EXERCISE

Part I: Multiple Choice

1. What is the primary benefit of foreign trade in the context of economic development?
A. It reduces competition among domestic firms.
B. It allows countries to specialize and achieve economies of scale.
C. It leads to job losses in all sectors.
D. It eliminates the need for domestic production.
2. What does terms of trade refer to?
A. The ratio of export prices to import prices
B. The amount of goods a country can trade for its exports
C. The cost of trade agreements between nations
D. The tariffs imposed on imports
3. Which of the following is a characteristic of Export Promotion Industrialization (EPI)?
A. Focus on protecting domestic industries from foreign competition
B. Emphasis on boosting exports to drive economic growth
C. Reliance on import quotas
D. Prioritization of agriculture over manufacturing
4. Import Substitution Industrialization aims to:
A. Increase imports of foreign goods
B. Reduce dependency on foreign goods by developing local industries
C. Promote international trade agreements
D. Enhance agricultural exports
5. A country that experiences a deficit in its balance of payments may need to:
A. Increase its exports
B. Cut public spending
C. Devalue its currency
D. All of the above
6. Which of the following is a potential drawback of Export Promotion Industrialization?
A. Over-reliance on foreign markets
B. Development of diverse local industries
 C. Increased employment in domestic markets
D. Enhanced technological transfer
7. What is a common reason for countries to adopt Import Substitution Industrialization
policies?
A. To increase foreign direct investment
B. To protect emerging domestic industries from international competition
C. To improve terms of trade
D. To promote tourism
8. Which one of the following is not true about outward-looking export promotion and inward
looking import substitution development polices.
A. Outward looking development policies encourage not only free trade but also free
moment of capital, worker, enterprise and multinational enterprise and an open system
of communication.
B. Inward looking development polies stress the need for LDCs to evolve their own style
of development and control their own density
C. Advocates of import substitution believe that LDCs should initially substitute domestic
production of previously imported simple consumer goods.
D. Advocates of export promotion of both primary and manufactured goods cite the
efficiency and growth benefits of free trade and competition.
E. None of the above.
9. Which of the following is a potential benefit of trade liberalization for developing
countries?
A. Increased government control over the economy
B. Greater access to international markets
C. Decreased competition among domestic firms
D. Reduced foreign investment
10. What is the primary goal of trade agreements such as NAFTA or the EU?
A. To reduce tariffs and promote trade among member countries
B. To establish quotas for exports
C. To limit foreign investments
D. To increase protectionism
11. Which of the following can negatively impact the terms of trade for developing countries?
A. A rise in global commodity prices
B. Increased demand for manufactured goods
C. A decline in the prices of primary commodities
D. Improved agricultural productivity
12. How can foreign direct investment (FDI) influence the development of a developing
country?
A. By reducing local employment opportunities
B. By transferring technology and skills to the local workforce
C. By increasing dependence on foreign companies
D. By discouraging local entrepreneurship
13. Which factor is most likely to enhance a developing country's competitiveness in
international trade?
A. High tariffs on imports
B. Investment in education and skill development
C. Limited access to international markets
D. Political instability
14. What role do international organizations, such as the World Trade Organization (WTO),
play in trade?
A. They impose tariffs on member countries.
B. They facilitate negotiations and settle trade disputes.
C. They primarily focus on domestic trade policies.
D. They restrict trade to protect developing countries.
15. Which of the following best describes the Heckscher-Ohlin model, which is built upon
factor endowment theory?
A. It states that countries should produce only what they can consume domestically.
B. It suggests that countries will export goods that utilize their abundant factors of
production.
C. It emphasizes the role of government intervention in trade.
D. It focuses solely on the impact of tariffs.
16. What is a common challenge faced by developing countries in international trade?
 A. Excessive export earnings
B. High levels of technological advancement
C. Vulnerability to global market fluctuations
D. Strong domestic industries
17. The development of synthetic products often leads to:
A. Increased demand for traditional agricultural exports
B. Decreased demand for natural resource-based exports
C. A rise in the price of raw materials
D. No significant changes in trade patterns
18. Which agricultural strategy involves the government providing financial support to
farmers?
A. Deregulation
B. Subsidization
C. Privatization
D. Liberalization
19. What is one of the primary reasons for low agricultural productivity in developing
countries?
A. Excessive technological advancements
B. High levels of mechanization
C. Inadequate access to modern farming techniques
D. Abundance of natural resources
20. What is the term used to describe a situation where the price of imports exceeds the price
of exports.
A. An improvement in the terms of trade.
B. A neutral performance in the terms of trade
C. A negative development in the terms of trade.
D. Deterioration in the terms of trade.
21. One of the following is not true about urban areas
A. Public utilities are readily available.
B. Slums are often developed in and around urban areas.
C. Most of the world population live in urban areas.
 D. Urban communities are characterized by complex and dynamic nature of life.
E. There are more opportunities for entertainment in urban areas.
22. Urbanization occurs by various factors except :
A. Natural population growth C. Urban development
B. Migration D. all E. none
23. What is the main driver of rural-urban migration according to the Harris-Todaro model?

A. Higher wages in rural areas C. Government policies

B. Expected income differentials D. Better climate in cities

24. The Lewis model of migration focuses on:

A. The role of the informal sector in urban areas
B. A dual economy with surplus rural labor moving to urban industries
C. The impact of globalization on migration
D. Government-led urbanization policies

Patr II: write “True” if the statement is correct and “False” with justification if it is incorrect
on the space provided.

1. Risk-averse subsistence farmers prefer a technology of food production that combines a

high mean per hectare yield with high variance to alternative technologies with a lower
mean yield but less variance of risk.
2. Government intervention in the agricultural sector is often necessary to correct market
failures.
3. The role of women in agriculture has been declining in developing countries over the past
few decades.
4. The difference between exports and imports of goods and service is called trade balance.
5. If terms of trade is greater than 100 percent, it implies that a country’s one unit of export
can buy more than one units of imports.
6. True or False: The Harris-Todaro model assumes that migrants make decisions based on
actual urban wages rather than expected income.
7. True or False: The Lewis model suggests that rural surplus labor can be absorbed by urban
industries without affecting rural productivity.
 8. True or False: Urban unemployment is higher in the formal sector than in the informal
sector.

Part III: Fill in the blanks

1. ____________refers to the exchange of goods and services between countries.

2. _____________ is an agriculture in which crops are produced mainly for personal
consumption.
3. ________________exchange rate is determined by the market forces (demand and supply
forces) without interventions from external forces.
4. ______________________are the principal factors of production in agriculture in Africa.
5. ______________________ is a tax imposed on imported goods.
6. The ___________ model explains migration as a response to expected income differences
between rural and urban areas.
7. ___________ refers to the over-concentration of population and economic activities in a
few large cities.
8. The ___________ sector provides temporary employment but lacks job security and
benefits.

Part IV: Discussion

1. The search for the optimal scale of urbanization is crucial for achieving sustainable
development.
a. Define urbanization and identify its key drivers.
b. Define sustainable development.
c. Describe the advantages that urbanization offers to consumers and producers.
2. Compare and contrast the predictions of the Lewis model and the Harris-Todaro model
regarding rural-urban migration. Which model do you find more applicable to the context
of developing countries, and why?
3. What are the positive and negative effects of agglomeration economies?
4. Discuss the role of the urban informal sector in developing economies. Is it a solution to
unemployment or a symptom of economic inefficiency? Support your argument with
examples.
5. Assume that rural wage is $1.50 per day, urban modern wage is $3 per day and urban
traditional income is $.25 per day. Also suppose that there is a 0.5 probability of getting a
modern job. Will there be migration?