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

Question 1

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.

Answer 1

B

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) The U.S. has an absolute advantage in the production of both wheat and beef because labor productivity in the U.S. exceeds labor productivity in Argentina for both products.
(b) In the U.S., the opportunity cost of wheat is 100/300 or 0.33 units of beef. In Argentina, the opportunity cost of wheat is 20/20 or 1.0 unit of beef.
(c) In the U.S., the opportunity cost of beef is 300/100 or 3.0 units of wheat. In Argentina, the opportunity cost of beef is 20/20 or 1.0 unit of wheat.
(d) The U.S. has a comparative advantage in wheat production and Argentina has a comparative advantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.33 units of beef per unit of wheat, then the U.S. will benefit. If Argentina can trade beef to the U.S. at a rate of more than one unit of wheat per unit of beef, then Argentina will benefit.

Question 3

Dynamics of the Global Economy
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.

Answer 3

A

Question 4

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 5

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 6

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 7

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 8

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.

Question 9

Trade in a One-Factor World
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 10

Trade in a One-Factor World
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 11

Trade in a One-Factor World
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.

Question 12

Trade in a One-Factor World
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 13

Dynamics of the Global Economy
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 14

Trade in a One-Factor World
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 15

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 16

Trade in a One-Factor World
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 17

Trade in a One-Factor World
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 18

Trade in a One-Factor World
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 19

Trade in a One-Factor World
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 20

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 21

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 22

The Ricardian proposition that international trade will benefit any country ("gains from trade") as long as the world terms of trade do not equal its autarkic relative prices is a straightforward and powerful concept. Nevertheless, it is impossible to demonstrate empirically. Why?

Question 23

As a result of trade between two countries which are of completely different economic sizes, specialization in the Ricardian 2X2 model tends to

A) be incomplete in both countries
B) be complete in both countries
C) be complete in the small country but incomplete in the large country
D) be complete in the large country but incomplete in the small country
E) sustain one countries economy in in direct proportion to the other.

Question 24

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 25

If two countries engage in Free Trade following the principles of comparative advantage, then

A) neither relative prices nor relative marginal costs (marginal rates of transformation-MRTs) in one country will equal those in the other country.
B) both relative prices and MRTs will become equal in both countries.
C) relative prices but not MRTs will become equal in both countries.
D) MRTs but not relative prices will become equal in both countries.
E) trade will be unrestricted, regardless of relative costs and MRTs.

Question 26

In a two country and two product Ricardian model, a small country is likely to benefit more than the large country because

A) the large country will wield greater political power, and hence will not yield to market signals.
B) the small country is less likely to trade at price equal or close to its autarkic (domestic) relative prices.
C) the small country is more likely to fully specialize.
D) the small country is less likely to fully specialize.
E) the small country can raise wages.

Question 27

If the world terms of trade equal those of country H, then

A) country H but not country F will gain from trade.
B) country H and country F will both gain from trade.
C) neither country H nor F will gain from trade.
D) only the country whose government subsidizes its exports will gain.
E) country F but not country H will gain from trade.

Question 28

In the Ricardian model, if a country's trade is restricted, this will cause all except which?

A) limited specialization and the division of labor
B) reduced volume of trade and reduced gains from trade
C) nations to produce inside their production possibilities curves
D) a country to produce some of the product of its comparative disadvantage
E) raised costs as more diverse product is produced internally

Question 29

As a result of trade, specialization in the Ricardian model tends to be

A) complete with constant costs and with increasing costs.
B) complete with constant costs and incomplete with increasing costs.
C) incomplete with constant costs and complete with increasing costs.
D) incomplete with constant costs and incomplete with increasing costs.
E) dependent on the specific opportunity costs involved in production.

Question 30

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 31

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

Question 32

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 33

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 34

It is generally claimed that a movement from autarky to free trade consistent with Ricardian comparative advantage increases the economic welfare of each of the trade partners. However, it may be demonstrated that under certain circumstances, not everyone in each country is made better off. Illustrate such a case.

Question 35

If the world terms of trade for a country are somewhere between the domestic cost ratio of H and that of F, then

A) country H but not country F will gain from trade.
B) country H and country F will both gain from trade.
C) neither country H nor F will gain from trade.
D) only the country whose government subsidizes its exports will gain.
E) country F but not country H will gain from trade.

Question 36

It is generally claimed that state trading, or centrally controlled trading will tend to reach a lower economic welfare than would be reached by allowing market forces to determine trade flow directions and terms of trade. Illustrate a counter-example to this proposition.

Question 37

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 38

Let us define the real wage as the purchasing power of one hour of labor. In the Ricardian 2X2 model, if two countries under autarky engage in trade then

A) the real wage will not be affected since this is a financial variable.
B) the real wage will increase only if a country attains full specialization.
C) the real wage will increase in one country only if it decreases in the other.
D) the real wage will rise in both countries.
E) the real wage will fall under pressure of international competition.

Question 39

If the world terms of trade equal those of country F, then

A) country H but not country F will gain from trade.
B) country H and country F will both gain from trade.
C) neither country H nor F will gain from trade.
D) only the country whose government subsidizes its exports will gain.
E) country F but not country H will gain from trade.

Question 40

If a very small country trades with a very large country according to the Ricardian model, then

A) the small country will suffer a decrease in economic welfare.
B) the large country will suffer a decrease in economic welfare.
C) the small country only will enjoy gains from trade.
D) the large country will enjoy gains from trade.
E) both countries will enjoy equal gains from trade.

Question 41

Dynamics of the Global Economy
Given the information in the table above. If these two countries trade these two goods in the context of the Ricardian model of comparative advantage, then what is the lower limit of the world equilibrium price of widgets?

Question 42

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 43

If a production possibilities frontier is bowed out (concave to the origin), then production occurs under conditions of

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

Question 44

If the production possibilities frontier of one trade partner ("Country A") is bowed out (concave to the origin), then increased specialization in production by that country will

A) increase the economic welfare of both countries.
B) increase the economic welfare of only Country A.
C) decrease the economic welfare of Country A.
D) decrease the economic welfare of Country B.
E) not affect the economic welfare of either country.

Question 45

The pauper labor theory, and the exploitation argument

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 46

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios), then if they both use the same currency

A) neither country has a comparative advantage.
B) only the low wage country has a comparative advantage.
C) only the high wage country has a comparative advantage.
D) consumers will still find trade worth while from their perspective.
E) it is possible that both will enjoy the conventional gains from trade.

Question 47

If two countries have identical production possibility frontiers, then trade between them is likely to be beneficial if

A) their supply curves are identical.
B) their cost functions are identical.
C) their demand conditions are identical.
D) their incomes are identical.
E) their demand functions differ.

Question 48

Mahatma Ghandi 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 49

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 economic welfare of all countries involved.

Question 50

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 51

Suppose the United States' production possibility frontier was flatter to the widget axis, whereas Germany's was flatter to the butter axis. We now learn that the German mark sharply depreciates against the U.S. dollar. We now know that

A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Germany has a comparative advantage in widgets.
E) Germany has lost its comparative advantage.

Question 52

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 53

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios) then it is probable that

A) free trade will not improve either both countries welfare.
B) free trade will result in no trade taking place.
C) free trade will result in each country exporting the good in which it enjoys comparative advantage.
D) free trade will result in each country exporting the good in which it suffers the greatest comparative disadvantage.
E) free trade will not affect the economic welfare of either country.

Question 54

Dynamics of the Global Economy
Given the information in the table above. If these two countries trade these two goods with each other in context of the Ricardian model of comparative advantage, what is the lower limit for the price of cloth?

Question 55

Suppose the United states production possibility frontier was flatter to the widget axis, whereas Germany's was flatter to the butter axis. We now learn that the German wage doubles, but U.S. wages do not change at all. We now know that

A) the United States has no comparative advantage.
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Not enough information is given.
E) Germany gains a comparative advantage in widgets.

Question 56

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 57

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

Question 58

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 59

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 in widget production.
E) Rhozundia may or may not have a comparative advantage in copper.

Question 60

If the United States' production possibility frontier was flatter to the widget axis, whereas Germany's was flatter to the butter axis, we know that

A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the U.S. has a comparative advantage in butter.
D) Germany has comparative advantages in both products.
E) the U.S. has a comparative disadvantage in widgets.

Question 61

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 62

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 63

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 64

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 65

The evidence cited in the chapter using the examples of the East Asia New Industrializing Countries suggests that as international productivities converge, so do international wage levels. Why do you suppose this happened for the East Asian NICs? In light of your answer, what do you think is likely to happen to the relative wages (relative to those in the United States) of China in the coming decade? Explain your reasoning.

Question 66

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.