Question: 1. In a two-paragraph explanation for each distinguish the main ideas of the following trade theories:

a) Mercantilism

b) Arbitrage

c) Absolute Advantage

d) Comparative Advantage

e) H-O Theory

f) Theory of the Cluster

g) Gravity Theory

h) Product Life Cycle Theory

2. If France can produce either 20 wines or 10 chocolates with a resource unit and Germany can produce 30 wines or 10 chocolates with a resource unit, then:

a) Which country has the absolute advantage in wine? In chocolate?

b) Which country has the comparative advantage in wine? In chocolate?

c) Which country will export chocolate for wine?

d) What is the upper and lower limits for the price of chocolate in terms of wine?

3. Country A has 40 units of labor and 90 units of capital. Country B has20 units of labor and 40 units of capital. Product X is labor-intensive and Product Y is capital-intensive.

a) Which country is capital abundant?

b) Which country should export Product X?

c) What will happen to the relative returns to labor and capital in Country B in the short-run? In the long run?

d) What will happen to the return to labor between Country A and Country B over time?

4. Trade can create economic winners and losers as income gets redistributed. For some countries that means that trade could be more hurtful than helpful. Agree or Disagree? Explain.

5. Any money we spend on imported goods could be better spent on our own domestic goods, because that creates jobs and increases our growth rate of GDP. Agree or Disagree. Explain.

6. When a country opens itself to trade, H-O Theory predicts that there will be less income inequality in that country over time. Agree or Disagree? Explain.

7. Consider alternative theories of intra-industry trade.

a) Name any one which arises from the violation of an H-O assumption.

b) Which assumption does it violate?

c) Give a real-world example of trade which is explained by the theory you selected.

8.How is it possible that free trade can allow a county to consume more than it can produce? If every country consumed more than it could produce, then global consumption would exceed global production. How could this be?

9. How does trade make it possible for less efficient countries to compete with more efficient ones?