Deck 3: Sources of Comparative Advantage

Question 1

When considering the effects of transportation costs, the conclusions of our trade model must be modified.This is because transportation costs result in

A) lower trade volume, higher import prices, smaller gains from trade.
B) lower trade volume, lower import prices, smaller gains from trade.
C) higher trade volume, higher import prices, smaller gains from trade.
D) higher trade volume, lower import prices, greater gains from trade.

Answer 1

lower trade volume, higher import prices, smaller gains from trade.

Question 2

According to Staffan Linder, trade between two countries tends to be MOST pronounced when the countries

A) have similar tastes and preferences.
B) experience economies of large-scale production over large output levels.
C) have good political relationships.
D) have approximately the same per capita income levels.

Answer 2

have approximately the same per capita income levels.

Question 3

Which of the following suggests that by widening the market's size, international trade can permit longer production runs for manufacturers, which leads to increasing efficiency?

A) economies of scale
B) diseconomies of scale
C) comparative cost theory
D) absolute cost theory

Answer 3

economies of scale

Question 4

Which theory suggests that factor (resource) endowments determine a nation's comparative advantage?

A) the Linder theory
B) the product life cycle theory
C) the MacDougall theory
D) the Heckscher-Ohlin theory

Question 5

Which term best applies to the theory of overlapping demands?

A) manufactured goods
B) human services
C) primary products
D) agricultural goods

Question 6

The Leontief paradox questioned the validity of the theory of

A) comparative advantage.
B) factor endowments.
C) overlapping demands.
D) absolute advantage.

Question 7

Concerning the influence that transportation costs have on the location of industry, which of the following industries is likely to have the greatest profit gain by locating the production facilities close to resource supplies?

A) autos
B) steel
C) soft drinks
D) valuable electronics goods

Question 8

A product will be internationally traded as long as the pretrade price differential between the trading partners is

A) greater than the cost of transporting it between them.
B) equal to the cost of transporting it between them.
C) less than the cost of transporting it between them.
D) variable, but always decreasing.

Question 9

Which theory emphasizes the role of technology in determining the trade patterns of manufactured products?

A) factor-endowment theory
B) theory of comparative advantage
C) product life cycle theory
D) theory of overlapping demands

Question 10

Assume that Country A, in the absence of trade, finds itself relatively abundant in labor and relatively scarce in land.The factor endowment theory reasons that with free trade, the internal distribution of national income in Country A will change in favor of

A) labor.
B) land.
C) both labor and land.
D) neither labor nor land.

Question 11

Which trade theory suggests that a newly produced good, once exported, could ultimately end up being imported as the technology is transferred to foreign nations?

A) factor-endowment theory
B) product life cycle theory
C) theory of overlapping demands
D) specific-factors theory

Question 12

The Leontief paradox

A) supported the factor-endowment theory.
B) concluded that exports were less capital intensive than import-competing goods.
C) found that national income differences underlie world trade patterns.
D) implied that diseconomies of scale occur at low output levels.

Question 13

Chinese manufacturers face rising wages because of

A) China's one-child policy.
B) increased migration to the cities.
C) reductions in Chinese interest rates.
D) restrictions on Chinese labor unions.

Question 14

Eli Heckscher and Bertil Ohlin are associated with the theory of comparative advantage that stresses differences in

A) income levels among countries.
B) tastes and preferences among countries.
C) resource endowments among countries.
D) labor productivities among countries.

Question 15

According to the factor-endowment theory, which factor is the ultimate determinant of comparative advantage?

A) productivities of labor inputs
B) tastes and preferences among nations
C) changes in technologies over time
D) relative differences in resources

Question 16

For textile production, the U.S.capital/labor ratio is 0.5 and China's capital/labor ratio is 0.02.This means that

A) the United States is the relatively capital scarce country.
B) China is the relatively labor scarce country.
C) China is the relatively capital abundant country.
D) the United States is the relatively capital abundant country.

Question 17

A firm is said to enjoy economies of scale over the range of output for which the long-run average cost is

A) increasing.
B) constant.
C) decreasing.
D) stagnant.

Question 18

Which products would LEAST apply to the product life cycle theory?

A) calculators and computers
B) coal and crude oil
C) home movie cameras
D) office machinery

Question 19

Assume the cost of transporting autos from Japan to Canada exceeds the pretrade price difference for autos between Japan and Canada.Trade in autos is

A) impossible without subsidies of some form.
B) possible but only with sufficiently high taxes.
C) highly profitable but only for the largest firms.
D) moderately profitable but only for the smallest firms.

Question 20

Hong Kong is relatively abundant in labor, while Canada is relatively abundant in capital.In both countries, the production of shirts is relatively more labor intensive than the production of computers.According to the factor-endowment theory, Hong Kong will have a(n)

A) absolute advantage in the production of shirts.
B) absolute advantage in the production of computers.
C) comparative advantage in the production of shirts.
D) comparative advantage in the production of computers.

Question 21

Stringent governmental regulations (e.g., air quality standards) imposed on domestic steel manufacturers tend to

A) increase the competitiveness of domestic steel manufacturers in the international market.
B) reduce the competitiveness of domestic steel manufacturers in the international market.
C) increase the profitability and productivity of domestic steel manufacturers.
D) reduce the market share of foreign firms selling steel in the domestic market.

Question 22

Intra-industry trade in differentiated products can be explained by

A) the product life cycle theory.
B) the principle of comparative advantage.
C) differences in per capita income.
D) overlapping demand segments in trading nations.

Question 23

Which statement is true about automation of American factories?

A) Automation has led to an increase in the number of factory jobs available.
B) Automation has allowed American industries to produce more with fewer workers.
C) The cost of using robots and automation in factories is steadily rising.
D) Automation of factories has not benefited American workers.

Question 24

Should international transportation costs decrease, the effect on international trade would include

A) an increase in the total volume of trade.
B) a smaller gain from trade for exporters.
C) a decline in exported goods.
D) a decrease in the level of specialization in production.

Question 25

The theory of overlapping demands argues that consumer demand within nations is strongly determined by

A) tastes and preferences.
B) expectations of future interest rate levels.
C) per-capita income levels.
D) labor productivities.

Question 26

Which concept explains why countries specialize in products that have a high domestic demand?

A) demand conditions
B) external economies of scale
C) home market effect
D) overlapping demand

Question 27

Dynamic comparative advantage involves

A) industrial policy to create comparative advantage.
B) less governmental involvement in the economy.
C) reduced rules and regulations imposed by foreign governments.
D) accepting and working with existing resources.

Question 28

According to the factor-endowment theory, countries with an abundance of unskilled labor, like China, are likely to

A) have higher labor costs.
B) have an economic advantage.
C) export goods like textiles and toys.
D) export goods like aircraft and machinery.

Question 29

The simultaneous import and export of computers by Germany is an example of

A) intra-industry trade.
B) inter-industry trade.
C) perfect competition.
D) imperfect competition.

Question 30

External economies of scale can occur when

A) an industry's firms become more dispersed.
B) there is a decrease in specialized workers.
C) firms seek out consultants for technical knowledge.
D) knowledge of production technology spreads through direct contacts.

Question 31

Internal economies of scale provide the incentive for countries to

A) specialize in a few products.
B) manufacture a wider range of products.
C) specialize in products that are in demand abroad.
D) manufacture only a few units of products that are in demand.

Question 32

Intra-industry trade can be explained in part by

A) Adam Smith's principle of absolute advantage.
B) perfect competition in product markets.
C) diseconomies of large scale production.
D) transportation costs between and within nations.

Question 33

Which trade theory suggests that comparative advantage tends to shift from one nation to another as a product matures?

A) factor-price equalization theory
B) factor-endowment theory
C) product life cycle theory
D) theory of comparative advantage

Question 34

Relative to Kenya, Japan has relatively higher economies of large-scale production, an abundance of resources, higher labor costs, and more research and development.The Heckscher-Ohlin theory explains Japan's comparative advantage over Kenya as the result of differences in countries'

A) economies of large-scale production.
B) relative abundance of various resources.
C) relative costs of labor.
D) research and development.

Question 35

Pollution legislation requiring domestic manufacturers to install pollution abatement equipment tends to promote

A) higher production costs and an increase in output.
B) higher production costs and a decrease in output.
C) lower production costs and an increase in output.
D) lower production costs and a decrease in output.

Question 36

The Leontief paradox provided

A) support for the principle of comparative advantage.
B) support for the factor-endowment theory.
C) evidence against the factor-endowment theory.
D) evidence against the principle of comparative advantage.

Question 37

For the United States, empirical studies indicate that over the past two decades the cost of international transportation relative to the value of U.S.imports has

A) increased.
B) decreased.
C) not changed.
D) remained stagnant on presidential election years.

Question 38

In the United States, most low-skilled manufacturing jobs have been lost due to

A) unfair tariffs.
B) international trade.
C) immigrants.
D) robots and other automation technology.

Question 39

The trade model of the Swedish economists Heckscher and Ohlin maintains that

A) absolute advantage determines the distribution of the gains from trade.
B) comparative advantage determines the distribution of the gains from trade.
C) the division of labor is limited by the size of the world market.
D) a country exports goods for which its resource endowments are most suited.

Question 40

Proponents of ____ maintain that government should enact policies that encourage the development of emerging "sunrise" industries.

A) product life cycle policy
B) static comparative advantage policy
C) intra-industry trade policy
D) industrial policy

Question 41

Figure 1. An Example of China-U.S. Trade Possibilities
Considering Figure 1, which of the following would be true?

A) China has more of both labor and capital than the U.S.
B) The U.S. has more of both labor and capital than China.
C) The U.S. is relatively capital abundant and China is relatively labor abundant.
D) The U.S. is relatively labor abundant and China is relatively capital abundant.

Question 42

If jetliners are a capital-intensive product, and the United States exports jetliners, then the Heckscher-Ohlin theory predicts that the United States is

A) a labor abundant country.
B) a land abundant country.
C) a capital abundant country.
D) an energy abundant country.

Question 43

Which theory considers the income distribution effects of trade in the short run?

A) specific-factors theory
B) product life cycle theory
C) factor-endowment theory
D) Stolper-Samuelson theorem

Question 44

To justify the subsidies it has received from European governments, The Airbus Company has used all of the following arguments EXCEPT

A) its subsidies have prevented U.S. aircraft firms from holding a world-wide monopoly.
B) U.S. aircraft firms have benefited from military-sponsored programs of the U.S. government.
C) Airbus' subsidies were totally repaid as the firm realized profits on its aircraft sales.
D) without subsidies to Airbus, Europe would be dependent on the United States as a supplier of aircrafts.

Question 45

Assume that the United States is relatively scarce in unskilled labor and relatively abundant in capital.According to the Stolper- Samuelson theorem, free trade policies would tend to be opposed by ______ in the United States.

A) unskilled workers
B) owners of capital
C) both unskilled workers and owners of capital
D) neither unskilled workers nor owners of capital

Question 46

Environmental regulation in the United States

A) mostly benefits U.S. steel industries.
B) is especially damaging to the forestry industry.
C) hurts certain industries while making others more competitive.
D) improves quality of life for Americans but harms the economy.

Question 47

From 2000-2010, which nation lost thousands of jobs to China, whose average wages were half of those of this country?

A) Japan
B) Canada
C) Germany
D) Mexico

Question 48

Figure 1. An Example of China-U.S. Trade Possibilities
Considering Figure 1, what are the terms of trade represented?

A) The terms of trade are 1½ aircraft per textile.
B) The terms of trade are 1½ textiles per aircraft.
C) The terms of trade are 1 textile per aircraft.
D) The terms of trade are 2/3 textile per aircraft.

Question 49

If tastes and preferences are identical for two trading nations, then comparative advantage is the result of

A) technological conditions of the two nations.
B) income levels of the two nations.
C) demand conditions of the two nations.
D) supply conditions of the two nations.

Question 50

The Heckscher-Ohlin theory assumes that ______ is (are) the same for all countries.

A) expenditure on advertising and sales promotion
B) transportation costs
C) technology
D) levels of personal income

Question 51

In explaining international trade, the product life-cycle theory focuses on

A) local resources.
B) the role of technological innovation.
C) per-capita income levels of nations.
D) the availability of unskilled labor.

Question 52

Assume that the United States is relatively scarce in labor and relatively abundant in capital.According to the Heckscher-Ohlin theory, which of the following will occur in the United States in the presence of trade?

A) The price of capital will rise and the price of labor will fall.
B) The price of capital will fall and the price of labor will rise.
C) The price of both capital and labor will fall.
D) The price of both capital and labor will rise.

Question 53

Which trade theory predicts that countries with similar preferences and technologies but dissimilar factor endowments will experience potential gains from trade?

A) specific-factors theory
B) Stolper-Samuelson theorem
C) Linder's theory
D) Heckscher-Ohlin theory

Question 54

According to the Heckscher-Ohlin Theory, ______ is (are) the major determinant(s) of comparative advantage.

A) research and development
B) innovation
C) resource endowments
D) acquired advantages in labor productivity

Question 55

Boeing Inc.has criticized The Airbus Company's competitiveness on the grounds that Airbus benefits from

A) import tariffs protecting Airbus in the European market.
B) import quotas protecting Airbus in the European market.
C) lenient environmental standards of European governments.
D) subsidies supplied by European governments.

Question 56

Figure 1. An Example of China-U.S. Trade Possibilities
Considering Figure 1, prior to trade the production of textiles and aircraft for both China and the U.S.are 19 and 9.Which of the following represents the pre-trade situation?

A) China has a comparative advantage in the production of textiles and the U.S. has a comparative advantage in the production of aircraft.
B) China has a comparative advantage in the production of aircraft and the U.S. has a comparative advantage in the production of textiles.
C) China has an absolute advantage in the production of both textiles and aircraft.
D) The U.S. has an absolute advantage in the production of both textiles and aircraft.

Question 57

Which of the following is NOT a claim made by industrial-policy critics?

A) Industrial policies result in protectionism and inhibit trade.
B) Industrial policies can promote "pork barrel" politics.
C) Industries do not receive enough governmental assistance.
D) Trading nations will develop policy that encourages "beggar thy neighbor" practices.

Question 58

Which of the following is NOT an assumption of the factor-endowment theory?

A) Each country has the same tastes and preferences for all products.
B) Labor and capital move effortlessly among industries within a country.
C) Each country uses the same technology for all products.
D) Comparative advantage is determined by a wide variety of factors.

Question 59

The United States argues that Airbus receives government subsidies in Europe, which place them at a disadvantage.Which of the following statements reflects a common oppositional European trade view?

A) "All of our industries receive tax support from the government, not just Airbus."
B) "Without subsidies, Airbus will cooperate with Russia to build airplanes."
C) "Although indirect, Boeing also receives subsidies from the United States government."
D) "If we do not offer subsidies for European-made planes, production will shift to East Asia."

Question 60

Economists David Autor, David Dorn, and Gordon Hanson investigated the effects of trade with China on blue-collar American jobs.Which statement reflects their findings?

A) Blue-collar jobs are most affected in industries where China has a comparative advantage.
B) Trade with China has resulted in widespread loss of blue-collar jobs across the U.S.
C) Trade with China has not resulted in a loss of American jobs.
D) American labor markets have been responsive and flexible in response to globalization and trade with China.

Question 61

According to the factor-endowment theory, a country will export that good which intensively uses the country's relatively scarce resource.

Question 62

Most theories dealing with the principle of comparative advantage explain the pattern of international trade by differences in

A) per-capita income levels.
B) interest rates.
C) demand for consumer products.
D) supply of factors of production.

Question 63

The Heckscher-Ohlin theory contends that over a period of years, a country that initially is an exporter of a product will become an importer of that product.

Question 64

The Linder theory asserts that countries with ______ will trade more manufactured goods with each other.

A) similar demand conditions
B) unlike demand conditions
C) similar supply conditions
D) unlike supply conditions

Question 65

According to the factor-endowment theory, a country will import that good which intensively uses the country's relatively abundant resource.

Question 66

As industry output increases, suppose that new knowledge about production technology spreads among firms in the area through direct contacts among firms or as workers transfer from firm to firm.Which concept does this example demonstrate?

A) internal economies of scale
B) external economies of scale
C) the home market effect
D) specialization in production

Question 67

Japan's fading success in the electronics industry can be explained by all of the following EXCEPT

A) the appreciation of the yen's exchange value.
B) lack of product innovation.
C) failure to use economies of large-scale production.
D) failure to recognize changing patterns of comparative advantage.

Question 68

The factor-endowment theory highlights the relative abundance of a nation's resources as the key factor underlying comparative advantage.

Question 69

According to the product life cycle theory, comparative advantage

A) always remains in the country where the product is first introduced to the market.
B) increases as government tariffs and quotas are imposed on imports.
C) may shift from the home country to a foreign country as the product matures.
D) is the result of lower wages in the home country than in other countries.

Question 70

External economies of scale exist when an industry's outputs increase and

A) a firm's long run average cost curve shifts downward.
B) a firm's long run average cost curve shifts upward.
C) a firm's long run average cost curve stays the same.
D) a firm's long run average cost curve hits zero.

Question 71

When transportation costs are included in a trade model

A) an exporting country's gains from trade decrease.
B) an exporting country's gains from trade increase.
C) an exporting country's volume of trade increases.
D) an exporting country's terms of trade can improve.

Question 72

The Heckscher-Ohlin theory asserts that relative differences in labor productivity underlie comparative advantage.

Question 73

Labor unions in the United States were generally pro-free trade in the 1950s and 1960s.They became concerned about free trade when

A) they negotiated wages and benefits above those in a competitive market.
B) they realized that their members faced increased competition from producers in other countries.
C) they stopped receiving subsidies from the federal government.
D) they started losing membership.

Question 74

According to the product life cycle theory, trade between countries is caused by

A) diseconomies of large scale production.
B) differences in per-capita income levels.
C) the occurrence of monopolies and oligopolies.
D) changing patterns of comparative advantage.

Question 75

In the United States, skilled labor is relatively abundant and unskilled labor is relatively scarce.Exporting goods that require skilled labor will

A) reduce wage inequality between skilled and unskilled workers.
B) increase wage inequality between skilled and unskilled workers.
C) not change the wage inequality between skilled and unskilled workers.
D) reduce the number of skilled workers employed in the United States.

Question 76

According to Ricardian theory, comparative advantage depends on relative differences in labor productivity.

Question 77

Canada simultaneously exports and imports automobiles.This is an example of

A) intra-industry specialization.
B) inter-industry specialization.
C) intra-industry trade.
D) inter-industry trade.

Question 78

Regarding governmental subsidies applied to commercial jetliners, the World Trade Organization ruled that during 2010-2012

A) only Airbus had received illegal subsidies.
B) only Boeing had received illegal subsidies.
C) both Airbus and Boeing had received illegal subsidies.
D) neither Airbus nor Boeing had received illegal subsidies.

Question 79

The Heckscher-Ohlin theory suggests that land-abundant nations will export land-intensive goods while labor-abundant nations will export labor-intensive goods.

Question 80

According to the factor-endowment theory,

A) the abundant factor gains from trade.
B) the scarce factor gains from trade.
C) those disadvantaged by trade outnumber those advantaged by trade.
D) everyone necessarily benefits from trade.