Chapter 24: Structural Change and Adjustment
MULTIPLE CHOICE
1. The best way of viewing structural change in development processes is:
a. Agriculture is an unproductive s sector.
b. Resources move from less-productive to more-productive sectors.
c. As development proceeds, the relative size of the service sector shrinks.
d. As development proceeds, the relative size of the manufacturing sector stays constant.
2. Which of the following is a non-traded good?
a. Wheat
b. Coal
c. Auto repair
d. Autos
3. In the figure below, what do points B,C indicate?
a. The resources of the country are efficiently employed.
b. There is internal balance in the economy.
c. There is external balance in the economy.
d. All of the above.
4. In the diagram below, what can we say about point 𝐶𝑇𝐷?
a. Consumption of traded goods exceeds production of trade goods.
b. There is a trade deficit equal to 𝐶𝑇𝐷 − 𝐵.
c. There is internal balance.
d. All of the above.
5. In the diagram below, what can we say about point 𝐶𝑇𝑆?
a. The economy is not allocatively efficient.
b. There is internal balance.
c. The country is producing more than it is consuming.
d. b and c above.
6. In the diagram below, what can we say about point 𝐶𝑇𝐷?
a. It has external imbalance.
b. It is running a current account surplus.
c. It must have a capital account deficit.
d. It has internal imbalance.
7. In the diagram below, what can we say about point 𝐶𝑇𝑆?
a. It has external imbalance.
b. It is running a current account surplus.
c. It must have a capital account deficit.
d. All of the above.
8. Which of the following are concerns with the model of internal and external balances
raised by structuralist economists?
a. Productive resources might not be mobile between the traded sector and the non-
trades sector.
b. If the economy is dependent on intermediate good imports for tradable good
production, a devaluation might make these goods more expensive with negative
effects on output and employment.
c. Demand reduction and exchange rate change should never be done togethere.
d. a and b.
9. What is the limitation to using just demand reduction to address a trade deficit?
a. It makes the trade deficit worse.
b. It involves a change of the exchange rate.
c. It can cause unemployment.
d. a and c.
10. What is meant by “switching” in using the exchange rate to address a trade deficit?
a. The use of a devaluation of a country’s currency to move the economy toward
external balance.
b. The use of a revaluation of a country’s currency to move the economy toward
external balance.
c. Switching from a flexible exchange rate regime to a fixed exchange rate regime.
d. Drastically reducing demand.
11. What is the Rybczynski theorem?
a. An increase in the relative price of a commodity through trade raises the return to the
factor used intensively in the production of the good.
b. An increase in the relative price of a commodity through trade lowers the return to the
factor used intensively in the production of the good.
c. An increase in the overall capital-labor ratio in a country.
d. An element of trade theory that considers what happens to the sectoral structure of an
economy as the resource endowments lchange.
TRUE/FALSE
1. Prices of traded goods are determined in domestic markets.
2. For non-traded goods, domestic consumption and domestic production must be the same
in value.
3. If consumption of traded goods in a country is greater than production, there is a trade
surplus.
4. If consumption of traded goods is less than production, there is a trade deficit.
5. One remedy for a country in the unsustainable position of financing a current account
deficit by drawing down reserve is a program of demand reduction.
6. Balance of payments adjustment via demand reduction alone can lead to internal
imbalance.
7. In order to avoid internal imbalance, a successful adjustment program must combine both
demand reduction and demand switching.
8. In the order of economic liberalization school of thought, the liberalization of domestic
financial markets should come first.
9. In the order of economic liberalization school of thought, exchange rate depreciation or
devaluation should come last.
10. By some arguments, an expansion of the traded goods sector can be associated with or
cause growth.
SHORT ANSWER
1. Why does the agricultural sector decline as a percent of GDP as a country grows and
develops?
2. Please explain the distinction between internal balance and external balance. How do
these concepts relate to the process of structural adjustment?
3. If a country is running a current account deficit, what must be happening in its other
elements of the balance of payments?
4. If a country with a trade deficit is unable to generate sufficient foreign saving in the form
or portfolio investment and FDI to finance this deficit, what will happen?
5. How are demand reduction policies, used to address an external imbalance in the form of
a trade deficit, implemented? What happens when these polices are implemented?
6. How does demand reduction affect the external balance of an economy? How does it
affect the internal balance?
7. How can demand switching help a country adjust from a balance of payments crisis?
8. How can a devaluation help to restore internal balance in an economy?
9. Why can it be important to pay attention to the sequencing of adjustment measures when
dealing with a country experiencing a balance of payments crisis?
10. What sequence of remedies makes sense for a country with a balance of payments
problem along with multiple weaknesses in economic fundamentals?
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