Deck 19: Interdependence and the Gains From Trade

Question 1

Opportunity costs change as an economy moves along its production possibilities frontier because

A) resources are not completely adaptable to alternative uses.
B) factors of production are limited and human wants are unlimited.
C) efficiencies are generated by large-scale production.
D) economic efficiency is only possible in the short run.

Answer 1

resources are not completely adaptable to alternative uses.

Question 2

Points outside the production possibilities frontier are attainable but inefficient.

Answer 2

False

Question 3

If an economy is operating on its production possibilities frontier, it must produce less of one good if it produces more of another.

Answer 3

True

Question 4

If an economy is operating on its production possibilities frontier, it must be using its resources efficiently.

Question 5

Tariffs and quotas cause deadweight losses because they raise the price of the imported good and cause over-production and under-consumption of the good in the importing country.

Question 6

A tariff raises the price of a good, reduces the domestic quantity demanded, increases the domestic quantity supplied, and increases the quantity imported.

Question 7

Opponents of free trade often argue that free trade destroys domestic jobs.

Question 8

Economic growth is depicted by a

A) shift in the production possibilities frontier outward.
B) movement from inside the curve toward the curve.
C) shift in the production possibilities frontier inward.
D) movement along a production possibilities frontier toward capital goods.

Question 9

Comparative advantage is a comparison based on opportunity cost.

Question 10

All points on a production possibilities frontier show the

A) maximum satisfaction that households receive from their purchases of goods.
B) minimum quantities of resources that must be used to produce a given quantity of output.
C) maximum output that society can produce with given resources and technology.
D) minimum output that society can produce with given resources and technology.

Question 11

If South Africa has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item.

Question 12

Comparative advantage, not absolute advantage, determines the decision to specialise in production.

Question 13

Points on the production possibilities frontier are

A) inefficient.
B) normative.
C) unattainable.
D) efficient.
E) equitable.

Question 14

Exhibit 1

Refer to Exhibit 1. Point F represents a combination of production that

A) is a more equitable output level of both biscuits and buns.
B) can be reached if we reduce the production of buns by 20 units.
C) can be reached if there is a sufficient advance in technology.
D) is inefficient because there are unemployed resources.

Question 15

Which of the following will not shift a country's production possibilities frontier outward?

A) An advance in technology.
B) An increase in the labour force.
C) An increase in the capital stock.
D) A reduction in unemployment.

Question 16

Exhibit 1

Refer to Exhibit 1. As we move from point A to point D,

A) the opportunity cost of buns in terms of biscuits falls.
B) the opportunity cost of buns in terms of biscuits rises.
C) the opportunity cost of buns in terms of biscuits is constant.
D) the economy becomes less efficient.
E) the economy becomes more efficient.

Question 17

The production possibilities frontier demonstrates the basic economic principle that

A) economies are always efficient.
B) assuming full employment, supply will always determine demand.
C) assuming full employment, an economy is efficient only when the production of capital goods in a particular year is greater than the production of consumption goods in that year.
D) assuming full employment, to produce more of any one thing, the economy must produce less of at least one other good.

Question 18

If trade benefits one country, its trading partner must be worse off due to trade.

Question 19

Exhibit 1

Refer to Exhibit 1. If the economy is operating at point C, the opportunity cost of producing an additional 15 units of biscuits is

A) 40 units of buns.
B) 10 units of buns.
C) 20 units of buns.
D) 30 units of buns.
E) 50 units of buns.

Question 20

If a nation has an absolute advantage in the production of a good it

A) can benefit by restricting imports of that good.
B) will specialise in the production of that good and export it.
C) can produce that good using fewer resources than its trading partner.
D) can produce that good at a lower opportunity cost than its trading partner.

Question 21

Table 1 shows the units of output a worker can produce per month in South Africa and Namibia.
$$\begin{array} { | l | c | c | } \hline & \text { Fond } & \text { Electranics } \\\hline \text { South Africa } & 20 & 5 \\\hline \text { Narmibia } & 8 & 2 \\\hline\end{array}$$

-Refer to Table 1. The opportunity cost of 1 unit of electronics in South Africa is

A) 4 units of food.
B) 5 units of food.
C) 1/5 of a unit of food.
D) 1/4 of a unit of food.

Question 22

Suppose the world consists of two countries: Germany and Spain. Further, suppose there are only two goods, food and clothing. Which of the following statements is true?

A) If Germany has an absolute advantage in the production of food, then Spain must have an absolute advantage in the production of clothing.
B) None of these answers.
C) If Germany has a comparative advantage in the production of food, Spain might also have a comparative advantage in the production of food.
D) If Germany has a comparative advantage in the production of food, it must also have a comparative advantage in the production of clothing.
E) If Germany has a comparative advantage in the production of food, then Spain must have a comparative advantage in the production of clothing.

Question 23

Busisani is a tax accountant. He receives R100 per hour doing tax returns. He can type 10 000 characters per hour into spreadsheets. He can hire an assistant who types 2 500 characters per hour into spreadsheets. Which of the following statements is true?

A) None of these answers.
B) Busisani should hire the assistant as long as he pays the assistant less than R25 per hour.
C) Busisani should not hire an assistant because the assistant cannot type as fast as he.
D) Busisani should hire the assistant as long as he pays the assistant less than R100 per hour.

Question 24

Table 1 shows the units of output a worker can produce per month in South Africa and Namibia.
$$\begin{array} { | l | c | c | } \hline & \text { Fond } & \text { Electranics } \\\hline \text { South Africa } & 20 & 5 \\\hline \text { Narmibia } & 8 & 2 \\\hline\end{array}$$

-Refer to Table 1. Which of the following statements about comparative advantage is true?

A) South Africa has a comparative advantage in the production of both food and electronics.
B) Namibia has a comparative advantage in the production of both food and electronics.
C) South Africa has a comparative advantage in the production of food while Namibia has a comparative advantage in the production of electronics.
D) Namibia has a comparative advantage in the production of food while South Africa has a comparative advantage in the production of electronics.
E) Neither country has a comparative advantage.

Question 25

Exhibit 2

Refer to Exhibit 2. If free trade is allowed, producer surplus is the

A) Area B + C + D.
B) Area A + B + C.
C) Area B + C.
D) Area A + B + C + D.
E) Area C.

Question 26

If a nation has a comparative advantage in the production of a good it

A) can produce that good at a lower opportunity cost than its trading partner.
B) can benefit by restricting imports of that good.
C) can produce that good using fewer resources than its trading partner.
D) must be the only country with the ability to produce that good.

Question 27

Table 1 shows the units of output a worker can produce per month in South Africa and Namibia.
$$\begin{array} { | l | c | c | } \hline & \text { Fond } & \text { Electranics } \\\hline \text { South Africa } & 20 & 5 \\\hline \text { Narmibia } & 8 & 2 \\\hline\end{array}$$

-Refer to Table 1. The opportunity cost of 1 unit of food in South Africa is

A) 1/5 of a unit of electronics.
B) 5 units of electronics.
C) 4 units of electronics.
D) 1/4 of a unit of electronics.

Question 28

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade, the opportunity cost of 1 watch is

A) 1/4 of a ring.
B) 3 rings.
C) 4 rings.
D) 12 rings.
E) 1/3 of a ring.

Question 29

Table 1 shows the units of output a worker can produce per month in South Africa and Namibia.
$$\begin{array} { | l | c | c | } \hline & \text { Fond } & \text { Electranics } \\\hline \text { South Africa } & 20 & 5 \\\hline \text { Narmibia } & 8 & 2 \\\hline\end{array}$$

-Refer to Table 1. The opportunity cost of 1 unit of electronics in Namibia is

A) 4 units of food.
B) 1/4 units of food.
C) 2 units of food.
D) 1/2 of a unit of food.

Question 30

Exhibit 2

Refer to Exhibit 2. If free trade is allowed, consumer surplus is the

A) Area A + B + C + D.
B) Area A.
C) Area A + B + D.
D) Area A + B + C.
E) Area A + B.

Question 31

Table 1 shows the units of output a worker can produce per month in South Africa and Namibia.
$$\begin{array} { | l | c | c | } \hline & \text { Fond } & \text { Electranics } \\\hline \text { South Africa } & 20 & 5 \\\hline \text { Narmibia } & 8 & 2 \\\hline\end{array}$$

-Refer to Table 1. Prices of electronics can be stated in terms of units of food. What is the range of prices of electronics for which both countries could gain from trade? The price must be greater than:

A) 1/5 of a unit of food but less than 1/4 of a unit of food.
B) 4 units of food but less than 5 units of food.
C) 1/4 of a unit of food but less than 1/2 of a unit of food.
D) 2 units of food but less than 4 units of food.

Question 32

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade, the domestic price of 1 ring is

A) 1/4 of a watch.
B) 3 watches.
C) 1/3 of a watch.
D) 12 watches.
E) 4 watches.

Question 33

Suppose the world price is below the before-trade domestic price for a good. If a country allows free trade in this good,

A) both producers and consumers will gain.
B) both producers and consumers will lose.
C) producers will gain and consumers will lose.
D) consumers will gain and producers will lose.

Question 34

Which of the following statements is true?

A) A self-sufficient country can, at best, consume on its production possibilities frontier.
B) Only countries with an absolute advantage in the production of every good should strive to be self-sufficient.
C) A self-sufficient country consumes outside its production possibilities frontier.
D) Self-sufficiency is the road to prosperity for most countries.

Question 35

Which of the following statements about trade is true?

A) Unrestricted international trade benefits every person in a country equally.
B) Trade can benefit everyone in society because it allows people to specialise in activities in which they have a comparative advantage.
C) People that are skilled at all activities cannot benefit from trade because they do not have an opportunity cost in production.
D) Trade can benefit everyone in society because it allows people to specialise in activities in which they have an absolute advantage.

Question 36

Exhibit 2

Refer to Exhibit 2. If trade is not allowed, producer surplus is the

A) Area A + B + C + D.
B) Area A + B + C.
C) Area B + C + D.
D) Area C.
E) Area B + C.

Question 37

If free trade is allowed, a country will export a good if the world price is

A) above the before-trade domestic price of the good.
B) below the before-trade domestic price of the good.
C) equal to the before-trade domestic price of the good.
D) equal to the price elasticity of supply of the good.

Question 38

Table 1 shows the units of output a worker can produce per month in South Africa and Namibia.
$$\begin{array} { | l | c | c | } \hline & \text { Fond } & \text { Electranics } \\\hline \text { South Africa } & 20 & 5 \\\hline \text { Narmibia } & 8 & 2 \\\hline\end{array}$$

-Refer to Table 1. Namibia should

A) specialise in electronics production, export electronics, and import food.
B) produce neither good because it has an absolute disadvantage in the production of both goods.
C) produce both goods because neither country has a comparative advantage.
D) specialise in food production, export food, and import electronics.

Question 39

According to the principle of comparative advantage, countries

A) should specialise in the production of goods that they enjoy consuming.
B) with a comparative advantage in the production of every good need not specialise.
C) should specialise in the production of goods for which they have a lower opportunity cost of production than their trading partners.
D) should specialise in the production of goods for which they use fewer resources in production than their trading partners.

Question 40

Table 1 shows the units of output a worker can produce per month in South Africa and Namibia.
$$\begin{array} { | l | c | c | } \hline & \text { Fond } & \text { Electranics } \\\hline \text { South Africa } & 20 & 5 \\\hline \text { Narmibia } & 8 & 2 \\\hline\end{array}$$

-Refer to Table 1. Which of the following statements about absolute advantage is true?

A) South Africa has an absolute advantage in the production of food while Namibia has an absolute advantage in the production of electronics.
B) Namibia has an absolute advantage in the production of food while South Africa has an absolute advantage in the production of electronics.
C) South Africa has an absolute advantage in the production of both food and electronics.
D) Namibia has an absolute advantage in the production of both food and electronics.

Question 41

Using the graph, assume that the government imposes a R1 tariff on ice cream.

a. What is the domestic price and quantity demanded of ice cream after the tariff is imposed?
b. What is the quantity of ice cream imported before the tariff?
c. What is the quantity of ice cream imported after the tariff?
d. What would be the amount of consumer surplus before the tariff?
e. What would be the amount of consumer surplus after the tariff?
f. What would be the amount of producer surplus before the tariff?
g. What would be the amount of producer surplus after the tariff?
h. What would be the amount of government revenue because of the tariff?
i. What would be the total amount of deadweight loss due to the tariff?

Question 42

Which of the following is not employed as an argument in support of trade restrictions?

A) Free trade harms the national security if vital products are imported.
B) Free trade is harmful to importing countries if foreign countries subsidise their exporting industries.
C) Free trade destroys domestic jobs.
D) Free trade harms both domestic producers and domestic consumers and therefore reduces total surplus.
E) Free trade harms infant industries in an importing country.

Question 43

How does an import quota differ from an equivalent tariff?

Question 44

Which of the following statements about a tariff is true?

A) A tariff increases producer surplus, decreases consumer surplus, increases revenue to the government, and increases total surplus.
B) A tariff increases consumer surplus, decreases producer surplus, increases revenue to the government, and reduces total surplus.
C) A tariff increases producer surplus, decreases consumer surplus, increases revenue to the government, and reduces total surplus.
D) A tariff increases consumer surplus, decreases producer surplus, increases revenue to the government, and increases total surplus.

Question 45

Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of horseshoes.
a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes.
b. On the graph, label a point that is efficient and a point that is inefficient.
c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy.
d. On a second graph, illustrate the effect of a new computerised assembly line in the production of hammers on this economy.

Question 46

Using the graph below, answer the following questions about dark chocolate slabs.

a. What is the equilibrium price of slabs before trade?
b. What is the equilibrium quantity of slabs before trade?
c. What is the price of slabs after trade is allowed?
d. What is the quantity of slabs imported after trade is allowed?
e. What is the amount of consumer surplus before trade?
f. What is the amount of consumer surplus after trade?
g. What is the amount of producer surplus before trade?
h. What is the amount of producer surplus after trade?
i. What is the amount of total surplus before trade?
j. What is the amount of total surplus after trade?
k. What is the change in total surplus because of trade?

Question 47

Exhibit 3

Refer to Exhibit 3. Government revenue from the tariff is the

A) Area D + F.
B) Area G.
C) Area E.
D) Area D + E + F.
E) Area C + D + E + F.

Question 48

Julia can fix a meal in 1 hour, and her opportunity cost of one hour is R50. Jacques can fix the same kind of meal in 2 hours, and his opportunity cost of one hour is R20. Will both Julia and Jacques be better off if she pays him R45 per meal to fix her meals? Explain.

Question 49

Exhibit 2

Refer to Exhibit 2. The gains from trade correspond to the

A) Area B.
B) Area D.
C) Area C.
D) Area B + D.
E) Area A.

Question 50

When a country allows trade and imports a good,

A) domestic producers are worse off, domestic consumers are better off, and the nation is worse off because the losses of the losers exceed the gains of the winners.
B) domestic consumers are worse off, domestic producers are better off, and the nation is worse off because the losses of the losers exceed the gains of the winners.
C) domestic producers are worse off, domestic consumers are better off, and the nation is better off because the gains of the winners exceed the losses of the losers.
D) domestic consumers are worse off, domestic producers are better off, and the nation is better off because the gains of the winners exceed the losses of the losers.

Question 51

Exhibit 3

Refer to Exhibit 3. If free trade is allowed, consumer surplus is the

A) Area A + B + C + D + E + F + G.
B) Area A + B.
C) Area A + B + C + D + E + F.
D) Area A.
E) Area A + B + C.

Question 52

What are the arguments in favour of trade restrictions, and what are the counterarguments? According to most economists, do any of these arguments really justify trade restrictions? Explain.

Question 53

Use the graph to answer the following questions about music album downloads.

a. What is the equilibrium price of music album downloads before trade?
b. What is the equilibrium quantity of music album downloads before trade?
c. What is the price of music album downloads after trade is allowed?
d. What is the quantity of music album downloads exported after trade is allowed?
e. What is the amount of consumer surplus before trade?
f. What is the amount of consumer surplus after trade?
g. What is the amount of producer surplus before trade?
h. What is the amount of producer surplus after trade?
i. What is the amount of total surplus before trade?
j. What is the amount of total surplus after trade?
k. What is the change in total surplus because of trade?

Question 54

The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.

a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A. How much of each good would the countries produce?
b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts?
c. Now suppose that each country decides to specialise in the good in which each has a comparative advantage. By specialising, what is the total world production of each product now?
d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

Question 55

Exhibit 3

Refer to Exhibit 3. The deadweight loss from the tariff is the

A) Area D + F.
B) Area E.
C) Area D + E + F.
D) Area B + D + E + F.
E) Area B.

Question 56

Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?

Question 57

When a country allows trade and exports a good,

A) domestic consumers are better off, domestic producers are worse off, and the nation is worse off because the losses of the losers exceed the gains of the winners.
B) domestic consumers are better off, domestic producers are worse off, and the nation is better off because the gains of the winners exceed the losses of the losers.
C) domestic producers are better off, domestic consumers are worse off, and the nation is worse off because the losses of the losers exceed the gains of the winners.
D) domestic producers are better off, domestic consumers are worse off, and the nation is better off because the gains of the winners exceed the losses of the losers.

Question 58

Yusuf and Lebogang must prepare a presentation for their marketing class. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Yusuf 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Lebogang 12 hours to do the calculations and 20 hours to prepare the slides.
a. How much time would it take the two to complete the project if they divide the calculations equally and the slides equally?
b. How much time would it take the two to complete the project if they use comparative advantage and specialise in calculating or preparing slides?
c. If Lebogang and Yusuf have the same opportunity cost of R50 per hour, is there a better solution than for each to specialise in calculating or preparing slides?