International Economics Thomas Pugel 17th Edition- Test Bank
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Sample Test
International Economics, 17e (Pugel)
Chapter 3 Why Everybody Trades: Comparative
Advantage
1) According to the Mercantilists, governments should
1. A)
subsidize and encourage imports.
2. B)
subsidize and encourage exports.
3. C)
allow for free trade unencumbered by government regulations and restrictions.
4. D)
not spend much on national defense.
Answer: B
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) ________ wrote the Wealth
of Nations.
1. A)
David Ricardo
2. B)
Paul Samuelson
3. C)
Adam Smith
4. D)
Karl Marx
Answer: C
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3) When Adam Smith presented his theory of absolute advantage,
he assumed that all “value” in an economy was determined by and measured in
terms of the ________ used in the production of the various goods.
1. A)
area of land
2. B)
labor hours
3. C)
amount of physical capital
4. D)
amount of money
Answer: B
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) Labor productivity refers to:
1. A)
the number of units of output a worker can produce in one hour.
2. B)
the money value of a good that all workers in a firm produce in one day.
3. C)
the number of hours it takes a worker to produce one unit of output.
4. D)
the total numbers of hours it takes all the workers in a firm to produce a
given money value of a good in one day.
Answer: A
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) Which of the following is true of mercantilism?
1. A)
Mercantilists believed that free trade is always beneficial for the trading
nations.
2. B)
Mercantilists believed that under free trade each of the trading countries
benefit equally.
3. C)
Mercantilists believed that a nation does not benefit directly from its
exports.
4. D)
Mercantilism believed that national well-being was based on national holdings
of gold and silver.
Answer: D
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6) If Country X has higher labor productivity in the production
of umbrellas than the rest of the world, we would say that Country X has a(n)
________ in the production of umbrellas.
1. A)
comparative advantage
2. B)
absolute advantage
3. C)
absolute disadvantage
4. D)
comparative disadvantage
Answer: B
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) Consider a two-country, two-commodity model. The table below
shows the units of Good X and Good Y produced in Country A and Country B per
labor hour. The number of labor hours required to produce one unit of Good X in
Country A is
|
Productivity |
Country A |
Country B |
|
Good X |
1.00 |
0.50 |
|
Good Y |
0.20 |
0.70 |
1. A)
0.5.
2. B) 1.
3. C)
1.43.
4. D) 2.
Answer: B
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) Consider a two-country, two-commodity model. The table below
shows the units of Good X and Good Y produced in Country A and Country B per
labor hour. The number of labor hours required to produce one unit of Good Y in
Country B is
|
Productivity |
Country A |
Country B |
|
Good X |
1.00 |
0.50 |
|
Good Y |
0.20 |
0.70 |
1. A)
0.5.
2. B) 1.
3. C)
1.43.
4. D) 2.
Answer: C
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9) Consider a two-country, two-commodity model. The table below
shows the units of Good X and Good Y produced in Country A and Country B per
labor hour. Which of the following statements is true?
|
Productivity |
Country A |
Country B |
|
Good X |
1.00 |
0.50 |
|
Good Y |
0.20 |
0.70 |
1. A)
Country B has an absolute advantage in the production of both Good X and Good
Y.
2. B) Country
A has an absolute advantage in the production of Good X.
3. C)
Country A has an absolute advantage in the production of both Good X and Good
Y.
4. D)
Country B has an absolute advantage in the production of Good X.
Answer: B
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10) Consider a two-country, two-commodity model. The table below
shows the units of Good X and Good Y produced in Country A and Country B per
labor hour. Country B has an absolute advantage in the production of
|
Productivity |
Country A |
Country B |
|
Good X |
1.00 |
0.50 |
|
Good Y |
0.20 |
0.70 |
1. A)
neither Good X nor Good Y.
2. B)
both Good X and Good Y.
3. C)
only Good X.
4. D)
only Good Y.
Answer: D
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
11) Consider a two-country, two-commodity model. The table below
shows the units of Good X and Good Y produced in Country A and Country B per
labor hour. If Country A transfers one labor hour from the production of Good Y
to the production of Good X, total world production of Good X will ________ by
________ unit(s).
|
Productivity |
Country A |
Country B |
|
Good X |
1.00 |
0.50 |
|
Good Y |
0.20 |
0.70 |
1. A)
increase; one
2. B)
decrease; 1.43
3. C)
increase; 0.5
4. D)
decrease; 0.7
Answer: A
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
12) Consider a two-country, two-commodity model. The table below
shows the units of Good X and Good Y produced in Country A and Country B per
labor hour. If Country B transfers one labor hour from the production of Good X
to the production of Good Y, total world production of Good Y will ________ by
________ unit(s).
|
Productivity |
Country A |
Country B |
|
Good X |
1.00 |
0.50 |
|
Good Y |
0.20 |
0.70 |
1. A)
increase; 0.7
2. B)
decrease; one
3. C)
decrease; 1.5
4. D) increase;
0.5
Answer: A
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
13) The theory of comparative advantage was proposed by
1. A)
Adam Smith.
2. B)
Karl Marx.
3. C)
David Ricardo.
4. D)
Eli Heckscher.
Answer: C
Difficulty: 1 Easy
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
14) If a country exports the products it can produce at a low
opportunity cost and imports the products it would otherwise produce at a high
opportunity cost, we say that such trade is based on the
1. A)
theory of absolute advantage.
2. B)
arbitrage pricing theory.
3. C)
theory of factor endowments.
4. D)
theory of comparative advantage.
Answer: D
Difficulty: 1 Easy
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
15) The table below shows the number of labor hours required to
produce one umbrella and one bushel of corn in the United Kingdom and the rest
of the world. The United Kingdom has an absolute advantage in the production of
|
Labor hours to make: |
In the United Kingdom |
In the Rest of the World |
|
1 umbrella |
3.00 |
2.00 |
|
1 bushel of corn |
1.00 |
0.25 |
1. A)
neither corn nor umbrellas.
2. B)
both corn and umbrellas.
3. C)
only corn.
4. D)
only umbrellas.
Answer: A
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
16) The table below shows the number of labor hours required to
produce one umbrella and one bushel of corn in the United Kingdom and the rest
of the world. The rest of the world has an absolute advantage in the production
of
|
Labor hours to make: |
In the United Kingdom |
In the Rest of the World |
|
1 umbrella |
3.00 |
2.00 |
|
1 bushel of corn |
1.00 |
0.25 |
1. A)
both corn and umbrellas.
2. B)
only umbrellas.
3. C)
only corn.
4. D)
neither corn nor umbrellas.
Answer: A
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
17) The table below shows the number of labor hours required to
produce one umbrella and one bushel of corn in the United Kingdom and the rest
of the world. Which of the following statements is true?
|
Labor hours to make: |
In the United Kingdom |
In the Rest of the World |
|
1 umbrella |
3.00 |
2.00 |
|
1 bushel of corn |
1.00 |
0.25 |
1. A)
The United Kingdom has a comparative advantage in the production of corn.
2. B)
The United Kingdom has an absolute advantage in the production of umbrellas.
3. C)
The United Kingdom has a comparative advantage in the production of umbrellas.
4. D)
The United Kingdom has a comparative advantage in the production of both goods.
Answer: C
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
18) The table below shows the number of labor hours required to
produce one umbrella and one bushel of corn in the United Kingdom and the rest
of the world. What is the opportunity cost of producing a bushel of corn in the
United Kingdom?
|
Labor hours to make: |
In the United Kingdom |
In the Rest of the World |
|
1 umbrella |
3.00 |
2.00 |
|
1 bushel of corn |
1.00 |
0.25 |
1. A)
1/8 of an umbrella
2. B)
1/3 of an umbrella
3. C)
Three umbrellas
4. D)
Eight umbrellas
Answer: B
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
19) The table below shows the number of labor hours required to
produce one umbrella and one bushel of corn in the United Kingdom and the rest
of the world. Calculate the opportunity cost of producing an umbrella in the
rest of the world.
|
Labor hours to make: |
In the United Kingdom |
In the Rest of the World |
|
1 umbrella |
3.00 |
2.00 |
|
1 bushel of corn |
1.00 |
0.25 |
1. A)
1/8 of a bushel of corn
2. B)
1/3 of a bushel of corn
3. C)
Three bushels of corn
4. D)
Eight bushels of corn
Answer: D
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
20) The table below shows the number of labor hours required to
produce one umbrella and one bushel of corn in the United Kingdom and the rest
of the world. If the United Kingdom and the rest of the world begin to trade
with each other, the international price of umbrellas will lie between ________
and
|
Labor hours to make: |
In the United Kingdom |
In the Rest of the World |
|
1 umbrella |
3.00 |
2.00 |
|
1 bushel of corn |
1.00 |
0.25 |
1. A)
1/3 of a bushel of corn per umbrella; three bushels of corn per umbrella.
2. B)
three bushels of corn per umbrella; eight bushels of corn per umbrella.
3. C)
1/8 of a bushel of corn per umbrella; 1/3 of a bushel of corn per umbrella.
4. D)
1/8 of a bushel of corn per umbrella; eight bushels of corn per umbrella.
Answer: B
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21) The table below shows the number of labor hours required to
produce one umbrella and one bushel of corn in the United Kingdom and the rest
of the world. If the United Kingdom and the rest of the world begin to trade
with each other, the international price of corn will lie between ________ and
|
Labor hours to make: |
In the United Kingdom |
In the Rest of the World |
|
1 umbrella |
3.00 |
2.00 |
|
1 bushel of corn |
1.00 |
0.25 |
1. A)
1/3 of an umbrella per bushel of corn; three umbrellas per bushel of corn.
2. B)
three umbrellas per bushel of corn; eight umbrellas per bushel of corn.
3. C)
1/8 of an umbrella per bushel of corn; 1/3 of an umbrella per bushel of corn.
4. D)
1/8 of an umbrella per bushel of corn; eight umbrellas per bushel of corn.
Answer: C
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22) The table below shows the number of umbrellas and bushels of
corn produced in the United Kingdom and the rest of the world per labor hour.
The rest of the world has an absolute advantage in the production of
|
Productivity |
In the United Kingdom |
In the Rest of the World |
|
Umbrellas per labor hour |
0.25 |
1.00 |
|
Bushels of corn per labor hour |
0.50 |
0.67 |
1. A)
both goods.
2. B)
neither corn nor umbrellas.
3. C)
only umbrellas.
4. D)
only corn.
Answer: A
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
23) The table below shows the number of umbrellas and bushels of
corn produced in the United Kingdom and the rest of the world per labor hour.
The United Kingdom has a comparative advantage in the production of
|
Productivity |
In the United Kingdom |
In the Rest of the World |
|
Umbrellas per labor hour |
0.25 |
1.00 |
|
Bushels of corn per labor hour |
0.50 |
0.67 |
1. A)
both goods.
2. B)
neither umbrellas nor corn.
3. C)
only umbrellas.
4. D)
only corn.
Answer: D
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
24) The table below shows the number of umbrellas and bushels of
corn produced in the United Kingdom and the rest of the world per labor hour.
The opportunity cost of producing a bushel of corn in the United Kingdom is
|
Productivity |
In the United Kingdom |
In the Rest of the World |
|
Umbrellas per labor hour |
0.25 |
1.00 |
|
Bushels of corn per labor hour |
0.50 |
0.67 |
1. A)
2/3 of an umbrella.
2. B)
three umbrellas.
3. C)
1/2 of an umbrella.
4. D)
two umbrellas.
Answer: C
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25) The table below shows the number of umbrellas and bushels of
corn produced in the United Kingdom and the rest of the world per labor hour.
The opportunity cost of producing an umbrella in the United Kingdom is
|
Productivity |
In the United Kingdom |
In the Rest of the World |
|
Umbrellas per labor hour |
0.25 |
1.00 |
|
Bushels of corn per labor hour |
0.50 |
0.67 |
1. A)
two bushels of corn.
2. B)
three bushels of corn.
3. C)
3/2 bushels of corn.
4. D)
1/3 of a bushel of corn.
Answer: A
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
26) The table below shows the number of umbrellas and bushels of
corn produced in the United Kingdom and the rest of the world per labor hour.
If the United Kingdom and the rest of the world begin to trade with each other,
the international price of umbrellas will lie between ________ and
|
Productivity |
In the United Kingdom |
In the Rest of the World |
|
Umbrellas per labor hour |
0.25 |
1.00 |
|
Bushels of corn per labor hour |
0.50 |
0.67 |
1. A)
2/3 of a bushel of corn per umbrella; two bushels of corn per umbrella.
2. B)
2/3 of a bushel of corn per umbrella; 3/2 bushels of corn per umbrella.
3. C)
1/2 of a bushel of corn per umbrella; 3/2 bushels of corn per umbrella.
4. D)
1/3 of a bushel of corn per umbrella; three bushels of corn per umbrella.
Answer: A
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27) The table below shows the number of umbrellas and bushels of
corn produced in the United Kingdom and the rest of the world per labor hour.
If the United Kingdom and the rest of the world begin to trade with each other,
the international price of corn will lie between ________ and
|
Productivity |
In the United Kingdom |
In the Rest of the World |
|
Umbrellas per labor hour |
0.25 |
1.00 |
|
Bushels of corn per labor hour |
0.50 |
0.67 |
1. A)
2/3 of an umbrella per bushel of corn; three umbrellas per bushel of corn.
2. B)
2/3 of an umbrella per bushel of corn; 3/2 umbrellas per bushel of corn.
3. C)
1/2 of an umbrella per bushel of corn; 3/2 umbrellas per bushel of corn.
4. D)
3/2 umbrellas per bushel of corn; three umbrellas per bushel of corn.
Answer: C
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28) The table below shows the number of labor hours required to
produce one gallon of wine and one pound of cheese in the United States and
France. The United States has an absolute advantage in the production of
|
Labor hours to make: |
In the United States |
In France |
|
1 gallon of wine |
4.00 |
1.00 |
|
1 pound of cheese |
1.00 |
2.00 |
1. A)
neither wine nor cheese.
2. B)
only wine.
3. C)
both wine and cheese.
4. D)
only cheese.
Answer: D
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
29) The table below shows the number of labor hours required to
produce one gallon of wine and one pound of cheese in the United States and
France. What is the relative price of cheese (the price of cheese in terms of
wine) in France under a no-trade situation?
|
Labor hours to make: |
In the United States |
In France |
|
1 gallon of wine |
4.00 |
1.00 |
|
1 pound of cheese |
1.00 |
2.00 |
1. A)
Two gallons of wine per pound
2. B)
One gallon of wine per pound
3. C)
0.5 gallon of wine per pound
4. D)
0.25 gallon of wine per pound
Answer: A
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
30) The table below shows the number of labor hours required to
produce one gallon of wine and one pound of cheese in the United States and
France. The opportunity cost of producing cheese in the United States is
|
Labor hours to make: |
In the United States |
In France |
|
1 gallon of wine |
4.00 |
1.00 |
|
1 pound of cheese |
1.00 |
2.00 |
1. A)
one gallon of wine.
2. B)
four gallons of wine.
3. C)
0.25 gallon of wine.
4. D)
0.5 gallon of wine.
Answer: C
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
31) The table below shows the number of labor hours required to
produce one gallon of wine and one pound of cheese in the United States and
France. The United States has a comparative advantage in the production of
|
Labor hours to make: |
In the United States |
In France |
|
1 gallon of wine |
4.00 |
1.00 |
|
1 pound of cheese |
1.00 |
2.00 |
1. A)
both goods.
2. B)
only cheese.
3. C)
only wine.
4. D)
neither cheese nor wine.
Answer: B
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32) The following table shows the number of labor hours required
to produce one gallon of wine and one pound of cheese in the United States and
France. If the United States and France engage in free trade with each other,
the international price of wine will lie between ________ and
|
Labor hours to make: |
In the United States |
In France |
|
1 gallon of wine |
4.00 |
1.00 |
|
1 pound of cheese |
1.00 |
2.00 |
1. A)
one pound of cheese per gallon; four pounds of cheese per gallon.
2. B)
0.5 pound of cheese per gallon; four pounds of cheese per gallon.
3. C)
one pound of cheese per gallon; two pounds of cheese per gallon.
4. D)
0.5 pound of cheese per gallon; two pounds of cheese per gallon.
Answer: B
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33) The table below shows the number of labor hours required to
produce one gallon of wine and one pound of cheese in the United States and
France. If the United States and France engage in free trade with each other,
the international price of cheese will lie between ________ and
|
Labor hours to make: |
In the United States |
In France |
|
1 gallon of wine |
4.00 |
1.00 |
|
1 pound of cheese |
1.00 |
2.00 |
1. A)
0.5 gallon of wine per pound; one gallon of wine per pound.
2. B)
two gallons of wine per pound; four gallons of wine per pound.
3. C)
0.25 gallon of wine per pound; two gallons of wine per pound.
4. D)
one gallon of wine per pound; four gallons of wine per pound.
Answer: C
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34) Which of the following is NOT true of a nation’s
production-possibility curve?
1. A)
The production-possibility curve shows all combinations of amounts of different
products that an economy can produce when its resources are fully employed.
2. B)
Points inside the production-possibility curve are feasible, but may represent
unemployment of some of the economy’s resources.
3. C)
Points outside the production-possibility curve are not feasible production
points given the resources in the economy.
4. D)
The negative slope of the production-possibility curve indicates declining
productivity.
Answer: D
Difficulty: 2 Medium
Topic: Ricardos Constant Costs and the
Production-Possibilities Curve
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
35) Which of the following is true of a constant-cost production-possibility
curve?
1. A) A
constant-cost production-possibilities curve is drawn as a positively sloped
straight line.
2. B)
Along a constant-cost production-possibilities curve, the opportunity cost of
producing more of a good is constant.
3. C)
When a country engages in free trade, the constant-cost production-possibility
curve shifts to the right.
4. D) A
country with a constant-cost production-possibility curve partially specializes
in the production of goods when it engages in free trade with other nations.
Answer: B
Difficulty: 2 Medium
Topic: Ricardos Constant Costs and the
Production-Possibilities Curve
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
36) The figure below shows the production-possibility curves for
Canada (AB) and the rest of the world (CD). The opportunity cost of producing a
bushel of corn in Canada and in the rest of the world are ________ liters and
________ liters of maple syrup, respectively.
1. A)
9/7; two
2. B)
7/9; two
3. C)
9/7; 1/2
4. D) 7/9;
1/2
Answer: C
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
37) The figure below shows the production-possibility curves for
Canada (AB) and the rest of the world (CD). The opportunity cost of producing
one liter of maple syrup in Canada and in the rest of the world are ________
bushels and ________ bushels of corn, respectively.
1. A)
9/7; two
2. B)
7/9; two
3. C)
9/7; 1/2
4. D)
7/9; 1/2
Answer: B
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
38) The following figure shows the production-possibility curves
for Canada (AB) and the rest of the world (CD). Suppose Canada begins to trade
with the rest of the world. If, in the international market, one bushel of corn
is exchanged for one liter of maple syrup, Canada will produce ________ bushels
of corn and the rest of the world will produce ________ liters of maple syrup.
32.
A) 35; 32.5
33.
B) 70; 50
34.
C) 0; 0
35.
D) 90; 100
Answer: C
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39) A bottle of wine can be produced in France with two labor
hours, and in the United States with four labor hours. A pound of beef can be
produced in France with one labor hour, and in the United States with ½ labor
hours. Given this context, which of the following is true?
1. A)
France has a comparative advantage in the production of beef.
2. B)
France has an absolute advantage in the production of beef.
3. C)
The United States has an absolute but not a comparative advantage in the
production of beef.
4. D)
The United States has both a comparative and absolute advantage in the
production of beef.
Answer: D
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40) Vineland and Moonited Republic produce wine and cheese. The
opportunity cost for the production of a bottle of wine in Vineland is two
pounds of cheese, and in the Moonited Republic is 2.5 pounds of cheese. Based
on this information, it can be concluded that
1. A)
based on comparative advantage trade between the two countries is not possible.
2. B)
Vineland has a comparative advantage in the production of wine.
3. C)
Vineland has a comparative advantage in the production of cheese and Moonited
has a comparative advantage in the production of wine.
4. D)
Vineland has an absolute disadvantage in the production of both goods.
Answer: B
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
41) In a two-country, two-commodity model, if a country has a
comparative advantage in the production of a certain good, it implies that this
country
1. A)
also has an absolute advantage in the production of this good.
2. B)
will start importing this good from the other country.
3. C)
can produce this good at a lower opportunity cost than the other country.
4. D)
uses most of its resources in the production of this good.
Answer: C
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
42) In a two-country, two-commodity model, if a country has an
absolute advantage in the production of a certain good, it implies that
1. A) it
is not possible that this country can gain by importing this good from the
other country.
2. B)
this country also has a comparative advantage in the production of this good.
3. C)
this country has greater resources than the other country.
4. D)
this country has higher labor productivity in the production of this good.
Answer: D
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
43) Adam Smith’s theory of absolute advantage is based on the
labor theory of value.
Answer: TRUE
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
44) Mercantilists believed that a country gains from
international trade only at the expense of another country or countries.
Answer: TRUE
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
45) If Country X has a higher labor productivity than the rest
of the world in the production of a good, then Country X has a comparative
advantage in the production of the good.
Answer: FALSE
Difficulty: 2 Medium
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
46) If a country does not have an absolute advantage in the
production of at least one commodity, then it cannot gain from free trade.
Answer: FALSE
Difficulty: 2 Medium
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
47) The opportunity cost of producing a good is the additional labor
cost incurred to produce an extra unit of the good.
Answer: FALSE
Difficulty: 1 Easy
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
48) In a two-country, two-commodity model, if a country has
higher labor productivity in producing both the goods, it must produce and
export both the goods to the other country.
Answer: FALSE
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
49) In the two-country, two-commodity model, both countries can
gain from trade as long as their relative advantages and disadvantages in
producing different goods are different.
Answer: TRUE
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
50) The act of buying at a low price in one place and selling at
a high price in another place is called relative pricing.
Answer: FALSE
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
51) Arbitrage is the act of buying at one place and selling at
another place in order to profit from the price differences that exist between
the two places.
Answer: TRUE
Difficulty: 1 Easy
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
52) Straight-line production-possibility curves indicate that
the opportunity cost of producing additional units of each good is constant.
Answer: TRUE
Difficulty: 2 Medium
Topic: Ricardos Constant Costs and the
Production-Possibilities Curve
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
53) Briefly discuss the implications of a country operating
inside its production-possibility curve. Use a graph in your discussion.
Answer: POSSIBLE RESPONSE: The production-possibility
curve (PPC) shows all combinations of the amounts of different products that an
economy can produce with full employment of its resources and maximum feasible
productivity of those resources.
The economy of Country A (above) produces two types of
goods—consumer goods and capital goods. If the economy of Country A is
operating at Point B inside the PPC it is not operating at peak efficiency.
This may reflect unemployment or inefficient use of resources or both. It also
implies that the country could produce more of both types of goods, or
more of one of the goods without foregoing any production of the other type of
good.
Difficulty: 2 Medium
Topic: Ricardos Constant Costs and the
Production-Possibilities Curve
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
54) Briefly explain the principle of comparative advantage.
Answer: POSSIBLE RESPONSE: David Ricardo’s principle of
comparative advantage shows that beneficial trade can occur even if one country
is worse (less productive) at producing all products. The principle of
comparative advantage is based on the importance of opportunity cost—the number
of units of other products that must be forgone to produce more of a particular
product. The principle states that a country will export products that it can
produce at low opportunity cost in return for imports of products that it would
otherwise produce at high opportunity cost.
Difficulty: 1 Easy
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
55) Briefly discuss the primary features of the mercantilist
philosophy. Mention two major criticisms of the mercantilist theory as put
forward by Adam Smith and other economists.
Answer: POSSIBLE RESPONSE: Mercantilist philosophy guided
European thinking about international trade for several centuries before Adam
Smith published the Wealth
of Nations in 1776. Mercantilists considered that
international trade could be a major source of benefits to a nation. They also
believed that government regulation of trade was necessary to provide maximum
benefits. Mercantilists emphasized the accumulation of gold and silver by a country.
They believed that exports are beneficial for an economy and imports are
harmful. According to them, if a country exports more than it imports then its
trading partners would have to pay for their excess purchases with gold and
silver. This, in turn, would increase this country’s stock of gold and silver
and consequently its well-being. Imports were considered to be harmful because
they tended to deplete the country’s stock of these precious metals.
Mercantilists viewed trade as a zero-sum activity. According to them, a country
can gain from free trade only at the expense of its trading partners.
Major criticisms, as pointed out by Adam Smith and other
economists, include the following:
- The
well-being of a country is mainly determined by its people’s ability to
consume products at present and in the future. Imports usually help to
expand national consumption and hence need not be suppressed.
- Exports
are useful because they help to pay for imports. That is, exports are what
the country gives up, to get the imports that add to national consumption.
Difficulty: 2 Medium
Topic: Adam Smith’s Theory of Absolute Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
56) Explain how a mutually beneficial trade is possible in a
two-country, two-commodity model even when one of the countries has absolute
advantage in the production of both the commodities.
Answer: POSSIBLE RESPONSE: In a two-country, two-commodity
model, even if one of the countries enjoys absolute advantage in the production
of both the goods, a mutually beneficial trade is possible between them. In
such a situation, the basis for beneficial trade between the countries is the
difference in opportunity costs of producing the goods in each country.
According to Ricardo, in this case, a country will produce and export the good
that it can produce at a lower opportunity cost compared to the other country.
On the other hand, a country will import the good for which it incurs a higher
opportunity cost, compared to the other country.
The following example explains how a beneficial trade takes
place between two countries on the basis of comparative advantage. Assume
Country A and Country B produce Good X and Good Y. Country A requires two labor
hours to produce one unit of Good X and one labor hour to produce one unit of
Good Y. On the other hand, Country B requires 0.5 labor hours to produce one
unit of Good X and 0.75 labor hours to produce one unit of Good Y. Thus,
Country B has an absolute advantage in the production of both the goods.
However, a mutually beneficial trade is still possible between the countries.
The opportunity cost of producing Good X in Country A is two units of Good Y,
but the opportunity cost of producing Good X in Country B is only 0.67 units of
Good Y. Looked at the other way, the opportunity cost of producing Good Y in
Country A is 0.5 units of Good X and that in Country B is 1.5 units of Good X.
Therefore, we can see that Country A has a comparative advantage in producing Good
Y and Country B has a comparative advantage in producing Good X. If, in the
international market, one unit of Good X is exchanged for one unit of Good Y,
both the countries can gain by exporting the good in which they have a
comparative advantage and importing the other good. Country A will receive one
unit of Good X in exchange for one unit of Good Y under free trade as compared
to 0.5 units of Good X under autarky. On the other hand, Country B will receive
one unit of Good Y in exchange for one unit of Good X, as compared to 0.67
units under autarky. Therefore, both countries gain when they enter into free
trade with each other.
Difficulty: 3 Hard
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
57) Using relevant diagrams, illustrate a two-country,
two-commodity model in which one country has an absolute advantage in the
production of both goods, but each has a comparative advantage in the
production of only one good. Assume both countries have the same total amount
of national labor to use in production in the country, and labor is the only
factor of production.
Answer: POSSIBLE RESPONSE: The following figure shows the
quantities of wheat and cotton that both Country A and Country B can produce in
a year.
Assume countries A and B have the same national endowment of
labor, and labor is the sole factor of production. From the figures, we can see
that Country B has an absolute advantage in the production of both commodities,
because, with the same amount of labor, Country B can produce more of each
commodity (if each country were to devote all of its labor to producing only
that product). However, the opportunity cost of producing wheat in Country A is
40/40=1C/W and that in Country B is 80/60 = (4/3) C/W. The opportunity cost of
producing wheat is lower in Country A; hence Country A has a comparative
advantage in the production of wheat. On the other hand, the opportunity cost
of producing cotton in Country A is 40/40=1W/C and that in Country B is 60/80 =
(¾) W/C. Therefore, Country B has a comparative advantage in the production of
cotton.
Difficulty: 2 Medium
Topic: Ricardo’s Theory of Comparative Advantage
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
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