Question 1

The principle of absolute advantage asserts that mutually beneficial trade can occur even if one nation is absolutely more efficient in the production of all goods.

Accepted Answer

A) True 
 B)False  False

Question 2

According to the principle of comparative advantage, an open trading system results in resources being channeled from uses of low productivity to those of high productivity.

Accepted Answer

A) True 
 B)False  True

Question 3

Is it possible to add up the preferences of all consumers in an entire nation?

Accepted Answer

No. It is impossible to make interpersonal comparisons of satisfaction, and thus it is not possible to add up preferences.

Question 4

Under free trade, Canada would $\underline {\text { not }    }$ enjoy any gains from trade with Sweden if Canada:

Accepted Answer

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 5

According to the principle of comparative advantage, specialization and trade increase a nation's total output since:

Accepted Answer

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 6

If Argentina has a comparative advantage over Brazil in beef relative to coffee, Argentina will specialize in beef production.

Accepted Answer

A) True 
 B)False

Question 7

Concerning international trade restrictions, which of the following is $\underline { \text { false }   }$? Trade restrictions:

Accepted Answer

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

Question 8

In a two-product, two-country world, international trade can lead to increases in:

Accepted Answer

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 9

The expression "importance of being unimportant" suggests that if one nation is much larger than the other, the larger nation realizes most of the gains from trade while the smaller nation realizes fewer gains from trade.

Accepted Answer

A) True 
 B)False

Question 10

Table 2.3. Terms of Trade
 $\begin{array}{lcccc}
& \text { Export Price Index }& & \text { Import Price Index }\
\text { Country } & 1990& 2004& 1990& 2004 \
\hline \text { Mexico } &100&220&100&200\
\text { Sweden } & 100 & 160 & 100 & 150 \
\text { Spain } & 100 & 155 & 100 & 155 \
\text { France } & 100 & 170 & 100 & 230 \
\text { Denmark } & 100 & 120 & 100 & 125 \
\hline
\end{array}$
-Referring to Table 2.3, which country's terms of trade did $\underline {  \text { not change }  }$ between 1990 and 2004?

Accepted Answer

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

Question 11

The dynamic gains from trade include all of the following $\underline {  \text { except }  }$:

Accepted Answer

A)   Economies of large-scale production resulting in decreasing unit cost
B)   Increased saving and investment resulting in economic growth
C)   Increased competition resulting in lower prices and wider range of output
D)   Increasing comparative advantage leading to specialization

Question 12

Figure 2.2 illustrates trade data for Canada. The figure assumes that Canada attains international trade equilibrium at point $\underline {   C . }$
Figure 2.2. Canadian Trade Possibilities
 
-Referring to Figure 2.2, Canada has a comparative advantage in:

Accepted Answer

A)   Televisions
B)   Refrigerators
C)   Televisions and refrigerators
D)   Neither televisions nor refrigerators

Question 13

With increasing opportunity costs, a nation totally specializes in the production of the commodity of its comparative advantage; with constant opportunity costs, a nation partially specializes in the production of the commodity of its comparative advantage.

Accepted Answer

A) True 
 B)False

Question 14

John Stuart Mill's theory of reciprocal demand best applies when trading partners:

Accepted Answer

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 15

The terms of trade represents the rate of exchange between a country's exports and imports.

Accepted Answer

A) True 
 B)False

Question 16

It is possible for a nation not to have an absolute advantage in anything; but it is not possible for one nation to have a comparative advantage in everything and the other nation to have a comparative advantage in nothing.

Accepted Answer

A) True 
 B)False

Question 17

International trade leads to increased welfare if a nation can achieve a post-trade consumption point lying inside of its production-possibilities schedule.

Accepted Answer

A) True 
 B)False

Question 18

Ricardo's model of comparative advantage assumed all of the following except:

Accepted Answer

A)   Trade is balanced, thus ruling out flows of money between nations
B)   Firms make production decisions in an attempt to maximize profits
C)   Free trade occurs between nations
D)   Labor is immobile within a country, but is incapable of moving between countries

Question 19

By reducing the overall volume of trade, import restrictions tend to reduce a nation's gains from trade.

Accepted Answer

A) True 
 B)False

Question 20

Modern trade theory contends that the pattern of world trade is governed by

Accepted Answer

A)   Differences in supply conditions and demand conditions
B)   Supply conditions only
C)   Demand conditions only
D)   None of the above

Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

The principle of absolute advantage asserts that mutually beneficial trade can occur even if one nation is absolutely more efficient in the production of all goods.

According to the principle of comparative advantage, an open trading system results in resources being channeled from uses of low productivity to those of high productivity.

Is it possible to add up the preferences of all consumers in an entire nation?

Under free trade, Canada would $\underline {\text { not } }$ enjoy any gains from trade with Sweden if Canada:

According to the principle of comparative advantage, specialization and trade increase a nation's total output since:

If Argentina has a comparative advantage over Brazil in beef relative to coffee, Argentina will specialize in beef production.

Concerning international trade restrictions, which of the following is $\underline { \text { false } }$ ? Trade restrictions:

In a two-product, two-country world, international trade can lead to increases in:

The expression "importance of being unimportant" suggests that if one nation is much larger than the other, the larger nation realizes most of the gains from trade while the smaller nation realizes fewer gains from trade.

The dynamic gains from trade include all of the following $\underline { \text { except } }$ :

With increasing opportunity costs, a nation totally specializes in the production of the commodity of its comparative advantage; with constant opportunity costs, a nation partially specializes in the production of the commodity of its comparative advantage.

John Stuart Mill's theory of reciprocal demand best applies when trading partners:

The terms of trade represents the rate of exchange between a country's exports and imports.

It is possible for a nation not to have an absolute advantage in anything; but it is not possible for one nation to have a comparative advantage in everything and the other nation to have a comparative advantage in nothing.

International trade leads to increased welfare if a nation can achieve a post-trade consumption point lying inside of its production-possibilities schedule.

Ricardo's model of comparative advantage assumed all of the following except:

By reducing the overall volume of trade, import restrictions tend to reduce a nation's gains from trade.

Modern trade theory contends that the pattern of world trade is governed by

Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

The principle of absolute advantage asserts that mutually beneficial trade can occur even if one nation is absolutely more efficient in the production of all goods.

According to the principle of comparative advantage, an open trading system results in resources being channeled from uses of low productivity to those of high productivity.

Is it possible to add up the preferences of all consumers in an entire nation?

Under free trade, Canada would not ‾\underline {\text { not } } not ​ enjoy any gains from trade with Sweden if Canada:

According to the principle of comparative advantage, specialization and trade increase a nation's total output since:

If Argentina has a comparative advantage over Brazil in beef relative to coffee, Argentina will specialize in beef production.

Concerning international trade restrictions, which of the following is false ‾\underline { \text { false } } false ​ ? Trade restrictions:

In a two-product, two-country world, international trade can lead to increases in:

The expression "importance of being unimportant" suggests that if one nation is much larger than the other, the larger nation realizes most of the gains from trade while the smaller nation realizes fewer gains from trade.

The dynamic gains from trade include all of the following except ‾\underline { \text { except } } except ​ :

Figure 2.2 illustrates trade data for Canada. The figure assumes that Canada attains international trade equilibrium at point C.‾\underline { C . }C.​ Figure 2.2. Canadian Trade Possibilities -Referring to Figure 2.2, Canada has a comparative advantage in:

With increasing opportunity costs, a nation totally specializes in the production of the commodity of its comparative advantage; with constant opportunity costs, a nation partially specializes in the production of the commodity of its comparative advantage.

John Stuart Mill's theory of reciprocal demand best applies when trading partners:

The terms of trade represents the rate of exchange between a country's exports and imports.

It is possible for a nation not to have an absolute advantage in anything; but it is not possible for one nation to have a comparative advantage in everything and the other nation to have a comparative advantage in nothing.

International trade leads to increased welfare if a nation can achieve a post-trade consumption point lying inside of its production-possibilities schedule.

Ricardo's model of comparative advantage assumed all of the following except:

By reducing the overall volume of trade, import restrictions tend to reduce a nation's gains from trade.

Modern trade theory contends that the pattern of world trade is governed by

Under free trade, Canada would $\underline {\text { not } }$ enjoy any gains from trade with Sweden if Canada:

Concerning international trade restrictions, which of the following is $\underline { \text { false } }$ ? Trade restrictions:

The dynamic gains from trade include all of the following $\underline { \text { except } }$ :