international economics
Content
CHAPTER 2 FOUNDATIONS OF MODERN TRADE THEORY
MULTIPLE-CHOICE QUESTIONS
1. The mercantilists would have objected to: a. Export promotion policies initiated by the government b. The use of tariffs or quotas to restrict imports c. Trade policies designed to accumulate gold and other precious metals d. International trade based on open markets . !nlike the mercantilists" #dam $mith maintained that: a. Trade benefits one nation only at the expense of another nation b. %overnment control of trade leads to maximum economic welfare c. #ll nations can gain from free international trade d. The world&s output of goods must remain constant over time '. The trading principle formulated by #dam $mith maintained that: a. International prices are determined from the demand side of the market b. (ifferences in resource endowments determine comparative advantage c. (ifferences in income levels govern world trade patterns d. #bsolute cost differences determine the immediate basis for trade ). !nlike #dam $mith" (avid *icardo&s trading principle emphasi+es the: a. (emand side of the market b. $upply side of the market c. *ole of comparative costs d. *ole of absolute costs ,. -hen a nation requires fewer resources than another nation to produce a product" the nation is said to have a .an/: a. #bsolute advantage in the production of the product b. 0omparative advantage in the production of the product c. 1ower marginal rate of transformation for the product d. 1ower opportunity cost of producing the product
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Test Bank for International Economics, 9e
2. #ccording to the principle of comparative advantage" speciali+ation and trade increase a nation&s total output since: a. *esources 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 3. In a two4product" two4country world" international trade can lead to increases in: a. 0onsumer welfare only if output of both products is increased b. 5utput of both products and consumer welfare in both countries c. Total production of both products" but not consumer welfare in both countries d. 0onsumer welfare in both countries" but not total production of both products 6. #s a result of international trade" speciali+ation in production tends to be: a. 0omplete with constant costs7complete with increasing costs b. 0omplete with constant costs7incomplete with increasing costs c. Incomplete with constant costs7complete with increasing costs d. Incomplete with constant costs7incomplete with increasing costs 8. # nation that gains from trade will find its consumption point being located: a. Inside its production possibilities curve b. #long its production possibilities curve c. 5utside its production possibilities curve d. 9one of the above !sing the data of Table .1" answer :uestions 1; through 1,. Table 2.1. Output Possibilities for the U. . and the U.!. 5utput per -orker per (ay Tons of $teel Televisions , 1; ), ;
0ountry !nited $tates !nited <ingdom
1;. *efer to Table .1. The !nited $tates has the absolute advantage in the production of: a. $teel b. Televisions c. =oth steel and televisions d. 9either steel nor televisions
"hapter #$ %oundations of &odern Trade Theor' 11. *efer to Table .1. The !nited <ingdom has a comparative advantage in the production of: a. $teel b. Televisions c. =oth steel and televisions d. 9either steel nor televisions
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1 . *efer to Table .1. If trade opens up between the !nited $tates and the !nited <ingdom" #merican firms should speciali+e in producing: a. $teel b. Televisions c. =oth steel and televisions d. 9either steel nor televisions 1'. *efer to Table .1. The opportunity cost of producing one ton of steel in the !nited $tates is: a. ' televisions b. 1; televisions c. ; televisions d. ), televisions 1). *efer to Table .1. >utually advantageous trade will occur between the !nited $tates and the !nited <ingdom so long as one ton of steel trades for: a. #t least 1 television" but no more than televisions b. #t least televisions" but no more than ' televisions c. #t least ' televisions" but no more than ) televisions d. #t least ) televisions" but no more than , televisions 1,. *efer to Table .1. The !nited <ingdom gains most from trade if: a. 1 ton of steel trades for televisions b. 1 ton of steel trades for ' televisions c. tons of steel trade for ) televisions d. tons of steel trade for , televisions 12. 0oncerning international trade restrictions" which of the following is false? Trade restrictions: a. 1imit speciali+ation and the division of labor b. *educe the volume of trade and the gains from trade c. 0ause nations to produce inside their production possibilities curves d. >ay result in a country producing some of the product of its comparative disadvantage 13. If a production possibilities curve is bowed out .i.e." concave/ in appearance" production occurs under conditions of: a. 0onstant opportunity costs b. Increasing opportunity costs c. (ecreasing opportunity costs d. @ero opportunity costs
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Test Bank for International Economics, 9e
16. Increasing opportunity costs suggest that: a. *esources are not perfectly shiftable between the production of two goods b. *esources are fully shiftable between the production of two goods c. # country&s production possibilities curve appears as a straight line d. # country&s production possibilities curve is bowed inward .i.e." convex/ in appearance 18. The trading4triangle concept is used to indicate a nation&s: a. Exports" marginal rate of transformation" terms of trade b. Imports" terms of trade" marginal rate of transformation c. >arginal rate of transformation" imports" exports d. Terms of trade" exports" imports ;. #ssuming increasing cost conditions" trade between two countries would not be likely if they have: a. Identical demand conditions but different supply conditions b. Identical supply conditions but different demand conditions c. (ifferent supply conditions and different demand conditions d. Identical demand conditions and identical supply conditions !se the data in Table . to answer :uestions 1 through 2. Table 2.2. Output Possibilities for outh !orea and (apan 5utput per -orker per (ay Tons of $teel A0*s 6; ; ); ;
0ountry $outh <orea Bapan
1. *efer to Table . . The opportunity cost of one A0* in Bapan is: a. 1 ton of steel b. tons of steel c. ' tons of steel d. ) tons of steel . *efer to Table . . The opportunity cost of one A0* in $outh <orea is: a. C ton of steel b. 1 ton of steel c. 1C tons of steel d. tons of steel '. *efer to Table . . #ccording to the principle of absolute advantage" Bapan should: a. Export steel b. Export A0*s c. Export steel and A0*s d. 9one of the aboveD there is no basis for gainful trade
"hapter #$ %oundations of &odern Trade Theor' ). *efer to Table . . #ccording to the principle of comparative advantage: a. $outh <orea should export steel b. $outh <orea should export steel and A0*s c. Bapan should export steel d. Bapan should export steel and A0*s
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,. *efer to Table . . -ith international trade" what would be the maximum amount of steel that $outh <orea would be willing to export to Bapan in exchange for each A0*? a. C ton of steel b. 1 ton of steel c. 1C tons of steel d. tons of steel 2. *efer to Table . . -ith international trade" what would be the maximum number of A0*s that Bapan would be willing to export to $outh <orea in exchange for each ton of steel? a. 1 A0* b. A0*s c. ' A0*s d. ) A0*s 3. The earliest statement of the principle of comparative advantage is associated with: a. #dam $mith b. (avid *icardo c. Eli Eeckscher d. =ertil 5hlin 6. If Eong <ong and Taiwan had identical labor costs but were subFect to increasing costs of production: a. Trade would depend on differences in demand conditions b. Trade would depend on economies of large4scale production c. Trade would depend on the use of different currencies d. There would be no basis for gainful trade 8. If the international terms of trade settle at a level that is between each country&s opportunity cost: a. There is no basis for gainful trade for either country b. =oth countries gain from trade c. 5nly one country gains from trade d. 5ne country gains and the other country loses from trade ';. International trade is based on the notion that: a. (ifferent currencies are an obstacle to international trade b. %oods are more mobile internationally than are resources c. *esources are more mobile internationally than are goods d. # country&s exports should always exceed its imports
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Test Bank for International Economics, 9e
'1. *efer to Gigure .1. The relative cost of steel in terms of aluminum is: a. ).; tons b. .; tons c. ;., tons d. ;. , tons Figure 2.1. Production Possibilities chedule
' . *efer to Gigure .1. The relative cost of aluminum in terms of steel is: a. ).; tons b. .; tons c. ;., tons d. ;. , tons ''. *efer to Gigure .1. If the relative cost of steel were to rise" then the production possibilities schedule would: a. =ecome steeper b. =ecome flatter c. $hift inward in a parallel manner d. $hift outward in a parallel manner '). *efer to Gigure .1. If the relative cost of aluminum were to rise" then the production possibilities schedule would: a. =ecome steeper b. =ecome flatter c. $hift inward in a parallel manner d. $hift outward in a parallel manner
"hapter #$ %oundations of &odern Trade Theor' ',. -hen a nation achieves autarky equilibrium: a. Input price equals final product price b. 1abor productivity equals the wage rate c. Imports equal exports d. Hroduction equals consumption
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'2. -hen a nation is in autarky and maximi+es its living standard" its consumption and production points are: a. #long the production possibilities schedule b. #bove the production possibilities schedule c. =eneath the production possibilities schedule d. #ny of the above '3. If 0anada experiences increasin) opportunity costs" its supply schedule of steel will be: a. (ownward4sloping b. !pward4sloping c. Eori+ontal d. Aertical '6. If 0anada experiences constant opportunity costs" its supply schedule of steel will be: a. (ownward4sloping b. !pward4sloping c. Eori+ontal d. Aertical '8. The gains from international trade increase as: a. # nation consumes inside of its production possibilities schedule b. # nation consumes along its production possibilities schedule c. The international terms of trade rises above the nation&s autarky price d. The international terms of trade approaches the nation&s autarky price );. In a two4country" two4product world" the statement IBapan enFoys a comparative advantage over Grance in steel relative to bicyclesJ is equivalent to: a. Grance having a comparative advantage over Bapan in bicycles relative to steel b. Grance having a comparative disadvantage against Bapan in bicycles and steel c. Bapan having a comparative advantage over Grance in steel and bicycles d. Bapan having a comparative disadvantage against Bapan in bicycles and steel )1. *icardo&s theory of comparative advantage was of limited real4world validity because it was founded on the: a. 1abor theory of value b. 0apital theory of value c. 1and theory of value d. Entrepreneur theory of value
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Test Bank for International Economics, 9e
) . #ssume that labor is the only factor of production and that wages in the !nited $tates equal K ; per hour while wages in the !nited <ingdom equal K1; per hour. Hroduction costs would be lower in the !nited $tates than the !nited <ingdom if: a. !.$. labor productivity equaled ); units per hour while !.<. labor productivity equaled 1, units per hour b. !.$. labor productivity equaled '; units per hour while !.<. labor productivity equaled ; units per hour c. !.$. labor productivity equaled ; units per hour while !.<. labor productivity equaled '; units per hour d. !.$. labor productivity equaled 1, units per hour while !.<. labor productivity equaled , units per hour )'. #ccording to *icardo" a country will have a comparative advantage in the product in which its: a. 1abor productivity is relatively low b. 1abor productivity is relatively high c. 1abor mobility is relatively low d. 1abor mobility is relatively high )). The *icardian model of comparative advantage is based on all of the following assumptions e*cept: a. 5nly two nations and two products b. Hroduct quality varies among nations c. 1abor is the only factor of production d. 1abor can move freely within a nation ),. The writings of %. (. #. >ac(ougall emphasi+ed which of the following as an explanation of a country&s competitive position? a. 9ational income levels b. *elative endowments of natural resources c. (omestic tastes and preferences d. 1abor compensation and productivity levels
TRUE-FALSE QUESTIONS
T T T T G G G G 1. #ccording to the mercantilists" a nation&s welfare would improve if it maintained a surplus of exports over imports. . The mercantilists maintained that a free4trade policy best enhances a nation&s welfare. '. The mercantilists contended that because one nation&s gains from trade come the expense of its trading partners" not all nations could simultaneously reali+e gains from trade. ). #ccording to the price4specie4flow doctrine" a trade4surplus nation would experience gold outflows" a decrease in its money supply" and a fall in its price level.
"hapter #$ %oundations of &odern Trade Theor' T T G G ,. The trade theories of #dam $mith and (avid *icardo viewed the determination of competitiveness from the demand side of the market.
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2. #ccording to the principle of absolute advantage" international trade is beneficial to the world if one nation has an absolute cost advantage in the production of one good while the other nation has an absolute cost advantage in the other good. 3. 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. 6. The basis for trade is explained by the principle of absolute advantage according to (avid *icardo and the principle of comparative advantage according to #dam $mith. 8. The principle of comparative advantage contends that a nation should speciali+e in and export the good in which its absolute advantage is smallest or its absolute disadvantage is greatest. 1;. The *icardian theory of comparative advantage assumes only two nations and two products" labor can move freely within a nation" and perfect competition exists in all markets. 11. #ssume that the !nited $tates is more efficient than the !nited <ingdom in the production of all goods. >utually beneficial trade is possible according to the principle of absolute advantage" but is impossible according to the principle of comparative advantage. 1 . It is possible for a nation not to have an absolute advantage in anythingD but it is not possible for one nation to have a comparative advantage in everything and the other nation to have a comparative advantage in nothing. 1'. *icardo&s theory of comparative advantage was of limited relevance to the real world since it assumed that labor was only one of several factors of production. 1). 0ompared to *icardian trade theory" modern trade theory provides a more general view of comparative advantage since it is based on all factors of production rather than Fust labor. 1,. 0onstant opportunity costs suggest that the relative cost of producing one product in terms of the other will remain the same no matter where a nation chooses to locate on its production4 possibilities schedule. 12. There are two explanations of constant opportunity costs: .1/ factors of production are imperfect substitutes for each otherD . / all units of a given factor have different qualities. 13. -ith increasing opportunity costs" a nation totally speciali+es in the production of the commodity of its comparative advantageD with constant opportunity costs" a nation partially speciali+es in the production of the commodity of its comparative advantage. 16. # nation&s trade triangle denotes its exports" imports" and terms of trade. 18. International trade leads to increased welfare if a nation can achieve a post4trade consumption point lying inside of its production4possibilities schedule.
T T T T T
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Test Bank for International Economics, 9e ;. If the !.$. post4trade consumption point lies along its production possibilities schedule" the !nited $tates achieves a higher level of welfare with trade than without trade. 1. If productivity in the %erman computer industry grows faster than it does in the Bapanese computer industry" the opportunity cost of each computer produced in Bapan increases relative to the opportunity cost of a computer produced in %ermany. . If Bapan loses competitiveness in computers" Bapanese computer workers lose Fobs to foreign computer workers and the wages of Bapanese computer workers tend to fall relative to the wages of foreign computer workers. '. -ith constant opportunity costs" a nation will achieve the greatest possible gains from trade if it partially speciali+es in the production of the commodity of its comparative disadvantage. ). =y reducing the overall volume of trade" import restrictions tend to reduce a nation&s gains from trade. ,. -ith increasing opportunity costs" comparative advantage depends on a nation&s supply conditions and demand conditionsD with constant opportunity costs" comparative advantage depends only on demand conditions. 2. #ccording to the principle of comparative advantage" an open trading system results in resources being channeled from uses of low productivity to those of high productivity. 3. The existence of exit barriers tends to delay the closing of inefficient firms that face international competitive disadvantages. 6. >ac(ougall&s empirical study of comparative advantage was based on the notion that a product&s labor cost is underlaid by labor productivity and the wage rate. 8. The >ac(ougall study of comparative advantage hypothesi+ed that in those industries in which !.$. labor productivity was relatively high" !.$. exports to the world should be lower than !.<. exports to the world" after adFusting for wage differentials. ';. The basic idea of mercantilism was that wealth consisted of the goods and services produced by a nation. '1. #ccording to #dam $mith" international trade was a Iwin4winJ situation since all nations could enFoy gains from trade. ' . The price4specie4flow mechanism illustrated why one nation&s gains from trade were accompanied by another country&s losses. ''. 0omplete speciali+ation usually occurs under the assumption of increasing opportunity costs. '). #dam $mith contended that gold" silver" and other precious metals constituted the wealth of a nation.
T
G
T T T
G G G
T T T T
G G G G
T T T T T
G G G G G
"hapter #$ %oundations of &odern Trade Theor' T T T G G G
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',. The price4specie4flow mechanism illustrated why nations could not maintain trade surpluses or trade deficits over the long run. '2. The marginal rate of transformation equals the absolute slope of a country&s production possibilities schedule. '3. #ssume that %ermany has higher labor productivity and higher wage levels than Grance. %ermany can produce a commodity more cheaply than Grance if its productivity differential more than offsets its wage differential. '6. *icardo&s theory of comparative advantage does not take into account demand conditions when determining relative commodity prices. '8. If 0anada has a higher wage level and higher labor productivity than >exico" 0anada will necessarily produce a good at a higher labor cost than >exico. );. If #rgentina has a comparative advantage over =ra+il in beef relative to coffee" #rgentina will speciali+e in beef production.
T T T
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MULTIPLE-CHOICE QUESTIONS
1. The mercantilists would have objected to: a. Export promotion policies initiated by the government b. The use of tariffs or quotas to restrict imports c. Trade policies designed to accumulate gold and other precious metals d. International trade based on open markets . !nlike the mercantilists" #dam $mith maintained that: a. Trade benefits one nation only at the expense of another nation b. %overnment control of trade leads to maximum economic welfare c. #ll nations can gain from free international trade d. The world&s output of goods must remain constant over time '. The trading principle formulated by #dam $mith maintained that: a. International prices are determined from the demand side of the market b. (ifferences in resource endowments determine comparative advantage c. (ifferences in income levels govern world trade patterns d. #bsolute cost differences determine the immediate basis for trade ). !nlike #dam $mith" (avid *icardo&s trading principle emphasi+es the: a. (emand side of the market b. $upply side of the market c. *ole of comparative costs d. *ole of absolute costs ,. -hen a nation requires fewer resources than another nation to produce a product" the nation is said to have a .an/: a. #bsolute advantage in the production of the product b. 0omparative advantage in the production of the product c. 1ower marginal rate of transformation for the product d. 1ower opportunity cost of producing the product
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Test Bank for International Economics, 9e
2. #ccording to the principle of comparative advantage" speciali+ation and trade increase a nation&s total output since: a. *esources 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 3. In a two4product" two4country world" international trade can lead to increases in: a. 0onsumer welfare only if output of both products is increased b. 5utput of both products and consumer welfare in both countries c. Total production of both products" but not consumer welfare in both countries d. 0onsumer welfare in both countries" but not total production of both products 6. #s a result of international trade" speciali+ation in production tends to be: a. 0omplete with constant costs7complete with increasing costs b. 0omplete with constant costs7incomplete with increasing costs c. Incomplete with constant costs7complete with increasing costs d. Incomplete with constant costs7incomplete with increasing costs 8. # nation that gains from trade will find its consumption point being located: a. Inside its production possibilities curve b. #long its production possibilities curve c. 5utside its production possibilities curve d. 9one of the above !sing the data of Table .1" answer :uestions 1; through 1,. Table 2.1. Output Possibilities for the U. . and the U.!. 5utput per -orker per (ay Tons of $teel Televisions , 1; ), ;
0ountry !nited $tates !nited <ingdom
1;. *efer to Table .1. The !nited $tates has the absolute advantage in the production of: a. $teel b. Televisions c. =oth steel and televisions d. 9either steel nor televisions
"hapter #$ %oundations of &odern Trade Theor' 11. *efer to Table .1. The !nited <ingdom has a comparative advantage in the production of: a. $teel b. Televisions c. =oth steel and televisions d. 9either steel nor televisions
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1 . *efer to Table .1. If trade opens up between the !nited $tates and the !nited <ingdom" #merican firms should speciali+e in producing: a. $teel b. Televisions c. =oth steel and televisions d. 9either steel nor televisions 1'. *efer to Table .1. The opportunity cost of producing one ton of steel in the !nited $tates is: a. ' televisions b. 1; televisions c. ; televisions d. ), televisions 1). *efer to Table .1. >utually advantageous trade will occur between the !nited $tates and the !nited <ingdom so long as one ton of steel trades for: a. #t least 1 television" but no more than televisions b. #t least televisions" but no more than ' televisions c. #t least ' televisions" but no more than ) televisions d. #t least ) televisions" but no more than , televisions 1,. *efer to Table .1. The !nited <ingdom gains most from trade if: a. 1 ton of steel trades for televisions b. 1 ton of steel trades for ' televisions c. tons of steel trade for ) televisions d. tons of steel trade for , televisions 12. 0oncerning international trade restrictions" which of the following is false? Trade restrictions: a. 1imit speciali+ation and the division of labor b. *educe the volume of trade and the gains from trade c. 0ause nations to produce inside their production possibilities curves d. >ay result in a country producing some of the product of its comparative disadvantage 13. If a production possibilities curve is bowed out .i.e." concave/ in appearance" production occurs under conditions of: a. 0onstant opportunity costs b. Increasing opportunity costs c. (ecreasing opportunity costs d. @ero opportunity costs
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Test Bank for International Economics, 9e
16. Increasing opportunity costs suggest that: a. *esources are not perfectly shiftable between the production of two goods b. *esources are fully shiftable between the production of two goods c. # country&s production possibilities curve appears as a straight line d. # country&s production possibilities curve is bowed inward .i.e." convex/ in appearance 18. The trading4triangle concept is used to indicate a nation&s: a. Exports" marginal rate of transformation" terms of trade b. Imports" terms of trade" marginal rate of transformation c. >arginal rate of transformation" imports" exports d. Terms of trade" exports" imports ;. #ssuming increasing cost conditions" trade between two countries would not be likely if they have: a. Identical demand conditions but different supply conditions b. Identical supply conditions but different demand conditions c. (ifferent supply conditions and different demand conditions d. Identical demand conditions and identical supply conditions !se the data in Table . to answer :uestions 1 through 2. Table 2.2. Output Possibilities for outh !orea and (apan 5utput per -orker per (ay Tons of $teel A0*s 6; ; ); ;
0ountry $outh <orea Bapan
1. *efer to Table . . The opportunity cost of one A0* in Bapan is: a. 1 ton of steel b. tons of steel c. ' tons of steel d. ) tons of steel . *efer to Table . . The opportunity cost of one A0* in $outh <orea is: a. C ton of steel b. 1 ton of steel c. 1C tons of steel d. tons of steel '. *efer to Table . . #ccording to the principle of absolute advantage" Bapan should: a. Export steel b. Export A0*s c. Export steel and A0*s d. 9one of the aboveD there is no basis for gainful trade
"hapter #$ %oundations of &odern Trade Theor' ). *efer to Table . . #ccording to the principle of comparative advantage: a. $outh <orea should export steel b. $outh <orea should export steel and A0*s c. Bapan should export steel d. Bapan should export steel and A0*s
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,. *efer to Table . . -ith international trade" what would be the maximum amount of steel that $outh <orea would be willing to export to Bapan in exchange for each A0*? a. C ton of steel b. 1 ton of steel c. 1C tons of steel d. tons of steel 2. *efer to Table . . -ith international trade" what would be the maximum number of A0*s that Bapan would be willing to export to $outh <orea in exchange for each ton of steel? a. 1 A0* b. A0*s c. ' A0*s d. ) A0*s 3. The earliest statement of the principle of comparative advantage is associated with: a. #dam $mith b. (avid *icardo c. Eli Eeckscher d. =ertil 5hlin 6. If Eong <ong and Taiwan had identical labor costs but were subFect to increasing costs of production: a. Trade would depend on differences in demand conditions b. Trade would depend on economies of large4scale production c. Trade would depend on the use of different currencies d. There would be no basis for gainful trade 8. If the international terms of trade settle at a level that is between each country&s opportunity cost: a. There is no basis for gainful trade for either country b. =oth countries gain from trade c. 5nly one country gains from trade d. 5ne country gains and the other country loses from trade ';. International trade is based on the notion that: a. (ifferent currencies are an obstacle to international trade b. %oods are more mobile internationally than are resources c. *esources are more mobile internationally than are goods d. # country&s exports should always exceed its imports
,3
Test Bank for International Economics, 9e
'1. *efer to Gigure .1. The relative cost of steel in terms of aluminum is: a. ).; tons b. .; tons c. ;., tons d. ;. , tons Figure 2.1. Production Possibilities chedule
' . *efer to Gigure .1. The relative cost of aluminum in terms of steel is: a. ).; tons b. .; tons c. ;., tons d. ;. , tons ''. *efer to Gigure .1. If the relative cost of steel were to rise" then the production possibilities schedule would: a. =ecome steeper b. =ecome flatter c. $hift inward in a parallel manner d. $hift outward in a parallel manner '). *efer to Gigure .1. If the relative cost of aluminum were to rise" then the production possibilities schedule would: a. =ecome steeper b. =ecome flatter c. $hift inward in a parallel manner d. $hift outward in a parallel manner
"hapter #$ %oundations of &odern Trade Theor' ',. -hen a nation achieves autarky equilibrium: a. Input price equals final product price b. 1abor productivity equals the wage rate c. Imports equal exports d. Hroduction equals consumption
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'2. -hen a nation is in autarky and maximi+es its living standard" its consumption and production points are: a. #long the production possibilities schedule b. #bove the production possibilities schedule c. =eneath the production possibilities schedule d. #ny of the above '3. If 0anada experiences increasin) opportunity costs" its supply schedule of steel will be: a. (ownward4sloping b. !pward4sloping c. Eori+ontal d. Aertical '6. If 0anada experiences constant opportunity costs" its supply schedule of steel will be: a. (ownward4sloping b. !pward4sloping c. Eori+ontal d. Aertical '8. The gains from international trade increase as: a. # nation consumes inside of its production possibilities schedule b. # nation consumes along its production possibilities schedule c. The international terms of trade rises above the nation&s autarky price d. The international terms of trade approaches the nation&s autarky price );. In a two4country" two4product world" the statement IBapan enFoys a comparative advantage over Grance in steel relative to bicyclesJ is equivalent to: a. Grance having a comparative advantage over Bapan in bicycles relative to steel b. Grance having a comparative disadvantage against Bapan in bicycles and steel c. Bapan having a comparative advantage over Grance in steel and bicycles d. Bapan having a comparative disadvantage against Bapan in bicycles and steel )1. *icardo&s theory of comparative advantage was of limited real4world validity because it was founded on the: a. 1abor theory of value b. 0apital theory of value c. 1and theory of value d. Entrepreneur theory of value
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Test Bank for International Economics, 9e
) . #ssume that labor is the only factor of production and that wages in the !nited $tates equal K ; per hour while wages in the !nited <ingdom equal K1; per hour. Hroduction costs would be lower in the !nited $tates than the !nited <ingdom if: a. !.$. labor productivity equaled ); units per hour while !.<. labor productivity equaled 1, units per hour b. !.$. labor productivity equaled '; units per hour while !.<. labor productivity equaled ; units per hour c. !.$. labor productivity equaled ; units per hour while !.<. labor productivity equaled '; units per hour d. !.$. labor productivity equaled 1, units per hour while !.<. labor productivity equaled , units per hour )'. #ccording to *icardo" a country will have a comparative advantage in the product in which its: a. 1abor productivity is relatively low b. 1abor productivity is relatively high c. 1abor mobility is relatively low d. 1abor mobility is relatively high )). The *icardian model of comparative advantage is based on all of the following assumptions e*cept: a. 5nly two nations and two products b. Hroduct quality varies among nations c. 1abor is the only factor of production d. 1abor can move freely within a nation ),. The writings of %. (. #. >ac(ougall emphasi+ed which of the following as an explanation of a country&s competitive position? a. 9ational income levels b. *elative endowments of natural resources c. (omestic tastes and preferences d. 1abor compensation and productivity levels
TRUE-FALSE QUESTIONS
T T T T G G G G 1. #ccording to the mercantilists" a nation&s welfare would improve if it maintained a surplus of exports over imports. . The mercantilists maintained that a free4trade policy best enhances a nation&s welfare. '. The mercantilists contended that because one nation&s gains from trade come the expense of its trading partners" not all nations could simultaneously reali+e gains from trade. ). #ccording to the price4specie4flow doctrine" a trade4surplus nation would experience gold outflows" a decrease in its money supply" and a fall in its price level.
"hapter #$ %oundations of &odern Trade Theor' T T G G ,. The trade theories of #dam $mith and (avid *icardo viewed the determination of competitiveness from the demand side of the market.
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2. #ccording to the principle of absolute advantage" international trade is beneficial to the world if one nation has an absolute cost advantage in the production of one good while the other nation has an absolute cost advantage in the other good. 3. 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. 6. The basis for trade is explained by the principle of absolute advantage according to (avid *icardo and the principle of comparative advantage according to #dam $mith. 8. The principle of comparative advantage contends that a nation should speciali+e in and export the good in which its absolute advantage is smallest or its absolute disadvantage is greatest. 1;. The *icardian theory of comparative advantage assumes only two nations and two products" labor can move freely within a nation" and perfect competition exists in all markets. 11. #ssume that the !nited $tates is more efficient than the !nited <ingdom in the production of all goods. >utually beneficial trade is possible according to the principle of absolute advantage" but is impossible according to the principle of comparative advantage. 1 . It is possible for a nation not to have an absolute advantage in anythingD but it is not possible for one nation to have a comparative advantage in everything and the other nation to have a comparative advantage in nothing. 1'. *icardo&s theory of comparative advantage was of limited relevance to the real world since it assumed that labor was only one of several factors of production. 1). 0ompared to *icardian trade theory" modern trade theory provides a more general view of comparative advantage since it is based on all factors of production rather than Fust labor. 1,. 0onstant opportunity costs suggest that the relative cost of producing one product in terms of the other will remain the same no matter where a nation chooses to locate on its production4 possibilities schedule. 12. There are two explanations of constant opportunity costs: .1/ factors of production are imperfect substitutes for each otherD . / all units of a given factor have different qualities. 13. -ith increasing opportunity costs" a nation totally speciali+es in the production of the commodity of its comparative advantageD with constant opportunity costs" a nation partially speciali+es in the production of the commodity of its comparative advantage. 16. # nation&s trade triangle denotes its exports" imports" and terms of trade. 18. International trade leads to increased welfare if a nation can achieve a post4trade consumption point lying inside of its production4possibilities schedule.
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Test Bank for International Economics, 9e ;. If the !.$. post4trade consumption point lies along its production possibilities schedule" the !nited $tates achieves a higher level of welfare with trade than without trade. 1. If productivity in the %erman computer industry grows faster than it does in the Bapanese computer industry" the opportunity cost of each computer produced in Bapan increases relative to the opportunity cost of a computer produced in %ermany. . If Bapan loses competitiveness in computers" Bapanese computer workers lose Fobs to foreign computer workers and the wages of Bapanese computer workers tend to fall relative to the wages of foreign computer workers. '. -ith constant opportunity costs" a nation will achieve the greatest possible gains from trade if it partially speciali+es in the production of the commodity of its comparative disadvantage. ). =y reducing the overall volume of trade" import restrictions tend to reduce a nation&s gains from trade. ,. -ith increasing opportunity costs" comparative advantage depends on a nation&s supply conditions and demand conditionsD with constant opportunity costs" comparative advantage depends only on demand conditions. 2. #ccording to the principle of comparative advantage" an open trading system results in resources being channeled from uses of low productivity to those of high productivity. 3. The existence of exit barriers tends to delay the closing of inefficient firms that face international competitive disadvantages. 6. >ac(ougall&s empirical study of comparative advantage was based on the notion that a product&s labor cost is underlaid by labor productivity and the wage rate. 8. The >ac(ougall study of comparative advantage hypothesi+ed that in those industries in which !.$. labor productivity was relatively high" !.$. exports to the world should be lower than !.<. exports to the world" after adFusting for wage differentials. ';. The basic idea of mercantilism was that wealth consisted of the goods and services produced by a nation. '1. #ccording to #dam $mith" international trade was a Iwin4winJ situation since all nations could enFoy gains from trade. ' . The price4specie4flow mechanism illustrated why one nation&s gains from trade were accompanied by another country&s losses. ''. 0omplete speciali+ation usually occurs under the assumption of increasing opportunity costs. '). #dam $mith contended that gold" silver" and other precious metals constituted the wealth of a nation.
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"hapter #$ %oundations of &odern Trade Theor' T T T G G G
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',. The price4specie4flow mechanism illustrated why nations could not maintain trade surpluses or trade deficits over the long run. '2. The marginal rate of transformation equals the absolute slope of a country&s production possibilities schedule. '3. #ssume that %ermany has higher labor productivity and higher wage levels than Grance. %ermany can produce a commodity more cheaply than Grance if its productivity differential more than offsets its wage differential. '6. *icardo&s theory of comparative advantage does not take into account demand conditions when determining relative commodity prices. '8. If 0anada has a higher wage level and higher labor productivity than >exico" 0anada will necessarily produce a good at a higher labor cost than >exico. );. If #rgentina has a comparative advantage over =ra+il in beef relative to coffee" #rgentina will speciali+e in beef production.
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