Deck 33: The Gains From International Trade

Question 1

Which of the following statements about comparative advantage are true?
1) A country's pattern of comparative advantage depends partly upon the relative abundance of different types of resources in its endowment of factors.
2) Trade allows small countries to reap economies of scale through specialization.
3) Climate affects a country's pattern of comparative advantage.

A) 1, 2, and 3
B) 1 and 2
C) 2 only
D) 1 only
E) 2 and 3

Answer 1

A

Question 2

The following production possibilities schedule shows the quantities of soybeans and oil that can be produced in Canada and Mexico with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Soybeans } \\\text { (bushels) }\end{array} & \begin{array} { l } \text { Oil } \\\text { (barrels) }\end{array} \\\hline \text { Canada } & 60 & 10 \\\hline \text { Mexico } & 24 & 8 \\\hline\end{array}\\\text { TABLE 33- } 3\end{array}$$

-Refer to Table 33- 3. Canada has an absolute advantage in the production of

A) neither soybeans nor oil.
B) both soybeans and oil.
C) soybeans.
D) oil.

Answer 2

both soybeans and oil.

Question 3

The following production possibilities schedule shows the quantities of soybeans and oil that can be produced in Canada and Mexico with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Soybeans } \\\text { (bushels) }\end{array} & \begin{array} { l } \text { Oil } \\\text { (barrels) }\end{array} \\\hline \text { Canada } & 60 & 10 \\\hline \text { Mexico } & 24 & 8 \\\hline\end{array}\\\text { TABLE 33- } 3\end{array}$$

-Refer to Table 33- 3. If Canada were to transfer half a unit of resources from oil to soybeans and Mexico were to transfer one unit of resources from soybeans to oil, the effect on the total output of the two countries would be as follows:

A) Soybean production would increase by 6 bushels and oil production would increase by 3 barrels.
B) oil production would increase by 8 barrels.
C) Soybean production would increase by 36 bushels and oil production would decrease by 2 barrels.
D) Soybean production would increase by 6 bushels and oil production would increase by 2.02 barrels.
E) Soybean production would increase by 30 bushels.

Answer 3

Soybean production would increase by 6 bushels and oil production would increase by 3 barrels.

Question 4

Trade, whether between individuals or nations, generally promotes

A) higher product prices.
B) specialization.
C) self- sufficiency.
D) autarky.
E) lower living standards.

Question 5

Two nations want to engage in trade but discover that one of them is more efficient in producing all goods. In this case,

A) no trade is possible.
B) the more efficient country should produce all goods and export them.
C) the more efficient country should import all goods.
D) the less efficient country should engage in importation of goods only.
E) each nation should export the good in which it has a comparative advantage.

Question 6

This table shows how much cotton and cocoa can be produced in Peru and Brazil with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Cotton } \\\text { (bales) }\end{array} & \begin{array} { l } \text { Cocoa Beans } \\\text { (bushels) }\end{array} \\\hline \text { Peru } & 2 & 4 \\\hline \text { Brazil } & 1 & 6 \\\hline\end{array}\\\text { TABLE 33- } 4\end{array}$$

-Refer to Table 33- 4. The opportunity cost of a bale of cotton in Brazil is

A) 1 bushel of cocoa beans.
B) 4 bushels of cocoa beans.
C) 6 bushels of cocoa beans.
D) 1/6 bushels of cocoa beans.
E) 2 bushels of cocoa beans.

Question 7

In moving from a no- trade to a free- trade situation, a country will

A) import those goods which are acquired more cheaply through trade than through domestic production.
B) expect a decrease in the average standard of living, but will see increased profits for firms in the export business.
C) experience an increase in its average standard of living only if it begins with an absolute advantage in the production of all goods.
D) be consuming inside its production possibilities boundary.
E) experience increases in employment in all industries.

Question 8

In addition to reaping the benefits of specialization according to comparative advantage, a nation that engages in international trade and specialization may realize benefits from

A) economies of scale and learning by doing.
B) diseconomies of scale and learning by doing.
C) a less diversified economy.
D) a devaluation of its currency.
E) learning by doing and increased opportunity costs.

Question 9

According to the Heckscher- Ohlin theory, national comparative advantages exist because of

A) differences in saving and investment.
B) differences in national factor endowments.
C) international factor mobility.
D) economies of scale.
E) differences in climate alone.

Question 10

The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice. FIGURE 33- 4
Refer to Figure 33- 4. Suppose that a trading partner offers to give Arcticland ice in exchange for its fish. If Arcticland is to improve its consumption possibilities, the terms of trade must be 1 tonne of ice for:

A) 3 tonnes of fish.
B) 2 tonnes of fish.
C) 1 tonne of fish.
D) 0.5 tonne of fish.
E) 0.33 tonne of fish.

Question 11

If Country A has a comparative advantage in the production of good X relative to Country B,

A) we do not have enough information to say anything about relative opportunity costs.
B) then Country A also has an absolute advantage in the production of this good.
C) then the opportunity cost of producing X in Country A is higher than in Country B.
D) then Country A also has an absolute advantage in the production of some good other than X.
E) then the opportunity cost of producing X in Country A is lower than in Country B.

Question 12

If a country has a comparative advantage in the production of soybeans, and it trades freely with other countries, it will most probably

A) export soybeans.
B) not consume soybeans.
C) import soybeans.
D) increase its consumption of soybeans.
E) derive no advantage from any trade in soybeans.

Question 13

If Canada has an absolute advantage in the production of oil relative to the United States, then

A) Canada also has a comparative advantage in producing some good other than oil.
B) the opportunity cost of producing oil is higher in Canada than in the United States.
C) Canada may or may not have a comparative advantage in producing oil relative to the United States.
D) the opportunity cost of producing oil is lower in Canada than in the United States.
E) Canada also has a comparative advantage in producing oil.

Question 14

Canada is a net exporter of oil. An increase in the world price of oil, ceteris paribus, means that Canada's terms of trade will

A) not change.
B) deteriorate.
C) improve as long as all of Canada's production of oil is being exported.
D) deteriorate as long as Canada exports more oil than it imports.
E) improve.

Question 15

Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted line. The outputs of wool and steel are given in physical units. FIGURE 33- 1
Refer to Figure 33- 1. When trade between Ireland and Japan begins, the probable trade pattern is to

A) export wool from Japan to Ireland and steel from Ireland to Japan.
B) export both wool and steel from Ireland to Japan.
C) export both wool and steel from Japan to Ireland.
D) export wool from Ireland to Japan and steel from Japan to Ireland.
E) impose tariffs on both goods in both countries.

Question 16

Since joining NAFTA in the early 1990s, Canada has experienced increases in productivity and output in many export- oriented industries because of economies of scale and learning by doing. In these industries, these gains from trade will lead to

A) downward movement (to the right) along the LRAC curve only.
B) downward shifts in the long- run average cost (LRAC) curve.
C) downward shifts in the LRAC and short- run AC curves.
D) downward shifts in the LRAC and movement to the left along the LRAC curve.
E) downward shifts in the LRAC curves and downward movement (to the right) along the LRAC curve.

Question 17

This table shows how much cotton and cocoa can be produced in Peru and Brazil with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Cotton } \\\text { (bales) }\end{array} & \begin{array} { l } \text { Cocoa Beans } \\\text { (bushels) }\end{array} \\\hline \text { Peru } & 2 & 4 \\\hline \text { Brazil } & 1 & 6 \\\hline\end{array}\\\text { TABLE 33- } 4\end{array}$$

-Refer to Table 33- 4. Compared with Peru, Brazil has

A) an absolute and a comparative advantage in the production of cotton.
B) an absolute, but not a comparative, advantage in the production of cocoa beans
C) a comparative but not absolute advantage in the production of cocoa beans .
D) an absolute and a comparative advantage in the production of cocoa beans.
E) an absolute advantage in the production of cotton.

Question 18

The following production possibilities schedule shows the quantities of soybeans and oil that can be produced in Canada and Mexico with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Soybeans } \\\text { (bushels) }\end{array} & \begin{array} { l } \text { Oil } \\\text { (barrels) }\end{array} \\\hline \text { Canada } & 60 & 10 \\\hline \text { Mexico } & 24 & 8 \\\hline\end{array}\\\text { TABLE 33- } 3\end{array}$$

-Refer to Table 33- 3. The opportunity cost of a barrel of oil in Canada is

A) 16.67 bushels of soybeans.
B) 6 bushels of soybeans.
C) 2.5 bushels of soybeans.
D) 1.2 barrels of oil.
E) 0.8 barrels of oil.

Question 19

The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts. FIGURE 33- 3
Refer to Figure 33- 3. Suppose that a trading partner offers to give coconuts to Robinson Crusoe in exchange for his bananas. If Robinson Crusoe is to improve his consumption possibilities, the terms of trade must be 1 kg coconuts for

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

Question 20

The index for a country's terms of trade is computed as

A) index of export prices/index of import prices.
B) (index of import prices + index of export prices) x 100.
C) index of import prices/index of export prices.
D) (index of import prices/index of export prices) x 100.
E) (index of export prices/index of import prices) x 100.

Question 21

A country with a domestic market is most likely to gain from international trade, in part because of its prospects of benefitting from .

A) mature; a less diversified economy
B) small; diseconomies of scale and learning by doing
C) mature; a devaluation of its currency
D) small; economies of scale and learning by doing
E) large; learning by doing

Question 22

The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade. FIGURE 33- 6
Refer to Figure 33- 6. If the world price of a regional jet is $30 million, Canada will

A) import 70 jets per year.
B) export 50 jets per year.
C) neither import nor export any jets.
D) import 90 jets per year.
E) export 70 jets per year.

Question 23

The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland. FIGURE 33- 5
Refer to Figure 33- 5. If Paperland engages in trade and the world price is PA, the residents of Paperland will consume units of newsprint.

A) Q1
B) Q2
C) Q3
D) Q4
E) Q5

Question 24

According to what economists call the "law of one price",

A) the world price of a commodity is established by the country with the highest opportunity cost in producing the product without respect to the domestic or world demand for the product.
B) the lower the costs to move a product from one market to the other, the more equal the prices for the same product when it is sold in different markets.
C) the world price of a commodity is established by the country with the highest relative demand for that product without respect to the cost of production.
D) the price of a given product will never be equal in two different markets because of differences in the patterns of demand.
E) the price of a specific product will be the same in any two markets in which the cost of labour is the same.

Question 25

The existence of any "gains from trade" relies on

A) tariffs.
B) comparative advantage.
C) closed economies.
D) both absolute and comparative advantage.
E) absolute advantage.

Question 26

Since 1950, the world's real GDP has increased by seven times and the volume of world trade has increased by roughly

A) the same amount.
B) two times.
C) ten times.
D) fifteen times.
E) thirty times.

Question 27

North America exports clothing to the European Union, and the European Union exports clothing to North America. This is a(n)

A) obvious failure to take advantage of specialization.
B) general conclusion of the Heckscher- Ohlin theory.
C) likely result of economies of scale and product differentiation.
D) example of the inefficiency of trade patterns.
E) violation of the law of comparative advantage.

Question 28

The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland. FIGURE 33- 5
Refer to Figure 33- 5. If Paperland engages in international trade and the world price is PA, the amount of newsprint will be .

A) imported; Q1
B) imported; Q5 - Q3
C) exported; Q5 - Q1
D) imported; Q5 - Q1
E) exported; Q5

Question 29

Canadian politicians who promoted the NAFTA in the early 1990s claimed that Canadian producers would have access to a larger market and thus costs would decline. Which of the following sources of the gains from trade are implied by this statement?

A) absolute advantage
B) climate.
C) factor endowments
D) economies of scale
E) comparative advantage

Question 30

Economies of scale and product differentiation can provide an explanation for

A) intra- industry trade.
B) countries remaining at their autarkic positions.
C) absolute advantage.
D) countries trading in completely different products.
E) the imposition of trade barriers.

Question 31

The "terms of trade" reflect the

A) quantity of domestic goods that must be exported to get a unit of imported goods.
B) quantity of imports that must be purchased to sell a unit of exported goods.
C) amount of absolute advantage held by one country over another.
D) difference in opportunity costs between two countries.
E) conditions under which trade takes place, as established by the World Trade Organization.

Question 32

When specialization according to comparative advantage also makes economies of scale possible,

A) costs will rise in all trading countries.
B) trade is not beneficial to the country that has the absolute advantage in both goods.
C) it will be beneficial for all trading countries to impose tariffs.
D) the production possibilities boundaries of all trading countries will shift inward.
E) there will be additional gains from trade.

Question 33

This table shows how much cotton and cocoa can be produced in Peru and Brazil with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Cotton } \\\text { (bales) }\end{array} & \begin{array} { c } \text { Cocoa Beans } \\\text { (bushels) }\end{array} \\\hline \text { Peru } & & 4 \\\hline \text { Brazil } & & 6 \\\hline\end{array}\\\text { TABLE 33-4 }\end{array}$$

-Refer to Table 33- 4. The opportunity cost of a bushel of cocoa beans in Peru is

A) 1/3 bale cotton.
B) 1 bale cotton.
C) 2/3 bale cotton.
D) 1/6 bale cotton.
E) 1/2 bale cotton.

Question 34

This table shows how much cotton and cocoa can be produced in Peru and Brazil with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Cotton } \\\text { (bales) }\end{array} & \begin{array} { c } \text { Cocoa Beans } \\\text { (bushels) }\end{array} \\\hline \text { Peru } & & 4 \\\hline \text { Brazil } & & 6 \\\hline\end{array}\\\text { TABLE 33-4 }\end{array}$$

-Refer to Table 33- 4. The opportunity cost of a bale of cotton in Peru is

A) 1/6 bushel of cocoa beans.
B) 1/2 bushel of cocoa beans.
C) 2/3 bushel of cocoa beans.
D) 2 bushels of cocoa beans.
E) 4 bushels of cocoa beans.

Question 35

The following production possibilities schedule shows the quantities of wheat and rice that can be produced in Canada and India with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Wheat } \\\text { (bushels) }\end{array} & \begin{array} { l } \text { Rioe } \\\text { (bushels) }\end{array} \\\hline \text { Canada } & 13 & 5 \\\hline \text { India } & 6 & 13 \\\hline\end{array}\\\text { TABLE 33- } 2\end{array}$$

-Refer to Table 33- 2. To achieve the potential gains from international trade,

A) India should export rice to Canada and import Canadian wheat.
B) India should exclude wheat from its consumption.
C) Canada should produce both wheat and rice and not trade with India.
D) India should export wheat to Canada and import Canadian rice.
E) India should produce both wheat and rice and not trade with Canada.

Question 36

The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland. FIGURE 33- 5
Refer to Figure 33- 5. If Paperland engages in trade and the world price is PB, the residents of Paperland will consume units of newsprint, and the net exports of newsprint from Paperland will be units.

A) Q1; Q5 - Q1
B) Q2; zero
C) Q3; zero
D) Q4; Q5 - Q1
E) Q5; zero

Question 37

There is an unfavourable change in a nation's terms of trade whenever its

A) import prices fall while its export prices remain constant.
B) export and import prices stay the same.
C) export prices rise more than its import prices.
D) export prices rise while its import prices remain constant.
E) import prices rise more than its export prices.

Question 38

Governments often implement programs designed to encourage research and development. Such programs may change the comparative advantage of that country because

A) they are expected to change the endowments of each country.
B) increases in research and development always lead to an increase in imports.
C) they will raise the costs of production of the trading partners.
D) they are expected to lead to improvements in technology.
E) the opportunity costs of exported products cannot change.

Question 39

This table shows how much wine and cheese can be produced in Spain and Portugal with one unit of equivalent resources. Initially there is no trade. Once trade opens up, transportation costs are assumed to be zero. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Wine } \\\text { (units) }\end{array} & \begin{array} { l } \text { Cheese } \\\text { (units) }\end{array} \\\hline \text { Spain } & 2 & 8 \\\hline \text { Portugal } & 2 & 3 \\\hline\end{array}\\\text { TABLE 33- } 5\end{array}$$

-Refer to Table 33- 5. The comparative advantage in cheese is held by

A) -- insufficient information to know.
B) both countries.
C) Spain.
D) neither country.
E) Portugal.

Question 40

The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice. FIGURE 33- 4
Refer to Figure 33- 4. Starting from point A and moving to point B, the opportunity cost of producing each additional tonne of ice is

A) decreasing followed by increasing.
B) decreasing.
C) increasing followed by decreasing.
D) constant.
E) increasing.

Question 41

When opportunity costs are identical between two countries for all goods,

A) international trade will be advantageous only to the country that has an absolute advantage in the production of some commodity.
B) there will be gains from trade for both countries if one country has an absolute advantage in the production of some commodity.
C) absolute advantages will determine the gains from trade.
D) there can be no gains from trade unless there are economies of scale in some of the products.
E) there will be absolute advantages from trade but no comparative advantages from trade.

Question 42

The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade. FIGURE 33- 6
Refer to Figure 33- 6. If the world price of a regional jet is $35 million, Canada will

A) import 60 jets per year.
B) neither import nor export any jets.
C) export 20 jets per year.
D) import 20 jets per year.
E) export 80 jets per year.

Question 43

The following production possibilities schedule shows the quantities of soybeans and oil that can be produced in Canada and Mexico with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Soybeans } \\\text { (bushels) }\end{array} & \begin{array} { l } \text { Oil } \\\text { (barrels) }\end{array} \\\hline \text { Canada } & 60 & 10 \\\hline \text { Mexico } & 24 & 8 \\\hline\end{array}\\\text { TABLE 33- } 3\end{array}$$

-Refer to Table 33- 3. The opportunity cost of one bushel of soybeans in Mexico is

A) lower than the opportunity cost of soybeans in Canada.
B) 0.4 bushels of soybeans.
C) 3 barrels of oil.
D) indicative of Mexico's comparative advantage in soybean production.
E) 0.33 barrels of oil.

Question 44

The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice. FIGURE 33- 4
Refer to Figure 33- 4. Suppose that a trading partner offers to give Arcticland some fish in exchange for its ice. If Arcticland is to improve its consumption possibilities, the terms of trade must be 1 tonne of fish for

A) 5 tonnes of ice.
B) 4 tonnes of ice.
C) 3 tonnes of ice.
D) 2 tonne of ice.
E) 1 tonne of ice.

Question 45

When two countries are specializing and trading with each other, the gains from trade will tend to be greater when

A) there are economies of scale in production.
B) prices rise in both countries.
C) the production possibilities boundaries shift inward.
D) opportunity costs in the two countries are similar.
E) comparative advantages are eliminated.

Question 46

Consider two countries that can produce rice and other products. If neither country has an absolute advantage in the production of rice,

A) neither country can possibly have a comparative advantage in the production of rice.
B) there is no possibility that either country will import rice from the other.
C) the opportunity cost of producing rice must be identical in the two countries.
D) rice will still be traded as long as one of the countries has a comparative advantage in its production.
E) then rice should not be produced.

Question 47

FIGURE 33- 2
Refer to Figure 33- 2. Assume that Austria and Switzerland do not engage in international trade. In that case,

A) each country will produce according to comparative advantage anyway.
B) Switzerland will produce all bicycles and no shoes.
C) the downward- sloping lines illustrate each country's consumption possibilities.
D) each country will consume according to comparative advantage anyway.
E) Austria will produce all shoes and no bicycles.

Question 48

The principle of comparative advantage was first formulated in the 18th century by

A) Karl Marx.
B) Thomas Malthus.
C) David Hume.
D) Adam Smith.
E) David Ricardo.

Question 49

If Country A has a comparative advantage in the production of oil relative to Country B, then

A) the opportunity cost of producing oil is higher in Country A than in Country B.
B) Country A when compared to Country B must have an absolute advantage in producing some good other than oil.
C) Country A also has an absolute advantage in producing oil.
D) the opportunity cost of producing oil is lower in Country A than in Country B.
E) Country A also has an absolute advantage in producing some good other than oil.

Question 50

There will be no gains from specialization and trade between two countries if
1) neither country has an absolute advantage in the production of any good;
2) neither country has a comparative advantage in the production of any good;
3) opportunity costs differ too much between the two countries.

A) 1 only
B) 3 only
C) 2 only
D) 2 and 3
E) 1 and 2

Question 51

Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted line. The outputs of wool and steel are given in physical units. FIGURE 33- 1
Refer to Figure 33- 1. Before any trade takes place, the opportunity cost of a unit of steel is

A) 3/4 unit of wool in Ireland; 3/8 unit of wool in Japan.
B) 4/3 unit of wool in Ireland; 8/3 unit of wool in Japan.
C) 3 units of wool in Ireland; 3 units of wool in Japan.
D) 4 units of wool in Ireland; 8 units of wool in Japan.
E) 4 units of wool in Ireland; 4 units of wool in Japan.

Question 52

If Canada's index of import prices is 250 and the index of export prices is 200, then the index of the terms of trade is

A) 0.80.
B) 1.25.
C) 12.50.
D) 80.00.
E) 125.00.

Question 53

When opportunity costs differ between countries,

A) comparative advantages may or may not exist.
B) specialization and trade can lead to increases in the production of all commodities.
C) each country should produce only those goods for which it has an absolute advantage.
D) only the larger countries will benefit from trade.
E) only the smaller countries will benefit from trade.

Question 54

According to David Ricardo's principle of comparative advantage, the gains from international trade can be reaped

A) only by developed countries.
B) only by a country with an absolute advantage in the production of some commodity.
C) by any country with opportunity costs different from other countries.
D) by any trading country with opportunity costs similar to other countries.
E) by only one country if opportunity costs are identical across countries.

Question 55

Canadians consume millions of cups of Tim Horton's coffee each year. If Tim Horton's reduced the price per cup of coffee (because of a decrease in administration and transportation costs), ceteris paribus, Canada's terms of trade will

A) improve as long as consumption of coffee decreases.
B) deteriorate.
C) not change.
D) improve.
E) deteriorate as long as consumption of coffee increases.

Question 56

The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland. FIGURE 33- 5
Refer to Figure 33- 5. If Paperland engages in international trade and the world price is PC, the amount of newsprint produced by Paperland will be .

A) Q1
B) Q2
C) Q3
D) Q4
E) Q5

Question 57

The division of the gains of trade between two trading countries depends on the

A) long- run costs.
B) size of the absolute advantages possessed by each country.
C) quantity of resources held by each country.
D) level of unemployment in both countries.
E) difference between the terms of trade and the autarkic relative prices.

Question 58

This table shows how much wine and cheese can be produced in Spain and Portugal with one unit of equivalent resources. Initially there is no trade. Once trade opens up, transportation costs are assumed to be zero. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Wine } \\\text { (units) }\end{array} & \begin{array} { l } \text { Cheese } \\\text { (units) }\end{array} \\\hline \text { Spain } & 2 & 8 \\\hline \text { Portugal } & 2 & 3 \\\hline\end{array}\\\text { TABLE 33- } 5\end{array}$$

-Refer to Table 33- 5. Once trade begins,

A) the opportunity cost of the goods they now import will be less than when there was no trade, for both countries.
B) the opportunity cost of the goods they now import will be less than when there was no trade, but for Portugal only.
C) some resources will be permanently unemployed in Portugal.
D) it will be beneficial for Portugal to ban the import of cheese.
E) it will be beneficial for Spain to ban the import of wine.

Question 59

The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade. FIGURE 33- 6
Refer to Figure 33- 6. If the world price of a regional jet is $20 million, Canada will

A) import 70 jets per year.
B) import 90 jets per year.
C) export 70 jets per year.
D) import 40 jets per year.
E) export 50 jets per year.

Question 60

FIGURE 33- 2
Refer to Figure 33- 2. The diagrams illustrate that the is lower in Austria than in Switzerland.

A) opportunity cost of producing shoes
B) opportunity cost of producing bicycles
C) comparative advantage in producing bicycles
D) average cost of producing bicycles
E) total cost of producing shoes

Question 61

The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland. FIGURE 33- 5
Refer to Figure 33- 5. If Paperland does not engage in international trade, the equilibrium quantity of newsprint produced will be

A) Q1.
B) Q2.
C) Q3.
D) Q4.
E) Q5.

Question 62

If the index of export prices increases from 120 to 150 and the index of import prices increases from 100 to 125, it may be said that

A) there is insufficient information to calculate the terms of trade.
B) there has been no change in the terms of trade.
C) the terms of trade have improved.
D) the terms of trade have improved by 10 percent.
E) the terms of trade have deteriorated.

Question 63

If a product is very inexpensive to move from one regional market to another, then the

A) "law of one price" argues that it will sell for the same price in all markets.
B) price it sells for in every country will depend on the cost of labour in the single low- cost country in which the product was produced.
C) absolute cost of producing the product must be the same in all markets.
D) difference in the price from one market to another will depend on the relative elasticities of demand in the separate markets.
E) production of the world supply will be from the single country with the lowest absolute cost of producing it.

Question 64

The "law of one price" states that the price of

A) a product that is costless to transport will be the same in all markets.
B) labour, measured in terms of its opportunity cost, is the same in all markets.
C) a product worldwide is always equal to the cost of production from the country with the lowest opportunity cost to make the product.
D) a product is always equal to the absolute cost of the resources that went into its production in any country.
E) natural resources is the same in all markets.

Question 65

Economies of scale and product differentiation can provide an explanation for

A) countries trading in similar products.
B) firms seeking government approval of mergers.
C) countries trading in completely different products.
D) firms seeking government intervention to protect their industries.
E) countries remaining at their autarkic positions.

Question 66

This table shows how much cotton and cocoa can be produced in Peru and Brazil with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Cotton } \\\text { (bales) }\end{array} & \begin{array} { l } \text { Cocoa Beans } \\\text { (bushels) }\end{array} \\\hline \text { Peru } & 2 & 4 \\\hline \text { Brazil } & 1 & 6 \\\hline\end{array}\\\text { TABLE 33- } 4\end{array}$$

-Refer to Table 33- 4. If one unit of resources is shifted from cotton to cocoa beans in Brazil, and one unit of resources is shifted from cocoa beans to cotton in Peru, world output would increase by

A) 1 bale of cotton and 2 bushels of cocoa beans.
B) 3 bales of cotton and 10 bushels of cocoa beans.
C) 2 bales of cotton and 1 bushel of cocoa beans.
D) 2 bales of cotton.
E) 6 bushels of cocoa beans.

Question 67

This table shows how much cotton and cocoa can be produced in Peru and Brazil with one unit of equivalent resources. $$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Cotton } \\\text { (bales) }\end{array} & \begin{array} { l } \text { Cocoa Beans } \\\text { (bushels) }\end{array} \\\hline \text { Peru } & 2 & 4 \\\hline \text { Brazil } & 1 & 6 \\\hline\end{array}\\\text { TABLE 33- } 4\end{array}$$

-Refer to Table 33- 4. For trade to be advantageous to both Peru and Brazil, the number of bushels of cocoa beans that must be traded for a bale of cotton is

A) less than 2.
B) 2.
C) more than 2, but less than 6.
D) 6.
E) more than 6.

Question 68

Canada is a net importer of citrus fruit. If severe weather in Florida wipes out the fruit crop for one season, Canada's terms of trade will likely

A) not change.
B) deteriorate.
C) improve.
D) improve as long as Canada stops importing citrus fruit from Florida.
E) indeterminable with the information provided.

Question 69

The idea that unit production costs fall as producers become more familiar with a new production process is known as

A) an opportunity cost curve.
B) intra- industry trade.
C) an isoquant map.
D) learning by doing.
E) an Edgeworth box.

Question 70

Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted line. The outputs of wool and steel are given in physical units. FIGURE 33- 1
Refer to Figure 33- 1. At the "terms of trade" shown by the dotted lines,

A) consumers will press for tariffs.
B) only Japan benefits from trade.
C) both countries experience gains from trade.
D) resources will be permanently unemployed in Ireland.
E) resources will be permanently unemployed in Japan.

Question 71

If Canada's terms of trade rise from 212 to 236, then the change is said to be

A) favourable.
B) neutral.
C) unfavourable.
D) a deterioration.
E) prudent, since the rule of 72 is not violated.

Question 72

The theory that patterns of international trade are determined by natural endowments of factors successfully explains the prominence of

A) Britain in the pop music industry.
B) Canada in communications technology.
C) the United States in pharmaceutical research.
D) Japan in car manufacturing.
E) tourism in the Turks and Caicos.

Question 73

One region is said to have an absolute advantage over another region in the production of good X when

A) there is no demand for good X in the second region.
B) the opportunity cost of one unit of X is lower in the first region than in the second region.
C) an equal quantity of resources can produce more of good X in the first region than in the second region.
D) the first region has a larger supply of the raw materials required to produce good X.
E) the first region has a more productive labour force than the second.

Question 74

Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted line. The outputs of wool and steel are given in physical units. FIGURE 33- 1
Refer to Figure 33- 1. The comparative advantage is held by

A) Japan in both goods.
B) Ireland in steel, Japan in wool.
C) Ireland in both goods.
D) neither country in either good.
E) Ireland in wool, Japan in steel.

Question 75

If two countries each produce wool and cotton, the country with the higher opportunity cost for cotton (in terms of wool) will also have

A) an absolute advantage in the production of cotton.
B) an absolute advantage in the production of both wool and cotton.
C) a comparative advantage in the production of cotton.
D) a comparative advantage in the production of wool.
E) an absolute advantage in the production of wool.

Question 76

A country that engages in no foreign trade is said to be in a situation of

A) absolute advantage.
B) comparative advantage.
C) autarky.
D) reciprocal absolute advantage.
E) isolation.

Question 77

The concept of "comparative advantage" refers to the

A) ability of one region to produce a commodity with less labour input than another region.
B) ability of one region to produce a commodity with fewer total inputs than another region.
C) ability of one region to produce a commodity at a lower opportunity cost than another region.
D) terms of trade index.
E) gains from international trade.

Question 78

The concept of comparative advantage in international trade is based on _ as opposed to absolute costs.

A) total cost
B) average cost
C) relative prices
D) absolute prices
E) opportunity costs

Question 79

Australia exports wine to Canada, and Canada also exports wine to Australia. This is a(n)

A) example of the inefficiency of trade patterns.
B) obvious failure to take advantage of specialization.
C) violation of the law of comparative advantage.
D) general conclusion of the Heckscher- Ohlin theory.
E) likely result of economies of scale and product differentiation.

Question 80

The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland. FIGURE 33- 5
Refer to Figure 33- 5. If Paperland engages in international trade and the world price is PA, the amount of newsprint produced by Paperland will be .

A) Q1
B) Q2
C) Q3
D) Q4
E) Q5