Terms of Trade and Prebisch-Singer Hypothesis Quiz

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What does the Prebisch-Singer Hypothesis suggest about primary commodity export prices over time?

They increase due to high income and price elasticities of demand.

They experience sharp fluctuations depending on the country's political stability.

They remain constant regardless of economic factors.

They fall due to low income and price elasticities of demand. (correct)

How does a falling terms of trade affect a country's ability to purchase the same level of imported goods?

It leads to an increase in foreign exchange reserves.

It has no impact on the country's import capacity.

It requires selling more exports to maintain the same purchasing power. (correct)

It encourages reduced dependence on imports.

What determines a country's total export earnings?

Total volume of exports sold (correct)

Number of trading partners

Variability in exchange rates

Total volume of imports sold

In the traditional theory of international trade, what does comparative advantage refer to?

Producing at a lower opportunity cost than alternative commodities that could be produced. Signup and view all the answers

What is the main concern highlighted by Prebisch and Singer regarding developing countries' reliance on primary exports?

Risk of revenue loss over time Signup and view all the answers

According to Ricardo and Mill's neoclassical model, what does international specialization in trade depend on?

Relative factor endowments Signup and view all the answers

What happens to the equilibrium home price and quantity in a closed economy without international trade?

The home price remains P1 and the quantity remains Q1. Signup and view all the answers

What does a small country opening its economy to world trade face?

A horizontal, perfectly elastic demand curve Signup and view all the answers

Who benefits from the lower price of imports in an open economy?

Domestic consumers Signup and view all the answers

What happens to the quantity demanded when the world price decreases to P2?

It rises from Q1 to Q3 Signup and view all the answers

How does the quantity supplied by domestic producers change when the world price decreases to P2?

It falls from Q1 to Q2 Signup and view all the answers

What does the steeper slope of the world price ratio 𝑃ഥ𝑎൘ for Less Developed World indicate?

It can get more manufactured goods for a unit of agriculture without trade. Signup and view all the answers

What does the difference between what domestic producers supply at a lower world price and what consumers want represent?

Amount imported Signup and view all the answers

What impact does the world price of agricultural goods being higher than Less Developed World’s domestic price ratio have on resource allocation?

It encourages specialization in labor-intensive agricultural production. Signup and view all the answers

How does the relative difference in costs of production and prices give rise to profitable trade?

By influencing the settlement of the international free-trade price ratio. Signup and view all the answers

In terms of the classical labor cost model, where does the international free-trade price ratio settle?

At a point between the domestic price ratios of Less Developed World and Rest of World. Signup and view all the answers

How does the steeper slope of Less Developed World's world price ratio impact its resource allocation?

It encourages a shift towards more labor-intensive agricultural production. Signup and view all the answers

What is the significance of the lines 𝑃ഥ𝑎൘ denoting the common world 𝑃𝑚 price ratio in both graphs?

They illustrate the common world price ratio for agricultural goods and manufactured goods. Signup and view all the answers

Which of the following is a key benefit of economic integration between countries?

Increased rational division of labor and exploitation of economies of scale Signup and view all the answers

What is the primary reason the Doha Development Round of trade negotiations, which began in 2001, remained stalled through 2014 according to the text?

Failure to adequately address the needs and interests of developing countries Signup and view all the answers

Which of the following regional trading blocs is NOT mentioned in the text?

ECOWAS Signup and view all the answers

What is a key unresolved question regarding regional trading blocs?

Whether they promote or retard the progress of globalization Signup and view all the answers

What does the text state is a key reason for the persistence of trade barriers, even after 8 rounds of trade liberalization over 50 years?

Barriers remain in place in agriculture and to a degree in other sectors Signup and view all the answers

Which of the following is NOT identified in the text as a key impact of the economic and commercial policies of developed countries on developing countries?

Provision of adjustment assistance for displaced workers Signup and view all the answers

Which of the following is NOT a result of free trade between regions?

Decreased output and consumption in one region Signup and view all the answers

According to the neoclassical model of international trade, which of the following statements is true?

All countries gain from trade Signup and view all the answers

If two countries have identical technologies of production, what will tend to happen to their domestic product price ratios and factor prices according to the text?

Domestic product price ratios will converge, and factor prices will converge Signup and view all the answers

What will happen to wage rates in labor-abundant Less Developed Countries as a result of free trade?

Wage rates will rise due to more intensive use of human resources Signup and view all the answers

Based on the information provided, which of the following statements about the neoclassical model of international trade is correct?

It assumes that technologies of production are different across countries Signup and view all the answers

According to the graph in Figure 5.1, what do points C and C' represent?

The free-trade equilibrium points for the two regions Signup and view all the answers