INTERNATIONAL ECONOMICS EXAM
WITH QUESTIONS AND 100%
CORRECT ANSWERS
International trade - Answer the exchange of goods and services between the countries
International trade. 7 Gains from international trade - Answer 1) Lower prices
2) Greater choice
3) Differences in resources
4) Economies of scale
5) Increased competition
6) More efficient allocation of resources
7) Source of foreign exchange
Absolute advantage - Answer A country is said to have an absolute advantage in the
production of a good if it can produce it using fewer resources than another country
Reciprocal absolute advantage (HL) - Answer Each country has an absolute advantage
in the production of one product
Comparative advantage (HL) - Answer A country is said to have a comparative
advantage in the production of a good if it can produce the good at a lower opportunity
cost than another country
Comparative advantage graph (HL) - Answer The comparative advantage for the better
producer is in the good where the distance between the production possibilities is the
greatest (a) and the comparative advantage for the less efficient producer is in the good
where the distance between the production possibilities is least (b)
Limitations (assumptions) of the theory of comparative advantage (HL) - Answer 1) It is
assumed producers and consumers have perfect knowledge and are aware of where
the least expensive goods may be purchased
2) No transport costs
3) Only two economies producing 2 goods
4) Costs do not change and returns to scale are constant
5) Goods are homogeneous
6) Factors of production remain in the country
7) Perfectly free trade among countries
,WTO aims - Answer 1) Administer WTO trade agreements
2) be a forum for trade negotiations
3) Handle trade disputes among member countries
4) Monitor national trade policies
5) Provide technical assistance and training for developing countries
6) Cooperate with other international organizations
Free trade - Answer trade that takes place between countries when there are no
barriers to trade put in place by governments or international organizations
Protectionism - Answer refers to government actions and policies that restrict or restrain
international trade, often done with the intent of protecting local businesses and jobs
from foreign competition
Arguments for and against protectionism - Answer 1) Protecting domestic employment
(VS: the industry will eventually decline, protectionism will just prolong the process)
2) Protecting the economy from low-cost labour (VS: against theory of comparative
advantage and specialization)
3) Protecting an infant (sunrise) industry (VS: the industry with access to highly efficient
capital markets would set up at most efficient size)
4) To avoid the risks of over-specialization (no VS)
5) Strategic reasons (VS: unlikely country at war will be cut off supplies)
6) To prevent dumping (VS: hard to prove, if gov subsidizes industry, it supports
dumping + rather need of talk btw gov than forms of protectionism)
7) To protect product standards (VS: against developing countries + a lot of
documentation, trade barrier is the cost involved in meeting product standards)
8) To raise government revenue (VS: taxes are paid by domestic consumers)
9) To correct balance of payments deficit (VS: only works in the short-run)
Dumping - Answer the selling by a country of large quantities of a commodity, at a price
lower than its production cost
Protectionism. 5 Arguments against protectionism - Answer 1) May rise prices to
consumers and producers that buy imports
2) Less choice for consumers
3) Competition would diminish (inefficient domestic industry)
4) Inefficient use of world's resources (distorts comparative advantage)
5) May hinder economic growth
Tariff graph - Answer
tariff imposition. 2 outcomes: - Answer 1) Loss of consumer surplus => dead-weight
loss of welfare
2) Inefficiency of domestic producers => loss of world's efficiency => dead-weight loss
of welfare
, Subsidy graph - Answer No change in price!!
Subsidy consequences - Answer Inefficiency of domestic producers => loss of world's
efficiency => dead-weight loss of welfare
Quota graph - Answer
quota imposition. 2 outcomes: - Answer 1) Loss of consumer surplus (k on the graph)
2) Loss of world's efficiency
Embargo - Answer extreme quota, may completely ban imports
Red tape - Answer Administrative processes that have to be undertaken (bureaucracy)
Nationalistic campaigns - Answer Marketing campaigns to encourage people to buy
domestic products to generate more demand and preserve jobs
Exchange rate. Why would people buy a currency in the foreign exchange market? -
Answer 1) Buy exports of goods and services
2) Invest in foreign firms (FDI)
3) Save money in foreign banks or other financial institutions
4) Make money by speculation
Exchange rate. 4 Causes of rise in the demand for the currency - Answer 1) Increase in
demand for could and services caused by: domestic inflation rates being lower making
goods less expensive; increase in incomes of a foreign country, change in tastes of
foreign consumers in favour of domestic production
2) Domestic investment prospects improve
3) Domestic interest rates increase, making savings there more attractive
4) Interest of speculators
Exchange rate. 4 Causes of rise in the supply for the currency - Answer 1) Domestic
consumers are more interested in foreign goods and services exchanging their currency
caused by: higher domestic inflation rate, increase in incomes of domestic consumers,
changes in tastes in favour of foreign production
2) Foreign investment prospects improve
3) Foreign interest rates increase, making savings there more attractive
4) Speculator expectations of fall in the currency
Exchange rate. 3 Possible advantages of a high exchange rate - Answer 1) Downward
pressure on inflation
2) More imports can be bought
3) A high value of a currency forces domestic producers to improve their efficiency
exchange rate. 2 Possible disadvantages of a high currency: - Answer 1) Damage to
export industries
WITH QUESTIONS AND 100%
CORRECT ANSWERS
International trade - Answer the exchange of goods and services between the countries
International trade. 7 Gains from international trade - Answer 1) Lower prices
2) Greater choice
3) Differences in resources
4) Economies of scale
5) Increased competition
6) More efficient allocation of resources
7) Source of foreign exchange
Absolute advantage - Answer A country is said to have an absolute advantage in the
production of a good if it can produce it using fewer resources than another country
Reciprocal absolute advantage (HL) - Answer Each country has an absolute advantage
in the production of one product
Comparative advantage (HL) - Answer A country is said to have a comparative
advantage in the production of a good if it can produce the good at a lower opportunity
cost than another country
Comparative advantage graph (HL) - Answer The comparative advantage for the better
producer is in the good where the distance between the production possibilities is the
greatest (a) and the comparative advantage for the less efficient producer is in the good
where the distance between the production possibilities is least (b)
Limitations (assumptions) of the theory of comparative advantage (HL) - Answer 1) It is
assumed producers and consumers have perfect knowledge and are aware of where
the least expensive goods may be purchased
2) No transport costs
3) Only two economies producing 2 goods
4) Costs do not change and returns to scale are constant
5) Goods are homogeneous
6) Factors of production remain in the country
7) Perfectly free trade among countries
,WTO aims - Answer 1) Administer WTO trade agreements
2) be a forum for trade negotiations
3) Handle trade disputes among member countries
4) Monitor national trade policies
5) Provide technical assistance and training for developing countries
6) Cooperate with other international organizations
Free trade - Answer trade that takes place between countries when there are no
barriers to trade put in place by governments or international organizations
Protectionism - Answer refers to government actions and policies that restrict or restrain
international trade, often done with the intent of protecting local businesses and jobs
from foreign competition
Arguments for and against protectionism - Answer 1) Protecting domestic employment
(VS: the industry will eventually decline, protectionism will just prolong the process)
2) Protecting the economy from low-cost labour (VS: against theory of comparative
advantage and specialization)
3) Protecting an infant (sunrise) industry (VS: the industry with access to highly efficient
capital markets would set up at most efficient size)
4) To avoid the risks of over-specialization (no VS)
5) Strategic reasons (VS: unlikely country at war will be cut off supplies)
6) To prevent dumping (VS: hard to prove, if gov subsidizes industry, it supports
dumping + rather need of talk btw gov than forms of protectionism)
7) To protect product standards (VS: against developing countries + a lot of
documentation, trade barrier is the cost involved in meeting product standards)
8) To raise government revenue (VS: taxes are paid by domestic consumers)
9) To correct balance of payments deficit (VS: only works in the short-run)
Dumping - Answer the selling by a country of large quantities of a commodity, at a price
lower than its production cost
Protectionism. 5 Arguments against protectionism - Answer 1) May rise prices to
consumers and producers that buy imports
2) Less choice for consumers
3) Competition would diminish (inefficient domestic industry)
4) Inefficient use of world's resources (distorts comparative advantage)
5) May hinder economic growth
Tariff graph - Answer
tariff imposition. 2 outcomes: - Answer 1) Loss of consumer surplus => dead-weight
loss of welfare
2) Inefficiency of domestic producers => loss of world's efficiency => dead-weight loss
of welfare
, Subsidy graph - Answer No change in price!!
Subsidy consequences - Answer Inefficiency of domestic producers => loss of world's
efficiency => dead-weight loss of welfare
Quota graph - Answer
quota imposition. 2 outcomes: - Answer 1) Loss of consumer surplus (k on the graph)
2) Loss of world's efficiency
Embargo - Answer extreme quota, may completely ban imports
Red tape - Answer Administrative processes that have to be undertaken (bureaucracy)
Nationalistic campaigns - Answer Marketing campaigns to encourage people to buy
domestic products to generate more demand and preserve jobs
Exchange rate. Why would people buy a currency in the foreign exchange market? -
Answer 1) Buy exports of goods and services
2) Invest in foreign firms (FDI)
3) Save money in foreign banks or other financial institutions
4) Make money by speculation
Exchange rate. 4 Causes of rise in the demand for the currency - Answer 1) Increase in
demand for could and services caused by: domestic inflation rates being lower making
goods less expensive; increase in incomes of a foreign country, change in tastes of
foreign consumers in favour of domestic production
2) Domestic investment prospects improve
3) Domestic interest rates increase, making savings there more attractive
4) Interest of speculators
Exchange rate. 4 Causes of rise in the supply for the currency - Answer 1) Domestic
consumers are more interested in foreign goods and services exchanging their currency
caused by: higher domestic inflation rate, increase in incomes of domestic consumers,
changes in tastes in favour of foreign production
2) Foreign investment prospects improve
3) Foreign interest rates increase, making savings there more attractive
4) Speculator expectations of fall in the currency
Exchange rate. 3 Possible advantages of a high exchange rate - Answer 1) Downward
pressure on inflation
2) More imports can be bought
3) A high value of a currency forces domestic producers to improve their efficiency
exchange rate. 2 Possible disadvantages of a high currency: - Answer 1) Damage to
export industries
