Universidad Carlos III de Madrid
World Economy September 18 2004, 12h
TYPE 1 EXAM
DO NOT OPEN THE EXAM BEFORE YOU ARE TOLD TO DO SO Exam duration: 2 hours.
Fill in your name, group, and ID number:
Name and Family Name
Group/Professor
ID number:
Please read carefully the following instructions. Not following them will result in a “suspenso”.
(a) The only objects you may have on the table are: a calculator, pens, your ID or University card, and the exam. Leave all other objects (e.g. bags, coat, etc..) at the front end of the classroom.
(b) Do not talk with any other student. Do not exchange any material with another student.
(c) Do not use a pencil to write the exam.
(d) Do not take apart the exam sheets
Read carefully the following instructions:
(a) The exam is made-up of two exercises (Part I) and one essay questions (Part II). You have to do BOTH exercises. Part III is a multiple-choice test.
(b) The multiple choice test is eliminatory. You need to score 8 points out of 20 points. Scoring 8 points is a necessary, but not sufficient, condition to pass the exam. Answer the multiple choice test on the special sheet provided. Do not answer randomly in the multiple choice test, as wrong answers will be penalised.
(c) Space is limited. Only use the sheets allocated specifically for the answer of each part. You can use the back of the exam sheets as scrap paper. We will not correct answers which lay outside the allocated space. Answer in a clear and concise manner.
DO NOT OPEN EXAM BEFORE YOU ARE TOLD TO DO SO
PART I (40%) Exercise 1 (20%)
(2 points)
Imagine that the world economy is made-up of two countries, A and B, that can only produce two goods:
telephones (measured in units) and coffee (measured in kilos). Country A is endowed with 1200 units of labour. In country A, 6 hours are required to produce 1 telephone, while 2 hours are required to produce 1 kilo of coffee. Country B is endowed with 400 units of labour. In country B, 4 hours are required to produce 1 telephone, while 2 hours are required to produce 1 kilo of coffee.
Let:
X(t): total quantity of telephones X(c): total quantity of coffee P(t): price of 1 telephone P(c): price of 1 kilo of coffee
a) Draw the production possibility frontier of each of the 2 countries in a single graph (0.5 points) b) Construct the World relative supply curve of telephones in terms of coffee (0.5 points) c) Suppose that the World’s relative demand is given by the following expression:
X(t)/X(c) = 25/6 - P(t)/P(c).
Under these circumstances, what will the equilibrium World relative price be? Which good(s) will each country produce and consume? What are these quantities (production and consumption of each good(s) in each country)? Will there be trade between these two countries? If the answer is positive, how much will each country export/import? (1 point)
Exercise 2 (20%) (2 points)
Imagine a small country that enjoys free-trade with the rest of the world. In that country, 2 goods are produced, food and manufactures, using three factors of production: labour, land, and capital. In the production of manufactures capital and labour are used, while land and labour are necessary for food production.
a) Imagine that in that country, there is massive emigration, which results in a fall in the quantity of labour available in that country. In that country, what would be the effect on wages, the quantity of labour used in each sector, and production in each sector? In that country, what would be the effect on the welfare of the owners of each specific factor? (1 point)
b) In addition, imagine that the quantity of capital increases. Under these circumstances, what would the final (total) effect be? Explain your answer using a graph. (1 point)
ANSWER ON THE NEXT TWO PAGES.
Answer to Part I:
You may continue on the next page.
Answer to Part I:
PART II: ESSAY QUESTIONS (20%)
Which factors influence the evolution of the terms of trade of developing countries that export primary commodities (raw materials and agricultural products)?
Answer to Part II
PART III: MULTIPLE CHOICE (40%)
INDICATE THE CORRECT ANSWER ON THE SPECIAL SHEETS PROVIDED. WE WILL ONLY CORRECT ANSWERS PROVIDED ON THE SHEETS
DO NOT ANSWER RANDOMLY, AS EACH ERROR WILL BE PENALISED.
TYPE 1 EXAM 1. For the effective rate of protection to be negative in a sector:
a) It is necessary and sufficient that tariffs on components are higher than tariffs on the final product b) It is necessary, but not sufficient, that tariffs on components are higher than tariffs on the final product c) The same tariff must apply to components and final products
d) Effective protection is never negative
2. Among the principal characteristics used by the International Monetary Fund to grant financing, an important one is
a) The obligation to adopt economic adjustment plans supervised by the IMF
b) The obligation to increase public spending and revalue the currency with respect to the dollar c) The obligation to obtain excellent results in terms of economic growth and the balance of payments d) None of the above
3. Suppose that the marginal productivity of land is decreasing, and that a country produces two goods (food, that uses land and labour, and clothing, that uses capital and land). Suppose that the country invades its neighbour, expulses the local population, and distributes the land among its own landowners:
a) That country’s landowners would gain and owners of capital would lose, while it is impossible to know whether workers would gain or lose.
b) Landowners, owners of capital, and workers would all gain as a result of the conquest of land from the neighbouring country
c) Workers will inevitably gain, given that the larger amount of land available will increase the demand for labour, and therefore, salaries will go up
d) None of the above
4. The International Monetary Fund’s adjustment plans a) Aim to re-establish external balance through a currency devaluation
b) Aim to increase internal savings in order to improve the country’s solvency so that it can meet its external debt obligations
c) Aim to reduce public sector deficits in order to improve the country’s solvency so that it can meet its external debt obligations
d) All of the above
5. Total Factor Productivity
a) Is a concept that reflects the effect of technological progress on a country’s income growth b) Is a concept that reflects the contribution of labour and capital on a country’s income growth
c) Is a concept that reflects the effect on a factor of production’s productivity when the quantity of the other factor of production is increased
d) None of the above
6. Multinational enterprises are usually found in sectors in which:
a) The labour force earns low wages and is poorly trained with respect to total labour force in the recipient country b) Products are simple and form part of traditional industry, such textiles and food products
c) The value of intangible capital is low
d) There exists a high level of product differentiation
7. Regarding the origin of the debt crisis during the early 1980’s, important factors are:
a) The increase in international liquidity during the 1970’s b) The shrinking of internat ional money supply during the 1970’s
c) The implementation of restrictive fiscal policies on the part of a group of developing countries d) Large Banks’ fear that lenders would go bankrupt
8. In the absence of technological progress, the existence of conditional convergence implies that:
a) Poor countries always converge to the per capita income of rich countries
b) Poor countries converge to their own steady state level of per capita income, and the latter can increase if the savings rate increases, population growth slows, or capital’s depreciation rate falls
c) Poor countries never converge to rich countries’ level of per capita income d) Convergence is conditioned by the level of per capita income
9. The infant industry argument:
a) Assumes that developing countries potentially have a comparative advantage in the production of manufactures, but that the sector will not develop if it is not protected temporarily
b) Assumes that developing countries face problems at the time of developing the production of manufactures, and therefore these countries must reduce protection for that sector
c) Is an argument that most developing countries use to design their trade policy
d) Is an argument that says that in designing trade policy, it is better to use tariffs instead of quotas
10. In our country, the total number of hours available is 400, and in the rest of the world there are 600 hours available. In our country, we require 1 hour to produce 1 kilo of cheese, and 3 hours to produce 1 litre of wine. In the rest of the world, these requirements are respectively 4 hours (cheese) and 3 hours (wine).
According to the basic Ricardian model, what would be the world production of cheese relative to wine, in case the relative price of these two goods is 1/2?
a) 200/400 = 0,5 b) 400/600 = 0.66 c) 400/200 = 2 d) 600/400 = 1.5
11. With respect to models of economic growth, indicate the correct answer:
a) The generic Solow model with a constant savings rate is based on the assumption that savings do not affect capital accumulation
b) The population growth rate and the depreciation rate have a negative effect on per capita income growth
c) The steady state describes a situation in which the relevant variables that affect per capita income growth are exogenous d) The st eady state describes a situation in which the relevant variables grow at an increasing rate
12. The outbreak of the debt crisis that occurred in Mexico in the early 1980’s was linked to:
a) The pursuit of policies aimed at promoting exports
b) The pursuit of restrictive fiscal and monetary policies aimed at controlling inflation c) The pursuit of a policy of energy diversification driven by the fall in the price of oil d) The increase in public deficits and the rise in interest rates on world markets
13. In the context of the Ricardian model with only two goods, imagine the following situation. The world relative price (P1/P2) is exactly equal to the relative prices in the rest of the world (a1/a2)* under autarky, and it is inferior to the autarky relative prices in our country (a1/a2). With trade:
a) Our country only produces good 1, while the rest of the world produces 2
b) Our country only produces good 2, while the rest of the world produces either both goods, or good 1 only c) Our country only produces good 1, while the rest of the world produces both goods
d) Our country produces both goods, while the rest of the world only produces good 1
14. According to the specific factor model, if a country is relatively abundant in land, who would benefit from trade?
a) Owners of capital b) Landowners
c) Both the owners of capital and landowners
d) It is indeterminate since it depends on marginal productivities
15. Assume that welfare is made -up of the sum of consumers’ surplus, producers’ surplus and tariff revenues. For a large country, under what circumstances is net effect on welfare resulting from the imposition of a tariff positive?:
a) When the distortion in production is less than the distortion in consumption
b) When the distortions in production and in consumption are less than the terms of trade effect c) When the terms of trade effect is less than the production and consumption distortions d) When the distortion in consumption is less than the distortion in production
16. The GATT/WTO transparency principle implies that:
a) Any preference granted to a GATT/WTO member is automatically and unconditionally extended to all members b) Imports will be treated in the same way as national products
c) If a country is granted a trade preference by another country, the country that benefits must reciprocate d) Tariffs represent the preferred instrument of trade policy
17. In the basic neoclassical model of growth (Solow), if the growth rate of per capita income is positive, then:
a) Per capita income gr owth is lower when the country is furthest away from its steady state b) Per capita income growth is larger when the country is closest to its steady state c) Per capita income growth is larger when the country is furthest away from its steady state d) None of the above
18. As a consequence of the increase in the cost of servicing international debt during the 1980’s, highly indebted poor countries had to:
a) Devalue their currencies in order to reduce the value of their international debts b) Increase public expenditure in order to pay back the debt
c) Reduce imports and internal consumption in order to meet their international obligations.
d) None of the above
19. During the second half of the 1970’s, which factors contributed to the increase in international liquidity and to increased lending to developing countries?
a) The fall in the price of oil and the reduction in export revenues in oil exporting countries b) The expansion of eurodollar markets and the increase in international interest rates c) The increase in the price of oil and the expansion of eurodollar markets
d) The fall in the price of oil and the Falklands war (“guerra de las Malvinas”)
20. With respect to phases of economic integration, it is correct to state that:
a) Common markets are free trade areas accompanied by selective integration of some sectors, such as the European Union and the Common Agricultural Policy
b) Customs unions are very similar to free trade areas, save for the fact that member states must adopt a common commercial policy and a common external tariff
c) Common markets are customs unions in which there is no free movement of factors of production among member states
d) None of the above