CHAPTER 3: The Political Economy of International Trade Cooperation

Multiple Choice Questions

1. The concept of production possibility frontiers (PPF) means that a) the factors of production are limited by a country’s geographical frontiers. b) any decision to use factors of production to produce one good necessarily means that these factors are not available to produce other goods. c) any decision to use factors of production to produce one good doesn’t necessarily mean that these factors are not available to produce other goods. d) the factors of production are unlimited by a country’s geographical frontiers. e) countries are endowed with factors of production in infinite amounts.

Answer: b

2. Production possibility frontiers (PPF) can be represented graphically by lines that a) are called the marginal rates of transformation. b) are called the rates of marginal production. c) are called the rates of frontier possibilities. d) are called the rates of production transformation. e) are called the marginal transformation of frontiers.

Answer: a

3. Because an autarkic country cannot consume more than it produces, the PPF also defines a) the limits of possible exports. b) the limits of possible imports. c) the limits of possible trade. d) the limits of possible investment. e) the limits of possible consumption.

Answer: e

4. Consumption indifference curves help us understand a) the specific combination of products consumers will purchase. b) the total amount of products consumers will purchase. c) the general combination of products consumers will not purchase. d) the general combination of products consumers will be indifferent to. e) the specific combination of products countries will not produce.

Answer: a

5. The marginal rate of substitution is a consumption indifference curve that a) typically slopes upwards. b) tells us how much of one good the consumer is willing to give up to acquire an additional unit of the second good. c) reflects the assumption of increasing marginal utility. d) each additional good provides a greater increase of utility. e) reflects the increasing aggregate utility of a country’s consumption.

Answer: b

6. Together the PPF and indifference curves allow us to define the equilibrium point a) where the marginal rate of transformation is less than the marginal rate of substitution. b) where the marginal rate of transformation is greater than the marginal rate of substitution. c) maximum consumption occurs in an autarkic economy. d) maximum production occurs in an autarkic economy. e) the point where the marginal rate of transformation is equal to the marginal rate of substitution.

Answer: e

7. Equilibrium production and consumption is changed by a country’s decision to a) specialize in the production of one good in order obtain more of another good in which it has a comparative advantage. b) specialize in the production of one good in which it has a comparative advantage in order obtain more of another good in which it has a comparative disadvantage. c) specialize in the production of one good in which it has a comparative disadvantage in order obtain less of another good in which it has a comparative advantage. d) not to trade with another country with which has a comparative advantage. e) not to trade with another country with which has a comparative disadvantage.

Answer: b -

8. Trade liberalization generally occurs a) because governments often liberalize trade unilaterally. b) because governments strive to open less competitive industries to imports. c) because governments strive to protect less competitive industries from imports. d) through trade bargaining in which governments exchange market access commitments. e) because trade bargaining with other governments is unnecessary. Answer: d

9. A country’s ideal bargaining point is usually its best possible outcome of a) liberalizing comparatively advantaged sectors and protecting comparatively disadvantaged sectors. b) liberalizing both comparatively advantaged and disadvantaged sectors. c) protecting both comparatively advantaged and disadvantaged sectors. d) protecting comparatively advantaged sectors and liberalizing comparatively disadvantaged sectors. e) minimizing all imports and maximizing all exports.

Answer: a

10. The ideal trade bargaining outcome for the Group of 20 countries a) combines high barriers to their agricultural exports and high barriers to their manufactured goods imports. b) combines low barriers to their agricultural exports and low barriers to their manufactured goods imports. c) combines low barriers to their agricultural exports and high barriers to their manufactured goods imports. d) combines high barriers to their agricultural exports and low barriers to their manufactured goods imports. e) combines high barriers to their agricultural imports and low barriers to their manufactured goods exports.

Answer: c

11. The ideal trade bargaining outcome for the US/EU countries a) combines high barriers to their agricultural imports and low barriers to their manufactured goods exports. b) combines high barriers to their agricultural imports and high barriers to their manufactured goods exports. c) combines low barriers to their agricultural imports and high barriers to their manufactured goods exports. d) combines low barriers to their agricultural imports and low barriers to their manufactured goods exports. e) combines high barriers to their services and high barriers to their manufactured goods imports.

Answer: a -

12. Negotiating the best deal possible requires a) governments to trust each other to reveal only information they wish to reveal. b) impatient governments to accept bad deals. c) patient governments to accept bad deals. d) governments to force each other to reveal information they do not wish to reveal. e) governments to reveal everything at the beginning of negotiations.

Answer: d

13. If governments are equally patient a) then no deal will ever be reached. b) one government may gain bargaining power if it has an attractive outside option. c) one government may lose bargaining power if it has an attractive outside option. d) one government may gain bargaining power if it doesn’t have an attractive outside option. e) they will both lose bargaining power.

Answer: b

14. Governments are more likely to capture a larger share of the available gains from an agreement if a) they are the least willing to wait. b) they are unwilling to risk a breakdown of negotiations. c) they don’t have outside options. d) they threaten brute force. e) they are the most willing to wait.

Answer: e-

15. The enforcement problem of trade agreements refers to the fact that a) governments can be certain that other governments will comply with the trade agreements that they conclude. b) governments cannot be certain that other governments will comply with the trade agreements that they conclude. c) governments can be certain that other governments will not comply with the trade agreements that they conclude. d) governments cannot be certain that other governments will not comply with the trade agreements that they conclude. e) governments are reluctant to enter into trade agreements that are mutually beneficial.

Answer: b

16. The Hecksher-Ohlin trade model argues that a) developed countries have the same basic factor endowments. b) developed countries have the same comparative advantages. c) developed countries have a lot of capital but little labor. d) comparative advantage arises from differences in factor endowments. e) comparative advantage arises from similarities in factor endowments.

Answer: d

17. A set of mutually beneficial agreements that exhaust joint gains is called a) a comparative advantage curve. b) a Hecksher-Ohlin curve. c) a contract curve. d) a marginal rate of substitution curve. e) a consumption indifference curve.

Answer: c

18. The sequence of preferred outcomes for the Group of 20 would be: a) protect/liberalize >liberalize/liberalize >protect/protect >liberalize/protect b) liberalize/liberalize >protect/protect >liberalize/protect >protect liberalize c) protect/protect >liberalize/protect >protect/liberalize >liberalize/liberalize d) liberalize/protect >liberalize/liberalize >protect/protect >liberalize/protect e) protect/liberalize >protect/protect > liberalize/liberalize >liberalize/protect

Answer: a

19. The sequence of preferred outcomes for the EU would be: a) protect/liberalize >liberalize/liberalize >protect/protect >liberalize/protect b) liberalize/protect >protect/protect >liberalize/liberalize > protect/liberalize c) protect/protect >liberalize/protect >protect/liberalize >liberalize/liberalize d) liberalize/liberalize >protect/protect >liberalize/protect >protect liberalize e) liberalize/protect >protect/protect> protect/liberalize >liberalize/liberalize

Answer: b

20. Pareto optimality is when a) no single actor can be made better off without at the same time making another actor worse off. b) at least one actor can be made better off without at the same time making another actor worse off. c) neither player has an incentive to change strategies unilaterally. d) both players have the advantage to change strategies unilaterally. e) one player has the advantage to change strategies unilaterally but the other player doesn’t.

Answer: a

21. Nash equilibrium is when a) no single actor can be made better off without at the same time making another actor worse off. b) at least one actor can be made better off without at the same time making another actor worse off. c) neither player has an incentive to change strategies unilaterally. d) both players have the advantage to change strategies unilaterally. e) one player has the advantage to change strategies unilaterally but the other player doesn’t.

Answer: c

22. The prisoners’ dilemma exercise suggests that a) even when all countries would benefit from trade liberalization, political dynamics trap governments in a protectionist world. b) even when all countries would benefit from protectionism, political dynamics trap governments in a liberalization world. c) even when no countries would benefit from trade liberalization, political dynamics trap governments in a protectionist world. d) even when no countries would benefit from protectionism, political dynamics trap governments in a liberalization world. e) trade liberalization and protectionism benefit all countries equally.

Answer: a -

23. In “tit-for-tat”, each government plays the strategy a) that its partner played in the first round of the game. b) that its partner played in the previous round of the game. c) that requires governments to know when their partners are not complying with trade agreements and when they are not cheating. d) that requires governments to know when their partners are liberalizing. e

). that requires governments to know when their partners are subsidizing.

Answer: b - a) It helps iterate the game by creating expectations of repeated interaction. b) WTO members know that the governments with which they negotiate today will be the governments with which they negotiate tomorrow. c) WTO members interact regularly within the organization. d) WTO’s rules define the conditions that must be met in order for governments to decrease transparency. e) WTO provides the information that governments need to implement effective reciprocity strategies

24. The WTO does NOT provide the following conditions.

Answer: d -

25. The international trade system lacks the equivalent of a state to enforce agreements, and thus a) governments face a pervasive enforcement problem when they try to cooperate for mutual gain. b) governments face a limited enforcement problem when they try to cooperate for mutual gain. c) governments often neglect consumer interests in favor of producer interests. d) governments often neglect producer interests in favor of consumer interests e) governments attempt to gain maximum access in exchange for political concessions.

Answer: a -

True-False Questions

1. Comparative advantage derives from differences in labor productivity that result from differences in technology.

Answer: True

2. Trade liberalization generally occurs through trade bargaining in which governments exchange market access commitments.

Answer: True

3. Indifference curves typically slope downwards.

Answer: True

4. Production and consumption will occur where the production possibility frontier and the indifference curve are parallel.

Answer: False

5. Bargaining power determines which distribution of gains governments ultimately select.

Answer: True

6. The enforcement problem refers to the fact that governments cannot be certain that other governments will comply with the trade agreements that they conclude

Answer: True

7. A Nash equilibrium is an outcome at which both players have an incentive to change strategies unilaterally.

Answer: False

8. Pareto optimality determines which distribution of gains governments ultimately select.

Answer: False

9. The prisoners’ dilemma model suggests that even when all countries would clearly benefit from trade protectionism, political dynamics trap governments in a liberalized world.

Answer: False

10. In tit for tat reciprocity strategies, each government plays the strategy that its partner played in the previous round of bargaining.

Answer: True

Essay/Discussion Questions

1. Why do governments have strong incentives not to liberalize trade even when it can be demonstrated that they are worse off than they could be when they won’t?

2. Explain the differences between production possibility frontiers and indifference curves. How do each affect trade patterns?

3. How can trade between the United States and China affect the equilibrium of production and consumption in both countries caused by each country specializing in different goods?

4. Explain the Hecksher-Ohlin model of trade and the role of factor endowments. Give specific sector examples.

5. Model trade bargaining using basic spatial theory using Doha Round problems as your example.

6. Explain the WTO’s Dispute Settlement Mechanism and its Appellate Body. What problems have arisen with US trade policies in recent history?

7. Explain the role of enforcement problems in trade agreements. How does the WTO contribute to the alleviation of these problems?

8. Explain the difference between Pareto optimal and suboptimal outcomes in trade bargaining using the prisons’ dilemma game.

9. What is a Nash equilibrium outcome? Give specific examples using Doha Round trade negotiations.

10. Explain the principle of comparative advantage in international trade.

Bargaining

Contract Curve

Dispute Settlement Mechanism

Enforcement Problem

Factor Endowments

Hecksher-Ohlin Model

Nash Equilibrium

Outside Option

Pareto Suboptimal

Patience Reciprocity