Question 1

Assume 1990 to be the base year.If by the end of 2004 a country's export price index rose from 100 to 125 while its import price index rose from 100 to 125,its terms of trade would equal 100.

Accepted Answer

Terms of trade is calculated by dividing the export price index by the import price index and multiplying by 100. In this case, (125/125)*100 = 100, which means there has been no change in the terms of trade since 1990.

Question 2

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

J.S.Mill's theory of reciprocal demand states that the terms of trade will reach an equilibrium point when the ratio of the domestic demands for each country's exports to the other country's exports is the same as the ratio of the two countries' production costs. Therefore, if we know the domestic demand expressed by both trading partners for both products, we can define the equilibrium terms of trade.

Question 3

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 4

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

It is actually the other way around. David Ricardo recognized that the region of mutually beneficial trade is bounded by the cost ratios of two countries, and J.S. Mill later built on this theory by considering the role of demand in determining the terms of trade.

Question 5

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 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 can be calculated by dividing the export price index by the import price index and multiplying it by 100. Therefore, (130/115) * 100 = 113.04. Hence, the terms of trade would equal 113.

Question 7

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.

Question 8

For the commodity terms of trade to improve,a country's export price index must rise relative to its import price index over a given time period.

Accepted Answer

The commodity terms of trade refer to the ratio between a country's export price index and its import price index. If a country's export price index increases relative to its import price index, then the ratio (or terms of trade) will improve. Therefore, for the commodity terms of trade to improve, a country's export price index must rise relative to its import price index.

Question 9

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 10

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 11

For the commodity terms of trade to improve,a country's import price index must rise relative to its export price index over a given time period.

Accepted Answer

For the commodity terms of trade to improve, a country's export price index must rise relative to its import price index over a given time period.

Question 12

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 13

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 assumes that two countries are of equal economic size, so that the demand conditions of each nation affect market prices. Therefore, option A is correct.

Question 14

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 asserts that as the U.S. demand for Canadian wheat rises, the equilibrium terms of trade improve for Canada, not the United States.

Question 15

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 that the prices of its exports have increased relative to the prices of its imports. Therefore, the country can now exchange fewer exports for the same amount of imports.

Question 16

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

An improvement in terms of trade is when a country can buy more imports for the same amount of exports, which happens when export prices rise relative to import prices.

Question 17

The commodity terms of trade are found by dividing a country's import price index by its export price index.

Accepted Answer

The answer of The commodity terms of trade are found...

Question 18

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

Accepted Answer

The terms of trade represent the ratio between the prices of a country's exports and the prices of its imports. It is a measure of the purchasing power of a country's exports in terms of its imports.

Question 19

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 international terms of trade lies beneath the Mexican cost ratio, it means that Mexico has to export more goods to buy the same amount of imports, which implies that its terms of trade have deteriorated. This would lead to a situation where Mexico is worse off with trade than without trade.

Question 20

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 means that the prices of its exports have decreased relative to the prices of its imports. Therefore, the country has to exchange more exports to obtain a given amount of imports, not fewer.

Quiz 2: Foundations of Modern Trade Theory: Comparative Advantage