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

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

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

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 2   World Trade: An Overview

 

2.1   Who Trades with Whom?

 

1) Approximately what percent of all world production of goods and services is exported to other countries?

  1. A) 10%
  2. B) 30%
  3. C) 50%
  4. D) 100%
  5. E) 90%

Answer:  B

Page Ref: 10

Difficulty:  Easy

 

2) The gravity model offers a logical explanation for the fact that

  1. A) trade between Asia and the U.S. has grown faster than NAFTA trade.
  2. B) trade in services has grown faster than trade in goods.
  3. C) trade in manufactures has grown faster than in agricultural products.
  4. D) Intra-European Union trade exceeds international trade by the European Union.
  5. E) the U.S. trades more with Western Europe than it does with Canada.

Answer:  D

Page Ref: 13

Difficulty:  Moderate

 

3) The gravity model suggests that over time

  1. A) trade between neighboring countries will increase.
  2. B) trade between all countries will increase.
  3. C) world trade will eventually be swallowed by a black hole.
  4. D) trade between Earth and other planets will become important.
  5. E) the value of trade between two countries will be proportional to the product of the two countries GDP.

Answer:  E

Page Ref: 16

Difficulty:  Moderate

 

4) The gravity model explains why

  1. A) trade between Sweden and Germany exceeds that between Sweden and Spain.
  2. B) countries with oil reserves tend to export oil.
  3. C) capital rich countries export capital intensive products.
  4. D) intra-industry trade is relatively more important than other forms of trade between neighboring countries.
  5. E) European countries rely most often on natural resources.

Answer:  A

Page Ref: 11

Difficulty:  Moderate

5) According to the gravity model, a characteristic that tends to affect the probability of trade existing between any two countries is

  1. A) their cultural affinity.
  2. B) the average weight/value of their traded goods.
  3. C) their colonial-historical ties.
  4. D) the distance between them.
  5. E) the number of different product varieties produced by their industries.

Answer:  D

Page Ref: 12

Difficulty:  Easy

 

6) In general, which of the following do NOT tend to increase trade between two countries?

  1. A) linguistic and/or cultural affinity
  2. B) historical ties
  3. C) larger economies
  4. D) mutual membership in preferential trade agreements
  5. E) the existence of well controlled borders between countries

Answer:  E

Page Ref: 13

Difficulty:  Easy

 

7) Why does the gravity model work?

  1. A) Large economies became large because they were engaged in international trade.
  2. B) Large economies have relatively large incomes, and hence spend more on government promotion of trade and investment.
  3. C) Large economies have relatively larger areas which raises the probability that a productive activity will take place within the borders of that country.
  4. D) Large economies tend to have large incomes and tend to spend more on imports.
  5. E) Large economies tend to avoid trading with small economies.

Answer:  D

Page Ref: 13

Difficulty:  Easy

 

8) We see that the Netherlands, Belgium, and Ireland trade considerably more with the United States than with many other countries.

  1. A) This is explained by the gravity model, since these are all large countries.
  2. B) This is explained by the gravity model, since these are all small countries.
  3. C) This fails to be consistent with the gravity model, since these are small countries.
  4. D) This fails to be consistent with the gravity model, since these are large countries.
  5. E) This is explained by the gravity model, since they do not share borders.

Answer:  C

Page Ref: 13

Difficulty:  Easy

 

9) The two neighbors of the United States do a lot more trade with the United States than European economies of equal size.

  1. A) This contradicts predictions from gravity models.
  2. B) This is consistent with predictions from gravity models.
  3. C) This is irrelevant to any inferences that may be drawn from gravity models.
  4. D) This is because these neighboring countries have exceptionally large GDPs.
  5. E) This relates to Belgiums trade record with the U.S.

Answer:  B

Page Ref: 13

Difficulty:  Moderate

 

2.2   The Changing Pattern of World Trade

 

1) Since the period following World War II (the early 1950s), the proportion of most countries production being used in some other country

  1. A) remained constant.
  2. B) increased.
  3. C) decreased.
  4. D) fluctuated widely with no clear trend.
  5. E) increased slightly before dropping off.

Answer:  B

Page Ref: 17

Difficulty:  Easy

 

2) Since World War II, the likelihood that foreign markets would gain importance to average exporters as a source of profits has

  1. A) remained constant.
  2. B) increased.
  3. C) decreased.
  4. D) fluctuated widely with no clear trend.
  5. E) increased slightly before dropping off.

Answer:  B

Page Ref: 17

Difficulty:  Easy

 

3) Since World War II, the likelihood that any single item in the typical consumption basket of a consumer in the U.S. originated outside of the U.S.

  1. A) remained constant.
  2. B) increased.
  3. C) decreased.
  4. D) fluctuated widely with no clear trend.
  5. E) increased slightly before dropping off.

Answer:  B

Page Ref: 18

Difficulty:  Easy

 

4) Since World War II, the likelihood that the job of a new college graduate will be directly or indirectly affected by world trade

  1. A) remained constant.
  2. B) increased.
  3. C) decreased.
  4. D) fluctuated widely with no clear trend.
  5. E) increased slightly before dropping off.

Answer:  B

Page Ref: 17

Difficulty:  Easy

 

5) Since World War II, the relative importance of raw materials, including oil, in total world trade

  1. A) remained constant.
  2. B) increased.
  3. C) decreased.
  4. D) fluctuated widely with no clear trend
  5. E) increased slightly before dropping off.

Answer:  C

Page Ref: 18-19

Difficulty:  Easy

 

6) In the current Post-Industrial economy, international trade in services (including banking and financial services)

  1. A) dominates world trade.
  2. B) does not exist.
  3. C) is an increasingly important component of global trade.
  4. D) is relatively stagnant.
  5. E) far surpasses the predictions of economist Alan Blinder.

Answer:  C

Page Ref: 20

Difficulty:  Easy

 

7) In the pre-World War I period, the U.S. exported mainly

  1. A) manufactured goods.
  2. B) services.
  3. C) primary products including agricultural.
  4. D) technology intensive products.
  5. E) weapons.

Answer:  C

Page Ref: 19

Difficulty:  Easy

 

 

8) In the pre-World War I period, the United Kingdom exported mainly

  1. A) manufactured goods.
  2. B) services.
  3. C) primary products including agricultural.
  4. D) technology intensive products.
  5. E) livestock.

Answer:  A

Page Ref: 18

Difficulty:  Easy

9) In the pre-World War I period, the United Kingdom imported mainly

  1. A) manufactured goods.
  2. B) services.
  3. C) primary products including agricultural.
  4. D) technology intensive products.
  5. E) from the United States.

Answer:  C

Page Ref: 18

Difficulty:  Easy

 

10) In the present, most of the exports from China are

  1. A) manufactured goods.
  2. B) services.
  3. C) primary products including agricultural.
  4. D) technology intensive products.
  5. E) overpriced by world market standards.

Answer:  A

Page Ref: 19

Difficulty:  Easy

 

11) Which of the following does NOT explain the extent of trade between Ireland and the U.S.?

  1. A) historical ties
  2. B) cultural Linguistic ties
  3. C) Gravity Model
  4. D) multinational corporations
  5. E) large numbers of Irish-Americans

Answer:  C

Page Ref: 13

Difficulty:  Moderate

 

 

12) When comparing the composition of world trade in the early 20th century to the early 21st century, we find major compositional changes. These include a relative decline in trade in agricultural and primary-products (including raw materials). How would you explain this in terms of broad historical developments during this period?

Answer:  The typical composition of world production during this period experienced major changes. Focusing on todays Industrialized Countries (primarily members of the OECD), the industrial-employment composition was focused primarily on agriculture. Most value was in land. The predominant single consumption category was food. Since then, the economies shifted from the agricultural to the manufacturing sectors (continuing trends begun over a century earlier in the industrial revolution). Incomes rose, and consumption shifted in favor of (increasingly affordable) manufactures. Both income and price elasticities were greater in manufactures than in agricultural products. At the same time there was a steady tendency for synthetic (manufactured) inputs to replace agricultural based raw materials and industrial inputs. Hence, trade and of course international trade conformed to overall changes in patterns of world production and consumption.

Page Ref: 17-21

Difficulty:  Easy

13) In the past half century, the developing countries have experienced major compositional shifts from exports of primary products (including agricultural and raw materials) to exports of manufactures. How might you explain this in terms of broad historical developments during this period?

Answer:  Any discussion of the export experience of the developing countries must first clarify the problem of definitional inclusion. In particular, the exports of the (non-OECD) developing countries, has become increasingly dominated by the experience of a relatively small number of countries in South-East Asia, termed the New Industrialized Countries (NICs). Since they experienced both very rapid increases in their exports, and very rapid increases in the manufactured component of their exports, their experience alone may explain the bulk of the observed phenomenon. Many would exclude the NICs from the developing country category so as to be able to focus the discussion on a more representative sample of (the over 100) developing countries. More recently, a second wave of East Asian countries, notably including China have replicated the experience of the NICs, and this again muddies the water for one interested in focusing on the export experience of the increasingly heterogeneous category, developing countries. Another explanation of the growing dependence on manufactured exports on the part of the developing countries is the following:  Since the consumer ( including industrial consumer) markets in OECD countries were rapidly shifting away from primary products, these markets were rapidly disappearing.

 

In addition, the world market for primary products was generally limited by low price and especially income elasticities; agricultural sectors tended to be highly and rigidly protected in potential OECD markets; and escalating effective tariff structures levied systematically large levels of protection against the primary exports of the developing countries; export success had to be pursued outside of the traditional primary exports of these countries.

Page Ref: 17-21

Difficulty:  Difficult

 

2.3   Do Old Rules Still Apply?

 

1)  The Neoclassical Heckscher-Ohlin model assumes that all producers of any industrial product has knowledge of, and may avail itself of the same production technology available to producers in any other country. Many have flagged this identical technology assumption as unrealistic. During the past half century, the relative importance of Multinational Corporations (MNCs) in world trade has steadily increased. How would this trend affect the realism of the identical technology assumption?

Answer:  Noting that MNC plants tend to use more labor intensive production processes in countries where labor tends to be relatively cheap (both in low tech, e.g., Nike, and high tech, e.g., Motorola), one may argue that MNCs use different technologies in developing countries. However, this is a gross misunderstanding of the identical technology assumption. It is axiomatically obvious that if the same MNC is producing something in both labor abundant and labor scarce using different processes, it nevertheless has knowledge (intimate knowledge in the case of proprietary patented processes) of available technology. The fact that the MNC may choose not to apply the same degree of capital intensity in environments with greatly different relative factor prices in no way lessens the fact that the Heckscher-Ohlin identical technology assumption is strengthened due to the growing relative strength of MNCs in developing countries. An additional fact that strengthens this argument is that, as compared to the early 1950s, a growing proportion of MNCs are themselves based in developing countries, such as China and Brazil.

Page Ref: 21

Difficulty:  Difficult

 

2) One of the major political developments of the past several decades is the growing size and economic/monetary integration of the European Union. What effect do you think this will have on international trade between countries?

Answer:  The growing economic integration between the various countries of Europe, both the old and existing members of the European Union (EU) and the new countries joining it (including perhaps soon, Turkey), means that the barriers to trade are steadily falling in a region that has traditionally dominated world trade. The common monetary unit should in itself go far to promote inter-country trade within the growing EU (judging by the positive historical effect of a single currency in the U.S.). The standardization of transportation (including railroad gauges, highway signs etc.) and product codes will also promote expansion of intra-EU trade. The decline in the probability of political conflict associated with this comprehensive economic union, plus conscious attempts to cooperate in fiscal and monetary policy stances again point to growing international trade, allowing these countries to increasingly enjoy the fruits of potential positive scale economies, and more traditional classical and neo-classical gains from trade. The scale economies will also tend to increase trade between the EU and other countries.

Page Ref: 21

Difficulty:  Difficult

 

3) The Services sector has been steadily rising in relative importance in GDP of the United States, as well as elsewhere around the world. Since services have been identified as non-tradable (e.g., it is difficult to export haircuts), it may be argued that this trend will likely slow the rapid growth in international trade. Discuss.

Answer:  This argument stands on questionable logical foundations. The past half century has seen a steady growth in the absolute and relative importance of international trade. This trend has been reversed only by global conflicts, i.e. the two World Wars. This trend has remained steady and robust despite major compositional shifts (e.g., from primary to manufacturing), and location shifts (e.g., the sudden rise of NICs as significant group of exporters). The trend will probably continue into the reasonable future, fueled by both super-regional preferential trade regions and a growing impact of the multilateral forces, represented institutionally by the World Trade Organization (WTO)as illustrated by the recent abolishment of the epitome cartelized trade, the world trade in textiles. Driven by technologyespecially in the areas of communication and transportationa reversal of the growing trade trend is not likely in the near future. In any case, many services are in fact quite tradable. Examples would be financial services, long-distance teaching, help-desk outsourcing, consulting and management services and others. In fact, when a tourist gets a haircut, we see that even haircuts become a tradable service.

Page Ref: 17-21

Difficulty:  Difficult

 

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 10   The Political Economy of Trade Policy

 

10.1   The Case for Free Trade

 

1) The efficiency case made for free trade is that as trade distortions such as tariffs are dismantled and removed

  1. A) government tariff revenue will decrease, and therefore national economic welfare will decrease.
  2. B) government tariff revenue will decrease, and therefore national economic welfare will increase.
  3. C) deadweight losses for producers and consumers will decrease, hence increasing national economic welfare.
  4. D) deadweight losses for producers and consumers will decrease, hence decreasing national economic welfare.
  5. E) government tariff revenue will increase, hence increasing national economic welfare.

Answer:  C

Page Ref: 236-241

Difficulty:  Easy

 

2) The opportunity to exploit economies of scale is one of the gains to be derived by removing tariffs and other trade distortions. These gains will be the result of a decrease in

  1. A) world prices of imports.
  2. B) the consumption distortion loss triangle.
  3. C) the production distortion loss triangle.
  4. D) international labor mobility.
  5. E) excessive entry and inefficient business practices.

Answer:  E

Page Ref: 236-241

Difficulty:  Easy

 

3) Judging by the ongoing changes in tariff rates in major trading countries, the world has been experiencing a great

  1. A) trade liberalization.
  2. B) surge of protectionism.
  3. C) lack of progress in the trade-policy area.
  4. D) move towards regional integration.
  5. E) shift from export subsidies to specific tariffs.

Answer:  A

Page Ref: 236-241

Difficulty:  Easy

 

 

4) A trade policy designed to alleviate some domestic economic problem by exporting it to foreign countries is know as a(n)

  1. A) international dumping policy.
  2. B) countervailing tariff policy.
  3. C) beggar thy neighbor policy.
  4. D) trade adjustment assistance policy.
  5. E) redistribution quota policy.

Answer:  C

Page Ref: 236-241

Difficulty:  Easy

5) Trade theory suggests that Japan would gain from a subsidy the United States provides its grain farmers if the gains to Japanese consumers of wheat products more than offsets the losses to Japanese wheat farmers. This would occur as long as Japan

  1. A) is a net importer in bilateral trade flows with the United States.
  2. B) is a net importer of wheat.
  3. C) has a comparative advantage in wheat.
  4. D) has an absolute advantage in producing wheat.
  5. E) is involved in intra-industry trade with the United States.

Answer:  B

Page Ref: 236-241

Difficulty:  Easy

 

6) It is argued that the United States would be foolish to maintain a free-trade stance in a world in which all other countries exploit child or prisoner labor, or are protectionist. On the other hand, Ricardos classic demonstration of the sources and effects of comparative advantage cogently demonstrates that regardless of other country policy, free trade remains the first best policy for a country to follow, since it will maximize its consumption possibilities (conditional upon other country policies). Explain. Discuss the contradiction with the argument in the preceding paragraph.

Answer:  In the context of the Ricardian model, it is true that gains from trade are strictly a result of world terms of trade, which differ from domestic marginal rates of substitution. In such a world, the reason why foreign goods are cheap is of no concern to domestic consumers. However, in a world which allows for large-scale labor migration, ignoring labor conditions abroad may ultimately result in living standards for domestic workers to be dragged down.

Page Ref: 236-241

Difficulty:  Moderate

 

 

10.2   National Welfare Arguments Against Free Trade

 

1) The optimum tariff is

  1. A) the best tariff a country can obtain via a WTO negotiated round of compromises.
  2. B) the tariff, which maximizes the terms of trade gains.
  3. C) the tariff, which maximizes the difference between terms of trade gains and terms of trade loses.
  4. D) not practical for a small country due to the likelihood of retaliation.
  5. E) not practical for a large country due to the likelihood of retaliation.

Answer:  E

Page Ref: 242

Difficulty:  Easy

 

2) The optimum tariff is most likely to apply to

  1. A) a small tariff imposed by a small country.
  2. B) a small tariff imposed by a large country.
  3. C) a large tariff imposed by a small country.
  4. D) a large tariff imposed by a large country.
  5. E) an ad valorem tariff on a small country.

Answer:  B

Page Ref: 242

Difficulty:  Easy

3) The prohibitive tariff is a tariff that

  1. A) is so high that it eliminates imports.
  2. B) is so high that it causes undue harm to trade-partner economies.
  3. C) is so high that it causes undue harm to import competing sectors.
  4. D) is so low that the government prohibits its use since it would lose an important revenue source.
  5. E) is so low that it causes domestic producers to leave the industry.

Answer:  A

Page Ref: 242

Difficulty:  Easy

 

4) The existence of marginal social benefits which are not marginal benefits for the industry producing the import substitutes

  1. A) is an argument supporting free trade and non-governmental involvement.
  2. B) is an argument supporting the use of an optimum tariff.
  3. C) is an argument supporting the use of market failures as a trade-policy strategy.
  4. D) is an argument rejecting free trade and supporting governmental involvement.
  5. E) is an argument rejecting the domestic market failure concept.

Answer:  D

Page Ref: 242-246

Difficulty:  Easy

 

 

5) The domestic market failure argument is a particular case of the theory of

  1. A) the optimum, or first-best.
  2. B) the second best.
  3. C) the third best.
  4. D) the sufficing principle.
  5. E) the efficiency case for free trade.

Answer:  B

Page Ref: 242-246

Difficulty:  Easy

 

6) The difficulty of ascertaining the right second-best trade policy to follow

  1. A) reinforces support for the third-best policy approach.
  2. B) reinforces support for increasing research capabilities of government agencies.
  3. C) reinforces support for abandoning trade policy as an option.
  4. D) reinforces support for free-trade options.
  5. E) reinforced support for the domestic market failure argument.

Answer:  D

Page Ref: 242-246

Difficulty:  Easy

 

7) The reason protectionism remains strong in the United States is that

  1. A) economists can produce any result they are hired to produce.
  2. B) economists cannot persuade the general public that free trade is beneficial.
  3. C) economists do not really understand how the real world works.
  4. D) the losses associated with protectionism are diffuse, making lobbying by the public impractical.
  5. E) economists cannot agree on trade policy recommendations.

Answer:  D

Page Ref: 242-246

Difficulty:  Easy

8) The United States appears at times to have a totally schizophrenic attitude toward protectionism. The United States was the country that proposed the establishment of the World Trade Organization as early as the late 1940s, and was also the only industrialized country that refused to ratify this at that time. The United States has consistently argued on the side of multinational free trade in GATT Rounds, and yet maintains many protectionist laws such as those which reserve oil shipments from Alaska to U.S. flag carriers. How can you explain this apparent lack of national consistency on this issue?

Answer:  This reflects the fact that international trade typically has many winners and relatively fewer, but politically powerful losers. Short of guaranteed (constitutional?) non-conditional compensatory mechanisms, the basic conflict between these two groups will always be there.

Page Ref: 242-246

Difficulty:  Moderate

 

 

Assume that Boeing (U.S.) and Airbus (European Union) both wish to enter the Hungarian market with the next new generation airliner. They both have identical cost and demand conditions (as indicated in the graph above).

 

9) Refer to above figure. Assume that Boeing is the first to enter the Hungarian market. Without a government subsidy what price would they demand, and what would be their total profits?

Answer:  $12 Million, $16.

Page Ref: 242-246

Difficulty:  Moderate

 

10) Refer to above figure. What is the consumer surplus enjoyed by Hungarian consumers of Boeing aircraft in the situation?

Answer:  $8 Million.

Page Ref: 242-246

Difficulty:  Moderate

11) Refer to above figure. Suppose the European government provides Airbus with a subsidy of $4 for each airplane sold, and that the subsidy convinces Boeing to exit the Hungarian market. Now Airbus would be the monopolist in this market. What price would they charge, and what would be their total profits?

Answer:  $10 Million, and $36 Million.

Page Ref: 242-246

Difficulty:  Moderate

 

12) Refer to above figure. What would be the cost of the subsidy to European taxpayers?

Answer:  $24 Million.

Page Ref: 242-246

Difficulty:  Moderate

 

 

13) Refer to above figure. What happens to the Consumer Surplus of Hungarian customers as a result of this subsidy?

Answer:  An increase of $10 Million.

Page Ref: 242-246

Difficulty:  Moderate

 

14) Refer to above figure. What is the revenue gain or loss for Europe as a whole (including taxpayers)?

Answer:  A gain of $12 Million.

Page Ref: 242-246

Difficulty:  Moderate

 

10.3   Income Distribution and Trade Policy

 

1) It is argued that special interest groups are likely to take over and promote protectionist policies, which may lead to a decrease in national economic welfare. This argument leads to

  1. A) a presumption that in practice a free trade policy is likely to be better than alternatives.
  2. B) a presumption that trade policy should be shifted to Non-Governmental Organizations, so as to limit taxpayer burden.
  3. C) a presumption that free trade is generally a second-best policy, to be avoided if feasible alternatives are available.
  4. D) a presumption that free trade is the likely equilibrium solution if the government allows special interest groups to dictate its trade policy.
  5. E) a presumption that protectionist policies will better serve a country as a whole than free trade policies.

Answer:  A

Page Ref: 246-251

Difficulty:  Easy

 

2) The authors of the text believe that

  1. A) second-best policy is worse than optimal policy.
  2. B) special interest groups generally enhance national welfare.
  3. C) national welfare is likely to be enhanced by the imposition of an optimal tariff.
  4. D) market failure arguments tend to support free-trade policy.
  5. E) there is no such thing as national welfare.

Answer:  D

Page Ref: 246-251

Difficulty:  Easy

 

3) The median voter model

  1. A) works well in the area of trade policy.
  2. B) is not intuitively reasonable.
  3. C) tends to result in biased tariff rates.
  4. D) does not work well in the area of trade policy.
  5. E) is not widely practiced in the United States.

Answer:  D

Page Ref: 246-251

Difficulty:  Easy

 

4) The fact that trade policy often imposes harm on large numbers of people, and benefits only a few may be explained by

  1. A) the lack of political involvement of the public.
  2. B) the power of advertisement.
  3. C) the problem of collective action.
  4. D) the basic impossibility of the democratic system to reach a fair solution.
  5. E) a cycle of political corruption.

Answer:  C

Page Ref: 246-251

Difficulty:  Easy

 

5) Protectionism tends to be concentrated in two sectors

  1. A) agriculture and clothing.
  2. B) high-tech and national security sensitive industries.
  3. C) capital and skill intensive industries.
  4. D) industries concentrated in the South and in the Midwest of the country.
  5. E) financial services and manufacturing based in the Midwest.

Answer:  A

Page Ref: 246-251

Difficulty:  Easy

 

6) Export embargoes cause greater losses to consumer surplus in the target country

  1. A) the lesser its initial dependence on foreign produced goods.
  2. B) the more elastic is the target countrys demand schedule.
  3. C) the more elastic is the target countrys domestic supply.
  4. D) the more inelastic the target countrys supply.
  5. E) the larger the target countrys labor force is.

Answer:  D

Page Ref: 246-251

Difficulty:  Easy

 

 

7) The strongest political pressure for a trade policy that results in higher protectionism comes from

  1. A) domestic workers lobbying for import restrictions.
  2. B) domestic workers lobbying for export restrictions.
  3. C) domestic workers lobbying for free trade.
  4. D) domestic consumers lobbying for export restrictions.
  5. E) domestic consumers lobbying for import restrictions.

Answer:  A

Page Ref: 246-251

Difficulty:  Easy

8) The average tariff rate dutiable imports in the United States is approximately

  1. A) less than 10 % of the value of imports.
  2. B) 15% of the value of imports.
  3. C) 20 % of the value of imports.
  4. D) 25% of the value of imports.
  5. E) more than 30% of the value of imports.

Answer:  A

Page Ref: 246-251

Difficulty:  Easy

 

9) In 1990 the United States imposed trade embargoes on Iraqs international trade. The negative effect on Iraqs consumer surplus would be greater the

  1. A) less elastic Iraqs demand schedule.
  2. B) more elastic Iraqs demand schedule.
  3. C) greater Iraqs dependence on foreign products.
  4. D) more inelastic Iraqs supply schedule.
  5. E) less elastic Iraqs labor force is.

Answer:  B

Page Ref: 246-251

Difficulty:  Easy

 

10) Today U.S. protectionism is concentrated in

  1. A) high-tech industries.
  2. B) labor-intensive industries.
  3. C) industries in which Japan has a comparative advantage.
  4. D) computer intensive industries.
  5. E) capital-intensive industries.

Answer:  B

Page Ref: 246-251

Difficulty:  Easy

 

 

11) The quantitative importance of U.S. protection of the domestic clothing industry is best explained by the fact that

  1. A) this industry is an important employer of highly skilled labor.
  2. B) this industry is an important employer of low skilled labor.
  3. C) most of the exporters of clothing into the U.S. are poor countries.
  4. D) this industry is a politically well organized sector in the U.S.
  5. E) the technology involved is very advanced.

Answer:  D

Page Ref: 246-251

Difficulty:  Easy

12) It may be demonstrated that any protectionist policy, which effectively shifts real resources to import competing industries or sectors will harm export industries or sectors. This may, for example, happen by the strengthening U.S. dollar in the foreign exchange market. Would you propose therefore that export industries lobby against protectionism in International Trade Commission proceedings? What of consumer advocates? Discuss the pros and the problems of such a suggestion.

Answer:  Actually this is an interesting idea. It is well known that the public interest is put on hold as the ITC considers only the squeaky wheels of those allegedly hurt by trade. While consumers may be too amorphous a group to successfully organize and pursue a political agenda, the exporters and consumer advocates may be able to form a counter weight to the import competing industries.

Page Ref: 246-251

Difficulty:  Moderate

 

10.4   International Negotiations and Trade Policy

 

1) The simple model of competition among political parties long used by political scientists tends to lead to the practical solution of selecting the

  1. A) optimal tariff.
  2. B) prohibitive tariff.
  3. C) zero (free-trade) tariff.
  4. D) the tariff rate favored by the median voter.
  5. E) the tariff rate supported by exporters.

Answer:  D

Page Ref: 252-261

Difficulty:  Easy

 

 

2) The General Agreement on Tariffs and Trade and the World Trade Organization have resulted in

  1. A) termination of export subsidies applied to manufactured goods.
  2. B) termination of import tariffs applied to manufactures.
  3. C) termination of import tariffs applied to agricultural commodities.
  4. D) termination of international theft of copyrights.
  5. E) a number of rounds of multilateral trade agreements.

Answer:  E

Page Ref: 252-261

Difficulty:  Easy

 

3) The General Agreement on Tariffs and Trade and the World Trade Organization have resulted in

  1. A) the establishment of universal trade adjustment assistance policies.
  2. B) the establishment of the European Union.
  3. C) the reciprocal trade clause.
  4. D) reductions in trade barriers via multilateral negotiations.
  5. E) the total protection of all intellectual property rights.

Answer:  D

Page Ref: 252-261

Difficulty:  Easy

4) Countervailing duties are intended to neutralize any unfair advantage that foreign exporters might gain because of foreign

  1. A) tariffs.
  2. B) subsidies.
  3. C) quotas.
  4. D) Local-Content legislation.
  5. E) comparative advantage.

Answer:  B

Page Ref: 252-261

Difficulty:  Easy

 

5) In 1980 the United States announced an embargo on grain exports to the Soviet Union in response to the Soviet invasion of Afghanistan. This embargo was mainly resisted by

  1. A) U.S. grain consumers of bread.
  2. B) U.S. grain producers.
  3. C) foreign grain producers.
  4. D) U.S. communists.
  5. E) economists concerned with U.S. terms of trade.

Answer:  B

Page Ref: 252-261

Difficulty:  Easy

 

 

6) Under U.S. commercial policy, the escape clause results in

  1. A) temporary quotas granted to firms injured by import competition.
  2. B) tariffs that offset export subsidies granted to foreign producers.
  3. C) a refusal of the U.S. to extradite anyone who escaped political oppression.
  4. D) tax advantages extended to minority-owned exporting firms.
  5. E) tariff advantages extended to certain Caribbean countries in the U.S. market.

Answer:  A

Page Ref: 252-261

Difficulty:  Easy

 

7) Under U.S. commercial policy, which clause permits the modification of a trade liberalization agreement on a temporary basis if serious injury occurs to domestic producers as a result of the agreement?

  1. A) adjustment assistance clause
  2. B) escape clause
  3. C) most favored nation clause
  4. D) prohibitive tariff clause
  5. E) anti-dumping legislation

Answer:  B

Page Ref: 252-261

Difficulty:  Easy

8) An issue never confronted effectively by GATT, but considered an important issue for WTO is that of

  1. A) the promotion of freer World trade.
  2. B) the promotion of freer World commodity trade.
  3. C) the promotion of freer World services trade.
  4. D) the lowering of tariff rates.
  5. E) the liberalization of trade.

Answer:  C

Page Ref: 252-261

Difficulty:  Easy

 

9) The political wisdom of choosing a tariff acceptable to the median U.S. voter is

  1. A) a good example of the principle of the second best.
  2. B) a good example of the way in which actual tariff policies are determined.
  3. C) a good example of the principle of political negotiation.
  4. D) not evident in actual tariff determination.
  5. E) usually evident in actual tariff determination.

Answer:  D

Page Ref: 252-261

Difficulty:  Easy

 

 

10) A game-theory explanation of the paradox that even though all countries would benefit if each chose free trade, in fact each tends to follow protectionist policies is

  1. A) trade war.
  2. B) collective action.
  3. C) prisoners dilemma.
  4. D) benefit-cost analysis.
  5. E) rent seeking.

Answer:  C

Page Ref: 252-261

Difficulty:  Easy

 

11) When the U.S. placed tariffs on French wine, France placed high tariffs on U.S. chickens. This is an example of

  1. A) deadweight losses.
  2. B) multilateral negotiations.
  3. C) bilateral trade negotiations.
  4. D) international market failures.
  5. E) a trade war.

Answer:  E

Page Ref: 252-261

Difficulty:  Easy

12) Presumably, since the United States is a large country in many of its international markets, a positive optimum tariff exists for this country. It follows therefore that when any legislator or government official who promotes zero-tariff free trade policies, is by definition not acting in the publics best interest. Discuss.

Answer:  Technically this is true. However, this is true only within the context of a generally myopic view of international relations. If the tariff imposing country is large enough to make a substantial difference in its welfare by seeking an optimum tariff, then it cannot hope to remain invisible, as its policies are substantially harming its trade partners. Foreign repercussions are almost a certainty. In such a game it is not at all certain that seeking the optimum tariff dominates alternative strategies.

Page Ref: 252-261

Difficulty:  Moderate

 

13) It has been claimed that foreign governments have attempted to influence votes in the U.S. that would promote policies of protectionism within the U.S. On the surface this appears to be totally illogical and counter intuitive, as this would presumably lessen the possibilities of foreigners exports to the U.S.

Answer:  This would make sense only if the form of protectionism is a tariff. However, if it is a quota, then the scarcity rents may be captured by established foreign producers. Hence, the reaction of the Japanese to automobile quotas was to dramatically increase the high-end, highly profitable automobiles. This would be even more self-evident if the protectionism took the form of a Voluntary Export Restraint (VER), or a detailed formalized bilateral cartel, such as the old Multi-Fibre Agreement.

Page Ref: 252-261

Difficulty:  Moderate

 

14) The U.S. producer Boeing, and the European Airbus are contemplating the next generation mid-sized fuel efficient generation of air carrier. If both produce their respective models, then each would lose $50 million (because the world market is just not large enough to enable either to capture potential scale economies if they had to share the world market). If neither produce, then each ones net gain would of course be zero. If either one produces while the other does not, then the producer will gain $500 million.

(a)  What is the correct strategy for either company?

(b)  What is the correct strategy for a government seeking to maximize national economic welfare?

(c)  If a national government decides to subsidize its aircraft producer, how high should be the subsidy?

Answer:

(a)  enter the market first. Then the other company knows that if it also enters, it will not be able to cover costs.

(b)  Subsidize its producer. If this allows it to enter first, then we get the same solution as answer (a) above.

(c)  Any figure above $50 million (e.g., $55 million). This would promise positive profits regardless of the decision of the competitor. The winner then may turn out to be that country whose voters are least sensitive to on-the-books, transparent subsidies given to rich corporations (these subsidies will have to continue year after year until the other country stops its subsidies).

Page Ref: 252-261

Difficulty:  Moderate

15) In recent cases, the U.S. placed quotas or protectionist tariffs on imported steel and imported microchips. In both cases the damage to downstream industries was obvious to all and relatively easy to quantify and demonstrate. Assuming that the U.S. lawmakers are not plain dumb, why did they enact these protectionist policies?

Answer:  The system by which these protectionist policies are set into law is biased in favor of the producers of import competitive goods. Other sectors of the economy that may be affected are not parties in the petitions made to the ITC seeking redress.

Page Ref: 252-261

Difficulty:  Moderate

 

16) The World Trade Organization (WTO) was organized as a successor to the

  1. A) IMF.
  2. B) UN.
  3. C) UNCTAD.
  4. D) GATT.
  5. E) the World Bank.

Answer:  D

Page Ref: 252-261

Difficulty:  Easy

 

 

17) The WTO was established by the ________ of multilateral trade negotiations.

  1. A) Kennedy Round
  2. B) Tokyo Round
  3. C) Uruguay Round
  4. D) Dillon Round
  5. E) NAFTA Round

Answer:  C

Page Ref: 252-261

Difficulty:  Easy

 

18) The Smoot-Hawley Tariff Act of 1930 has generally been associated with

  1. A) falling tariffs.
  2. B) free trade.
  3. C) intensifying the worldwide depression.
  4. D) recovery from the worldwide depression.
  5. E) non-tariff barriers.

Answer:  C

Page Ref: 252-261

Difficulty:  Easy

 

19) The World Trade Organization provides for all of the following EXCEPT

  1. A) the usage of the most favored nation clause.
  2. B) assistance in the settlement of trade disagreements.
  3. C) bilateral tariff reductions.
  4. D) multilateral tariff reductions.
  5. E) the prevention of nontariff interventions in trade.

Answer:  C

Page Ref: 252-261

Difficulty:  Easy

20) Which organization determines procedures for the settlement of international trade disputes?

  1. A) World Bank
  2. B) World Trade Organization
  3. C) International Monetary Organization
  4. D) International Bank for Reconstruction and Development
  5. E) The League of Nations

Answer:  B

Page Ref: 252-261

Difficulty:  Easy

 

 

21) The WTOs intervention against clean air standards

  1. A) has earned it universal approval.
  2. B) was done in order to limit national sovereignty.
  3. C) has resulted in much criticism.
  4. D) has resulted in much criticism among professional economists.
  5. E) was championed in developing countries.

Answer:  C

Page Ref: 252-261

Difficulty:  Easy

 

10.5   The Doha Disappointment

 

1) For most developing countries

  1. A) productivity is high among domestic workers.
  2. B) population growth and illiteracy rates are low.
  3. C) saving and investment levels are high.
  4. D) agricultural goods and raw materials constitute a high proportion of domestic output.
  5. E) pollution emissions are relatively low.

Answer:  D

Page Ref: 261-267

Difficulty:  Moderate

 

2) Developing countries have often attempted to establish cartels so as to counter the actual or perceived inexorable downward push on the prices of their exported commodities. OPEC is the best well known of these. How are such cartels expected to help the developing countries? At times importing countries profess support for such schemes. Can you think of any logical basis for such support? How are cartels like monopolies, and how are they different from monopolies. Why is there a presupposition among economists that such schemes are not likely to succeed in the long run?

Answer:  Such cartels are expected to shift the exporters terms of trade in their favor. Also they are expected to produce the maximum profit, which the market will bear. Importing countries may benefit from the price stability generated by the cartel. Cartels are like monopolies in that their total output is the same as that which would be generated by a single monopoly. They differ from monopolies in that the monopoly profits need to be divided among the producing countries, which have different cost structures.

Page Ref: 261-267

Difficulty:  Moderate

 

3) The U.S. is probably the most open international market among the industrialized countries. What then does the U.S. have to gain by joining the WTO?

Answer:  There are two answers. First, the U.S. exporters stand to gain profitable markets if foreign protectionism in areas of U.S. comparative advantage (e.g., soy) is removed due to WTO efforts. The second is that the WTO offers the U.S. government administration a counterweight to regional and sectoral interests demanding protection. It is always politically easier to bring about more efficient resource allocations if the complaints of the losers may be deflected by the presence of a binding treaty with an international organization (our hands are tied).

Page Ref: 261-267

Difficulty:  Moderate

 

4) The world trading system combines negotiated agreements that promote trade liberalization called ________ with binding agreements called ________ that block tariff increases.

  1. A) fiscal policies; monetary policies
  2. B) truces; aggressions
  3. C) free trade; enforcement contracts
  4. D) levers; ratchets
  5. E) wheels; walls

Answer:  D

Page Ref: 261-267

Difficulty:  Moderate

 

5) One of the major issues that arose during the Doha round of negotiations involved complaints by ________ about ________.

  1. A) developing countries; agricultural subsidies.
  2. B) manufacturers; intellectual property
  3. C) industrialized countries; enforcement of contracts
  4. D) Eastern European countries; European Union tariffs
  5. E) South and Central American countries; domestic content requirements

Answer:  A

Page Ref: 261-267

Difficulty:  Moderate

 

10.6   Appendix to Chapter 10: Proving That the Optimum Tariff Is Positive

 

1) The effect of an export tariff on a large country is to ________ the terms of trade.

  1. A) always improve
  2. B) sometimes improve
  3. C) leave unchanged
  4. D) sometimes worsen
  5. E) always worsen

Answer:  A

Page Ref: 272-274

Difficulty:  Easy

 

 

2) Assume that a country has a domestic demand curve defined as Qd = 100 2P and a domestic supply curve defined as Qs = -20 + 3P. What is the autarchy equilibrium price and quantity?

Answer:  100 2P = -20 + 3P => P = 120/5 = 24 and Q = 52

Page Ref: 272-274

Difficulty:  Moderate

3) Assume that a country has a domestic demand curve defined as Qd = 100 2P and a domestic supply curve defined as Qs = -20 + 3P. What is the countrys import demand curve (Qm)?

Answer:  Qm = Qd Qs = (100 2P) (-20 + 3P) = 120 5P

Page Ref: 272-274

Difficulty:  Moderate

 

4) Refer to the figure above, which shows domestic supply and demand. If P1 is equal to P2 (the world price) plus a tariff, then the social loss from the tariff is equal to

  1. A) a + c
  2. B) b
  3. C) P1( Q3- Q2)
  4. D) P2[(Q2- Q1) + (Q4  Q3)]
  5. E) a + b + c

Answer:  A

Page Ref: 272-274

Difficulty:  Easy

 

5) Refer to the figure above, which shows domestic supply and demand. If P1 is equal to P2 (the world price) plus a tariff, then government revenue from the tariff is equal to

  1. A) a + c
  2. B) b
  3. C) P1( Q3- Q2)
  4. D) P2[(Q2- Q1) + (Q4  Q3)]
  5. E) a + b + c

Answer:  B

Page Ref: 272-274

Difficulty:  Easy

 

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 22 (11)   Developing Countries: Growth, Crisis, and Reform

 

22.1   Income, Wealth, and Growth in the World Economy

 

1) The worlds economies can be divided into four main categories according to their annual per-capita income levels. Which one of the following is NOT one of the categories?

  1. A) low-income
  2. B) upper middle-income
  3. C) high-income
  4. D) lower middle-income
  5. E) middle-income

Answer:  E

Page Ref: 670-674

Difficulty:  Easy

 

2) Average per-capita GDP in the richest, most prosperous economies is ________ times that of the average in the ________ economies.

  1. A) 95, low (poorest) income
  2. B) 95, lower-middle income
  3. C) 73, lower-middle income
  4. D) 44, low (poorest) income
  5. E) 69, low (poorest) income

Answer:  E

Page Ref: 670-674

Difficulty:  Easy

 

3) Compared with industrialized economies, most developing countries are poor in the factors of production essential to modern industry: These factors are

  1. A) capital and skilled labor.
  2. B) capital and unskilled labor.
  3. C) fertile land and unskilled labor.
  4. D) fertile land and skilled labor.
  5. E) water and capital.

Answer:  A

Page Ref: 670-674

Difficulty:  Easy

 

4) The main factors that discourage investment in capital and skills in developing countries are

  1. A) political instability, insecure property rights.
  2. B) political instability, insecure property rights, misguided economic policies.
  3. C) political instability, misguided economic policies.
  4. D) political instability.
  5. E) insecure property rights, misguided economic policies.

Answer:  B

Page Ref: 670-674

Difficulty:  Easy

5) The per-capita GNP of the industrial group is about ________ times that of the upper middle-income countries.

  1. A) 6
  2. B) 10
  3. C) 15
  4. D) 19
  5. E) 2

Answer:  A

Page Ref: 670-674

Difficulty:  Easy

 

6) When one compares per-capital output growth rates among countries

  1. A) one needs to correct the data to account for departures from purchasing power parity.
  2. B) such corrections are often not necessary.
  3. C) such corrections are sometimes necessary.
  4. D) the evidence whether such corrections are necessary are vague.
  5. E) such corrections are not necessary.

Answer:  A

Page Ref: 670-674

Difficulty:  Easy

 

7) Over the period 1960-2010, the United States economy grew at roughly

  1. A) 2.1 percent.
  2. B) 3 percent.
  3. C) 4 percent.
  4. D) one percent.
  5. E) 3.5 percent.

Answer:  A

Page Ref: 670-674

Difficulty:  Easy

 

8) Over the period 1960-2000, France grew ________ than the United States economy

  1. A) 2 % slower.
  2. B) 2% faster.
  3. C) more than 2% slower.
  4. D) less than 2% faster.
  5. E) more than 2% faster.

Answer:  D

Page Ref: 670-674

Difficulty:  Easy

 

 

9) Over the post-war era, the gaps between industrial countries living standards

  1. A) disappeared.
  2. B) stayed the same.
  3. C) increased.
  4. D) decreased.
  5. E) fluctuated.

Answer:  D

Page Ref: 670-674

Difficulty:  Easy

10) Over the post-war era, the gaps between countries living standards

  1. A) disappeared.
  2. B) stayed the same.
  3. C) increased.
  4. D) decreased.
  5. E) changed inconsistently.

Answer:  E

Page Ref: 670-674

Difficulty:  Easy

 

11) Over the post-war era, poorer countries grew

  1. A) faster.
  2. B) slower.
  3. C) stayed the same.
  4. D) grew faster, then grew slower.
  5. E) No general tendency can be found.

Answer:  E

Page Ref: 670-674

Difficulty:  Easy

 

12) Since 1960, countries in Africa have grown at rates ________ those of the main industrial countries.

  1. A) far below
  2. B) far above
  3. C) about the same
  4. D) slightly below
  5. E) slightly above

Answer:  A

Page Ref: 670-674

Difficulty:  Easy

 

 

13) Since 1960, South Korea and Singapore enjoyed an average per-capita growth rates ________ the average industrialized world.

  1. A) far below
  2. B) far above
  3. C) about the same
  4. D) slightly below
  5. E) slightly above

Answer:  B

Page Ref: 670-674

Difficulty:  Easy

 

14) Until recently, per-capita income increased in East Asian countries such as Hong Kong, Singapore, South Korea, and Taiwan by ________-fold every generation

  1. A) 2
  2. B) 3
  3. C) 4
  4. D) 5
  5. E) 1

Answer:  D

Page Ref: 670-674

Difficulty:  Easy

15) Between 1960 and 2010, the annual growth rate in percent per year was the highest in

  1. A) China.
  2. B) United States.
  3. C) Brazil.
  4. D) Singapore.
  5. E) South Korea.

Answer:  A

Page Ref: 670-674

Difficulty:  Easy

 

16) What is the basic problem of developing countries?

  1. A) corruption
  2. B) murder
  3. C) poverty
  4. D) stock market
  5. E) natural resources

Answer:  C

Page Ref: 670-674

Difficulty:  Easy

 

 

17) How would you describe the world distribution of income?

  1. A) persistently unequal
  2. B) temporarily unequal
  3. C) converging
  4. D) fairly equal
  5. E) completely unpredictable

Answer:  A

Page Ref: 670-674

Difficulty:  Easy

 

18) How would you define convergence?

  1. A) tendency for gaps between industrial countries per-capital incomes to narrow
  2. B) tendency for gaps between all countries per-capital incomes to narrow
  3. C) the theory that a crisis in a low-income country will spread to all countries, regardless of debt structure
  4. D) the theory that a crisis in a low-income country will spread to only those countries which had lent money to the original country
  5. E) tendency for the world distribution of income to be persistently unequal

Answer:  A

Page Ref: 670-674

Difficulty:  Easy

 

19) Which of the following countries had a larger growth rate since 1960?

  1. A) U.S.
  2. B) Senegal
  3. C) South Korea
  4. D) Kamul
  5. E) Colombia

Answer:  C

Page Ref: 670-674

Difficulty:  Easy

20) What explains the sharply divergent long-run growth patterns?

Answer:  The answer lies in the economic and political features of developing countries and the way these have changed over time in response to both world events and internal pressures.

Page Ref: 670-674

Difficulty:  Moderate

 

21) Explain the theory behind convergence and why it is a deceptively simple theory.

Answer:  Convergence is the tendency for gaps between industrialized countries living standards (i.e. per capita income) to narrow. If trade is free, if capital can move to countries offering the highest returns, and if knowledge itself moves across political borders so that countries always have access to new production technologies, then there is no reason for international income differences to persist for long. Some differences, however, do exist because of policy differences across industrial countries.

Page Ref: 670-674

Difficulty:  Moderate

 

22) Explain what the four main categories of world economies are and give examples?

Answer:  The four main categories of the world economies are categorized by annual per-capita income levels. Low-income economies which include India, Pakistan, and much of the sub-Saharan Africa. Lower middle income includes most Middle Eastern Countries, Latin American, Caribbean countries, the former Soviet countries and the most of the African countries. The upper middle income economies which are Latin American countries, Saudi Arabia, Malaysia, South Africa, Poland, Hungary, Czech and the Slovak Republic. The last category is the high-income economies such as Korea, Israel, Kuwait, Singapore and the United states.

Page Ref: 670-674

Difficulty:  Moderate

 

23) Please consider Table 22-2 below.

 

Assuming constant Annual Average Growth Rate in the future, calculate the output per capita for the United States and South Korea for the year 2040.

Answer:  Since 2040 2000 = 2000 1960, then

output per capita for U.S.       = 34365 * (34365 / 1544)

= 90,633

output per capita for South Korea      = 15702 * (15702 / 1544)

= 159,685

Page Ref: 670-674

Difficulty:  Moderate

 

24) Please consider Table 22-2 below.

 

At that Annual Average Growth Rate, how many years does it take for the output per capita to double in both the United States and South Korea.

 

Answer:  United States

(1 + 0.025)t = 2

t = ln(2) / ln(1.025)

= 28 years

South Korea

(1 + 0.06)t = 2

t = ln(2) / ln(1.06)

= 12 years

 

(short-cut-rule of 69)

United States

t 69 / 2.5 = 28 years

South Korea

t 69 / 6 = 12 years

Page Ref: 670-674

Difficulty:  Moderate

 

25) Please consider Table 22-2 below.

 

Assuming constant Annual Average Growth Rate in the future, determine the year in which the United States will have the same output per capita as South Korea?

Answer:  (34,365) (1 + 0.025)t-2000 = (15,702) (1 + 0.06)t-2000

(34,365) / (15,702) = [(1.06) / (1.025)]t-2000

t 2000 = ln[(34,365) / (15,702)] / ln[(1.06) / (1.025)]

t = 2023

Page Ref: 670-674

Difficulty:  Moderate

 

22.2   Structural Features of Developing Countries

 

1) While many developing countries have reformed their economies in order to imitate the success of the successful industrial economies, the process remains incomplete and most developing countries tend to be characterized by all of the following EXCEPT

  1. A) seigniorage.
  2. B) control of capital movements by limiting foreign exchange transactions connected with trade in assets.
  3. C) use of natural resources or agricultural commodities as an important share of exports.
  4. D) a worse job of directing savings toward their most efficient investment uses.
  5. E) reduced corruption and poverty due to limited underground markets.

Answer:  E

Page Ref: 674-677

Difficulty:  Easy

 

2) In general, one would expect that life expectancies reflect international differences in income levels. Do the data support such a cla

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