Deck 2: The Law of Comparative Advantage

Question 1

If with one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input):

A)Px/Py=1 in nation A
B)Px/Py=3 in nation B
C)Py/Px=1/3 in nation B
D)Px/Py=3 in nation A

Answer 1

D

Question 2

If nation A can produce 5 units of good X or 10 units of good Y and nation B can produce 4 units of good X or 12 units of good Y we can conclude that nation A has a

A)Comparative advantage in X and an absolute advantage in Y
B)Comparative advantage in X and an absolute advantage in X
C)Comparative advantage in Y and an absolute advantage in X
D)Comparative advantage in Y and an absolute advantage in Y

Answer 2

A

Question 3

The Mercantilists did not advocate:

A)free trade
B)stimulating the nation's exports
C)restricting the nations' imports
D)the accumulation of gold by the nation

Answer 3

A

Question 4

The Ricardian trade model has been empirically

A)verified
B)rejected
C)not tested
D)tested but the results were inconclusive

Question 5

Which of the following statements is true?

A)The combined demand for each commodity by the two nations is negatively sloped
B)the combined supply for each commodity by the two nations is rising stepwise
C)the equilibrium relative commodity price for each commodity with trade is given by the intersection of the demand and supply of each commodity by the two nations
D)All of the above statements are true.

Question 6

According to Adam Smith,international trade is based on:

A)absolute advantage
B)comparative advantage
C)both absolute and comparative advantage
D)neither absolute nor comparative advantage

Question 7

The Mercantilists believed in

A)running trade surpluses
B)balanced trade
C)the logic of Adam Smith
D)no government intervention in markets.

Question 8

With one hour of labor time nation A can produce either 3X or 3Y,while nation B can produce either 1X or 3Y (and labor is the only input).If 3X is exchanged for 3Y:

A)nation A gains 2X
B)nation B gains 6Y
C)nation A gains 3Y
D)nation B gains 3Y

Question 9

What proportion of international trade is based on absolute advantage?

A)All
B)most
C)some
D)none

Question 10

If domestically 3X=3Y in nation A,while 1X=1Y domestically in nation B:

A)there will be no trade between the two nations
B)the relative price of X is the same in both nations
C)the relative price of Y is the same in both nations
D)all of the above

Question 11

Ricardo explained the law of comparative advantage on the basis of:

A)the labor theory of value
B)the opportunity cost theory
C)the law of diminishing returns
D)all of the above

Question 12

The commodity in which the nation has the smallest absolute disadvantage is the commodity of its:

A)absolute disadvantage
B)absolute advantage
C)comparative disadvantage
D)comparative advantage

Question 13

With one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input).The range of mutually beneficial trade between nation A and B is:

A)3Y < 3X < 5Y
B)5Y < 3X < 9Y
C)3Y < 3X < 9Y
D)1Y < 3X < 3Y

Question 14

"The importance of being unimportant" refers to which of the following?

A)Small countries are likely to gain a great deal from trade since they have little impact on world prices.
B)Small countries are likely to gain a great deal from trade because they will be able to sell large amounts on world markets.
C)Large countries are likely to gain a great deal from trade since they have a large impact on world prices.
D)All countries are will gain from trade because every country will have a comparative advantage in at least one good.

Question 15

A difference in relative commodity prices between two nations can be based upon a difference in:

A)factor endowments
B)technology
C)tastes
D)all of the above

Question 16

If in a two-nation (A and B),two-commodity (X and Y)world,it is established that nation A has a comparative advantage in commodity X,then nation B must have:

A)an absolute advantage in commodity Y
B)an absolute disadvantage in commodity Y
C)a comparative disadvantage in commodity Y
D)a comparative advantage in commodity Y

Question 17

If nation A can produce 5 units of good X or 10 units of good Y and nation B can produce 4 units of good X or 12 units of good Y we can conclude that both nations would gain from trade if nation A sold _____ units of good _____ for one unit of good _____

A)0.4;Y;X
B)2.5;Y;X
C)2.5;X;Y
D)0.4;X;Y

Question 18

The first empirical test of the comparative advantage trade model was conducted by

A)MacDougall
B)Marshall
C)Jevons
D)Friedman

Question 19

If with one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input):

A)nation A has a comparative disadvantage in commodity X
B)nation B has a comparative disadvantage in commodity Y
C)nation A has a comparative advantage in commodity X
D)nation A has a comparative advantage in neither commodity

Question 20

In trade between a small and a large nation:

A)the large nation is likely to receive all of the gains from trade
B)the small nation is likely to receive all of the gains from trade
C)the gains from trade are likely to be equally shared
D)we cannot say

Question 21

Explain the benefits and risks of being a small country relative to the size of international markets.

Question 22

Assume a Ricardian,constant-cost world.There are two countries,the United States and Canada.Each country can produce cameras and milk.The table below shows production per man-hour for each country.

The United States has a labor force of 1,000 workers,and Canada has a labor force of 500 workers.
a)Use this information to graph production possibilities frontiers for both countries.Put cameras on the horizontal axis.
b)Assuming that a world price is established at which both countries can gain from trade,show possible consumption frontiers for each country.

Question 23

How can the production possibilities frontier be used to determine opportunity cost?

Question 24

Explain the mercantilist view on trade.

Question 25

Assume a Ricardian,constant-cost world.There are two countries,the United States and Canada.Each country can produce cameras and milk.The table below shows production per man-hour for each country.

The United States has a labor force of 1,000 workers,and Canada has a labor force of 500 workers.
a)Graph the world supply curve for cameras.
b)Show a possible world demand curve and price (assuming that both countries completely specialize).

Question 26

Assume that both the United States and Germany produce beef and computer chips with the following costs:

a)What is the opportunity cost of beef (B)and computer chips (C)in each country?
b)In which commodity does the United States have a comparative cost advantage?
What about Germany?
c)What is the range for mutually beneficial trade between the United States and Germany for each computer chip traded?
d)How much would the United States and Germany gain if 1 unit of beef is exchanged for 3 chips?

Question 27

The theory of comparative advantage was first proposed by

A)Adam Smith
B)David Ricardo
C)J.M.Keynes
D)Paul Krugman

Question 28

Explain why Ricardo's model of trade was superior to Adam Smith's.

Question 29

Who was the first to test the theory of comparative advantage and what were to results?