CA Foundation P4 · Chapter 9
International Trade MCQs with Answers
15 multiple-choice questions on International Trade for CA Foundation P4 Business Economics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The mercantilist doctrine held that a nation's wealth increases through:
- A) Accumulation of gold and silver by maintaining an export surplus
- B) Free trade without any restrictions
- C) Specialisation based on comparative costs
- D) Importing more than exporting
Show answer & explanation
Answer: A) Accumulation of gold and silver by maintaining an export surplus
Mercantilists (16th-18th centuries) believed that wealth consisted of precious metals and that a country should promote exports and restrict imports to accumulate bullion. Free trade and comparative advantage were later classical ideas that criticised mercantilism.
Question 2
The theory of absolute advantage as a basis for international trade was propounded by:
- A) David Ricardo
- B) Bertil Ohlin
- C) Paul Krugman
- D) Adam Smith
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Answer: D) Adam Smith
Adam Smith, in The Wealth of Nations (1776), argued that countries gain by specialising in goods they can produce with absolute advantage. David Ricardo developed comparative advantage, Heckscher and Ohlin the factor-endowment theory, and Krugman new trade theory.
Question 3
Labour hours required to produce one unit: Country X: cloth 10 hours, wheat 20 hours Country Y: cloth 15 hours, wheat 45 hours According to Ricardo's theory of comparative advantage:
- A) X should specialise in cloth and Y in wheat
- B) X should produce both goods, since it has an absolute advantage in both
- C) X should specialise in wheat and Y in cloth
- D) No trade will take place, since X is more efficient in both goods
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Answer: C) X should specialise in wheat and Y in cloth
Opportunity cost of 1 wheat in X = 20/10 = 2 cloth; in Y = 45/15 = 3 cloth. X has the lower opportunity cost of wheat. Opportunity cost of 1 cloth in X = 10/20 = 0.5 wheat; in Y = 15/45 = 0.33 wheat, so Y has the comparative advantage in cloth. Absolute advantage in both goods does not prevent mutually beneficial trade.
Question 4
According to the Heckscher-Ohlin theory, a labour-abundant country will:
- A) Export capital-intensive goods and import labour-intensive goods
- B) Export labour-intensive goods and import capital-intensive goods
- C) Export goods in which it has an absolute advantage only
- D) Not gain from trade because factor prices are low
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Answer: B) Export labour-intensive goods and import capital-intensive goods
The Heckscher-Ohlin (factor endowment) theory states that a country exports goods that use its relatively abundant factor intensively, because that factor is relatively cheap. A labour-abundant country thus exports labour-intensive goods.
Question 5
An ad valorem import tariff of 15% is levied on a machine with an assessable value of Rs. 40,000. The tariff payable is:
- A) Rs. 6,000
- B) Rs. 600
- C) Rs. 4,600
- D) Rs. 46,000
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Answer: A) Rs. 6,000
An ad valorem tariff is a percentage of the value of the good. Tariff = 15% x 40,000 = Rs. 6,000. Rs. 46,000 is the value including the tariff. A specific tariff, by contrast, would be a fixed amount per unit.
Question 6
Which of the following is a non-tariff measure?
- A) An ad valorem duty on imports
- B) A specific duty per tonne of imports
- C) A compound duty combining ad valorem and specific elements
- D) An import quota limiting the quantity of a good that may be imported
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Answer: D) An import quota limiting the quantity of a good that may be imported
Non-tariff measures restrict or affect trade without levying a tax - for example quotas, licensing, sanitary and phytosanitary measures and technical standards. Ad valorem, specific and compound duties are all forms of tariffs.
Question 7
In international trade, 'dumping' refers to:
- A) Imposing high tariffs on imports to protect domestic industry
- B) Exporting a product at a price lower than its normal value in the exporter's home market
- C) Disposing of hazardous waste in another country
- D) Exporting goods without any government subsidy
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Answer: B) Exporting a product at a price lower than its normal value in the exporter's home market
Dumping occurs when goods are exported at a price below their normal value (usually the domestic price in the exporting country). If it causes material injury to the domestic industry of the importing country, that country may levy an anti-dumping duty.
Question 8
The World Trade Organization (WTO), which replaced GATT, came into existence on:
- A) 1 January 1948
- B) 1 January 1995
- C) 1 April 1991
- D) 15 April 1994
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Answer: B) 1 January 1995
GATT came into force in 1948. The Uruguay Round agreements were signed at Marrakesh on 15 April 1994, establishing the WTO, which began functioning on 1 January 1995.
Question 9
The 'Most-Favoured-Nation' (MFN) principle of the WTO requires that:
- A) Imported goods must be treated the same as domestic goods once inside the market
- B) Developing countries receive more favourable treatment than developed countries
- C) Each member chooses one favoured trading partner
- D) A trade concession granted to one member must be extended to all other members
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Answer: D) A trade concession granted to one member must be extended to all other members
MFN means non-discrimination among trading partners: if a member lowers a tariff for one country, it must do so for all WTO members (subject to exceptions such as free trade areas). Equal treatment of imported and domestic goods is the National Treatment principle.
Question 10
Other things being equal, a depreciation of the Indian rupee against the US dollar will tend to:
- A) Make Indian exports costlier for US buyers
- B) Make imports from the US cheaper for Indians
- C) Make Indian exports cheaper for US buyers and imports from the US costlier for Indians
- D) Have no effect on trade flows
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Answer: C) Make Indian exports cheaper for US buyers and imports from the US costlier for Indians
When the rupee depreciates, one dollar buys more rupees. Indian goods priced in rupees become cheaper in dollar terms, encouraging exports, while US goods cost more rupees, discouraging imports.
Question 11
The exchange rate changes from Rs. 75 per US dollar to Rs. 80 per US dollar. Measuring the change in the dollar value of one rupee, the percentage depreciation of the rupee is:
- A) 6.25%
- B) 6.67%
- C) 5%
- D) 7.5%
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Answer: A) 6.25%
The depreciation of the rupee is measured by the change in what one rupee is worth in dollars: before = $1/75, after = $1/80. Percentage change = (1/80 - 1/75)/(1/75) x 100 = (75/80 - 1) x 100 = -6.25%, so the rupee depreciated by 6.25%. The figure (80 - 75)/75 x 100 = 6.67% is the appreciation of the dollar against the rupee, not the depreciation of the rupee.
Question 12
A system in which the exchange rate is mainly determined by market forces but the central bank intervenes to smooth excessive volatility is called:
- A) A fixed (pegged) exchange rate
- B) The gold standard
- C) A currency board
- D) A managed float
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Answer: D) A managed float
Under a managed (dirty) float, the exchange rate is broadly market-determined, but the central bank buys or sells foreign exchange to curb excessive fluctuations. A fixed peg or currency board ties the currency to another currency at a set rate.
Question 13
Foreign Direct Investment (FDI) is distinguished from Foreign Portfolio Investment (FPI) mainly because FDI:
- A) Involves purchase of government bonds only
- B) Is always short-term and highly volatile
- C) Involves a lasting interest and a significant degree of control or influence over the enterprise
- D) Is made only by foreign governments
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Answer: C) Involves a lasting interest and a significant degree of control or influence over the enterprise
FDI reflects a long-term interest and management influence, such as setting up a subsidiary or acquiring a substantial equity stake. FPI is investment in financial assets such as shares and bonds without control and is generally more volatile ('hot money').
Question 14
If the export price index rises from 100 to 120 and the import price index rises from 100 to 150 over a period, the net barter terms of trade:
- A) Fall to 80, indicating a deterioration
- B) Rise to 125, indicating an improvement
- C) Fall to 80, indicating an improvement
- D) Remain at 100
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Answer: A) Fall to 80, indicating a deterioration
Net barter terms of trade = (export price index / import price index) x 100 = 120/150 x 100 = 80. A value below 100 means a unit of exports now buys fewer imports than in the base period, so the terms of trade have deteriorated.
Question 15
Leontief's empirical test of the Heckscher-Ohlin theory found that the United States, a capital-abundant country, exported relatively labour-intensive goods. This finding is known as:
- A) The infant industry argument
- B) The Leontief paradox
- C) The Stolper-Samuelson theorem
- D) The Rybczynski theorem
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Answer: B) The Leontief paradox
Contrary to the Heckscher-Ohlin prediction, Leontief (1953) found US exports were more labour-intensive than its import-competing goods. Explanations offered include the high productivity (skill) of US labour and the role of natural resources.