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TRUE FALSE UNCERTAIN: For questions 1-6 begin your answer with the quick assertion “true”, “false”, or “uncertain” and justify your answer with a few sentences. Do not spend too much time answering any of these questions: a few sentences at most will suffice. (5 points each)

1. Suppose that imports and exports in an industry are both $100 million. If exports rise to $200 million, the value of the industry's index of intra-industry trade will fall.

2. Testing Paul Samuelson's model of a decrease in prices of exported production factors, we find that there has been significant deterioration in the U.S. position with respect to merchandise trade.

3. Starting in the early 1980s, the United States saw an increase in relative wages for skilled workers and an increase in the level of employment of skilled workers, which was difficult to explain with models of trade at the time, such as the H-O model.

4. Vertical FDI refers to provision of a service or production of component parts of a good in different countries that are then used or assembled into a final good in another location.

5. In horizontal models of multinational activity, foreign direct investment flows between neighboring countries are particularly appealing.

SHORT ANSWER QUESTIONS: For questions 6-8 read the questions completely before answering. When you are asked to “briefly explain” a few well written sentences is sufficient.

6. (15 points) In 2006, Proctor and Gamble (P&G), one of the largest American multinational consumer goods companies opened a new manufacturing plant in Lodz, Poland, to produce Gillette blades and razors. Discuss how opening a manufacturing plant in Poland relates to the location decision models of FDI developed in class. Please mention both of our rationales for offshoring in your answer.

7. (30 points) Consider the Melitz model presented in class in which firms produce differentiated goods and face downward sloping demand given by the following

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