goods
b) Free trade policies reduce imports
c) Tariffs encourage imports
d) Currency appreciation has no impact on imports
5. Foreign Direct Investment (FDI) affects exports by:
a) Increasing domestic production capacity
b) Reducing the need for exports
c) Making domestic goods expensive abroad
d) Increasing reliance on imports

Section 2: Production Possibility Curve (PPC)

6. The Production Possibility Curve (PPC) represents:
a) The possible combinations of two goods an economy can produce
b) The amount of goods that must be exported
c) The impact of foreign trade on domestic output
d) The increase in GDP over time
7. A shift outward in the PPC represents:
a) Economic decline
b) Economic growth
c) Reduction in trade opportunities
d) Decrease in resource availability
8. Which of the following is NOT an assumption of the PPC?
a) Resources are fixed
b) Technology remains constant
c) Unemployment is high
d) The economy operates at full efficiency
9. Moving from one point to another on the PPC demonstrates:
a) Opportunity cost
b) Unlimited resources
c) No trade-offs in production
d) A violation of the law of scarcity
10. A country producing inside its PPC curve is experiencing:
a) Unemployment or inefficiency
b) Full utilization of resources
c) Rapid economic growth
d) No trade-offs in production
Section 3: Trade Theories
11. Adam Smith’s Absolute Advantage theory states that a country should:
a) Export goods it produces most efficiently
b) Import all goods from other nations
c) Avoid international trade
d) Focus only on agricultural production
12. Ricardo’s Comparative Advantage theory suggests that a country should:
a) Specialize in producing goods with the lowest opportunity cost
b) Export only manufactured goods
c) Trade only if it has an absolute advantage
d) Avoid trade if it imports more than it exports
13. J.S. Mill’s Reciprocal Demand theory focuses on:
a) The supply and demand interactions between trading countries
b) The need for government-imposed trade barriers
c) A country producing everything domestically
d) The benefits of import substitution
14. The theory of Comparative Advantage is based on:
a) Opportunity cost
b) Labor cost alone
c) Currency fluctuations
d) High import tariffs
15. Which assumption is made in the Ricardian model of trade?
a) Labor is the only factor of production
b) Capital is highly mobile across countries
c) There are no trade restrictions
d) Both a and c

Section 4: Terms of Trade (ToT)

16. Terms of Trade (ToT) is defined as:
a) The ratio of export prices to import prices
b) The total quantity of imports
c) The foreign exchange rate of a country
d) The total number of trade agreements signed
17. If the Terms of Trade (ToT) is greater than 100, it indicates:
a) More exports in terms of value
b) More imports than exports
c) Trade restrictions
d) A decline in GDP
18. Which method measures the ratio of export quantity to import quantity?
a) Gross Barter ToT
b) Net Barter ToT
c) Income ToT
d) Exchange Rate Index
 19. A worsening ToT for a country means:
a) Export prices have fallen relative to import prices
b) The country is exporting more than before
c) Trade policies have become more favorable
d) The domestic currency has appreciated
20. Which factor can lead to an improvement in a country’s Terms of Trade?
a) Increase in export prices
b) Increase in import dependency
c) Depreciation of currency
d) Decrease in GDP growth

Section 5: Trade Protectionism vs. Free Trade

21. A key feature of free trade is:
a) No trade restrictions
b) High tariffs on imports
c) Government-controlled exports
d) Strict import quotas
22. Protectionism is primarily aimed at:
a) Safeguarding domestic industries
b) Promoting global trade
c) Reducing government revenue
d) Encouraging monopolies
23. A country using tariffs as a protectionist tool is:
a) Imposing taxes on imports
b) Offering financial aid to exporters
c) Restricting the quantity of imported goods
d) Fixing foreign exchange rates
24. Which of the following is an example of a non-tariff barrier?
a) Quotas
b) Import duties
c) Currency depreciation
d) Export subsidies
25. Dumping refers to:
a) Selling products at artificially low prices in foreign markets
b) Restricting imports through high taxes
c) Hoarding domestic goods
d) Reducing the price of domestic products

Section 6: Economic Integration

26. A Customs Union includes:
a) Free trade among members and a common external tariff
b) No restrictions on labor movement
c) Complete economic integration
d) Individual trade policies with non-members
 27. Which of the following is the highest level of economic integration?
a) Free Trade Agreement
b) Common Market
c) Economic Union
d) Preferential Trade Agreement
28. The European Union (EU) is an example of a:
a) Economic Union
b) Customs Union
c) Free Trade Area
d) Preferential Trade Agreement
29. Trade creation occurs when:
a) A country shifts trade from high-cost to low-cost producers
b) Trade is diverted to inefficient producers
c) Import restrictions are increased
d) A country reduces its exports
30. The main disadvantage of economic integration is:
a) Loss of national sovereignty
b) Increased tariffs on exports
c) Decreased international trade
d) Reduction in GDP

Section 7: Exchange Rate Determination

31. What happens when a country's currency appreciates?
a) Exports become cheaper, and imports become expensive
b) Exports become expensive, and imports become cheaper
c) There is no impact on trade
d) The economy experiences inflation
32. A floating exchange rate is determined by:
a) The government
b) The demand and supply of the currency in the forex market
c) A fixed percentage set annually
d) The central bank alone
33. When a country devalues its currency, it results in:
a) Higher cost of imports
b) Cheaper exports
c) Improved trade balance
d) All of the above
34. Which of the following can lead to a currency depreciation?
a) Higher interest rates
b) Decreased demand for domestic currency
c) Strong GDP growth
d) Increased foreign investment inflows
35. Fixed exchange rates are usually maintained by:
a) Allowing the currency to fluctuate freely
b) Government intervention in the foreign exchange market
c) Reducing the money supply
d) Increasing inflation
Section 8: Balance of Payments (BoP)
36. The Balance of Payments (BoP) records:
a) Only trade in goods and services
b) All international economic transactions of a country
c) Only capital inflows and outflows
d) Only government borrowing from abroad
37. Which of the following is included in the Current Account of the BoP?
a) Foreign direct investment (FDI)
b) Trade in goods and services
c) Foreign portfolio investment
d) Central bank reserves
38. A BoP surplus means that:
a) Exports exceed imports
b) Imports exceed exports
c) There is a trade deficit
d) Foreign currency reserves are depleting
39. A BoP deficit can be corrected by:
a) Increasing exports
b) Decreasing imports
c) Attracting more foreign investment
d) All of the above
40. If a country has a trade deficit, it means:
a) It exports more than it imports
b) It imports more than it exports
c) Its currency is undervalued
d) Its foreign reserves are increasing

Section 9: International Monetary Policies

41. The International Monetary Fund (IMF) primarily helps countries by:
a) Providing long-term economic development funds
b) Stabilizing exchange rates and providing short-term financial aid
c) Regulating global trade policies
d) Offering trade agreements between nations
42. What is the purpose of the World Bank?
a) To provide short-term loans to governments
b) To fund long-term development projects in developing countries
c) To regulate exchange rates
d) To control global inflation
43. A capital account surplus means that:
a) The country is experiencing higher trade deficits
b) More money is leaving the country than entering
c) Foreign investors are putting more money into the country
d) The country is running out of foreign reserves
 44. When a government imposes exchange controls, it aims to:
a) Allow free movement of foreign currency
b) Stabilize its economy by restricting currency outflows
c) Reduce foreign investments
d) Increase trade deficits
45. What is the main goal of monetary policy in an open economy?
a) Control inflation and stabilize currency values
b) Reduce government spending
c) Increase imports
d) Prevent foreign investments

Section 10: International Capital Markets

46. Which of the following is a characteristic of the Foreign Exchange Market (Forex
Market)?
a) It operates only during business hours
b) It is decentralized and operates 24/7
c) It deals only with government transactions
d) It allows only large corporations to participate
47. Foreign Direct Investment (FDI) is different from Foreign Portfolio Investment (FPI)
because:
a) FDI involves long-term ownership and control
b) FPI is long-term, while FDI is short-term
c) FDI is riskier than FPI
d) FDI is made only by governments
48. Which of the following is an example of capital market liberalization?
a) Removing restrictions on foreign investments
b) Increasing import tariffs
c) Decreasing interest rates for domestic loans
d) Reducing trade deficits
49. A sovereign wealth fund (SWF) is:
a) A fund created by a government to invest in foreign assets
b) A fund created by private banks for foreign investments
c) A trade agreement between nations
d) A way to raise taxes on imports
50. The Eurocurrency market is:
a) A market where European nations trade currencies
b) A market for deposits and loans in foreign currencies outside their country of origin
c) A market regulated by the European Central Bank
d) A government-controlled currency exchange system

Advanced MCQs (51-80) – Hardest and Most Important Questions

Section 1: Advanced Trade Theories

51. According to Ricardo's Comparative Advantage Theory, a country should trade even
if:
a) It has an absolute disadvantage in both goods
 b) It has an absolute advantage in both goods
c) It has a trade surplus
d) It has an equal opportunity cost in production
52. The opportunity cost of producing a good under the Production Possibility Curve
(PPC) is:
a) The value of the best alternative forgone
b) The total cost of production
c) The labor cost only
d) The price at which the good is sold
53. The Heckscher-Ohlin Model explains trade patterns based on:
a) Comparative advantage
b) Factor endowments (labor & capital)
c) Market demand
d) Absolute productivity differences
54. The Leontief Paradox contradicts the Heckscher-Ohlin Theory by showing that:
a) The U.S. exports labor-intensive goods despite being capital-abundant
b) Developing countries export high-tech products
c) Trade occurs without factor mobility
d) Developed nations should always run trade surpluses
55. The Stolper-Samuelson theorem states that:
a) Trade benefits the abundant factor and hurts the scarce factor
b) Free trade reduces inequality
c) Protectionism leads to higher wages
d) Countries should always protect their labor-intensive industries

Section 2: Terms of Trade & Trade Policies

56. Net Barter Terms of Trade (N) is calculated as:
a) N=PxPm×100N = \frac{P_x}{P_m} \times 100N=PmPx×100
b) N=QxQm×100N = \frac{Q_x}{Q_m} \times 100N=QmQx×100
c) N=PmPx×100N = \frac{P_m}{P_x} \times 100N=PxPm×100
d) N=X−MGDP×100N = \frac{X-M}{GDP} \times 100N=GDPX−M×100
57. Income Terms of Trade (I) is important because:
a) It measures how much a country can import per unit of exports
b) It calculates exchange rate fluctuations
c) It focuses only on volume, not value
d) It determines a country’s GDP growth
58. A country that experiences a decline in its Single Factorial Terms of Trade (S) is likely
facing:
a) A fall in productivity of export industries
b) A rise in foreign direct investment
c) A decrease in domestic demand
d) An increase in foreign reserves
59. Tariffs are considered more transparent than Non-Tariff Barriers (NTBs) because:
a) They are easier to measure and negotiate
b) They cause no trade distortion
c) They improve terms of trade automatically
d) They do not affect domestic prices
 60. The Effective Rate of Protection (ERP) is higher than the nominal tariff rate when:
a) The imported inputs used in domestic production are also taxed
b) The country has a fixed exchange rate
c) The tariff applies only to finished goods
d) There is no change in domestic production

Section 3: Trade Protectionism & Dumping

61. Predatory Dumping occurs when:
a) A firm sets export prices below domestic prices to eliminate competition
b) Firms dump products in their domestic markets
c) Governments impose high tariffs on imports
d) Trade agreements lower import prices
62. The WTO's Anti-Dumping Agreement allows countries to impose countervailing duties
if:
a) Dumping causes injury to domestic industries
b) Imports exceed a specific threshold
c) The exporter refuses to negotiate prices
d) The country's balance of payments worsens
63. Voluntary Export Restraints (VERs) are imposed when:
a) An exporting country agrees to limit its exports to avoid trade barriers
b) A country imposes tariffs to restrict imports
c) The WTO enforces export quotas
d) Domestic industries demand higher tariffs
64. The most common justification for import quotas is:
a) To protect domestic employment and industries
b) To generate government revenue
c) To increase the country’s GDP
d) To expand free trade agreements
65. A quota is more restrictive than a tariff when:
a) Domestic demand for imports increases
b) The government earns more revenue from it
c) The supply of foreign goods is fixed
d) The domestic currency appreciates

Section 4: Exchange Rates & Balance of Payments

66. The J-Curve effect suggests that after a currency depreciation:
a) The trade balance worsens before improving
b) Exports decrease and imports increase
c) The currency appreciates over time
d) The trade deficit remains unchanged
67. A fixed exchange rate system can be maintained by:
a) Central bank intervention in currency markets
b) Floating interest rates
 c) Eliminating capital controls
d) Allowing free market fluctuations
68. The Marshall-Lerner condition states that a depreciation improves the trade balance if:
a) The sum of price elasticities of exports and imports is greater than one
b) The domestic economy is highly industrialized
c) The central bank increases interest rates
d) The country runs a trade surplus
69. A capital account surplus means that:
a) More foreign investments are entering the country
b) The country is running a trade surplus
c) The currency is undervalued
d) The government is increasing tariffs
70. Which of the following is NOT a component of the Balance of Payments (BoP)?
a) Capital account
b) Current account
c) Exchange rate reserves
d) Terms of trade index

Section 5: Economic Integration & International Capital Markets

71. A Customs Union differs from a Free Trade Agreement because:
a) It imposes a common external tariff on non-members
b) It does not allow free movement of goods
c) It only removes tariffs on agricultural products
d) It increases government intervention in trade
72. The European Union (EU) is an example of:
a) An Economic Union
b) A Preferential Trade Agreement
c) A Common Market
d) A Free Trade Area
73. Trade diversion occurs when:
a) A country imports from a less efficient partner due to economic integration
b) A country reduces tariffs to boost trade
c) Imports shift from high-cost to low-cost producers
d) Tariff barriers are eliminated completely
74. A sovereign wealth fund (SWF) is primarily used for:
a) Investing in foreign assets using government reserves
b) Reducing trade deficits
c) Restricting foreign capital inflows
d) Supporting domestic industries
75. The Triffin Dilemma highlights a problem in:
a) A country issuing the global reserve currency
b) Floating exchange rate systems
c) Foreign direct investment inflows
d) Balance of trade policies
76. Which of the following factors can cause capital flight?
a) Political instability and economic uncertainty
b) Strong trade agreements
 c) Increased government subsidies
d) Trade surpluses
77. The Eichengreen Hypothesis relates to:
a) The stability of fixed exchange rate systems
b) Tariff escalation in international trade
c) The elasticity of trade demand
d) The role of monopolies in global markets
78. Which of the following best describes Hot Money?
a) Short-term capital flows seeking quick profits
b) Long-term government bonds
c) Trade in physical goods
d) Fixed capital investments
79. The Plaza Accord (1985) was an agreement to:
a) Depreciate the U.S. dollar
b) Introduce trade protectionism
c) Remove capital controls
d) Establish fixed exchange rates
80. Which financial institution regulates international trade disputes?
a) WTO
b) IMF
c) World Bank
d) G20