International Trade and Finance: practice questions

6 questions · 11 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   One unit of resources can produce the following:

   	Watches		Phones
   Country X	20	or	10
   Country Y	12	or	4

   Which of the following is correct?

   A

   Country X has a comparative advantage in watches.

   B

   Country Y has a comparative advantage in phones.

   C

   Country X has a comparative advantage in phones.

   D

   Country Y has an absolute advantage in watches.

2. Question 2Multiple choice · 1 mark

   Using the data in the previous question, which terms of trade would benefit both countries?

   A

   1 phone = 1.5 watches

   B

   1 phone = 2.5 watches

   C

   1 phone = 3.5 watches

   D

   1 phone = 4 watches

3. Question 3Multiple choice · 1 mark

   A small open economy imposes a per-unit tariff on imported Good Z. Which of the following will result?

   A

   The world price of Good Z rises by the tariff.

   B

   Domestic consumption of Good Z rises.

   C

   Domestic production of Good Z rises.

   D

   Imports of Good Z rise.

4. Question 4Multiple choice · 1 mark

   Which of the following is recorded in Hong Kong's current account?

   A

   A Hong Kong resident buys shares in a Japanese company.

   B

   A US firm builds a factory in Hong Kong.

   C

   The HKMA buys US Treasury bills.

   D

   A Hong Kong resident receives interest on US government bonds.

5. Question 54 marks

   With the aid of a diagram, explain the effects of a per-unit tariff on domestic production and imports of a good in a small open economy.

   Show worked solution

   The tariff raises the domestic price from the world price $P_w$ to $P_w + t$. (1)

   (Diagram: domestic demand and supply; horizontal lines at $P_w$ and $P_w + t$; quantities $Q_1$ to $Q_4$.) (1)

   At the higher price, domestic producers supply more: production rises from $Q_1$ to $Q_2$. (1)

   Consumers buy less ($Q_4$ to $Q_3$), so imports fall from $Q_4 - Q_1$ to $Q_3 - Q_2$. (1)

6. Question 63 marks

   Explain whether a current account deficit means that an economy has a balance of payments deficit.

   Show worked solution

   No. (1) A current account deficit can be offset by net inflows recorded in the financial account, e.g. foreigners investing in the economy. (1) A BoP deficit means the official reserve assets fall, which happens only if the other accounts do not offset the deficit. (1)