C h a p t e r7I n t e r n a t i o n a l F a c t o r M o v e m e n t s Multiple Choice Questions1. Which of the following differs in its essential analytical framework(a) I nternational trade in goods(b) I nternational conflict resolution(c) I nternational trade in services(d) I nternational trade in factors of production(e) I nternational borrowing and lendingAnswer: B2. The slope of the production function measures(a) t he physical increase in output as country grows.(b) t he dollar-value increase in output as a country grows.(c) t he increase in number of workers as immigration proceeds.(d) t he marginal product of labor.(e) t he marginal product of capital.Answer: D3. International free labor mobility will under all circumstances(a) i ncrease total world output.(b) i mprove the economic welfare of everyone.(c) i mprove the economic welfare of workers everywhere.(d) i mprove the economic welfare of landlords (or capital owners)everywhere.(e) N one of the above.Answer: E4. If the world attained a perfect Heckscher-Ohlin model equilibrium withtrade, then(a) w orkers in the labor abundant country would migrate to the capitalabundant country.(b) w orkers in the labor abundant country would wish to migrate to thecapital abundant country.(c) w orkers in the labor abundant country would have no desire to migrateto the capital abundant country.(d) w orkers in the capital abundant country would wish to migrate to thelabor abundant country.(e) w orkers in the capital abundant country would migrate to the laborabundant country.Answer: C5. During the mass migration period of late 19th-early 20th centuries,(a) w ages rose in the origin countries and fell in the destinationcountries.(b) w ages fell in the origin countries and rose in the destinationcountries.(c) w ages generally rose faster in the origin countries.(d) w ages generally rose faster in the destination countries.(e) w ages generally fell faster in the origin countries.Answer: C6. International borrowing and lending may be interpreted as one form of(a) i ntermediate trade.(b) i nter-temporal trade.(c) t rade in services.(d) u nrequited international transfers.(e) N one of the above.Answer: B7. The relative price of future consumption is(a) t he interest rate.(b) u nknown at any given time.(c) t he real interest rate.(d) t he relative interest rate.(e) N one of the above.Answer: C8. A country that has a comparative advantage in future production ofconsumption goods(a) w ill tend to be an international borrower.(b) w ill tend to have low real interest rates.(c) w ill tend to be an international investor or lender.(d) w ill tend to have good work ethics.(e) N one of the above.Answer: A9. A . multinational corporation(a) h as a controlling share in a foreign subsidiary and is not itselfforeign controlled.(b) i s foreign controlled and has no controlling share in a foreigncompany.(c) h as a controlling share in a foreign subsidiary and may itself beforeign controlled by a foreign company.(d) i s a . company whose major markets are outside the United States.(e) N one of the above.Answer: C10. Why a good is produced in two different countries is known as thequestion of(a) i nternalization.(b) v ertical integration.(c) e xploitation.(d) l ocation.(e) N one of the above.Answer: D11. Internalization deals with the question(a) w hy workers prefer to work indoors(b) i nternationalization(c) w hy components are produced by one firm rather than by many.(d) W hy a good is produced in two different countries(e) N one of the aboveAnswer: C12. The home location of most of the world’s large multinational companiesis(a) N orth America and Europe.(b) N orth America and Asia.(c) E urope and South America.(d) E urope and Asia.(e) N one of the above.Answer: A13. Which of the following best refers to the outright construction orpurchase abroad of productive facilities by domestic residents(a) F oreign direct investment(b) P ortfolio Investment(c) S hort-term capital investment.(d) L ong-term capital investment(e) N one of the above.Answer: A14. Most direct investment in the United States has come from(a) J apan.(b) C anada.(c) W estern Europe.(d) S outh America.(e) A sia.Answer: C15. Most . direct foreign investment occurs in(a) c ommunications.(b) a griculture.(c) p etroleum.(d) m anufacturing.(e) N one of the above.Answer: D16. Most foreign direct investment in the United States occurs in(a) c ommunications.(b) a griculture.(c) p etroleum.(d) m anufacturing.(e) N one of the above.Answer: D17. Multinational corporations may provide benefits to their home countriesfor the following reasons except which one(a) S ecure raw materials for the source country(b) A llow for exports of products, which involve company-specific tradesecrets(c) A llow domestic firms to secure timely deliveries of commodities orproducts, which do not enjoy a stable or deep market internationally(d) S hift home country technology overseas via licensing(e) N one of the above.Answer: D18. Trade analysis involving multinational corporations differs from ourconventional trade analysis because multinational corporation analysisinvolves(a)absolute cost differentials rather than comparative cost differentials.(b) t he international movement of factor inputs as well as that offinished goods.(c)purely competitive markets rather than imperfectly competitive markets.(d) p ortfolio investments rather than direct foreign investment.(e) N one of the above.Answer: B19. Direct foreign investment may take any of the following forms except(a) i nvestors buying bonds of an existing firm overseas.(b) t he creation of a wholly owned business overseas.(c) t he takeover of an existing company overseas.(d) t he construction of a manufacturing plant overseas.(e) N one of the above.Answer: A20. Which of the following could logically explain why foreign directinvestment might be attracted to the United States(a) . wage rates exceeding the productivity of . labor(b) . price ceilings that hold down the price of energy(c) E specially high price/earning ratios associated with the stock of .firms(d) A nticipations of future reductions in . non-tariff barriers(e) N one of the above.Answer: B21. Multinational corporations(a) i ncrease the transfer of technology between nations.(b) m ake it harder for nations to foster activities of comparativeadvantage.(c) a lways enjoy political harmony in host countries in which theirsubsidiaries operate.(d) r equire governmental subsidies in order to conduct worldwideoperations.(e) N one of the above.Answer: A22. American labor unions have recently maintained that . multinationalcorporations have been(a) e xporting American jobs by investing overseas.(b) e xporting American jobs by keeping investment in the United States.(c) i mporting cheap foreign labor by shifting . investment overseas.(d) i mporting cheap foreign workers by keeping . investment at home.(e) N one of the above.Answer: A23. Multinational corporations(a) a lways produce primary goods.(b) a lways produce manufactured goods.(c) a lways produce services.(d) m ay produce primary or manufactured goods.(e) N one of the above.Answer: D24. ___________ refers to highly educated and skilled people who migrate frompoor developing countries to wealthy industrial countries.(a) D irect investment(b) P ortfolio investment(c) T ransfer pricing(d) B rain drain(e) N one of the above.Answer: D25. International labor mobility(a) l eads to wage convergence by raising wages in destination country andlowering in source country.(b) i s in accordance with the specific factors model(c) i s in accordance with the Heckscher-Ohlin factor proportions model.(d) l eads to wage convergence by raising wages in source and lowering themin destination country.(e) i s in accordance with scale economy model.Answer: D26. In theory, labor mobility is(a) a complete complement to trade flows.(b) a partial complement to trade flows.(c) a complete substitute for trade flows.(d) a partial substitute for trade flows.(e) N one of the above.Answer: C27. In practice, international labor mobility is(a) a complete complement to trade flows.(b) a partial complement to trade flows.(c) a complete substitute for trade flows.(d) a partial substitute for trade flows.(e) N one of the above.Answer: D28. If one observes that Japan was traditionally a net foreign lender, onecould conclude that relative to its international trade and financial partners(a) J apan’s inter-temporal production possibilities are biased towardfuture consumption.(b) J apan’s inter-temporal production possibilities are larger than thatof the other countries.(c) J apan’s inter-temporal production possibilities are biased towardpresent consumption.(d) J apan’s inter-temporal production possibilities are not biased.(e) N one of the above.Answer: C29. Rapidly growing developing countries tend to be borrowers on theinternational capital markets. From this information we may surmise that they have a comparative advantage in(a) c apital goods.(b) f uture income.(c) d isposable income.(d) c onsumer goods.(e) p resent income.Answer: B30. It may be argued that theoretically, international capital movements(a) t end to hurt the donor countries.(b) t end to hurt the recipient countries.(c) t end to hurt labor in donor countries.(d) t end to hurt labor in recipient countries.(e) N one of the above.Answer: C31. Transactions between branches of the same multinational corporationsaccount for ________ of . imports.(a) o ne quarter(b) o ne third(c) o ne half(d) t hree quarters(e) a llAnswer: C32. The shift of labor-intensive assembly operations from the United Statesto Mexican maqiladora may be best explained in terms of a theory of(a) l ocation.(b) v ertical integration.(c) h orizontal integration.(d) i nternalization.(e) N one of the above.Answer: A33. When comparing the United States to the United Kingdom, between 1985 and1990, the relative growth of foreign-owned firms in manufacturing(a) g rew faster in the ., whose proportion of foreign-owned firms islarger.(b) g rew faster in the ., whose proportion of foreign-owned firms islarger.(c) g rew faster in the ., whose proportion of foreign-owned firms issmaller.(d) g rew faster in the ., whose proportion of foreign-owned firms issmaller.(e) N one of the above.Answer: C34. The inflow of foreign direct investment into the United States has alwaysbeen perceived(a) w ith trepidation.(b) w ith resentment.(c) w ith equanimity.(d) w ith satisfaction.(e) N one of the above.Answer: E35. The purchase by Germany’s Daimler-Benz of America’s Chryslercorporation is generally viewed as(a) d irect foreign investment typical of trends in the 1980s.(b) a capital outflow from the United States, since Daimler-Benz“milked” the assets of Chrysler.(c) a major success story of globalization.(d) a n example of international vertical integration.(e) N one of the above.Answer: E36. In a typical short-run production function, as labor increases(a) t he marginal product of capital decreases.(b) t he overall product of labor decreases.(c) t he average product of labor decreases.(d) t he marginal product of labor decreases.(e) N one of the above.Answer: D37. American labor unions accuse . multinational corporations of all exceptwhich(a) T hey enjoy unfair advantages in taxation.(b) T hey export jobs by shifting technology overseas.(c) T hey export jobs by shifting investment overseas.(d) T hey operate at output levels where scale economies occur.(e) N one of the above.Answer: DEssay Questions1. The Heckscher-Ohlin model is famous for being elegant and mathematicallysophisticated, yet failing to describe reality. One manifestation of this fact is Trefler’s Case of Missing Trade. Explain what exactly is missing.In what sense is it missing How would you explain why it is missing Howcan a relaxation of the identical production functions explain the caseof the missing tradeAnswer: Trefler demonstrated that the actual volume of world trade is significantly less than that which would be predicted by theHeckscher-Ohlin model. One explanation is thatNorth-South trade is especially less than would be predicted by a factor proportions model. If technologies differ in the poorer countries,then it is possible that the cost of producing a product, whichuses relatively much of their abundant factor may still be higherthan the cost of producing it in the other country.2.Factor-intensity reversals describe a situation in which the productionof a product may be land-intensive in one country, and relatively labor intensive in another (at given relative wage levels). For example, cotton may be land intensive in the ., and labor intensive in Egypt where land is relatively scarce and expensive. Suppose factor-intensity reversalswere common. How would that affect the conclusion that a country in which land is relatively scarce will not be the country witha comparative advantage in the land-intensive productAnswer: The answer here is straightforward (though it has variousinteresting implications). In this case we cannot define oridentify a product in terms of its relative factor intensity (atall or any relative wage level). Therefore, the Heckscher-OhlinTheorem is ipso-facto inapplicable.3. Why is it that North-South trade in manufactures seems to be consistentwith the results or expectations generated by the factor-proportionstheory of international trade, whereas North-North trade is notAnswer: There is a clear difference in relative factor availabilities between North and South countries, no matter how we define andmeasure the factors of production. Hence, the factor-proportionstheory of trade may be sensibly expected to explain the pattern(though not the volume) of trade between these two groups ofcountries. However, the North North trade partners do not varysignificantly in their relative factor availabilities, so thatother forces, such as scale economies play a relatively large rolein determining trade patterns.4. One of the commonly used assumptions in deriving the Heckscher-Ohlinmodel is that tastes are homothetic, or that if the per capita incomeswere the same in two countries, the proportions of their expendituresallocated to each product would be the same as it is in the other country.Imagine that this assumption is false, and that in fact, the tastes ineach country are strongly biased in favor of the product in which it hasa comparative advantage. How would this affect the relationship betweenrelative factor abundance between the two countries, and the nature(factor-intensity) of the product each exports What if the taste biasfavored the imported goodAnswer: If in fact national tastes were strongly biased in favor of the product in which the country enjoyed a comparative advantage, thenwe would expect a bias in favor of rejecting the Heckscher-OhlinTheorem in actual trade data. The engine driving the H-O model isthat a country should be expected to have a relatively low cost ofproducing the good in which it has a comparative advantage.However, the respective demand forces would tend to raise theprice of this good, so that the expected pattern would notgenerally be observed. However, if the tastes were biased in favorof the imported good, then the predictions of the Heckscher-OhlinTheorem would be expected to be generally observed.5. Why do you suppose that South-South trade does not conform in volume, butdoes conform in pattern with expectations generated by the Heckscher-Ohlin modelAnswer: The pattern of trade is generally observed to conform to the Heckscher-Ohlin models expectations. That is, the developingcountries tend to export labor-intensive goods, such as textiles,and import capital-intensive goods such as machinery. The volumehowever is quite lower than what would be expected from theNeoclassical model. There are many possible reasons, such asfinancial crises necessitating premia in the financing of thistrade.6. It has been argued that even if intra-European Union labor mobility wereto be completely removed, one should not expect to observe massive, oreven large reallocations of populations with the . DiscussAnswer: Theoretically, just as completely free trade consistent with Heckscher-Ohlin model (with no complete specialization) isassociated with factor price equalization; so does completely freelabor mobility. It therefore follows that if intra . tradeflourishes, as any restraints on trade there are abolished, theeconomic incentive for labor mobility will be removed. Sincelanguage and cultural differences remain, we would expectpopulations to tend to stay where they are.Quantitative/Graphing Problems1. In Home and Foreign there are two factors of production, land and labor,used to produce only one good. The land supply in each country and the technology of production are exactly the same. The marginal product of labor in each country depends on employment as follows:Number of WorkersEmployedMarginalProductof Last Worker130 229 328 427 526 625 72482392210211120Initially there are 11 workers employed in Home but only 3 workers in Foreign. Find the effect of free movement of labor from the high wage to the low wage country. When such economic migration ceases, what will be the levels of production, real wages and the income of landowners in each countryAnswer: The total production in the world will increase, since the addition to production (the marginal product of labor) in thetarget country is larger for each worker than the loss ofproduction (also the marginal product of workers) in theemigration country. The real wages will rise in the emigrationcountry and fall in the immigration country. Landlord incomes willrise in the immigration country and fall in the emigration country.2. Suppose Australia, a land (K)-abundant country and Sri-Lanka, a labor(L)-abundant country both produce labor and land intensive goods with thesame technology. Following the logic of the Heckscher-Ohlin model fromChapter 4, what will be the incentive for migration once trade isestablished between these two countries Now, suppose that a tariff by one country creates an incentive for labor migration. From which country to which country will be the migration Explain how you arrived at youranswer.Answer: Once trade is established, there is no longer any incentive for (economic-based) immigration, since the real wages will beequalized in both. If a tariff is established in Australia, thenthe price of the labor intensive good will be higher in Australia,as will be the marginal product of labor and hence the real wageof workers there. Hence, workers will immigrate from Sri-Lanka toAustralia until the two domestic prices are equalized.3. Use the diagram below derived from Figure 4-4 to identify the pre-tradesituation for Australia and Sri-Lanka, as discussed in question 2 above.Where on the K/L axis will you find each of the two countries Which ofthe two countries has a higher relative wage, w/r Which product is thelabor intensive, and which is the land intensive one Show where therelative price of cloth to food will be found once trade opens betweenthese two countries. Show where the relative wages of each will appear.Answer: You will find Sri-Lanka to the left of Australia on the K/L axis.Australia has a higher relative wage.Food is the land intensive product.The relative price P C /P F is found between the two autarkic prices.The post trade relative wage is between the two autarkic ones onthe vertical axis.4. Using the figure above from question 3, demonstrate what happens to thecomposition of production (that is quantity of cloth per 1 unit of food) in Australia once trade is established between the two countries. Which country will export cloth What happens to the relative income of workers in Australia as a result of trade Does it increase or decrease Would land owners in Australia lobby for or against free trade Would land owners in Australia lobby for or against free admittance of immigrant workersAnswer: The proportion of food to cloth will increase in the production of Australia Sri Lanka will export cloth. The relative (and real)incomes of workers will fall in Australia as a result of trade.Land Owners in Australia should lobby in favor of trade. Theywould also lobby for free labor mobility (of workers intoAustralia), since the marginal product of labor is high, theowners of land have much (Ricardian) rents to gain from an inflowof workers.5. Imagine that the relative capital abundance of Australia was so muchgreater than that of Sri-Lanka, that we would have to locate Australiafar to the right on the K/L axis. If this were so far to the right that there was no area of overlap on the w/r axis, then what product wouldAustralia export Is this answer different from that in question 4 above Will the relative wages as calculated now be the same or different from those calculated in question 4Answer: Australia would still export food, which is the same as inquestion 4. As a result of trade, wages will fall in Australia andwill rise in Sri-Lanka. However, in this case, the wages inAustralia will remain higher than in Sri-Lanka, creating anincentive for migration from the latter to the former country.。