MEcon Master of Economics International Trade and Finance 1 — Questions and Answers
Question 1: According to the theory of comparative advantage, a country should specialize in producing goods for which it has a lower:
- Absolute cost
- Opportunity cost (Correct answer)
- Labor cost
- Capital cost
Correct answer: Opportunity cost
Comparative advantage is based on opportunity cost — producing the good that requires giving up the least of other goods.
Question 2: The Heckscher-Ohlin theorem predicts that a country will export goods that intensively use its:
- Scarce factor
- Abundant factor (Correct answer)
- Most expensive factor
- Imported factor
Correct answer: Abundant factor
H-O theory states that countries export goods whose production is intensive in the factor they possess in relative abundance.
Question 3: A tariff imposed on imported goods directly results in:
- Lower domestic prices
- Higher government revenue and higher domestic prices (Correct answer)
- Lower foreign producer revenue only
- A trade surplus necessarily
Correct answer: Higher government revenue and higher domestic prices
Tariffs raise the domestic price of imports and generate government revenue, though they reduce overall economic welfare.
Question 4: The Marshall-Lerner condition states that a currency depreciation will improve the trade balance if the sum of the absolute values of import and export demand elasticities is:
- Less than 0
- Equal to 0
- Greater than 1 (Correct answer)
- Less than 1
Correct answer: Greater than 1
If |price elasticity of exports| + |price elasticity of imports| > 1, depreciation improves the current account.
Question 5: Under a fixed exchange rate regime, a central bank must intervene in currency markets to:
- Maximize exports
- Maintain the pegged exchange rate (Correct answer)
- Control inflation directly
- Set domestic interest rates freely
Correct answer: Maintain the pegged exchange rate
A fixed exchange rate requires the central bank to buy or sell foreign currency to keep the exchange rate at its stated peg.
Question 6: The 'impossible trinity' (trilemma) in international finance states that a country cannot simultaneously have:
- Low inflation, high growth, and low unemployment
- A fixed exchange rate, free capital flows, and independent monetary policy (Correct answer)
- Free trade, capital controls, and a surplus
- High tariffs, a weak currency, and a trade deficit
Correct answer: A fixed exchange rate, free capital flows, and independent monetary policy
The Mundell-Fleming trilemma shows only two of the three policy goals — fixed rates, capital mobility, monetary autonomy — can be achieved at once.
MEcon Master of Economics International Trade and Finance 1
According to the theory of comparative advantage, a country should specialize in producing goods for which it has a lower: