Instructor:
John Whitehead
e-mail: whiteheadjc@appstate.edu
Exam #1 Study Guide
The exam will/may consist of 50 multiple choice and true/false questions. Each question is worth 2 points.
Key Terms
Chapter 2: demand, supply, consumer surplus, producer surplus, arbitrage, one-dollar one-vote, autarky, exports, imports, gains from trade, winners and losers
Chapter 3: Adam Smith and the Wealth of Nations, absolute advantage, David Ricardo, comparative advantage, mercantilism, labor theory of value, labor productivity (2 x 2 x 1) model, opportunity cost, autarky, (complete) specialization, pattern of trade, exports, imports, terms of trade, gains from trade, winners and losers
Chapter 4: factor proportions (2 x 2 x 2) model, factor abundance, factor intensities, autarky, (incomplete) specialization, pattern of trade, exports, imports, terms of trade, gains from trade, winners and losers, income distribution
Chapter 6: balanced growth, import-biased growth, export-biased growth, small-country, large-country, terms of trade effect
Practice Questions
1. Given the labor productivities below, determine the absolute advantages, the opportunity costs and the comparative advantages, the pattern of trade and a range for the terms of trade. [Key]
| Labor hours to make | Country A | Country B |
| 1 unit of X | 3 | 2 |
| 1 unit of M | 1 | 0.25 |
2. Given the production frontiers below (assuming an equal supply of labor in both countries), determine the absolute advantages, opportunity costs and the comparative advantages, the pattern of trade and a range for the terms of trade. [Key]
3.Assume that there are two countries (Thirstionia and Drunconia) in the world. In the world without trade, Thirstionia and Drunconia produce and consume beer. The pre-trade price of beer in Thirstionia is lower than the pre-trade price of beer in Drunconia. Assume that free trade opens up between Drunconia and Thirstionia. Using what you have learned about consumer and producer surplus, describe what happens to consumers and producers in each country as a result of the move to free trade. What happens to overall economic welfare in the two countries? Be sure to describe the changes in consumer and producer surplus that result from the move to free trade. [Key]
4. Suppose Japan is labor abundant and land scarce relative to the U.S. The production of rice is relatively land intensive. The production of cars is relatively labor intensive. Describe the pattern of trade as the countries go from autarky to free trade. Explain the long-run effects of trade on the incomes of: workers and landowners in each country. [Key]