Question 1

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

The answer of International trade leads to increased welfare if...

Question 2

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

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.

Question 3

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

The statement is incorrect. Even though the United States may have an absolute advantage in the production of all goods, trade can still be mutually beneficial based on the principle of comparative advantage. Comparative advantage takes into consideration the opportunity cost of producing a good, which can differ between countries even if one has an absolute advantage in all goods.

Question 4

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

The statement is true as an increase in productivity in Germany compared to Japan means that Germany can produce more computers with the same resources as before. This makes the opportunity cost of each computer produced in Germany lower than before while the opportunity cost of each computer produced in Japan increases because Japan is now giving up more resources to produce the same amount of computers as before.

Question 5

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 6

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 considers not only labor but all factors of production such as capital, technology, natural resources, and skilled labor. This results in a more comprehensive understanding of comparative advantage in international trade.

Question 7

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 Japan loses competitiveness in computers, the demand for Japanese computer workers decreases and they may lose their jobs to foreign computer workers. This increase in supply of computer workers may push down their wages relative to foreign computer workers who are in demand.

Question 8

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...

Question 9

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

Accepted Answer

Import restrictions, such as tariffs or quotas, create barriers to trade and limit the ability of consumers and businesses to access imported goods at competitive prices. This reduces the overall volume of trade, which can lead to less efficiency, higher costs for consumers, and reduced economic gains from trade. Therefore, import restrictions tend to reduce a nation's gains from trade.

Question 10

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 11

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 opportunity cost of producing one good in terms of the other remains the same, regardless of where a nation is located on its production-possibilities curve. This implies that the relative cost ratio between the two goods remains constant.

Question 12

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 what they can produce most efficiently, and trade with other countries for goods and services that they cannot produce as efficiently. This leads to resources being allocated to their most productive uses and overall economic efficiency being increased.

Question 13

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 14

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 suggests that a nation should specialize in and export goods for which it has the lowest opportunity cost of production, not necessarily where its absolute advantage is smallest or its absolute disadvantage is greatest.

Question 15

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

Accepted Answer

A trade triangle refers to the relationship between a country's exports, imports, and terms of trade. Therefore, the statement is true.

Question 16

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 supply conditions and demand conditions, not just demand conditions.

Question 17

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.

Question 18

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 19

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

Accepted Answer

Exit barriers such as high sunk costs, specialized assets, and long-term contracts make it difficult for inefficient firms to exit the industry, which leads to delays in their closing despite facing international competitive disadvantages.

Question 20

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 assumed that labor was the only factor of production, not one of several.

Quiz 2: Foundations of Modern Trade Theory: Comparative Advantage

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

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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.

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.

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.

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

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.