Deck 3: The Classical World of David Ricardo and Comparative Advantage

Question 1

Is it possible for trade to take place in the Classical world of David Ricardo without complete specialization of production in both countries? If so, when? Who will receive the gains from trade in this instance? Why?

Answer 1

not answered

Question 2

If a country's relative price of X (compared to Y) in autarky is greater than the same relative prices on the world market, then the country has a comparative advantage in good __________, and it will __________.

A) X; export Y and import X
B) X; export X and import Y
C) Y; export Y and import X
D) Y; export X and import Y

Answer 2

C

Question 3

Given the following Ricardo-type table shows the labor input required per unit of output in each of the two industries in each of the two countries:
$$\begin{array} { l l l } & \underline{ { \text { SteelCloth }} } \\& & \\\text { United Kingdom } & \text { 4 days } & 8 \text { days } \\\text { Germany } & \text { 6 days } & 9 \text { days }\end{array}$$
Which one of the following statements is true?

A) The United Kingdom has an absolute advantage in both goods and a comparative Advantage in cloth.
B) The pretrade price ratio in the United Kingdom is 1 steel:2 cloth.
C) The United Kingdom has an absolute advantage in neither good but a comparative Advantage in steel.
D) The pretrade price ratio in Germany is 1 cloth:1.5 steel.

Answer 3

The pretrade price ratio in Germany is 1 cloth:1.5 steel.

Question 4

Did the concept of comparative advantage strengthen or worsen the case against Mercantilist trade doctrine? Why?

Question 5

In the following Classical-type table showing the output per 10-days of labor input in each of the two commodities in each of the two countries,
$$\begin{array} { l l l } &\underline{ \text { Cameras }} &\underline{ \text { Wine }} \\\text { France } & 100 \text { units } & 40 \text { units } \\\text { Germany } & 150 \text { units } & 50 \text { units }\end{array}$$

A) Germany has a comparative advantage in both goods.
B) France has an absolute advantage in both goods.
C) France has a comparative advantage in cameras.
D) the pretrade price ratio in France is 1 wine = 2.5 cameras.

Question 6

It is often said that international trade involves both absolute and comparative advantage. Can this be so? Why or why not?

Question 7

Set up a Ricardo-type comparative advantage numerical example with two countries and two goods. Distinguish "absolute advantage" from "comparative advantage" in the context of your example. Then select an international terms-or-trade ratio and explain in some detail how trade between the two countries benefits each of them in comparison with autarky. When would either of your countries NOT benefit from engaging in trade? Explain.

Question 8

Suppose that, with constant opportunity costs, Spain can produce 2,000 units of clothing if it devotes all of its resources to clothing production and 8,000 units of wheat if it devotes all of its resources to wheat production. If Spain is opened to trade at a world price ratio of 1 wheat:0.4 clothing (or 1 clothing:2.5 wheat), Spain will export __________; if the world price ratio were 1 wheat:4 clothing (or 1 clothing:2.5 wheat), Spain would __________.

A) wheat; also export wheat
B) wheat; would export clothing
C) clothing; also would export clothing
D) clothing; would be indifferent to trade

Question 9

Given the following Ricardo-type table showing the amount of labor input needed to get one unit of output in each industry in each country:
$$\begin{array} { l c l } &\underline{ \text { Wheat }} &\underline{ \text { Chairs} } \\\text { Malaysia } & 3 \text { days } & 2 \text { days } \\\text { India } & \text { 10 days } & 8 \text { days }\end{array}$$

A) Terms of trade of 1 wheat:1.25 chairs is not a feasible equilibrium terms of trade.
B) Terms of trade of 1 wheat:1.5 chairs would give all the gains from trade to India.
C) Malaysia has an absolute advantage in both goods and a comparative advantage in Wheat.
D) India has an absolute advantage in both goods and a comparative advantage in wheat.

Question 10

Given the following constant-cost production-possibilities frontiers for Pakistan and India:

Pakistan has an autarky relative price of __________; if trade begins with India, then Pakistan would produce at point __________, assuming complete specialization.

A) 1 cloth:0.5 wheat ; (i.e., P_cloth/P_wheat = 0.5); A
B) 1 cloth:0.5 wheat ; (i.e., P_cloth/P_wheat = 0.5); B
C) 1 cloth:2 wheat ; (i.e., P_cloth/P_wheat = 2); A
D) 1 cloth:2 wheat ; (i.e., P_cloth/P_wheat = 2); B

Question 11

Given the information in Question #12 above, suppose that Germany is a much larger Country in terms of production and income than is the United Kingdom. In this situation, Other things equal, when the countries engage in trade, the posttrade price ratio (terms of Trade) would tend to settle __________, and __________ would therefore tend to have Relatively large gains from trade.

A) toward a value of 1 cloth:2 steel; the United Kingdom
B) toward a value of 1 cloth:2 steel; Germany
C) toward a value of 1 cloth:1.5 steel; the United Kingdom
D) toward a value of 1 cloth:1.5 steel; Germany

Question 12

The assumption of constant costs of production in the Classical model results in a __________ production possibilities frontier, and, in the case of a "small" country, __________ specialization in production when trade takes place.

A) linear; incomplete
B) concave-to-the-origin; complete
C) convex-to-the-origin; incomplete
D) linear; complete

Question 13

Suppose that, in a Classical constant-opportunity-costs framework, country I can produce 15 units of wheat if it devotes all of its resources to wheat production and 45 units of clothing if it devotes all of its resources to clothing production. In a trading situation for this country, if the world price ratio is P_wheat/P_clothing = (or P_clothing/P_wheat = 3), country I would

A) export wheat and import clothing.
B) export clothing and import wheat.
C) be indifferent to trade.
D) export either clothing or wheat and import either wheat or clothing - cannot be Determined without more information.

Question 14

Given the following Ricardo-type table shows the labor input required per unit of output In each of the two industries in each of the two countries:
$$\begin{array} { l l l } & \underline{\text { Shirts }} &\underline{ \text { Brandy }} \\\text { United States } & 4 \text { days } & 12 \text { days } \\\text { France } & 6 \text { days } & 12 \text { days }\end{array}$$
Which one of the following statements is correct?

A) France's pretrade price ratio is 1 brandy = 2 shirts.
B) The U.S. pretrade price ratio is 1 shirt = 3 brandy.
C) The United States has an absolute advantage in both goods.
D) France will export shirts after trade begins.

Question 15

In the situation in Question #8 above, if the countries engage in trade at posttrade prices (terms of trade) of 1 shirt = 0.5 brandy, then

A) France gets all the gains from trade.
B) the United States gets all the gains from trade.
C) neither country gains from trade.
D) the two countries share equally in the gains from trade.

Question 16

Suppose that the pre-trade price ratio is 2 grain:5 hardware and that the international terms of trade are 3 grain:5 hardware. Which commodity will the country in question export? Why? What will happen to production in the country under the Classical assumptions? Why?

Question 17

Country A has the following constant-opportunity-costs production-possibilities frontier (PPF):

Suppose that this country in autarky is located at point R on its PPF, where it is producing 300 units of good Y and __________ of good X. Suppose that country A is now opened to trade and can trade at a terms of trade of 1X:3Y. Assuming complete specialization in production, the country will now produce at __________.

A) 50 units; point N and will export good X and import good Y
B) 150 units; point N and will export good X and import good Y
C) 50 units; point M and will export good Y and import good X
D) 150 units; point M and will export good Y and import good X

Question 18

In the Classical (Ricardo) analysis,

A) if a country has an absolute advantage in a good, it also has a comparative advantage In the good.
B) if a country has a comparative advantage in a good, it cannot have an absolute Advantage in the good.
C) a country can have a comparative advantage in a good at the same time that it has an Absolute advantage in that good.
D) a country with an absolute advantage in all goods cannot gain from trade.

Question 19

Why did Ricardo think that international trade was based on comparative advantage while internal (domestic) trade was based on absolute advantage?

Question 20

As a country moves from autarky to trade, the relative price of the country's import good will __________ for home consumers, and the relative price of the country's export good __________ for home consumers.

A) fall; will rise
B) fall; also will fall
C) rise; also will rise
D) rise; will fall

Question 21

Given the following Ricardo-type table showing the amount of labor input required to produce one unit of output of each of the two goods in each of the two countries:
$\begin{array}{lll}&\underline{\text { Wheat }}&\underline{\text { Clothing }}\\\text { United Kingdom } & 6 \text { days } & 5 \text { days } \\\text { United States } & 4 \text { days } & 3 \text { days }\end{array}$

A) The United Kingdom has an absolute advantage in neither good.
B) The United States has a comparative advantage in wheat.
C) The United States has a comparative advantage in both goods.
D) A post-trade price ratio (terms of trade) of 1 wheat:1.5 clothing is a feasible
Equilibrium post-trade price ratio.

Question 22

In Question #27 above, suppose that the country, when it is opened to trade, did not Change its production combination from the production combination at point M. In this Situation, how many units of its import good could the country obtain if it exported all of The export good that it produced?

A) 240 units
B) 350 units
C) 500 units
D) 800 units

Question 23

In Question #25 above,

A) a post-trade price ratio (terms of trade) of 1 shirt:0.75 machine is a feasible post-trade price ratio.
B) a post-trade price ratio (terms of trade) of 1 machine:0.6 shirt is a feasible post- trade price ratio and it would give all the gains from trade to France.
C) a post-trade price ratio (terms of trade) of 1 machine:0.55 shirt is a feasible post-trade price ratio and both countries would gain from trade at that price ratio.
D) other things equal, if world demand for shirts is much greater than world demand for machines, then the post-trade price ratio (terms of trade) will tend to settle toward or be located at 1 shirt:0.6 machine rather than settle toward or be located at 1 shirt:0.5 machine.

Question 24

In Question #22 above,

A) if the United Kingdom were a much larger country than the United States, then, other Things equal, the terms of trade would tend to be located more toward the U.S.Pre-trade price ratio than toward the U.K. pre-trade price ratio.
B) if world demand (the sum of U.S. demand and U.K. demand) were directed more Toward clothing than toward wheat, other things equal, then the terms of trade Would tend to be located more toward the U.K. price ratio than toward the U.S. Pre-trade price ratio.
C) a post-trade price ratio (terms of trade) of 1 clothing:0.75 wheat would mean that the United Kingdom did not gain from trade.
D) a post-trade price ratio (terms of trade) of 1 wheat:1.2 clothing would give all the gains From trade to the United States.

Question 25

Given the following Ricardo-type table showing the amount of labor input required to produce one unit of output of each of the two goods in each of the two countries:
$\begin{array}{lcc} &\underline{\text { Shirts}} &\underline{\text { Machines }}\\\text { France } & 3 \text { days } & 5 \text { days } \\\text { Germany } & 2 \text { days } & 4 \text { days }\end{array}$
France has an absolute advantage in __________ and a comparative advantage in __________.

A) both goods; machines
B) both goods; shirts
C) neither good; machines
D) neither good; shirts

Question 26

Suppose that a country in the Classical model has the following production-possibilities frontier (PPF):

If, in autarky, the country is producing 700 computers and is located at point M on the PPF, the country would be producing __________ autos. If the country is now opened to trade at a terms of trade of 1 auto: 2 computers (or 1 computer: 0.5 auto), it would export __________.

A) 120; autos
B) 120; computers
C) 280; autos
D) 280; computers

Question 27

Which one of the following is NOT an assumption contained in the Classical/Ricardo trade model?

A) Factors of production (labor) are completely mobile within a country.
B) Factors of production (labor) are completely mobile between countries.
C) Marginal costs are constant as production increases for a firm/industry.
D) Transportation costs of goods between countries are zero.

Question 28

If, in a two-commodity, two-country Classical world, Sweden can make a unit of furniture with 10 days of labor and a unit of steel with 15 days labor, while Germany can make a unit of furniture with 12 days of labor and a unit of steel with 12 days labor, then

A) Sweden has an absolute advantage in steel and Germany has an absolute advantage in Furniture.
B) Sweden has a comparative advantage in steel and Germany has a comparative Advantage in furniture.
C) the pretrade price ratios indicate that Germany will export steel if trade takes place.
D) the pretrade price ratio in Sweden is 1 furniture:1.5 steel.