Deck 3: Comparative Advantage and the Production Possibilities Frontier

Question 1

The terms of trade is given by:

A) the prices paid for all imports.
B) the prices received for all exports.
C) the price paid for all domestically produced goods.
D) the prices received for exports and paid for imports.

Answer 1

the prices received for exports and paid for imports.

Question 2

A deterioration of a country's terms of trade causes that country's welfare to:

A) improve.
B) deteriorate.
C) remain unchanged.
D) Any of the above can occur.

Answer 2

Any of the above can occur.

Question 3

The slope of a country's production possibilities frontier is called:

A) the marginal rate of expansion.
B) the marginal rate of substitution.
C) the marginal rate of transformation.
D) the marginal benefits of trade.

Answer 3

the marginal rate of transformation.

Question 4

International trade guarantees that countries that engage in trade all benefit by exactly the same amount. Is this statement true or false? Explain your answer.

Question 5

Suppose that a country can convert wheat into textiles at a ratio of 3W = 1T. If the country could trade at 2.9W = 1T, it would be better off not trading. Explain why this statement is true or false.

Question 6

What is the commodity terms of trade? Why is it sometimes used as a measure of changes in the gains from trade? Explain some of the problems associated with this sort of use.