Deck 16: Comparative Advantage and the Open Economy

Question 1

Of the countries below,the one with the highest imports-to-GDP ratio is

A)Canada.
B)France.
C)Luxembourg.
D)Norway.

Answer 1

Luxembourg.

Question 2

Of the countries below,the country with the lowest imports-to-GDP ratio is

A)Germany.
B)Japan.
C)Netherlands.
D)United Kingdom.

Answer 2

Japan.

Question 3

When the principle of comparative advantage is used to guide trade,then a country will

A)specialize only in that good with the highest opportunity cost.
B)specialize only in goods with the lowest opportunity costs.
C)specialize only in that good where production is less per worker-hour than another country.
D)specialize only in that good where production costs are more than average total costs.

Answer 3

specialize only in goods with the lowest opportunity costs.

Question 4

Assume that the United States could produce all products at a lower per unit cost compared to Canada.If this were the case,

A)it would still be possible for Canada to have an absolute advantage in the production of some products.
B)Canada could not have a comparative advantage in any product.
C)it would still be possible for Canada to have a comparative advantage in trade for some products.
D)Canada would have a comparative advantage to the United States in all products.

Question 5

Suppose that Canada and Japan are the only two countries and each can produce two goods--cellular phones and cars.If Canada has an absolute advantage in cellular phones and Japan has an absolute advantage in cars,we know that

A)there will be no trade because neither country has a comparative advantage in either good.
B)one of the countries will have a comparative advantage in cellular phones,but we can't tell which one without more information.
C)Canada must have a comparative advantage in cars and Japan in cellular phones.
D)Canada has a comparative advantage in cellular phones and Japan has a comparative advantage in cars.

Question 6

Suppose that John can produce 80 widgets per hour and can lift 75 kilograms.Robert,on the other hand,can produce 60 widgets per hour and can lift 50 kilograms.It can be concluded that

A)John has a comparative advantage in lifting weights.
B)Robert has an absolute advantage in lifting weights.
C)Robert has a comparative advantage in the production of widgets.
D)John has an absolute advantage in widget production.

Question 7

Specialization can lead to an increase in the production of all goods only if

A)the two nations specialized in the production of goods.
B)each nation were to produce all goods.
C)the opportunity cost of producing goods differs between two nations.
D)neither country has a comparative advantage in the production of any good.

Question 8

Given two economic systems,A and B,if economy A has a comparative advantage in the production of widgets,then

A)the inputs necessary to produce widgets in economy A cost less than in economy B.
B)economy A must give up less of all other goods to produce widgets than economy B.
C)economy A is less efficient in the production of some goods than economy B.
D)economy A would not benefit from the specialization of production.

Question 9

Suppose that the opportunity cost of producing goods differs between two nations.We can correctly state that

A)the two nations should not specialize in the production of goods.
B)each nation should produce all goods.
C)one country has a comparative advantage in the production of at least one of the goods.
D)neither country has a comparative advantage in the production of any good.

Question 10

Consider a world of two countries producing only wheat and cloth.If country A uses 1 unit of labour to produce 1 unit of wheat and 2 units of labour to produce 1 unit of cloth,while B uses 3 units of labour per unit of wheat and 4 units of labour per unit of cloth,A should export

A)wheat and cloth,and B should not export anything.
B)wheat,and B should export cloth.
C)nothing,and B should export wheat and cloth.
D)cloth,and B should export wheat.

Question 11

Mike and Mary each produce two goods.According to the principle of comparative advantage,the total output produced by the individuals will be greatest

A)if Mary produces both goods and Mike produces nothing.
B)if each good is produced by the individual who has the lower opportunity cost of producing the good.
C)if each good is produced by the individual who has the higher absolute cost of producing the good.
D)if Mike produces both goods and Mary produces nothing.

Question 12

If a country has an absolute advantage in every good,then

A)it should avoid international trade.
B)it should still export those goods in which it has a comparative advantage.
C)it should export a small amount of every good.
D)this is an impossible condition;a country cannot have an absolute advantage in all goods.

Question 13

In general,lower imports-to-GDP ratios are more likely,the

A)smaller the country.
B)larger the country.
C)richer the country.
D)more agricultural the country.

Question 14

The principle of comparative advantage essentially states that

A)there are some goods for which the opportunity costs of production are the same regardless of who produces them.
B)some goods have high opportunity costs and low absolute costs.
C)specialization can reduce output rather than increasing it.
D)total output of an economic system is greatest when each good is produced by those who have the lowest opportunity cost of producing the good.

Question 15

In general,higher imports-to-GDP ratios are more likely,the

A)smaller the country.
B)larger the country.
C)richer the country.
D)more agricultural the country.

Question 16

If country X can produce a unit of good 1 with fewer resources than can country Y,it is correct to state that country X

A)has a comparative advantage in producing good 1.
B)has an absolute advantage in producing good 1.
C)will export good 1 to country Y.
D)will not produce good 1.

Question 17

Suppose Mexico has a comparative advantage relative to Canada in clothing manufacturing and Canada has a comparative advantage in producing agricultural products.Which of the following options is most likely to occur?

A)Mexico and Canada will not trade agricultural products or clothing.
B)Mexico will sell clothing to Canada and Canada will sell agricultural products to Mexico.
C)Mexico will sell agricultural products to Canada and Mexico will buy clothing from Canada.
D)Mexico will sell clothing to Canada but not buy any agricultural products from Canada.

Question 18

That each individual should engage in economic activities in which he or she is relatively most efficient is an application of the concept of

A)competition.
B)absolute advantage.
C)scarcity.
D)comparative advantage.

Question 19

Given two economic systems,A and B,if economy A must give up less of all other goods to produce widgets than economy B,then

A)economy A has an absolute advantage in the production of widgets.
B)economy A has a comparative advantage in the production of widgets.
C)economy A is less efficient in the production of some goods than economy B.
D)economy A would not benefit from the specialization of production.

Question 20

Specialization in trade will be economically efficient if it is based upon

A)national security needs.
B)absolute advantage.
C)comparative advantage.
D)government regulations.

Question 21

The basic proposition in international trade is that

A)trade is determined by absolute advantage.
B)in the long run,imports are paid for by exports.
C)everyone is made better off by free trade.
D)fair trade is more important than free trade.

Question 22

If Jane is five times more productive than Sally when working on the computer and three times more productive than Sally when doing accounting tasks,it is correct to state that

A)Jane has an absolute advantage in both accounting and computers when compared to Sally.
B)Sally has a comparative advantage in computers.
C)Sally has an absolute advantage in leisure.
D)Sally should not be employed.

Question 23

Comparative advantage is defined as

A)producing all goods at lower opportunity costs than other countries can.
B)producing more output of all goods than anyone else can.
C)producing one good at a lower opportunity cost than another country can.
D)the ability to produce more output from given inputs than anyone else can.

Question 24

During the Great Depression,many industrial countries tried protecting domestic jobs by raising tariffs.Economic theory would suggest that the result would be

A)success for only the countries that raised tariffs first.
B)success for firms that had a comparative advantage in manufactured goods rather than agricultural goods.
C)reduced exports and volume of trade for everyone.
D)increased incomes in the countries that pursued this policy.

Question 25

The notion that every country has a comparative advantage in something is an example of to

A)quota theory.
B)the infant industry argument.
C)international trade theory
D)less developed countries cannot trade successfully with developed countries.

Question 26

In India 3 units of labour are needed to produce 1 unit of cloth and 5 units of labour are needed to produce 1 unit of food;in Australia 2 units of labour are needed to produce 1 unit of cloth and 2 units of labour are needed to produce 1 unit of food.It is correct to state that

A)India has a comparative advantage in producing cloth.
B)India has an absolute advantage in producing cloth.
C)India has no comparative advantage with cloth or wheat.
D)Australia has a comparative advantage in producing cloth.

Question 27

If there are two goods and two countries,then one country can have

A)an absolute advantage in both goods but a comparative advantage in only one good.
B)an absolute advantage in both goods and a comparative advantage in both goods.
C)an absolute advantage in one good,an absolute disadvantage in the other good,and a comparative advantage in neither.
D)an absolute advantage in neither good and a comparative advantage in both goods.

Question 28

In the long run,imports will most likely be paid for with

A)exports.
B)the sale of real and financial assets.
C)the extension of credit.
D)higher domestic unemployment.

Question 29

When one country "dumps" some of its products in another country,it

A)creates an environmental hazard in the receiving country.
B)sells its products abroad at a price lower than it costs to produce the goods.
C)increases the aggregate level of employment in the receiving country.
D)indirectly reduces its national income.

Question 30

If country A exports good X to country B,and country B exports good Y to country A,it is most likely that

A)A has an absolute advantage in the production of good X.
B)B has a comparative advantage in the production of good Y.
C)the opportunity cost of domestic production of good Y for country A is lowered with trade.
D)B is producing less of good Y than in the no-trade case.

Question 31

Specialization and international trade lead to

A)an outward shift in the production possibilities frontier.
B)an inward shift in the consumption possibilities frontier.
C)a lower opportunity cost of domestic production of all goods.
D)an enhanced level of consumption.

Question 32

One economic truism is that any nation's restriction of imports ultimately leads to

A)a increase in exports.
B)a reduction in exports.
C)an economic upswing.
D)an increase in GDP.

Question 33

A country will specialize in that good in which

A)it has absolute advantage.
B)it has a moderate cost of production.
C)it can produce at minimum average cost.
D)it has comparative advantage.

Question 34

Restrictions on imports

A)eventually reduce exports too.
B)enhance economic welfare by encouraging more exports.
C)are the quickest way for a country in recession to start on a path of economic recovery.
D)usually have no long-run effects on an economy.

Question 35

Absolute advantage is defined as

A)the ability to produce more output of one good relative to another good than another country can.
B)the ability to produce more output from given inputs of resources than others can.
C)the ability to use more input of resources than others can.
D)having a lower average fixed cost in the production of a good than does someone else.

Question 36

According to economic historians,one characteristic of international trade is that it

A)aids in the international transmission of ideas.
B)reduces the world-wide output of goods.
C)reduces the world-wide consumption of goods.
D)causes persistent world-wide inflation.

Question 37

A new industry develops and we want to protect it from foreign competition.Which one of the following arguments would appropriately describe this Type of protection?

A)national security
B)cartelization
C)infant industry
D)protecting Canadian jobs

Question 38

According to international trade theory

A)trade is based on absolute advantage.
B)comparative advantage is based on absolute advantage.
C)every country has a comparative advantage in something.
D)less developed countries cannot trade successfully with developed countries.

Question 39

In France 1 unit of labour can produce 3 units of wheat or 5 units of wine;in Germany 1 unit of labour can produce 4 units of wheat or 10 units of wine,it is correct to state that

A)Germany has an absolute advantage in producing both wheat and wine.
B)Germany has a comparative advantage in producing wheat.
C)France has a comparative advantage in producing wine.
D)All of these are correct.

Question 40

Suppose the United States and Japan are the only two countries and each can produce two goods--wheat and cars.If the United States has an absolute advantage in wheat and Japan has an absolute advantage in cars,we know that

A)there will be no trade because neither country has a comparative advantage in either good.
B)one of the countries will have a comparative advantage in wheat,but we can't tell which one without more information.
C)the United States must have a comparative advantage in cars and Japan in wheat.
D)the United States has a comparative advantage in wheat and Japan has a comparative advantage in cars.

Question 41

The infant industry argument suggests that

A)a country needs tariff protection since it has no comparative advantage in the production of any good.
B)a country needs protection against unfair trade practices.
C)an industry may need temporary tariff protection until the industry matures.
D)the industry has no potential and must be protected to survive.

Question 42

An assumption behind the infant industry argument for tariff protection is that

A)foreign competitors are selling output below average cost.
B)the domestic industry will be facing an upward adjustment in its average cost.
C)the domestic industry will eventually gain comparative advantage in producing the good.
D)the market needs additional competition to satisfy consumer demand.

Question 43

The infant-industry argument for tariff protection is that tariffs should be imposed to protect from competition

A)industries that are essential if a country is to become an industrial nation.
B)industries needed for national defense.
C)industries that cannot compete with foreign competitors at this point in time,but will be able to once they gain some size and experience.
D)industries that can compete with foreign competitors at this point in time and are deemed essential by the government.

Question 44

Dumping occurs when,in a foreign market,a good is sold

A)below its cost of production.
B)at a discount below the list price.
C)below its nominal price.
D)at a price above the equilibrium price.

Question 45

For infant-industry tariff protection to be valid requires that

A)the tariff be allowed to last forever.
B)only industries that currently are producing efficiently should be protected.
C)government officials can predict which industries will eventually be able to compete with more established foreign producers.
D)the industries protected have substantial monopoly power in the absence of foreign competition.

Question 46

Restricting imports usually leads to

A)a country producing beyond its production possibilities frontier.
B)a country consuming even further beyond its production possibilities frontier.
C)a reduction in exports and employment.
D)a higher per capita level of real consumption.

Question 47

Lessening restrictions on imports usually leads to

A)a country producing at the interior of its production possibilities frontier.
B)a country consuming even further beyond its production possibilities frontier.
C)an increase in exports and employment.
D)a lower per capita level of real consumption.

Question 48

Import restrictions

A)can protect Canadian jobs in the protected industry,which increases economic welfare of the country as a whole.
B)can protect Canadian in the protected industry but will also lead to job reductions in other export industries.
C)hurt people who work in importing companies,but makes consumers better off.
D)cannot protect Canadian jobs in any sector of the economy.

Question 49

A quota is

A)a tariff imposed on goods that are dumped in the country.
B)a law that prevents ecologically damaging goods to be imported into a country.
C)a market-imposed balancing factor that keeps prices of imports and exports in equilibrium.
D)a government-imposed restriction on the quantity of a specific good that can be imported.

Question 50

A government-imposed restriction on the quantity of a specific good that can be imported is an example of

A)dumping.
B)a countervailing duty.
C)a tariff.
D)a quota.

Question 51

Dumping is defined as

A)selling a good abroad at prices below the costs of the firms in the foreign countries.
B)exporting goods that are of inferior quality.
C)selling a good abroad at prices below its cost of production or below the price charged in the home market.
D)exporting goods that are sources of pollution.

Question 52

A rationale used for tariff protection by some is when

A)the country wants to practice international price discrimination.
B)the country finds its cost of producing their products higher than in other countries.
C)imports are produced by firms that received subsidies from their governments.
D)imports are produced by firms that are more efficient than domestic producers.

Question 53

Industries that cannot compete with foreign competitors at this point in time,but will be able to once they gain some size and experience describes

A)industries that are essential if a country is to become an industrial nation.
B)industries needed for national defense.
C)The infant-industry argument for tariff protection
D)industries that are subject to anti-dumping regulations.

Question 54

Tariffs to limit imports to "protect Canadian jobs" will also

A)stimulate exports.
B)limit exports.
C)decrease import prices.
D)reduce domestic production of importables.

Question 55

Dumping is

A)international price discrimination.
B)international monopolistic pricing.
C)collusive behaviour among producers in different countries.
D)selling goods produced with government approval.

Question 56

International price discrimination is also known as

A)dumping
B)a tariff
C)a quota
D)countervailing duty.

Question 57

When economists David Gould,G.L.Woodbridge,and Roy Ruffin examined the data on the relationship between increases in imports and the rate of unemployment,they concluded that

A)free trade leads to increased unemployment.
B)there is not a causal link between increases in imports and the rate of unemployment.
C)increases in imports always precede increases in unemployment by a period of 6 months to one year.
D)increases in unemployment always precede increases in imports by a period of 6 months to one year.

Question 58

A tax on imported goods is an example of.A tariff is

A)a quota.
B)a countervailing duty.
C)a tariff.
D)dumping.

Question 59

Governments sometimes subsidize domestic industries.When this occurs,

A)the governments also impose tariffs on imports to protect the industries even more.
B)the subsidized industries have an advantage on international markets relative to non-subsidized industries.
C)firms cannot be guilty of dumping because their prices are not below their costs.
D)the subsidized industries sell less in international markets because it is more profitable to sell domestically.

Question 60

For the infant-industry argument for tariffs to be appropriate,it is necessary that

A)the industry be deemed essential by the government.
B)the government can identify which industries will eventually be able to compete with more established foreign producers.
C)only industries that currently are operating efficiently will be protected.
D)the country has access to the most modern production techniques.

Question 61

Explain why specialization and trade increases a country's overall level of consumption through comparative advantage..

Question 62

The effects of a tariff are

A)reduced quantity supplied overall,reduced quantity supplied by domestic producers,and a lower price.
B)reduced quantity supplied overall,increased quantity supplied by domestic producers,and a higher price.
C)reduced quantity supplied overall,decreased quantity supplied by domestic producers,and a lower price.
D)identical to the effects of a quota,except that the price of the good is higher.

Question 63

Voluntary export restraint agreements are

A)a Type of tariff in which the tax is a fixed amount per unit of good imported.
B)a Type of tariff in which the tax is based on the value of the good.
C)a Type of quota that actually benefits the firms facing the restrictions.
D)a Type of quota agreed to "voluntarily" in order to prevent more severe protection of another Type.

Question 64

Suppose an industry receives protection from the government in the form of tariffs.A number of years later,it is observed that the quantity supplied by domestic firms had decreased and that the domestic price was substantially greater than the world price.We could conclude that

A)the tariff had been imposed to counteract dumping and had been successful.
B)removal of the tariff would actually cause domestic output to increase and price to fall.
C)the tariff had been imposed to protect an infant industry and that the industry still needed protection.
D)removal of the tariff would cause domestic output to fall even further and the price to fall to consumers.

Question 65

The General Agreement on Tariffs and Trade is an international agreement

A)that outlaws all tariffs but permits quotas.
B)to encourage world trade by lowering tariffs and other trade barriers.
C)to encourage world trade by lending resources to developing countries.
D)between the United States and Japan that has never been ratified,resulting in several trade wars with Japan.

Question 66

If a country voluntarily agrees to restrict its exports to another country,the country is said to have

A)a voluntary export restraint (VER).
B)a voluntary restraint agreement (VRA).
C)a mandated tariff.
D)a mandated agreement.

Question 67

The free trade agreement between the United States,Canada,and Mexico is called the

A)General Agreement on Tariffs and Trade (GATT).
B)World Trade Organization (WTO).
C)North American Free Trade Agreement (NAFTA).
D)Uruguay Round.

Question 68

An import quota specifies

A)the amount of money that can be charged to any imported good.
B)the amount of taxes that must be paid on any imported good.
C)the maximum amount of a commodity that may be imported during a specified period.
D)the minimum amount of a commodity that may be imported during a specified period.

Question 69

Quotas and tariffs both serve the purpose of

A)increasing foreign trade.
B)restricting foreign trade.
C)causing domestic producers to lose revenues.
D)lowering prices on imported goods.

Question 70

A difference between a quota and a tariff is that

A)a tariff generates a higher price than a quota does.
B)a tariff generates a greater reduction in exports.
C)a quota increases profits of domestic producers more than a tariff does.
D)the government collects revenues from a tariff,which does not happen with a quota.

Question 71

The WTO is responsible for

A)handling trade disputes among its members.
B)agreements between the U.S.and Mexico only.
C)implementing protectionism.
D)restricting foreign trade.

Question 72

The effect of a quota is to

A)increase quantity supplied and lower price.
B)increase quantity supplied and increase price.
C)increase demand for the good and increase price.
D)reduce the quantity supplied and raise price.

Question 73

Overall,since the 1930s,tariff rates in Canada have

A)increased.
B)decreased.
C)remained unchanged.
D)become very unstable,changing week-to-week.

Question 74

The Uruguay round of GATT talks resulted in

A)reducing trade barriers and tariffs.
B)increasing trade barriers and tariffs.
C)lowering some trade barriers but increasing tariffs.
D)no changes in tariffs or trade barriers.

Question 75

A tariff is

A)a subsidy on domestically produced goods.
B)the difference between the world market price and the domestic price when a group of firms in an industry collude successfully.
C)a tax on imported goods.
D)a government imposed restriction on the quantity of a specific good that can be imported into the country and sold.

Question 76

If protective import-restricting tariffs are imposed by a country,in the vast majority of cases the consumers end up

A)paying a higher price for the good than they otherwise would.
B)paying a lower price for the good than they otherwise would.
C)consuming more of the good than they otherwise would.
D)having a higher standard of living than they otherwise would.

Question 77

A policy that has the effect of reducing the quantity supplied and raising price is said to be a

A)quota.
B)product guilty of dumping.
C)tariff.
D)countervailing duty.

Question 78

"When countries specialize in producing the good in which they have a comparative advantage and then trade with each other,only the country with an absolute advantage gains." Do you agree or disagree with this statement.Explain fully.

Question 79

A voluntary export restraint (VER)occurs when .

A)a country voluntarily agrees to restrict its exports to another country
B)a country has open access to another county's markets.
C)a mandated tariff.is in effect
D)a mandated agreement forces all parties to restrict output in the home country.

Question 80

Distinguish between absolute advantage and comparative advantage.