# Economic Multiple choice – Gravity, Ricardian, Heckscher-Ohlin model

Use the following Scenario to answer Questions 1-2:
Consider two countries, Australia and New Zealand, in a H-O model. Both countries produce two goods, cars and ships. There are two factors of production used: labor and capital. In free trade, New Zealand exports ships to Australia. The workers in New Zealand protest against free trade between Australia and New Zealand.

1. From the information given above you would infer that __.
A. New Zealand is relatively abundant in labour
B. Australia is relatively labour abundant
C. both New Zealand and Australia are labour abundant to produce so much cars and ships
D. Not enough information is given to infer about the factor abundance.
E. None of above is correct.
2. From the information given above you would infer that __.
A. the production of cars is a relatively labour-intensive activity.
B. the production of ships is a relatively labour-intensive activity.
C. both products are labour-intensive activities.
D. Not enough information is given to infer about the factor intensity.
E. None of above is correct.
3. Assume that labour is the only factor of production and that wages in Australia are \$17 per hour while wages in Japan are \$10 per hour. Australia can have a cost advantage in a good if _.
A. Japan’s labour productivity equalled 5 units per hour and Australia’s 10 units per hour
B. Japan’s labour productivity equalled 10 units per hour and Australia’s 15 units per hour C. Japan’s labour productivity equalled 15 units per hour and Australia’s 20 units per hour
D. Japan’s labour productivity equalled 30 units per hour and Australia’s 35 units per hour
E. None of the above is correct.
4. In the Ricardian model, the marginal product of labor:
A. first rises, then falls, as more labor is employed to produce a good.
B. first falls, then rises, as more labor is employed to produce a good.
C. does not change, as more labor is employed to produce a good.
D. continuously falls, as more labor is employed to produce a good.
E. continuously rises, as more labor is employed to produce a good.

Use the following figures to answer Question 5:

1. If computers are a labour-intensive industry, which nation has more labour resources relative to its capital resources?
A. Home
B. Foreign
C. neither Home nor Foreign
D. Home without trade, but Foreign with trade
E. Not enough information to answer.
2. Which of the following statements explain(s) why Asian countries trade with industrialized countries? I. Workers in Asian countries have low wages.
II. Workers are very productive in some Asian countries.
III. Asian countries have an abundant supply of raw materials.
A. I
B. II
C. III
D. I, II
E. I, II and III
3. Why is the PPF concave to the origin in the Heckscher-Ohlin model? A. Capital is specific to the production of one good.
B. Labor is specific to the production of the other good.
C. Labor is not perfectly mobile between the production of the two goods.
D. Both labor and capital are not perfectly mobile between the production of the two goods.
E. There are increasing opportunity costs of producing each good.
4. Sweeden requires 2 hours of labor to mine a ton of ore and 5 hours of labor to produce 100 board feet of lumber. In Finland, 2 hours of labor are required to mine a ton of ore and 4 hours of labor to produce 100 board feet of lumber. Which country has a comparative advantage in the production of lumber? A. Sweeden
B. Finland
C. Neither
D. Both
E. Not enough information to answer the question
5. Since the early 1960s, world’s trade as a share of world production has A. remained constant.
B. increased.
C. decreased.
D. fluctuated widely with no clear trend.
E. increased slightly before dropping off.
6. Assume a Heckscher-Ohlin model of two countries (Australia and Malaysia), two products (food and smartphones), and two inputs (capital and labour). If Australia is relatively capital rich, and if food is relatively land intensive then trade between these two, formerly autarkic countries will result in A. an increase in the relative price of smartphones in Malaysia.
B. a global increase in the relative price of smartphones.
C. a decrease in the relative price of smartphones in both countries.
D. an increase in the relative price of smartphones in the Australia.
E. an increase in the relative price of smartphones in both countries.
7. Which of the following concepts cannot be explained by the Ricardian model?
A. Wage difference across countries
E. None of the above
8. When the production possibilities frontier is a straight line, then production occurs under conditions of:
A. increasing costs.
B. constant costs.
C. decreasing costs.
D. increasing, then decreasing costs.
E. increasing, then decreasing, then constant costs.

Use the information from the table below to answer Questions 13-15:
Unit Labor Requirements
Fridges Rice
Australia 30 20
New Zealand 40 20

1. Given the information in the table above,
A. New Zealand has a comparative advantage in rice; its opportunity cost of rice for fridges is 1/2 of Australia’s opportunity cost.
B. Australia has a comparative advantage in rice; its opportunity cost of rice for fridges is 3/4 of New Zealand’s opportunity cost.
C. Australia has an absolute advantage in fridges and rice.
D. New Zealand has a comparative advantage in fridges; its opportunity cost of fridges for rice is 2.
E. Australia has a comparative advantage in fridges; its opportunity cost of fridges for rice is 1.5.
2. Given the information in the table above, if the Australian economy enjoyed technological improvement, and the Unit Labour Requirements halved to 15 for fridges and 10 for rice then Australia should
A. export fridges.
B. export rice.
C. export both and import nothing.
D. export and import nothing.
E. import both and export nothing.
3. Given the information in the table above, suppose a cyclone in New Zealand increases its unit labour requirements for rice to 25. Everything else held constant, which of the following statements is/are true? I. The export and import behaviours of both New Zealand and Australia do not change. II. Australia has absolute advantages in fridges and rice.
III. New Zealand now exports the product that it used to import before the cyclone. A. I
B. I, II
C. II
D. II, III
E. III
4. A nation will gain from trade if it:
A. produces and consumes along its PPF.
B. produces outside its PPF and consumes along its PPF.
C. produces inside its PPF and consumes along its PPF.
D. produces along its PPF and consumes outside its PPF.
E. produces and consumes outside its PPF.
5. Which of the following statements is TRUE?
A. The Heckscher-Ohlin model offers a reasonable explanation of the pattern of trade and the gains from trade.
B. The Ricardian trade model (with labor as the only input) offers a better explanation of the pattern of trade and the gains from trade than the Heckscher-Ohlin model.
C. The Heckscher-Ohlin model offers a reasonable explanation for both inter-industry and intraindustry trade.
D. The Heckscher-Ohlin trade model does not offer an explanation of the pattern of trade.
E. The Heckscher-Ohlin trade model does not offer an explanation of the gains from trade.
6. When a country requires fewer resources to produce a product than other countries, it is said to have a(n):
A. absolute advantage in the production of the product.
B. absolute advantage in the production of other products.
C. comparative advantage in the production of the product.
D. comparative advantage in the production of other products.
E. There is not enough information to make a conclusion.
7. Which of the following is implied by the Heckscher-Ohlin model? A. In the long run, labor is mobile and capital is not.
B. The wage-rental ratio is determined by relative product prices.
C. An increase in a country’s labor supply will increase production of the capital-intensive good and decrease production of the and the labor-intensive good.
D. An increase in a country’s labor supply will increase production of both the capital-intensive and the labor-intensive good.
E. Factor price equalization will occur only if there is costless mobility of all factors across borders.
8. Assume that two countries (Home and Foreign) each produce two goods (wheat and rice) under constant cost production. Home produces 3 tons of rice or 1 ton of wheat with a day of labour. Foreign produces 2 tons of rice or 4 tons of wheat each day of labour. Without trade (in autarky), Home’s daily production is 60 tons of rice and 20 tons of wheat. At which international price will Home’s gains from trade be largest?
A. 3 tons of rice per ton of wheat
B. 2.5 tons of rice per ton of wheat
C. 2 tons of rice per ton of wheat
D. 1.5 ton of rice per ton of wheat
E. 1 ton of rice per ton of wheat

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