International Trade Theory And Policy 10th Edition By Krugman – Test Bank

Chapter 11 Trade Policy in Developing Countries

11.1 Import-Substituting Industrialization

1) The infant industry argument was an important theoretical basis for
A) neo-colonialist theory of international exploitation.
B) import-substituting industrialization.
C) historiography of the industrial revolution in Western Europe.
D) the East-Asian miracle.
E) the reduction of tariffs on Western Europe.
Answer: B
Page Ref: 275-281
Difficulty: Easy

2) Sophisticated theoretical arguments supporting import-substitution policies include
A) terms of trade effects.
B) scale economy arguments.
C) learning curve considerations.
D) the problem of appropriability.
E) domestic market failure arguments.
Answer: D
Page Ref: 275-281
Difficulty: Easy

3) Which of the following could explain why the terms of trade of developing countries might deteriorate over time?
A) Developing country exports consist mainly of manufactured goods.
B) Developing country exports consist mainly of primary products.
C) Commodity export prices are determined in highly competitive markets.
D) Commodity export prices are solely determined by developing countries.
E) Developing country exports are too diverse.
Answer: C
Page Ref: 275-281
Difficulty: Easy

4) Which trade strategy have developing countries used to restrict imports of manufactured goods so that the domestic market is preserved for home producers?
A) international commodity agreement
B) export promotion
C) multilateral contract
D) import substitution
E) export subsidies
Answer: D
Page Ref: 275-281
Difficulty: Easy
5) The infant industry argument is that
A) comparative advantage is irrelevant to economic growth.
B) developing countries have a comparative advantage in agricultural goods.
C) developing countries have a comparative advantage in manufacturing.
D) developing countries have a potential comparative advantage in manufacturing.
E) developing countries have no chance to compete with industrialized countries.
Answer: D
Page Ref: 275-281
Difficulty: Easy

6) The infant industry argument calls for active government involvement
A) only if the government forecasts are accurate.
B) only if some market failure can be identified.
C) only if the industry is not one already dominated by industrial countries.
D) only if the industry has a high value added.
E) only if the industry is independently able to earn high returns.
Answer: B
Page Ref: 275-281
Difficulty: Easy

7) The imperfect capital market justification for infant industry promotion
A) assumes that new industries will tend to have low profits.
B) assumes that infant industries will soon mature.
C) assumes that infant industries will be in products of comparative advantage.
D) assumes that banks can allocate resources efficiently.
E) assumes that developing country will reward the donor country.
Answer: A
Page Ref: 275-281
Difficulty: Easy

8) The United States, as it began its long and successful growth in the early 19th century, consciously promoted domestic production through such activities as tariffs, Clay’s American System, and many direct subsidies to railroads, canal companies, farmers (free land) etc. Today we view this blatant example of large scale and extensive import-substitution industrialization as having been very successful. Comment on this.
Answer: This is an interesting point and emphasizes that economic models tend to be a-historical. That is, they lack the historic perspective; and thus may be misleading as guides to long run issues, such as economic growth. This also suggests that trade policy per se is almost certainly not sufficient to explain why some countries grow and others do not.
Page Ref: 275-281
Difficulty: Moderate

9) Refer to above figure. If OmL1 workers are employed in manufacturing then what is the marginal productivity of labor in manufacturing?
Answer: OmWm.
Page Ref: 275-281
Difficulty: Moderate

10) Refer to above figure. If OmL1 workers are employed in manufacturing then what is the marginal productivity of labor in agriculture?
Answer: OfWf.
Page Ref: 275-281
Difficulty: Moderate