MCQ:

Use the following Scenario to answer Questions 1-2:

Japan and Korea operate in a Heckscher-Ohlin world. Each country produces two goods, cars and software. Cars are relatively capital intensive and Korea is relatively labor abundant.

1.Consider Korea is a small country and Japan is a large country. Suppose the amount of capital in

Korea decreases. Then you expect that _______.

a. the welfare of Korea unambiguously falls

b. the welfare change in Japan is ambiguous

c. relative price of software in terms of cars (PSoftware/ PCars) increases

d. PSoftware/ PCarsdecreases

e. Both (A) and (B) are correct.

2.Consider both Japan and Korea are large countries. Suppose the capital endowment in Korea

increases. Then you expect that __________.

a. the terms of trade of both countries do not change

b. the terms of trade of Japan improves

c. the welfare of Korea unambiguously falls

d. the welfare of Japan unambiguously rises

e. None of the above.

Which of the following statements is TRUE?

a. Free trade is beneficial only if your country is strong enough to stand up to foreign competition.

b. Free trade is beneficial only if your competitor does not pay unreasonably low wages.

c. Free trade can be beneficial to the economic welfare of all countries involved.

d. Free trade is beneficial only if both countries have access to the same technology.

e. Free trade is never beneficial for developing countries.

In trade, if - due to technology - Japan can produce cars with fewest resources, it is known as a(n):

A. comparative advantage.

B. absolute advantage.

C. technology advantage.

D. factor abundance.

E. technology abundance.