Question 1

A nation's trade triangle denotes its exports,imports,and terms of trade.

Accepted Answer

The answer of A nation's trade triangle denotes its exports,imports,and...

Question 2

The existence of exit barriers tends to delay the closing of inefficient firms that face international competitive disadvantages.

Accepted Answer

Exit barriers refer to the costs and obstacles that prevent firms from leaving the market. These could be in the form of high sunk costs, legal restrictions, or lack of alternative opportunities for employees. If a firm faces international competitive disadvantages, exiting the market may appear to be the best option for its shareholders and stakeholders. However, if there are significant exit barriers, such as the inability to sell assets or long-term contractual obligations, the firm may delay its closure despite its inefficiencies. Therefore, the existence of exit barriers tends to delay the closing of inefficient firms that face international competitive disadvantages.

Question 3

With increasing opportunity costs,comparative advantage depends on a nation's supply conditions and demand conditions; with constant opportunity costs,comparative advantage depends only on demand conditions.

Accepted Answer

With constant opportunity costs, comparative advantage depends on a nation's supply conditions and not just on demand conditions.

Question 4

Constant 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 production-possibilities schedule.

Accepted Answer

Constant opportunity costs mean that the ratio of resources used to produce one good compared to the other will remain constant no matter where a nation chooses to produce on its production-possibilities schedule. This implies that the relative cost of producing one product in terms of the other remains the same.

Question 5

Assume that the United States is more efficient than the United Kingdom in the production of all goods.Mutually beneficial trade is possible according to the principle of absolute advantage,but is impossible according to the principle of comparative advantage.

Accepted Answer

Even if one country is more efficient in producing all goods, trade can still be mutually beneficial if each country specializes in producing the goods in which it has a comparative advantage (i.e. producing at a lower opportunity cost). Therefore, comparative advantage still applies in this scenario and trade is possible and mutually beneficial.

Question 6

With constant opportunity costs,a nation will achieve the greatest possible gains from trade if it partially specializes in the production of the commodity of its comparative disadvantage.

Accepted Answer

With constant opportunity costs, a nation achieves the greatest possible gains from trade by specializing in the production of the commodity of its comparative advantage, not its comparative disadvantage. Comparative advantage means producing goods at a lower opportunity cost than trading partners.

Question 7

There are two explanations of constant opportunity costs: (1) factors of production are imperfect substitutes for each other; (2) all units of a given factor have different qualities.

Accepted Answer

Constant opportunity costs occur when factors of production are perfectly substitutable for each other, not when they are imperfect substitutes or have different qualities. This scenario typically results in a straight-line production possibility frontier, indicating that the opportunity cost of producing one good over another remains constant.

Question 8

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

Accepted Answer

The principle of comparative advantage states that countries should specialize in producing goods in which they have a lower opportunity cost relative to other countries, and trade with those that have a higher opportunity cost. This results in resources being allocated more efficiently, and shifting towards uses of high productivity. Therefore, an open trading system promotes the efficient allocation of resources and higher productivity.

Question 9

The basis for trade is explained by the principle of absolute advantage according to David Ricardo and the principle of comparative advantage according to Adam Smith.

Accepted Answer

The principle of absolute advantage is attributed to Adam Smith, while the principle of comparative advantage is attributed to David Ricardo.

Question 10

The principle of comparative advantage contends that a nation should specialize in and export the good in which its absolute advantage is smallest or its absolute disadvantage is greatest.

Accepted Answer

The principle of comparative advantage contends that a nation should specialize in and export the good in which it has the lowest opportunity cost of production, not necessarily the good in which its absolute advantage is smallest or absolute disadvantage is greatest.

Question 11

If the U.S.post-trade consumption point lies along its production possibilities schedule,the United States achieves a higher level of welfare with trade than without trade.

Accepted Answer

The answer of If the U.S.post-trade consumption point lies along...

Question 12

Ricardo'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.

Accepted Answer

Ricardo's theory of comparative advantage assumes that labor is the only factor of production, so the statement is false.

Question 13

If productivity in the German computer industry grows faster than it does in the Japanese computer industry,the opportunity cost of each computer produced in Japan increases relative to the opportunity cost of a computer produced in Germany.

Accepted Answer

This is because if productivity in Germany grows faster than in Japan, the cost of producing a computer in Germany will decrease. This will lead to an increase in the supply of computers in Germany, causing the price of computers to fall. As a result, the opportunity cost of producing a computer in Japan increases relative to the opportunity cost of producing a computer in Germany.

Question 14

Compared to Ricardian trade theory,modern trade theory provides a more general view of comparative advantage since it is based on all factors of production rather than just labor.

Accepted Answer

Modern trade theory, also known as the Heckscher-Ohlin theory, takes into account all factors of production (including labor, capital, and land) in determining comparative advantage, while Ricardian trade theory focuses solely on differences in labor productivity. Therefore, modern trade theory provides a broader perspective on comparative advantage.

Question 15

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

Accepted Answer

Import restrictions limit the flow of goods and services between countries, leading to reduced competition and higher prices for consumers. This can result in a decrease in the overall volume of trade, which in turn reduces a nation's gains from trade.

Question 16

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

Accepted Answer

International trade increases welfare when a nation can consume beyond its production-possibilities frontier, not inside it, as trade allows access to a greater variety of goods and services.

Question 17

If Japan loses competitiveness in computers,Japanese computer workers lose jobs to foreign computer workers and the wages of Japanese computer workers tend to fall relative to the wages of foreign computer workers.

Accepted Answer

If Japanese computer workers lose their competitiveness in their industry, they would lose their jobs to foreign workers who are more competitive, and this would lead to a decrease in their wages relative to foreign workers.

Question 18

The Ricardian 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.

Accepted Answer

This statement correctly summarizes the assumptions of the Ricardian theory of comparative advantage.

Question 19

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

Accepted Answer

The answer of It is possible for a nation not...

Question 20

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

Accepted Answer

With increasing opportunity costs, a nation may not fully specialize in the production of the commodity of its comparative advantage because the cost of reallocating resources becomes too high. With constant opportunity costs, a nation is more likely to fully specialize in the production of the commodity of its comparative advantage, as the cost of reallocating resources does not increase.

Quiz 2: Foundations of Modern Trade Theory: Comparative Advantage