Deck 2: Foundations of Modern Trade Theory: Comparative Advantage

Question 1

Table 2.1.Output Possibilities of the U.S.and the U.K.

Referring to Table 2.1,the United Kingdom gains most from trade if:

A) 1 ton of steel trades for 2 televisions
B) 1 ton of steel trades for 3 televisions
C) 2 tons of steel trade for 4 televisions
D) 2 tons of steel trade for 5 televisions

Answer 1

B

Question 2

If a production possibilities curve 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

Answer 2

B

Question 3

Concerning international trade restrictions,which of the following is false? Trade restrictions:

A) Limit specialization and the division of labor
B) Reduce the volume of trade and the gains from trade
C) Cause nations to produce inside their production possibilities curves
D) May result in a country producing some of the product of its comparative disadvantage

Answer 3

C

Question 4

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 5

When a nation requires fewer resources than another nation to produce a product,the nation is said to have a:

A) Absolute advantage in the production of the product
B) Comparative advantage in the production of the product
C) Lower marginal rate of transformation for the product
D) Lower opportunity cost of producing the product

Question 6

Table 2.1.Output Possibilities of the U.S.and the U.K.

Refer to Table 2.1.If trade opens up between the United States and the United Kingdom,American firms should specialize in producing:

A) Steel
B) Televisions
C) Both steel and televisions
D) Neither steel nor televisions

Question 7

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

A) Inside its production possibilities curve
B) Along its production possibilities curve
C) Outside its production possibilities curve
D) None of the above

Question 8

Table 2.1.Output Possibilities of the U.S.and the U.K.

Refer to Table 2.1.Mutually advantageous trade will occur between the United States and the United Kingdom so long as one ton of steel trades for:

A) At least 1 television,but no more than 2 televisions
B) At least 2 televisions,but no more than 3 televisions
C) At least 3 televisions,but no more than 4 televisions
D) At least 4 televisions,but no more than 5 televisions

Question 9

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 10

Table 2.1.Output Possibilities of the U.S.and the U.K.

Referring to Table 2.1,the United States has the absolute advantage in the production of:

A) Steel
B) Televisions
C) Both steel and televisions
D) Neither steel nor televisions

Question 11

Table 2.1.Output Possibilities of the U.S.and the U.K.

Referring to Table 2.1,the United Kingdom has a comparative advantage in the production of:

A) Steel
B) Televisions
C) Both steel and televisions
D) Neither steel nor televisions

Question 12

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 curve appears as a straight line
D) A country's production possibilities curve is bowed inward (i.e.,convex) in appearance

Question 13

Table 2.1.Output Possibilities of the U.S.and the U.K.

Referring to Table 2.1,the opportunity cost of producing one ton of steel in the United States is:

A) 3 televisions
B) 10 televisions
C) 20 televisions
D) 45 televisions

Question 14

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

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

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 curve
D) The problem of unemployment is eliminated

Question 17

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

A) Exports,marginal rate of transformation,terms of trade
B) Imports,terms of trade,marginal rate of transformation
C) Marginal rate of transformation,imports,exports
D) Terms of trade,exports,imports

Question 18

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 19

As a result of international trade,specialization in production tends to be:

A) Complete with constant costs--complete with increasing costs
B) Complete with constant costs--incomplete with increasing costs
C) Incomplete with constant costs--complete with increasing costs
D) Incomplete with constant costs--incomplete with increasing costs

Question 20

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 21

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 22

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 23

Figure 2.1.Production Possibilities Schedule

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 24

Figure 2.1.Production Possibilities Schedule

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

A) Become steeper
B) Become flatter
C) Shift inward in a parallel manner
D) Shift outward in a parallel manner

Question 25

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

A) Along the production possibilities schedule
B) Above the production possibilities schedule
C) Beneath the production possibilities schedule
D) Any of the above

Question 26

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

A) Downward-sloping
B) Upward-sloping
C) Horizontal
D) Vertical

Question 27

Table 2.2.Output possibilities for South Korea and Japan

Refer to Table 2.2.With international trade,what would be the maximum number of VCRs that Japan would be willing to export to South Korea in exchange for each ton of steel?

A) 1 VCR
B) 2 VCRs
C) 3 VCRs
D) 4 VCRs

Question 28

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

Question 29

Table 2.2.Output possibilities for South Korea and Japan

Referring to Table 2.2,the opportunity cost of one VCR in Japan is:

A) 1 ton of steel
B) 2 tons of steel
C) 3 tons of steel
D) 4 tons of steel

Question 30

Figure 2.1.Production Possibilities Schedule

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

A) Become steeper
B) Become flatter
C) Shift inward in a parallel manner
D) Shift outward in a parallel manner

Question 31

Table 2.2.Output possibilities for South Korea and Japan

Refer to Table 2.2.With international trade,what would be the maximum amount of steel that South Korea would be willing to export to Japan in exchange for each VCR?

A) 1/2 ton of steel
B) 1 ton of steel
C) 1-1/2 tons of steel
D) 2 tons of steel

Question 32

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 33

Table 2.2.Output possibilities for South Korea and Japan

Referring to Table 2.2,the opportunity cost of one VCR in South Korea is:

A) 1/2 ton of steel
B) 1 ton of steel
C) 1 1/2 tons of steel
D) 2 tons of steel

Question 34

Table 2.2.Output possibilities for South Korea and Japan

Refer to Table 2.2.According to the principle of absolute advantage,Japan should:

A) Export steel
B) Export VCRs
C) Export steel and VCRs
D) None of the above; there is no basis for gainful trade

Question 35

If the international terms of trade settle 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

Question 36

Table 2.2.Output possibilities for South Korea and Japan

Refer to Table 2.2.According to the principle of comparative advantage:

A) South Korea should export steel
B) South Korea should export steel and VCRs
C) Japan should export steel
D) Japan should export steel and VCRs

Question 37

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 38

The earliest statement of the principle of comparative advantage is associated with:

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

Question 39

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

A) Downward-sloping
B) Upward-sloping
C) Horizontal
D) Vertical

Question 40

Figure 2.1.Production Possibilities Schedule

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 41

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 42

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 43

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

A) Lies above its production possibilities curve
B) Is tangent to its production possibilities curve
C) Intersects its production possibilities curve
D) Lies below its production possibilities curve

Question 44

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 45

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 curve
C) The comparative costs of each trading partner
D) The strength of world supply and demand for each good

Question 46

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 47

"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 48

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 49

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 50

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 curve
D) Where a country chooses to locate along its trade triangle

Question 51

The Ricardian model of comparative advantage is based on all of the following assumptions except:

A) Only 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 52

Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in the United Kingdom equal $10 per hour.Production costs would be lower in the United States than the United Kingdom if:

A) U.S.labor productivity equaled 40 units per hour while U.K.labor productivity equaled 15 units per hour
B) U.S.labor productivity equaled 30 units per hour while U.K.labor productivity equaled 20 units per hour
C) U.S.labor productivity equaled 20 units per hour while U.K.labor productivity equaled 30 units per hour
D) U.S.labor productivity equaled 15 units per hour while U.K.labor productivity equaled 25 units per hour

Question 53

Trade between two nations would not be possible if they have:

A) Identical community indifference curves but different production possibilities curves
B) Identical production possibilities curves but different community indifference curves
C) Different production possibilities curves and different community indifference curves
D) Identical production possibilities curves and identical community indifference curves

Question 54

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 55

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 56

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 57

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 58

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 59

Introducing indifference curves into our trade model permits us to determine:

A) Where a nation chooses to locate along its production possibilities curve in autarky
B) The precise location of a nation's production possibilities curve
C) Whether absolute cost or comparative cost conditions exist
D) The currency price of one product in terms of another product

Question 60

The writings of G.MacDougall emphasized which of the following as an explanation of a country's competitive position?

A) National income levels
B) Relative endowments of natural resources
C) Domestic tastes and preferences
D) Labor compensation and productivity levels

Question 61

If Japan and France have identical production possibilities curves and identical community indifference curves:

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 62

The theory of reciprocal demand does not well apply when one country:

A) Produces under constant cost conditions
B) Produces along its production possibilities curve
C) Is of minor economic importance in the world marketplace
D) Partially specializes the production of its export good

Question 63

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C.
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 64

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C.
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

Question 65

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C.
Figure 2.2.Canadian Trade Possibilities

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

A) Methods of production
B) Tastes and preferences
C) Technological know-how
D) All of the above

Question 66

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 67

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 curve
D) Contract the production possibilities curve

Question 68

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 69

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C.
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 70

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 71

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C.
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 72

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C.
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 73

Table 2.3.Terms of Trade

Referring to Table 2.3,which countries' terms of trade improved between 1990 and 2004?

A) Mexico and Denmark
B) Sweden and Denmark
C) Sweden and Spain
D) Mexico and Sweden

Question 74

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 curve
D) Contract the production possibilities curve

Question 75

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 76

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 77

Table 2.3.Terms of Trade

Referring to Table 2.3,which countries' terms of trade worsened between 1990 and 2004?

A) Spain and Mexico
B) Mexico and France
C) France and Denmark
D) Denmark and Sweden

Question 78

Table 2.3.Terms of Trade

Referring to Table 2.3,which country's terms of trade did not change between 1990 and 2004?

A) Spain
B) Sweden
C) France
D) Denmark

Question 79

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C.
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 80

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