Deck 3: Labor Productivity and Comparative Advantage: the Ricardian Model

Question 1

Given the information in the table above, if wages were to double in Home, then Home should

A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.

Answer 1

export cloth.

Question 2

Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef?
Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.

Answer 2

(a) Argentina has an absolute advantage in the production of both wheat and beef because labor productivity in Argentina exceeds labor productivity in the U.S. for both products.
(b) In the U.S., the opportunity cost of wheat is 200/100 or 2.0 units of beef. In Argentina, the opportunity cost of wheat is 400/200 or 2.0 units of beef.
(c) In the U.S., the opportunity cost of beef is 100/200 or 0.5 units of wheat. In Argentina, the opportunity cost of beef is 400/200 or 0.5 units of wheat.
(d) Neither country has a comparative advantage and there is, therefore, no opportunity for beneficial trade.

Question 3

The Ricardian model demonstrates that

A) trade between two countries will benefit both countries.
B) trade between two countries may benefit both regardless of which good each exports.
C) trade between two countries may benefit both if each exports the product in which it has a comparative advantage.
D) trade between two countries may benefit one but harm the other.
E) trade between two countries always benefits the country with a larger labor force.

Answer 3

trade between two countries may benefit both if each exports the product in which it has a comparative advantage.

Question 4

Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef?
Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.

Question 5

Given the information in the table above, Home's opportunity cost of cloth is

A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.

Question 6

Given the information in the table above, Foreign's opportunity cost of cloth is

A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.

Question 7

In the Ricardian model, comparative advantage is likely to be due to

A) scale economies.
B) home product taste bias.
C) greater capital availability per worker.
D) labor productivity differences.
E) political pressure.

Question 8

Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef?
Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.

Question 9

Given the information in the table above

A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in cloth.
C) Foreign has a comparative advantage in cloth.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.

Question 10

Given the information in the table above, Home's opportunity cost of widgets is

A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.

Question 11

The Ricardian model attributes the gains from trade associated with the principle of comparative advantage result to

A) differences in technology.
B) differences in preferences.
C) differences in labor productivity.
D) differences in resources.
E) gravity relationships among countries.

Question 12

Given the information in the table above, if it is ascertained that Foreign uses prison-slave labor to produce its exports, then home should

A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.

Question 13

In a two-country, two-product world, the statement "Germany enjoys a comparative advantage over France in autos relative to ships" is equivalent to

A) France having a comparative advantage over Germany in ships.
B) France having a comparative disadvantage compared to Germany in autos and ships.
C) Germany having a comparative advantage over France in autos and ships.
D) France having no comparative advantage over Germany.
E) France should produce autos.

Question 14

Given the information in the table above

A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in widgets.
C) Foreign has a comparative advantage in widgets.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.

Question 15

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

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

Question 16

Trade between two countries can benefit both countries if

A) each country exports that good in which it has a comparative advantage.
B) each country enjoys superior terms of trade.
C) each country has a more elastic demand for the imported goods.
D) each country has a more elastic supply for the exported goods.
E) each country produces a wide range of goods for export.

Question 17

Given the information in the table above, if the Home economy suffered a meltdown, and the Unit Labor Requirements doubled to 20 for cloth and 40 for widgets then home should

A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.

Question 18

In order to know whether a country has a comparative advantage in the production of one particular product we need information on at least ________ unit labor requirements.

A) one
B) two
C) three
D) four
E) five

Question 19

Given the information in the table above, Foreign's opportunity cost of widgets is

A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.

Question 20

A country engaging in trade according to the principles of comparative advantage gains from trade because it

A) is producing exports indirectly more efficiently than it could alternatively.
B) is producing imports indirectly more efficiently than it could domestically.
C) is producing exports using fewer labor units.
D) is producing imports indirectly using fewer labor units.
E) is producing exports while outsourcing services.

Question 21

Given the information in the table above. What is the opportunity cost of cloth in terms of Widgets in Foreign?

Question 22

Which of the following statements is TRUE?

A) Free trade is beneficial only if your country is strong enough to stand up to foreign competition.
B) Free trade is beneficial only if your competitor does not pay unreasonably low wages.
C) Free trade is beneficial only if both countries have access to the same technology.
D) Free trade is never beneficial for developing countries.
E) Free trade can be beneficial to the economic welfare of all countries involved.

Question 23

Many countries in sub-Saharan Africa have very low labor productivities in many sectors, for example in manufacturing and agriculture. They often despair of even trying to attempt to build their industries unless it is done in an autarkic context, behind protectionist walls because they do not believe they can compete with more productive industries abroad. Discuss this issue in the context of the Ricardian model of comparative advantage.

Question 24

Given the information in the table above, if the world equilibrium price of widgets were 40 cloths, then

A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.

Question 25

If labor productivities were exactly proportional to wage levels internationally, this would

A) not negate the logical basis for trade in the Ricardian model.
B) render the Ricardian model theoretically correct but practically useless.
C) negate the logical basis for trade in the Ricardian model.
D) negate the applicability of the Ricardian model if the number of products were greater than the number of trading partners.
E) demonstrate the validity of the Ricardian model.

Question 26

How does the two-good, two-country version of the Ricardian model differ from the two-country, many-good model in terms of the determination which goods are produced and exported by each country?

Question 27

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.
E) prices of both goods in both countries.

Question 28

We know that in antiquity, China exported silk because no one in any other country knew how to produce this product. From this information we know that

A) China had a comparative advantage in silk.
B) China had an absolute advantage, but not a comparative advantage in silk.
C) no comparative advantage could exist because the technology was not diffused.
D) China exported silk for political reasons even though it had no comparative advantage.
E) China was unable to profit by exporting silk because it was unknown in the rest of the world.

Question 29

If a production possibilities frontier is a straight line, then production occurs under conditions of

A) increasing opportunity costs.
B) constant opportunity costs.
C) decreasing opportunity costs.
D) infinite opportunity costs.
E) uncertain opportunity costs.

Question 30

A nation engaging in trade according to the Ricardian model will find its consumption bundle

A) inside its production possibilities frontier.
B) on its production possibilities frontier.
C) outside its production possibilities frontier.
D) inside its trade-partner's production possibilities frontier.
E) on its trade-partner's production possibilities frontier.

Question 31

Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the United States as compared to Japan if

A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.
B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour.
C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour.
D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour.
E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour.

Question 32

Given the information in the table above. What is the opportunity cost of Cloth in terms of Widgets in Foreign?

Question 33

The Country of Rhozundia is blessed with rich copper deposits. The cost of copper produced (relative to the cost of widgets produced) is therefore very low. From this information we know that

A) Rhozundia has a comparative advantage in copper.
B) Rhozundia should import copper and export widgets.
C) Rhozundia should export both widgets and copper.
D) Rhozundia should invest in more widget production.
E) Rhozundia may or may not have a comparative advantage in copper.

Question 34

Given the information in the table above, if the world equilibrium price of widgets were 4 cloth, then

A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.

Question 35

The two-country, multi-product model differs from the two-country, two-product model in that, in the former

A) the relative wage ratio will determine the pattern of trade ( which good is exported by which country).
B) which country will export which product is determined entirely by labor productivity data.
C) full specialization is likely to hold in equilibrium.
D) none of the goods are potentially nontraded.
E) domestic relative prices are not relevant.

Question 36

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.
E) labor is outsourced to neighboring countries.

Question 37

An examination of the Ricardian model of comparative advantage yields the clear result that trade is (potentially) beneficial for each of the two trading partners since it allows for an expanded consumption choice for each. However, for the world as a whole the expansion of production of one product must involve a decrease in the availability of the other, so that it is not clear that trade is better for the world as a whole as compared to an initial situation of non-trade (but efficient production in each country). Are there in fact gains from trade for the world as a whole?
Explain.

Question 38

Mahatma Gandhi exhorted his followers in India to promote economic welfare by decreasing imports. This approach

A) makes no sense.
B) makes no economic sense.
C) is consistent with the the Ricardian model of comparative advantage.
D) is not consistent with the Ricardian model of comparative advantage.
E) guarantees benefits for Indian workers.

Question 39

The pauper labor and the exploitation arguments

A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative advantage.
B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance.
C) are not relevant because the Ricardian model is based on the labor theory of value.
D) are not relevant because the Ricardian model allows for different technologies in different countries.
E) invalidate the Ricardian model.

Question 40

In 1975, wage levels in South Korea were roughly 5% of those in the United States. It is obvious that if the United States had allowed Korean goods to be freely imported into the United States at that time, this would have caused devastation to the standard of living in the United States, because no producer in this country could possibly compete with such low wages. Discuss this assertion in the context of the Ricardian model of comparative advantage.

Question 41

Assume that transportation costs are especially high for Widgets in the two-country, two-product Ricardian model, and Country A enjoys a comparative advantage in Widgets, then

A) country B must also enjoy a comparative advantage in Widgets.
B) country B may end up exporting Widgets.
C) country A may switch to having a comparative advantage in the other good.
D) country A will still export Widgets.
E) trade may be impossible between the two countries.

Question 42

Which of the following has been confirmed by empirical tests of the Ricardian model?

A) All predictions of the model for a multi-product, multi-country world are highly unrealistic.
B) The existence of nontraded goods results in a high degree of specialization among countries.
C) International trade has no impact on income distribution.
D) The unimportance of economies of scale as a cause of trade.
E) Companies tend to export goods in which they have a relatively high level of productivity.

Question 43

Which of the following is most likely to be an untraded good in a Ricardian two-country, multi-good model?

A) steel
B) textiles
C) haircuts
D) petroleum
E) telemarketer services

Question 44

When compared with China, the growth of clothing exports originating in Bangladesh clearly illustrates the difference between absolute and comparative advantage. Discuss and explain.

Question 45

When compared with China, the growth of clothing exports originating in Bangladesh is the result of

A) the comparative advantage that Bangladesh has in the production of clothing for export.
B) the absolute advantage that China has in the production of clothing for export.
C) the absolute advantage that Bangladesh has in the production of clothing for export.
D) the comparative and absolute advantage that China has in the production of clothing for export.
E) the comparative and absolute advantage that Bangladesh has in the production of clothing for export.

Question 46

When compared with China, the growth of clothing exports originating in Bangladesh clearly illustrates the Ricardian model of comparative advantage. Discuss and explain.

Question 47

The growth of clothing exports originating in Bangladesh is the result of the

A) high productivity of workers in Bangladesh.
B) low wages in Bangladesh.
C) low productivity of workers in other countries.
D) low productivity of workers in Bangladesh in industries other than those that produce clothing for export.
E) high wages in other countries.