Chapter 1: Trade in the Global Economy

Multiple Choice
Instructions: Read the following questions carefully and choose the answer that best
describes. There are 40 questions in total and each question has 2.5 points (100 points in
total). This is an open-book test. The given time for this quiz is 60 minutes.

Question 1
What is the term for a capital flow that is used to purchase or build a tangible asset like a
factory?
Answer
a. migration
b. service exports
c. service imports
d. foreign direct investment

Question 2
An import is:
Answer
a. goods or services purchased from a foreign resident.
b. goods or services sold to foreign residents.
c. goods only purchased from foreigners—you cannot purchase services from foreigners.
d. services only—imports do not include goods.

Question 3
Service exports include:
Answer
a. items that you must travel to another country to purchase, such as a
restaurant meal.
b. items, such as equipment or automobiles, that carry a warranty and a
service contract.
c. anything sold to a resident of another nation that is not a good that can be
shipped.
d. workers who migrate to jobs in other nations.

Question 4
The difference between the total value of a country's exports and the total value of its imports
is defined as the nation's:
Answer
a. trade status.
b. trade balance.
c. trade deficit.
d. bilateral trade balance.

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Question 5
An American tourist buys a ticket to an opera in Paris. How does the U.S. government
classify this transaction?
Answer
a. a goods import of a French Opera
b. a service export
c. a service import
d. a goods export

Question 6
A Chinese student pays tuition at a U.S. university. How does the Chinese government
classify this transaction?
Answer
a. a goods import
b. a service export
c. a service import
d. a goods export

Question 7
If the value of a nation's imports is more than the value of its exports, then the nation is
experiencing:
Answer
a. a trade deficit.
b. a trade surplus.
c. balanced trade.
d. the trade balance.

Question 8
If country X has a GDP of $1 trillion and exports $200 billion to country Y and imports
$300 billion from country Y, then its bilateral trade balance with country Y is:
Answer
a. –$100 billion.
b. +$100 billion.
c. $500 billion.
d. 50%.

Question 9
The difference in value between exports and imports in a particular nation is called:
Answer
a. a trade deficit.
b. bilateral trade balance.
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c. balanced trade.
d. the trade balance.

Question 10
A bilateral trade balance means:
Answer
a. half the trade deficit.
b. the measure of imports only—not exports.
c. the difference between the value of imports and exports between two trading nations.
d. the sum of the value of imports and exports traded between two nations.

Question 11
Which statement is correct?
Answer
a. The bilateral trade balance is a good indicator of the inequality of imports and exports
between the United States and China.
b. The bilateral trade balance vastly understates the gap in imports and exports between the
United States and China.
c. The bilateral trade balance may overstate the gap in imports and exports between the
United States and China because some of the manufacturing inputs used do not originate in
China.
d. The bilateral trade balance shows that there is balanced trade between the United States
and China.

Question 12
“Value added” in the context of international trade refers to:
Answer
a. the difference between the value of the imported inputs and the value of the exported
product.
b. the additional value a worker provides to a firm when she is hired.
c. the value added by being able to purchase goods in a competitive market.
d. the value added by import brokers when they mark up the price of the products.

Question 13
How has China explained its growing bilateral imbalance with the United States?
Answer
a. Current accounting practices make it very difficult to determine the value added and true
national origin of goods.
b. If the United States would only improve its efficiency, there would be no gap.
c. Most Chinese imports are cheap consumer goods, and no firm in the United States wants to

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make those things anyway.

d. China continues to struggle with corrupt officials at the customs bureau.

Question 14
Jane Ferlengeti, a U.S. citizen, purchases a phone for $300 that Apple imported from China.
Apple paid its Chinese subsidiary $150 for the phone. How did these transactions change the
U.S.-Chinese trade balance?
Answer
a. It increased by $300.
b. It worsened by $300.
c. It worsened by $150.
d. It did not change the U.S.-Chinese trade balance since Apple's $150 margin ($300–$150)
offset the $150 cost of importing the phone from China.

Question 15
Joel Tuoroniemi, a U.S. citizen, purchases a phone from AT&T for $300. The following table
gives costs associated with the phone supply chain.

Source
Component/process Cost
country
Hard drive Japan $75
Display module Taiwan $25
Video chip U.S. $20
Controller chip U.S. $10
Assembly China $20
Wholesale distribution U.S. (Apple) $100
Retail distribution U.S. (AT&T) $50
Retail price $300

By how much did Joel's purchase change the U.S. trade balance with China?
Answer
a. $300
b. $150
c. $120
d. $30

Question 16

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Joel Tuoroniemi, a U.S. citizen, purchases a phone from AT&T for $300. The following table
gives costs associated with the phone supply chain.

Source
Component/process Cost
country
Hard drive Japan $75
Display module Taiwan $25
Video chip U.S. $20
Controller chip U.S. $10
Assembly China $20
Wholesale distribution U.S. (Apple) $100
Retail distribution U.S. (AT&T) $50
Retail price $300

By how much did Joel's transaction affect the U.S.-Japanese trade balance?
Answer
a. It did not affect it at all.
b. The U.S.–Japanese trade balance fell by $750.
c. The U.S.–Japanese trade balance rose by $130.
d. The U.S.–Japanese trade balance fell by 25%.

Question 17
An example of “value added” as an important concept for international trade was the case of
imports of iPods from China. The value added by China is equal to:
Answer
a. the total value of imported raw and semi-finished materials into China plus the value of the
export to the United States.
b. the total value of the export to the United States minus the total value of imported raw and
semi-finished materials into China.
c. the total value of the export plus shipping costs.
d. the difference between the total value of exports to the United States minus the total value
of imports from the United States.

Question 18
Which economic grouping below has the largest volume of trade among its member nations?
Answer
a. NAFTA
b. the European Union

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c. the Free Trade Area of the Americas

d. the European Free Trade Area

Question 19
NAFTA is:
Answer
a. a free trade area between Mexico, Canada, and the United States.
b. a trade agreement to limit environmentally dangerous imports and exports.
c. a law preventing illegal immigration.
d. another name for the European Union.

Question 20
One way to gauge the impact of trade on a nation is to measure:
Answer

a. wage distortions and job loss.

b. the ratio of total imports and exports expressed as a percent of a nation's GDP.
c. shipping costs.
d. rises in national income due to trade.

Question 21
What is used to measure a country's openness to international trade?
Answer

a. the ratio of its exports to its GDP

b. the ratio of its imports to its GDP
c. the ratio of its trade balance (exports minus imports) to its GDP
d. the ratio of its exports plus imports to its GDP.

Question 22
What does a country's gross domestic product (GDP) measure?
Answer

a. the value of all intermediate goods produced in a year

b. the value of all exports produced in a year
c. the value of all final goods produced in a year
d. the value of all production in a year

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Question 23

Why do larger countries tend to have lower ratios of international trade to GDP than smaller
countries?
Answer

a. Larger countries tend to have more trade between states or provinces within their borders
than smaller countries.
b. Larger countries tend to have higher tariffs than smaller countries.
c. Larger countries tend to trade with other larger countries.
d. Larger countries tend to have larger trade deficits than smaller countries.

Question 24

What is the best measure of a country's openness to international trade?

Answer

a. the ratio of its exports to its GDP

b. the ratio of its imports to its GDP
c. the ratio of its trade balance (exports minus imports) to its GDP
d. the ratio of its exports plus imports to its GDP

Question 25

A tax on imported goods is called a(n):

Answer
a. luxury tax.
b. excise tax.
c. income tax.
d. tariff.

Question 26
Raising tariffs in a country has what immediate effect on its economy?
Answer
a. It increases the volume of trade.
b. It reduces the volume of imports.
c. It increases the volume of imports.
d. It promotes better trade relations with other countries.

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Question 27
During the 2008–2009 financial crisis, what happened to international trade levels?
Answer

a. They rose.
b. They fell.
c. They did not change.
d. We do not have enough data yet to say what happened.

Question 28
The movement of people across borders is known as:
Answer

a. resettlement.
b. guest workers.
c. migration.
d. fractionalization

Question 29
The Organization for Economic Cooperation and Development is primarily composed of:
Answer
a. the richest countries.
b. the poorest countries.
c. North American countries.
d. European countries.

Question 30
In general, migration is _____ than trade.

Answer

a. more free
b. more controlled and regulated
c. less desirable
d. more desirable

Question 31
Immigration issues are usually more intense in:

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Answer
a. low-wage nations.
b. nations whose borders are not secured.
c. nations with open-door policies.
d. nations whose wages are higher than world averages.

Question 32
In spite of hopes that migration between nations in the European Union would be free,
several nations have agreements to restrict it. Why?
Answer
a. They are afraid of disease.
b. Labor policies are very different, and new workers will expect the same benefits.
c. They are concerned that mass inflows of workers will lower wages and offer competition
for their own domestic labor force.
d. Domestic workers are more productive.

Question 33
Foreign direct investment (FDI) flows include:
Answer
a. purchase of a controlling interest in a foreign firm by a domestic firm.
b. purchase of stocks or bonds directly from an international dealer.
c. purchase of foreign government bonds by domestic investors.
d. accounts denominated in foreign currency in foreign banks owned by domestic depositors.

Question 34
Most FDI flows are destined to:
Answer
a. low-income nations.
b. Australia.
c. high-income (OECD) nations.
d. the African continent.

Question 35
Which of the following is NOT a reason for firms in an industrial nation to undertake vertical
FDI in a low-income nation?

Answer
a. access to raw materials
b. lower wages

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c. avoidance of export taxes

d. access to raw materials, lower wages, avoidance of export taxes

Question 36
What is the principal reason for Intel (a U.S. computer chip producer) to establish a computer
chip manufacturing plant in a developing country (e.g., Malaysia)?
Answer

a. to take advantage of low wages in Malaysia

b. to take advantage of Malaysia's climate
c. to take advantage of Malaysia's low tariffs on imported computer chips.
d. All of the answers are reasons for Intel to establish a computer chip manufacturing plant in
Malaysia.

Question 37
Which of the following is NOT a reason why a foreign truck manufacturer might want to
acquire or construct a plant in the United States?
Answer

a. Production in the U.S. will avoid the U.S. 25% tariff on imported pickup trucks.
b. It is easier to produce pickup trucks in the U.S. than in other countries.
c. It wants to take advantage of lower wages in the U.S.
d. U.S. consumers will buy only U.S.-made pickup trucks.

Question 38
Which of the following is NOT a reason for horizontal FDI?
Answer

a. to avoid tariffs or other trade barriers

b. to have improved facilities and information for marketing products
c. to take advantage of inexpensive labor
d. to share expertise and avoid possible duplication of products

Question 39
Which of the following is an example of horizontal FDI?
Answer

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a. Ford Motor Company acquires the British firm Jaguar.

b. Lenovo, a Chinese company, acquires IBM's personal computing business.
c. The Venezuelan government acquires the Venezuelan operations of BP, a British
petroleum firm.
d. General Motors Corporation builds a plant in China to supply Buicks to the Chinese
market.

Question 40
China has received a great deal of FDI. Why?
Answer
a. Firms such as automakers can take advantage of low wages and also avoid tariffs if their
production is finished in China.
b. The U.S. government has encouraged domestic firms to buy foreign firms.
c. Loans to purchase manufacturing facilities in other nations are subsidized by the U.S.
government.
d. China has a system of business that is free from corruption and interference by the Chinese
government.

The End!

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