Question 1

According to J.S.Mill,if we know the domestic demand expressed by both trading partners for both products,the equilibrium terms of trade can be defined.

Accepted Answer

According to J.S.Mill, if the domestic demand expressed by both trading partners for both products is known, the equilibrium terms of trade can be determined.

Question 2

If a country's terms of trade improve,it must exchange more exports for a given amount of imports.

Accepted Answer

If a country's terms of trade improve, it means the prices of its exports have increased relative to the prices of its imports. Therefore, the country can obtain more imports for a given level of exports, meaning it needs to exchange fewer exports for a given amount of imports.

Question 3

An improvement in a nation's terms of trade occurs if the prices of its exports rise relative to the prices of its imports over a given time period.

Accepted Answer

A nation's terms of trade improve when the prices of its exports increase relative to the prices of its imports. This can lead to an increase in the nation's income and potentially improve its economic balance.

Question 4

The theory of reciprocal demand best applies when two countries are of equal economic size,so that the demand conditions of each nation have a noticeable impact on market prices.

Accepted Answer

The theory of reciprocal demand is based on the assumption that two countries are of equal economic size, which means that demand conditions of each nation can affect market prices. Therefore, option A is correct.

Question 5

If two nations of approximately the same size and with similar taste patterns participate in international trade,the gains from trade tend to be shared about equally between them.

Accepted Answer

According to the law of comparative advantage, when two countries specialize in producing the goods that they can produce at a lower opportunity cost and trade with each other, both countries can benefit and gain from the trade. Therefore, the gains from trade are likely to be shared about equally between them.

Question 6

Assume 1990 to be the base year.If by the end of 2004 a country's export price index rose from 100 to 130 while its import price index rose from 100 to 115,its terms of trade would equal 113.

Accepted Answer

Terms of trade = (Export price index / Import price index) x 100. 
Therefore, Terms of trade = (130/115) x 100 = 113. Therefore, the statement is true.

Question 7

Although J.S.Mill recognized that the region of mutually beneficial trade is bounded by the cost ratios of two countries,it was not until David Ricardo developed the theory of reciprocal demand that the equilibrium terms of trade could be determined.

Accepted Answer

The statement is incorrect. It was David Ricardo who recognized that the region of mutually beneficial trade is bounded by the cost ratios of two countries, and he developed the theory of comparative advantage to determine the equilibrium terms of trade. The theory of reciprocal demand was developed by Edgeworth and Marshall in the late 19th century.

Question 8

If the international terms of trade lies beneath (inside) the Mexican cost ratio,Mexico is worse off with trade than without trade.

Accepted Answer

If the terms of trade are lower than Mexico's cost ratio, it means that the country is receiving a lower relative price for its exports compared to what it pays for its imports. This results in a net loss for Mexico and it would be better off without trade.

Question 9

The terms of trade represents the rate of exchange between a country's exports and imports.

Accepted Answer

The terms of trade is the ratio of export prices to import prices. It represents the relative value of a country's exports in terms of its imports.

Question 10

Assume that Canada has a comparative advantage in wheat and a comparative disadvantage in autos.As the Canadian demand for wheat increases,Canada's equilibrium terms of trade improves.

Accepted Answer

An increase in domestic demand for wheat in Canada would likely lead to an increase in domestic prices for wheat, making Canadian wheat more expensive on the international market. This could worsen Canada's terms of trade, as it would have to give up more of its wheat (or other goods) to obtain the same amount of autos (or other imports) from abroad. Comparative advantage affects production decisions, not terms of trade directly in this context.

Question 11

The domestic cost ratios of nations set the outer limits to the equilibrium terms of trade.

Accepted Answer

The domestic cost ratios of nations determine the relative prices of traded goods and services and therefore set the range or outer limits to which the equilibrium terms of trade may converge.

Question 12

The theory of reciprocal demand asserts that as the U.S.demand for Canadian wheat rises,the equilibrium terms of trade improve for the United States.

Accepted Answer

The theory of reciprocal demand suggests that as the demand for a country's exports increases, the terms of trade will actually worsen for that country. This is because the increased demand for exports will lead to a rise in the price of those exports, which will make imports relatively cheaper, ultimately leading to a decline in the terms of trade. Therefore, as the U.S. demand for Canadian wheat rises, the equilibrium terms of trade would actually worsen for the United States, not improve.

Question 13

Assume 1990 to be the base year.If by the end of 2004 a country's export price index rose from 100 to 140 while its import price index rose from 100 to 160,its terms of trade would equal 120.

Accepted Answer

The terms of trade are calculated as the ratio of the export price index to the import price index, multiplied by 100. In this case, it would be (140 / 160) * 100 = 87.5, not 120.

Question 14

Because the Ricardian theory of comparative advantage was based only on a nation's supply conditions,it could only determine the outer limits within which the equilibrium terms of trade would lie.

Accepted Answer

The statement accurately describes the limitations of the Ricardian theory of comparative advantage. The theory did not take into account demand conditions or other factors that could affect the terms of trade between nations beyond the range determined by their relative supply conditions.

Question 15

Mutually beneficial trade for two countries occurs if the equilibrium terms of trade lies between the two countries' domestic cost ratios.

Accepted Answer

This statement is a basic principle of international trade theory known as the Theory of Comparative Advantage. It states that trade can be mutually beneficial if each country specializes in producing goods for which they have a comparative advantage (i.e. lower domestic cost ratios) and then trade with each other at a price between their domestic cost ratios. This leads to increased efficiency, productivity, and economic growth for both countries.

Question 16

Assume that the United States and Canada engage in trade.If the international terms of trade coincides with the Canadian cost ratio,the United States realizes all of the gains from trade with Canada.

Accepted Answer

The answer of Assume that the United States and Canada...

Question 17

The expression "importance of being unimportant" suggests that if one nation is much larger than the other,the larger nation realizes most of the gains from trade while the smaller nation realizes fewer gains from trade.

Accepted Answer

The expression "importance of being unimportant" actually suggests that smaller nations have more to gain from trade, as they can specialize in producing the goods and services in which they have a comparative advantage and trade with larger nations that may not have a comparative advantage in those areas. Therefore, the statement in the question is incorrect.

Question 18

If a country's terms of trade worsen,it must exchange fewer exports for a given amount of imports.

Accepted Answer

If a country's terms of trade worsen, it must exchange more exports for a given amount of imports, as the value of its exports relative to imports has decreased.

Question 19

Assume that the United States and Canada engage in trade.If the international terms of trade coincides with the U.S.cost ratio,the United States realizes all of the gains from trade with Canada.

Accepted Answer

When the international terms of trade coincide with one country's cost ratio, it does not mean that this country realizes all the gains from trade. Both countries can still benefit from trade due to the principle of comparative advantage, which allows for gains to be shared between trading partners, even if the terms of trade are more favorable to one side.

Question 20

The theory of reciprocal demand best applies when one country has a "large" economy and the other country has a "small" economy.

Accepted Answer

The theory of reciprocal demand applies to trade between any two countries, regardless of their economic size, and focuses on how the mutual demand for each other's goods determines the terms of trade.

Quiz 2: Foundations of Modern Trade Theory: Comparative Advantage