Deck 2: Foundations of Modern Trade Theory Comparative Advantage

Question 1

If the international terms of trade settles at a level that is between each country's opportunity cost,

A) there is no basis for gainful trade for either country.
B) both countries gain from trade.
C) only one country gains from trade.
D) one country gains and the other country loses from trade.

Answer 1

both countries gain from trade.

Question 2

Unlike the mercantilists, Adam Smith maintained that

A) trade benefits one nation only at the expense of another nation.
B) government control of trade leads to maximum economic welfare.
C) all nations can gain from free international trade.
D) the world's output of goods must remain constant over time.

Answer 2

all nations can gain from free international trade.

Question 3

International trade is based on the notion that

A) different currencies are an obstacle to international trade.
B) goods are more mobile internationally than are resources.
C) resources are more mobile internationally than are goods.
D) a country's exports should always exceed its imports.

Answer 3

goods are more mobile internationally than are resources.

Question 4

Increasing opportunity costs suggest that

A) resources are not perfectly shiftable between the production of two goods.
B) resources are fully shiftable between the production of two goods.
C) a country's production possibilities frontier appears as a straight line.
D) a country's production possibilities frontier is bowed inward (i.e., convex) in appearance.

Question 5

The trading-triangle concept is used to indicate a nation's

A) exports, marginal rate of transformation, and terms of trade.
B) imports, terms of trade, and marginal rate of transformation.
C) marginal rate of transformation, imports, and exports.
D) terms of trade, exports, and imports.

Question 6

The mercantilists would have objected to

A) export promotion policies initiated by the government.
B) the use of tariffs or quotas to restrict imports.
C) trade policies designed to accumulate gold and other precious metals.
D) international trade based on open markets.

Question 7

The trading principle formulated by Adam Smith maintained that

A) international prices are determined from the demand side of the market.
B) differences in resource endowments determine comparative advantage.
C) differences in income levels govern world trade patterns.
D) absolute cost differences determine the immediate basis for trade.

Question 8

The earliest theorist to discuss the principle of comparative advantage was

A) Adam Smith.
B) David Ricardo.
C) Eli Heckscher.
D) Bertil Ohlin.

Question 9

Unlike Adam Smith, David Ricardo's trading principle emphasizes the

A) demand side of the market.
B) supply side of the market.
C) role of comparative costs.
D) role of absolute costs.

Question 10

According to the principle of comparative advantage, specialization and trade increase a nation's total output since

A) resources are directed to their highest productivity.
B) the output of the nation's trading partner declines.
C) the nation can produce outside of its production possibilities frontier.
D) the problem of unemployment is eliminated.

Question 11

Figure 2.1. Production Possibilities Frontier

-Referring to Figure 2.1, the relative cost of steel in terms of aluminum is

A) 4.0 tons.
B) 2.0 tons.
C) 0.5 tons.
D) 0.25 tons.

Question 12

Assuming increasing-cost conditions, trade between two countries would NOT be likely if they have

A) identical demand conditions but different supply conditions.
B) identical supply conditions but different demand conditions.
C) different supply conditions and different demand conditions.
D) identical demand conditions and identical supply conditions.

Question 13

If Spain's weather is better for growing wine grapes than Denmark's, it can be said that Spain has a(n)

A) absolute advantage in the production of wine.
B) comparative advantage in the production of wine.
C) lower marginal rate of transformation for wine.
D) lower opportunity cost of producing wine.

Question 14

Which of the following statements is FALSE?

A) International trade restrictions limit specialization and the division of labor.
B) International trade restrictions reduce the volume of trade and the gains from trade.
C) International trade restrictions cause nations to produce inside their production possibilities frontier.
D) International trade restrictions result in a country producing some of the product of its comparative disadvantage.

Question 15

In a two-product, two-country world, international trade can lead to increases in

A) consumer welfare only if output of both products is increased.
B) output of both products and consumer welfare in both countries.
C) total production of both products, but not consumer welfare in both countries.
D) consumer welfare in both countries, but not total production of both products.

Question 16

The United States has an absolute disadvantage to Spain on wine production.According to David Ricardo, specialization can be more efficient only in the following circumstances:

A) Spain intentionally slows its production.
B) The United States grows its own grapes, thereby reducing transport costs.
C) In this case, specialization will not have an impact on either country.
D) Specialization can lead to more efficient allocation of resources with free trade.

Question 17

Figure 2.1. Production Possibilities Frontier

-Referring to Figure 2.1, the relative cost of aluminum in terms of steel is

A) 4.0 tons.
B) 2.0 tons.
C) 0.5 tons.
D) 0.25 tons.

Question 18

If Hong Kong and Taiwan had identical labor costs but were subject to increasing costs of production,

A) trade would depend on differences in demand conditions.
B) trade would depend on economies of large-scale production.
C) trade would depend on the use of different currencies.
D) there would be no basis for gainful trade.

Question 19

If a production possibilities frontier is bowed out (i.e., concave) in appearance, production occurs under conditions of

A) constant opportunity costs.
B) increasing opportunity costs.
C) decreasing opportunity costs.
D) zero opportunity costs.

Question 20

A nation that gains from trade will find its consumption point being located

A) inside its production possibilities frontier.
B) along its production possibilities frontier.
C) outside its production possibilities frontier.
D) below its production possibilities frontier.

Question 21

The introduction of community indifference curves into our trading example focuses attention on the nation's

A) income level.
B) resource prices.
C) tastes and preferences.
D) productivity level.

Question 22

Introducing indifference curves into our trade model permits us to determine

A) where a nation chooses to locate along its production possibilities frontier in autarky.
B) the precise location of a nation's production possibilities frontier.
C) whether absolute cost or comparative cost conditions exist.
D) the currency price of one product in terms of another product.

Question 23

When a nation is in autarky and maximizes its living standard, its consumption and production points are

A) along the production possibilities frontier.
B) above the production possibilities frontier.
C) beneath the production possibilities frontier.
D) beside the production possibilities frontier.

Question 24

MacDougall's 1951 writings argued that ______ explains a country's competitive position?

A) national income levels
B) relative endowments of natural resources
C) domestic tastes and preferences
D) labor productivity

Question 25

The use of indifference curves helps us determine the point

A) along the terms-of-trade line a country will choose.
B) where a country maximizes its resource productivity.
C) at which a country ceases to become competitive.
D) where the marginal rate of transformation approaches zero.

Question 26

When a nation achieves autarky equilibrium,

A) input price equals final product price.
B) labor productivity equals the wage rate.
C) imports equal exports.
D) production equals consumption.

Question 27

Ricardo's theory of comparative advantage was of limited real-world validity because it was founded on the

A) labor theory of value.
B) capital theory of value.
C) land theory of value.
D) entrepreneur theory of value.

Question 28

Figure 2.1. Production Possibilities Frontier

-Refer to Figure 2.1.If the relative cost of steel were to rise, then the production possibilities frontier would

A) become steeper.
B) become flatter.
C) shift inward in a parallel manner.
D) shift outward in a parallel manner.

Question 29

With trade, a country will maximize its satisfaction when it

A) moves to the highest possible indifference curve.
B) forces the marginal rate of substitution to its lowest possible value.
C) consumes more of both goods than it does in autarky.
D) finds its marginal rate of substitution exceeding its marginal rate of transformation.

Question 30

In a two-country, two-product world, the statement "Japan enjoys a comparative advantage over France in steel relative to bicycles" is equivalent to

A) France having a comparative advantage over Japan in bicycles relative to steel.
B) France having a comparative disadvantage against Japan in bicycles and steel.
C) Japan having a comparative advantage over France in steel and bicycles.
D) Japan having a comparative disadvantage against Japan in bicycles and steel.

Question 31

Autarky is defined as

A) the relative cost to produce and consume.
B) the absence of trade.
C) the amount of labor required to produce 1 unit of a product.
D) the slope of the production possibilities frontier.

Question 32

In the absence of trade, a nation is in equilibrium where a community indifference curve

A) lies above its production possibilities frontier.
B) is tangent to its production possibilities frontier.
C) intersects its production possibilities frontier.
D) lies below its production possibilities frontier.

Question 33

Trade between two nations would NOT be possible if they have

A) identical community indifference curves but different production possibilities frontiers.
B) identical production possibilities frontiers but different community indifference curves.
C) different production possibilities frontiers and different community indifference curves.
D) identical production possibilities frontiers and identical community indifference curves.

Question 34

Figure 2.1. Production Possibilities Frontier

-Refer to Figure 2.1.If the relative cost of aluminum were to rise, then the production possibilities frontier would

A) become steeper.
B) become flatter.
C) shift inward in a parallel manner.
D) shift outward in a parallel manner.

Question 35

According to Ricardo, a country will have a comparative advantage in the product in which its

A) labor productivity is relatively low.
B) labor productivity is relatively high.
C) labor mobility is relatively low.
D) labor mobility is relatively high.

Question 36

If Canada experiences constant opportunity costs, its supply schedule of steel will be

A) downward-sloping.
B) upward-sloping.
C) horizontal.
D) vertical.

Question 37

Given a two-country and two-product world, the United States would enjoy all the attainable gains from free trade with Canada if it

A) trades at the U.S. rate of transformation.
B) trades at the Canadian rate of transformation.
C) specializes completely in the production of both goods.
D) specializes partially in the production of both goods.

Question 38

The gains from international trade increase as

A) a nation consumes inside of its production possibilities schedule.
B) a nation consumes along its production possibilities schedule.
C) the international terms of trade rises above the nation's autarky price.
D) the international terms of trade approaches the nation's autarky price.

Question 39

Constant-cost conditions reflect that

A) quality differs between products.
B) products are perfect substitutes for each other.
C) product quality is related to who products it.
D) one product is more desirable than the other.

Question 40

The Ricardian model of comparative advantage includes all of the following assumptions EXCEPT

A) it is only based on two nations and two products.
B) product quality varies among nations.
C) labor is the only factor of production.
D) labor can move freely within a nation.

Question 41

Because the Ricardian trade theory recognized only how supply conditions influence international prices, it could determine

A) the equilibrium terms of trade.
B) the outer limits for the terms of trade.
C) where a country chooses to locate along its production possibilities frontier.
D) where a country chooses to locate along its trade triangle.

Question 42

Figure 2.2. Canadian Trade Possibilities
​ ​
Consider Figure 2.2.In the absence of trade, Canada would produce and consume

A) 8 televisions and 16 refrigerators.
B) 12 televisions and 16 refrigerators.
C) 8 televisions and 12 refrigerators.
D) 12 televisions and 8 refrigerators.

Question 43

The best explanation of the gains from trade that David Ricardo could provide was to describe only the outer limits within which the equilibrium terms of trade would fall.This is because Ricardo's theory did NOT recognize how market prices are influenced by

A) demand conditions.
B) supply conditions.
C) business expectations.
D) profit patterns.

Question 44

The terms of trade is given by

A) (Price of exports/price of imports) ? 100.
B) (Price of exports/price of imports) + 100.
C) (Price of exports/price of imports) ÷ 100.
D) (Price of exports/price of imports) × 100.

Question 45

A term-of-trade index that equals 90 indicates that compared to the base year,

A) it requires a greater output of domestic goods to obtain the same amount of foreign goods.
B) it requires a lesser amount of domestic goods to obtain the same amount of foreign goods.
C) the price of exports has fallen from $100 to $90.
D) the price of imports has fallen from $100 to $90.

Question 46

The terms of trade is given by the prices

A) paid for all goods imported by the home country.
B) received for all goods exported by the home country.
C) received for exports and paid for imports.
D) of primary products as opposed to manufactured products.

Question 47

Under free trade, Canada would not enjoy any gains from trade with Sweden if Canada

A) trades at the Canadian rate of transformation.
B) trades at Sweden's rate of transformation.
C) specializes completely in the production of its export good.
D) specializes partially in the production of its export good.

Question 48

John Stuart Mill's theory of reciprocal demand best applies when trading partners

A) are of equal size and importance in the market.
B) produce under increasing cost conditions.
C) partially specialize in the production of commodities.
D) have similar taste and preference levels.

Question 49

Figure 2.2. Canadian Trade Possibilities
​ ​
Referring to Figure 2.2, Canada has a comparative advantage in

A) televisions.
B) refrigerators.
C) televisions and refrigerators.
D) neither televisions nor refrigerators.

Question 50

A rise in the price of imports or a fall in the price of exports will

A) improve the terms of trade.
B) worsen the terms of trade.
C) expand the production possibilities frontier.
D) contract the production possibilities frontier.

Question 51

The equilibrium prices and quantities established after trade are fully determinate if we know

A) the location of all countries' indifference curves.
B) the shape of each country's production possibilities frontier.
C) the comparative costs of each trading partner.
D) the strength of world supply and demand for each good.

Question 52

If Japan and France have identical production possibilities frontiers and identical community indifference curves, then

A) Japan will enjoy all the gains from trade.
B) France will enjoy all the gains from trade.
C) Japan and France share equally in the gains from trade.
D) gainful specialization and trade are not possible.

Question 53

A fall in the price of imports or a rise in the price of exports will

A) improve the terms of trade.
B) worsen the terms of trade.
C) expand the production possibilities frontier.
D) contract the production possibilities frontier.

Question 54

"The equilibrium relative commodity price at which trade takes place is determined by the conditions of demand and supply for each commodity in both nations.Other things being equal, the nation with the more intense demand for the other nation's exported good will gain less from trade than the nation with the less intense demand." This statement was first proposed by

A) Alfred Marshall with offer curve analysis.
B) John Stuart Mill with the theory of reciprocal demand.
C) Adam Smith with the theory of absolute advantage.
D) David Ricardo with the theory of comparative advantage.

Question 55

The theory of reciprocal demand does NOT well apply when one country

A) produces under constant-cost conditions.
B) produces along its production possibilities frontier.
C) is of minor economic importance in the world marketplace.
D) partially specializes the production of its export good.

Question 56

Which of the following terms-of-trade concepts is calculated by dividing the change in a country's export price index by the change in its import price index between two points in time, multiplied by 100 to express the terms of trade in percentages?

A) commodity terms of trade
B) marginal rate of transformation
C) marginal rate of substitution
D) autarky price ratio

Question 57

Given free trade, small nations tend to benefit the most from trade since they

A) are more productive than their large trading partners.
B) are less productive than their large trading partners.
C) have demand preferences and income levels lower than their large trading partners.
D) enjoy terms of trade lying near the opportunity costs of their large trading partners.

Question 58

Figure 2.2. Canadian Trade Possibilities
​ ​
Consider Figure 2.2.With specialization, Canada produces

A) 16 televisions.
B) 12 televisions and 8 refrigerators.
C) 8 televisions and 16 refrigerators.
D) 24 refrigerators.

Question 59

A terms-of-trade index that equals 150 indicates that compared to the base year,

A) it requires a greater output of domestic goods to obtain the same amount of foreign goods.
B) it requires a lesser amount of domestic goods to obtain the same amount of foreign goods.
C) the price of exports has risen from $100 to $150.
D) the price of imports has risen from $100 to $150.

Question 60

Under free trade, Sweden enjoys all of the gains from trade with Holland if Sweden

A) trades at Holland's rate of transformation.
B) trades at Sweden's rate of transformation.
C) specializes completely in the production of its export good.
D) specializes partially in the production of its export good.

Question 61

Figure 2.3 Production Possibilities Frontier
In Figure 2.3, one ton of wheat can be produced at a cost of

A) one and two-thirds cars.
B) two and one-third cars.
C) three fifths of a car.
D) three sevenths of a car.

Question 62

Figure 2.3 Production Possibilities Frontier
In Figure 2.3, one car can be produced at a cost of

A) one and two-thirds tons of wheat.
B) two and one-third tons of wheat.
C) three fifths tons of wheat.
D) three sevenths tons of wheat.

Question 63

Improvements in productivity may lead to decreasing comparative costs if

A) the assumption of fixed technologies under constant costs is relaxed.
B) technologies available to each nation are maintained the same.
C) resource endowments do not vary.
D) comparative advantage does not change.

Question 64

Suppose Japan produces Widget A at the lowest cost.Then, Sweden discovers and uses new technology to produce Widget A at a slightly lower cost.What could Japan do to increase its comparative advantage in Widget A?

A) Japan could specialize on aspects of Widget A for which it is more productive relative to Sweden.
B) Japan can produce less of Widget A.
C) Japan can use its manufacturing sector to produce a different kind of widget.
D) Japan can continue to produce Widget A with no changes in production.

Question 65

Concerning possible determinants of international trade, which are sources of comparative advantage?

A) differences in role of production
B) differences in tastes and preferences
C) differences in technological know-how
D) differences in terms of trade

Question 66

Figure 2.3 Production Possibilities Frontier
In Figure 2.3, the marginal rate of transformation of autos into wheat is

A) one and two-thirds.
B) two and one-third.
C) three fifths.
D) three sevenths.

Question 67

Ricardo's model of comparative advantage assumed all of the following EXCEPT

A) in each nation, labor is the only input.
B) costs do not vary with the level of production.
C) perfect competition prevails in all markets.
D) transportation costs rise as distance increases between countries.

Question 68

Modern trade theory contends that the pattern of world trade is governed by

A) mercantilism.
B) supply conditions only.
C) demand conditions only.
D) the ability to separate the production process into tasks that can be done in different locations.

Question 69

The commodity terms of trade measures

A) the rate at which exports exchange for imports.
B) the influence trade has on productivity levels.
C) the effect on income of the trading nation.
D) the improvement in a nation's welfare.

Question 70

The dynamic gains from trade include all of the following EXCEPT

A) economies of large-scale production resulting in decreasing unit cost.
B) increased saving and investment resulting in economic growth.
C) increased competition resulting in lower prices and wider range of output.
D) increasing comparative advantage leading to specialization.

Question 71

Figure 2.2. Canadian Trade Possibilities
​ ​
Consider Figure 2.2.With trade, Canada consumes

A) 12 televisions and 8 refrigerators.
B) 12 televisions and 16 refrigerators.
C) 8 televisions and 16 refrigerators.
D) 24 refrigerators.

Question 72

According to your text, international trade has little impact on jobs because

A) people prefer to buy domestically.
B) governments control trade through tariffs.
C) trade and unemployment typically move in unison.
D) international trade tends to follow the principle of comparative advantage.

Question 73

Figure 2.3 Production Possibilities Frontier
In Figure 2.3, the marginal rate of transformation of wheat into autos is

A) one and two-thirds.
B) two and one-third.
C) three fifths.
D) three sevenths.

Question 74

Which is NOT true about Adam Smith?

A) He was a leading advocate of free trade.
B) He developed the concept of absolute advantage.
C) He maintained that labor costs represent the major determinant of production cost.
D) He stated that a favorable trade balance is possible only in the short run, as over time it would automatically be eliminated.

Question 75

Ricardo's model of comparative advantage assumed all of the following EXCEPT

A) trade is balanced, thus ruling out flows of money between nations.
B) firms make production decisions in an attempt to maximize profits.
C) free trade occurs between nations.
D) labor is immobile within a country, but is incapable of moving between countries.

Question 76

Figure 2.2. Canadian Trade Possibilities
​ ​
According to Figure 2.2, imports for Canada total

A) 6 televisions.
B) 8 televisions.
C) 12 televisions.
D) 16 televisions.

Question 77

Incomplete specialization may be caused by

A) increasing opportunity cost.
B) unrestricted trade.
C) constant opportunity cost.
D) decreasing opportunity cost.

Question 78

When nations are of similar size and have similar taste patterns, the gains from trade

A) are shared equally between them.
B) are impossible to determine.
C) are too small, so that trading is not beneficial.
D) are determined by the nation that has comparative advantage in the more essential product.

Question 79

All of the following may be exit barriers EXCEPT

A) employee health benefit costs.
B) treatment, storage and disposal costs.
C) penalties for terminating contracts with raw material suppliers.
D) increasing opportunity cost of production.

Question 80

Figure 2.2. Canadian Trade Possibilities
​ ​
According to Figure 2.2, exports for Canada total

A) 16 refrigerators.
B) 8 refrigerators.
C) 12 refrigerators.
D) 16 refrigerators.