Chapter 4: Intra-Industry Trade
MULTIPLE CHOICE
1. Which of the following does not describe inter-industry trade?
a. It is based on comparative advantage.
b. It covers either imports or exports in a given sector of the economy.
c. It covers both imports and exports in a given sector of the economy.
d. All of the above.
2. Which of the following does not describe intra-industry trade?
a. It is based on product differentiation.
b. It applies to either imports or exports in a given sector of the economy.
c. It applies to both imports and exports in a given sector of the economy.
d. None of the above.
3. Under what circumstances would the United States, which is a manufacturer of blue
cheese and ordinary, processed cheese, import blue cheese from France?
a. It tastes better.
b. It can be cheaper than the US product, yielding consumer surplus in the United States.
c. It costs more but US citizens buy it because it confers prestige.
d. All of the above.
4. Under what circumstances would France, a manufacturer of blue cheese and ordinary,
processed cheese, import processed cheese from the United States?
a. It is cheaper, providing consumer surplus in France.
b. It is a prestige item.
c. The French want to improve the US trade balance.
d. None of the above.
5. What characterizes vertical intra-industry trade?
a. Both imports and exports in a given sector at the same stage of processing.
b. Both imports and exports in a given sector at different stages of processing.
c. Either imports or exports in a given sector.
d. Difficult adjustment.
6. Why are firms engaged in intra-industry trade less likely to seek protection from
imports?
a. Workers in firms in the same sector can shift more easily to production of another
product in that sector.
b. They are earning money from the imports.
c. Workers have more difficulty shifting to production of another product.
d. None of the above.
7. Why would country A, which makes consumer products X and Y within the same sector,
engage in intra-industry trade?
a. Its consumers would benefit from importing X which has a lower world price than
A’s autarky price.
b. Its producers would benefit from a higher world price of Y.
c. A and B above.
d. None of the above.
TRUE/FALSE
1. Inter-industry trade is based on produce differentiation
2. Intra-industry trade is based on comparative advantage
3. Intra-industry trade almost always takes place between developed countries
4. Proximity encourages intra-industry trade
5. A value of 85 on the Grubel-Lloyd index signifies a high degree of intra-industry trade
6. A value of 85 on the Grubel-Lloyd index signifies a high degree of inter-industry trade
7. Firms engaged in inter-industry trade are more likely to seek protection from imports
because it is harder for their workers to shift from contracting to expanding sectors.
SHORT ANSWER
1. The Unites States produces both vintage chardonnay wine and the non-vintage variety.
Why should it import vintage chardonnay from France?
2. How does the adjustment process work in inter-industry trade?
3. How does the adjustment process work in intra-industry trade?
4. Which would more likely lead to demand for protection: the adjustment process under
inter-industry trade or the adjustment process under intra-industry trade?
5. Please carefully describe the difference between horizontal intra-industry trade and
vertical intra-industry trade.
6. What is the Grubel-Lloyd index?