COMM 498

Sauder School of Business

University of British Columbia Second Term

Midterm Practice

Sample Questions with Answers

January, 2015

NOTE: this practice exam DOES NOT have the same length or the exact same distribution as the
midterm exam. This just meant to serve as a practice for students

Part I. Multiple Choice: There are 4 questions. Each question has at least 1 correct response. However,
some questions have more than one correct response. There are 10 correct responses in total. Each
correct response is worth 2 marks. You may choose as many correct responses as you wish, up to 10. If
you choose more than 10 responses, you will lose 2 marks for each extra response. Your best strategy is
to make exactly 10 responses.

On this page, please circle the answers that you believe to be correct. Answers must be recorded on this
page only. Markings on the question pages will not be graded.

1. (a.) (b.) c. d. (e.)

2. a. (b.) c. (d.) e.
3. a. (b.) (c.) d. e.
4. (a.) b. (c.) d. (e.)

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 COMM 498
Sauder School of Business
University of British Columbia Second Term

1) Consider two countries (Sauderlandia and Buchananlandia) that trade with each other.
Assume there are no other countries in the world and labour is the only input. Productivities
per hour in the three goods are shown in the first three data columns and wages per hour are
in the last column.

Bridles Horseshoes Saddles Wages (gold

pieces)
Sauderlandia 5 15 20 6
Buchananlandia 10 20 30 9

Which situations below are consistent with each country’s competitive advantages?

a. Buchananlandia and Sauderlandia can both gain from trading with each other
b. Buchananlandia will export bridles to Sauderlandia and import horseshoes
c. Buchananlandia will export saddles and import horseshoes and bridles from Sauderlandia
d. Sauderlandia will import all three goods because it has comparatively lower productivity (high
opportunity cost)
e. There are no gains from trade in saddles

2) According to empirical research on international and interprovincial trade flows based on the
“Gravity Equation,” which of the following is correct:

a. The volume of trade between neighbouring British Columbia and Washington State should be about
the same as between neighbouring Ontario and Michigan.
b. Doubling distance between countries decreases trade by about half.
c. Trade flows are proportional to the economic size of the importing country, but not the exporting
country.
d. There remains a significant border effect after adjusting for distance and size of the economies
involved.
e. Distance effects on trade in goods were important before the 1990s but have since been eliminated
by the “communication revolution” (fax, internet, teleconferencing)

3) Which of the following is a positive entry in the U.S. current account?

a. Purchase of U.S. government bonds by a French company

b. Exports from the U.S. to Mexico
c. Dividend payments from IBM Mexico to IBM U.S.
d. Spending by US tourists in Paris.
e. The establishment of a branch office in the U.S. by a French MNE

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 COMM 498
Sauder School of Business
University of British Columbia Second Term

4) MFN tariffs in Canada are positive for chocolate bars, cars, and clothes. Which of the
following situations would allow for tariff free imports into Canada?

a. Chocolate bars produced in the United States by a Swiss company and shipped to Canada
b. A car made in Japan first imported into Seattle then shipped to Canada
c. Cars first imported by a Mexican company into Guadalajara from U.S then shipped to Canada
d. Clothes produced in China by a U.S. affiliate in China and shipped to Canada
e. Chocolate bars produced in the United States by a U.S. company and shipped to Canada

Part II. Short essays. Choose four of the following five statements and determine whether each is true,
false, or uncertain and briefly explain your answer. Your mark will mainly depend on the quality of your
explanation. For some questions, I have included background information. In writing your answer you
should assume that statements in italics are factually correct

1) “When agreeing on the terms for an export to an unfamiliar foreign buyer, the exporter should
insist that the deal is carried out on ‘open account,’ and that the price should be quoted in
home (export-country) currency.”

No. Unfamiliarity requires either a letter of credit, or payment in advance. L/C is better because it
protects buyer as well (which means greater willingness to pay from the buyer). Quoting in home
currency reduces exchange risk but may be unattractive to the buyer and force them to use forward
contracts to hedge. If your access to such contracts is good it may give you a competitive advantage to
quote in the buyer’s local currency, especially if that currency is highly liquid, like U.S. dollars or Euros.

2) A Canadian company, CanCo, is facing anti-dumping duties on its export of widgets from Canada
to the United States. The U.S. Department of Commerce has issued a preliminary finding that
CanCo is selling widgets below normal value. “The best strategy for CanCo is to exit the U.S.
market.”

Exiting is one of four strategies. The other three options are (1) concede/settle by raising the price; (2)
fight (in trade “courts”) the preliminary ruling through a NAFTA or WTO panel and/or fight to show that
dumped imports were not a cause of injury to 1the U.S. widget industry; (3) circumvent by investing in
the U.S. and producing there. Given the preeminence of the U.S. market, it is likely to be large enough
that CanCo would not to simply exit. Conceding might be a good idea if CanCo is happy with higher
prices. However, if it needs to charge low prices in the U.S. market for some reason, it makes sense to
contest the ruling. Circumvention by FDI is also possible but whether it is desirable depends on many
other considerations besides the ADD.

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 COMM 498
Sauder School of Business
University of British Columbia Second Term

Part III. Numerical Questions

1) Soccer ball manufacturing takes two steps. First, a bladder is made by blowing air into a mold
containing latex. Then synthetic leather panels (20 hexagons and 12 pentagons) are cut and
stitched together into covers into which the bladder is inserted. Each ball consists of one
bladder (B) and one cover (C). There 120 workers in the Malaysian factory and 1200 workers at
the Pakistan factory. In each factory a worker can stitch covers or mold bladders. The table
below depict the productivity in each country and task.

Tasks
Bladders (B) Covers (C)
Factory Malaysia 36 12
Pakistan 6 3

a. What allocation of worker tasks at each factory will maximize output given the number of
employees in each factory?

First determine who has comparative advantage in what. Opportunity costs will give our first clue to the
optimal strategy. We find that the op cost of covers is 3 bladders in Malaysia and 2 bladders in Pakistan
so Pakistan has comp. adv. in covers.

Notice that if Malaysia specializes on bladders, Pakistan cannot produce enough covers to match the
bladders produced in Malaysia even if all Pakistan workers produce covers. Then we guess Pakistan
should be the one to specialize in its comparative advantage activity.

So Pakistan will have LPB = 0 and LPC = 1200, resulting in 1200 ∗ 3 = 3600 covers. We need B = C so that
implies 36 LMB = 3600 and LMB = 100 just to match Pakistan production of covers.

Now with the remaining 20 workers in Malaysia factory we can produce complete balls by allocation
some workers to the production of covers and bladders.

36 LMB =12 LMc

36 LMB =12 (20-LMB )

So, 5 additional Malaysian workers will produce bladders, LMB = 5. The remaining 15 workers make
covers. Therefore, in total LMB = 100+5=105 and LMC = 15

Total output is 3600 + 12 ∗ 15 = 3780 soccer balls.

b. What is the increase in productivity relative to self-sufficiency?

Self-sufficient Malaysia requires 36 LMB = 12(120 − LMB) leading to LMB = 30 and therefore 30 ∗ 36 = 1080
soccer balls. self-sufficient Pakistan requires 6 LPB = 3(1200 – LPB) leading to LPB = 400 and therefore 400 ∗

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 COMM 498
Sauder School of Business
University of British Columbia Second Term

6 = 2400 soccer balls. Total output under self-sufficiency is 3480. The increase in productivity is
(3780−3480)/3480 = 0.086 or about 9%.

c. Calculate and depict on a line the range of relative wages where both plants should be operated
once workers can be hired and fired.

Malaysia’s relative wage expressed in a common currency (eWM/WP) should be between 12/3 = 4 and
36/6 = 6 times Pakistan’s. (Alternatively, Pakistan’s relative wage needs to be between 1/6 and 1/4 of
Malaysia’s.)

d. If wages are WP= 250 Pakistani rupee and WM= 50 Malaysian ringgit, what is the exchange rate e
(Pakistani rupee per Malaysian ringgit) that supports the operation of both plants?

The exchange rate e (Pakistani rupee per Malaysian ringgit) has to be higher than 20 and lower than 30
in order to have economic sense to keep operation in both plants

4<(eWM/WP)<6; 4<(e50/250)<6; therefore 4*5=20<e<6*5=30

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