19. State three country characteristics that encourage and three that discourage economic integration
among developing countries.
Answer: Among those encouraging: similar economic systems, locations, development levels, and
20. Explain the dynamic rationale for economic integration among developing countries.
Answer: Similar to the infant industry argument—see the chapter.
21. State and explain three [or some other number chosen by the instructor] reasons why the scope for
further expansion of developing country commodity exports is likely to be limited.
Answer: (a) development of further synthetic substitutes, (b) continued agricultural protection in
22. Suppose that a good that was formerly an import becomes an export, perhaps after an import substitution
and export promotion strategy. How is this change reflected in the production possibility frontier?
Answer: The good that was on the import axis, now is found on the export axis. Leaving the goods
23. Explain the difference between nominal and effective tariffs.
Answer: Spelled out in the text.
24. What is the difference between a devaluation and a depreciation?
Answer: A currency is devaluated when the rate at which the central bank will exchange the local
currency for foreign convertible currency, such as dollars, is abruptly increased. A depreciation
25. Explain how international trade and trade policy helped Taiwan transform itself from an underdeveloped
country to a high income country in a relatively short span of time. You might begin by discussing
Taiwan’s trade strategy. Why do you think international trade is of such vital importance to Taiwan?
Answer: Discussed in the case study.
26. Economists frequently urge governments of developing countries to replace import quotas with
import tariffs as a first step in a strategy that aims to reduce import protection. What is the reasoning
offered by economists to support this recommendation to developing countries?
Answer: Quotas yield rents that result in domestic groups wasting real resources fighting over these
27. What is an overvalued exchange rate? What factors may cause a country’s currency to become
overvalued?
Answer: The value of the domestic currency is greater than its value at the equilibrium point
in the foreign exchange market. One likely reason why currencies become overvalued
28. How did active government industrialization strategy and industrial policies, including the collaboration
between private and public sectors contribute to the East Asian development success?
Answer: Page 615 in the textbook. The policies included encouraging indigenous skills, technologies,
and firms. Upgrading technologies over time from labor intensive to relatively more capital
Multiple Choice
1. The ratio of a country’s average export price to its average import price is
(a) its absolute advantage.
(b) its comparative advantage.
(c) its terms of trade.
(d) its exchange rate.
2. According to the Prebisch-Singer thesis
(a) demand for primary products has steadily fallen.
(b) profits of primary producers have steadily fallen.
(c) primary producers’ terms of trade have steadily fallen.
(d) prices of primary products have risen over time.
3. The purpose of commodity buffer stocks is
(a) to moderate price fluctuations.
(b) to raise commodity prices.
(c) to encourage commodity substitution.
(d) to guarantee national security.
4. Developing countries might be unable to respond smoothly to changing international price signals
because of
(a) a lack of government regulation.
(b) an abundance of skilled labor.
(c) inelastic supply curves.
(d) limited foreign exchange.
5. Autarchy as used in the text refers to
(a) an economy that does not trade.
(b) an economy that trades primary products in exchange for manufactures.
(c) developing country dictatorships.
(d) the caste system and related social structures.
6. Which of the following is an argument in favor of the liberalization?
(a) Increased technical efficiency.
(b) Accelerated technical progress.
(c) Decreased shortages of foreign exchange.
(d) All of the above.
(e) both (a) and (b) are correct.
7. Which of the following is an argument in favor of trade liberalization?
(a) Increased investment.
(b) Infant industry.
(c) Fluctuating export earnings.
(d) Increased government revenue.
8. Which of the following is an argument in favor of interventionist trade policies?
(a) Cheaper capital goods.
(b) Declining terms of trade.
(c) Decreased losses from rent-seeking activities.
(d) All of the above.
(e) None of the above.
9. Guiding the market through strategic coordination of business investments to increase export market
shares is known as
(a) development planning.
(b) industrial policy.
(c) shifting terms of trade.
(d) all of the above.
(e) none of the above.
10. The opening of export markets for primary products can provide employment for previously
underutilized land and labor. The term for this is
(a) vent for surplus.
(b) comparative advantage.
(c) Prebisch-Singer thesis.
(d) barter trade.
11.Which of the following statements is true?
(a) larger countries (in terms of size) tend to be more open (in terms of larger share of exports in GDP)
than smaller countries and developing countries tend to be less open than developed economies.
(b) larger countries (in terms of size) tend to be less open (in terms of lower share of exports in GDP)
than smaller countries and developing countries tend to be less open than developed economies.
(c) larger countries (in terms of size) tend to be more open (in terms of larger share of exports in
GDP) than smaller countries and developing countries tend to be more open than developed
economies.
(d) larger countries (in terms of size) tend to be less open (in terms of lower share of exports in GDP)
than smaller countries and developing countries tend to be more open than developed economies.
12. The dependence on the export of one or two primary products for a majority of the revenue from
exports is most severe in countries in
(a) South Asia.
(b) East Asia.
(c) Sub Saharan Africa.
(d) Latin America.
13. The real price trendline for non fuel primary commodities from 1960-2005 has been
(a) Unchanged
(b) Steadily increasing
(c) Steadily decreasing
(d) First decreased and then increased.
14. The nominal rate of protection shows the extent to which the domestic price of imported goods exceeds
(a) what the price would be without tariffs.
(b) the cost of intermediate inputs.
(c) the social opportunity costs of the good.
(d) the no-trade equilibrium price.
15. The effective rate of protection is
(a) value added with protection divided by value added without protection.
(b) value added with protection.
(c) value added without protection.
(d) (value added with protection minus value added without protection) divided by value added
without protection.
16. The average level of effective protection has exceeded 300% for which of the following countries?
(a) Pakistan and Uruguay.
(b) Argentina and Brazil.
(c) Philippines and Mexico.
(d) India and China.
17. An economic community
(a) attempts to raise prices by restricting quantity.
(b) seeks to stabilize commodity prices.
(c) seeks concessional loans.
(d) imposes a common external tariff.
(e) none of the above.
18. The long-run social benefits of infant industry protection are more likely to be realized if
(a) investors believe that tariff barriers are permanent.
(b) investors believe that tariff barriers are transitory.
(c) tariff barriers increase over time.
(d) tariff barriers are replaced with quotas over time.
19. Which of the following factors makes the success of economic integration more likely?
(a) Nationalism.
(b) Desire for prestige projects.
(c) Diverse economic systems.
(d) All of the above.
(e) None of the above.
20. Why is it impossible that all industries in a developing country qualify as infant industries?
(a) You cannot have a comparative advantage in everything.
(b) You cannot have an absolute advantage in everything.
(c) This would violate international law.
(d) This would reduce the terms of trade.
21. Which of the following is not a reason why the prospects for the further expansion of developing
country commodity exports are likely to be limited?
(a) Low income elasticities for these products.
(b) Low likelihood of development of further synthetic substitutes.
(c) Continued agricultural protection despite trade agreements.
(d) Declining terms of trade.
22. Which of the following is a major argument of trade pessimists?
(a) Increased productivity of developed country agriculture.
(b) Increased efficiency in industrial use of raw materials.
(c) Protectionism against labor-intensive manufactures.
(d) All of the above.
23. Which of the following is a major argument of trade optimists?
(a) Industrial policy can increase productivity of developing country manufacturing efficiency.
(b) New synthetic substitutes are constantly being discovered and improved.
(c) Developing country efficiency would improve with trade liberalization.
(d) All of the above.
24. Which of the following countries provides the best example of a successful import substitution
development strategy?
(a) Chile.
(b) Taiwan.
(c) Argentina.
(d) Botswana.
25. Which of the following is a nontariff barrier policy tool?
(a) Sanitary regulations.
(b) Average duties.
(c) Phased liberalization.
(d) Ad valorem tax.
26. Nontariff barriers
(a) decrease foreign exchange earnings.
(b) reduce the quantity of goods exported.
(c) lower the effective price received for exports.
(d) all of the above.
27. The most important role of the World Trade Organization is
(a) to promote market oriented economic policies.
(b) to settle trade disputes.
(c) to provide development assistance.
(d) to help countries choose the appropriate level of a tariff or quota.
28. If the equilibrium exchange rate is 15 pesos per dollar and the central bank fixes the exchange rate
at 17 pesos per dollar then we can conclude that the peso is
(a) appreciated.
(b) depreciated.
(c) overvalued.
(d) undervalued.
29. In most less developed countries, the initial target of import substitution is to promote domestic
production of
(a) consumer goods.
(b) food and other agricultural goods.
(c) capital goods.
(d) manufactured intermediate goods.
30. Which of the following is not an argument in favor of export promotion over import substitution?
(a) international competition compels domestic producers to become more efficient.
(b) exposure to world markets provides greater opportunities to learn new technologies.
(c) producing for export permits greater specialization and economies of scale.
(d) outward-looking development promotes larger firms.