Question 1

The price-specie-flow mechanism illustrated why nations could not maintain trade surpluses or trade deficits over the long run.

Accepted Answer

The price-specie-flow mechanism showed that if a nation had a trade surplus, its currency would appreciate in value, making its exports more expensive and reducing demand for them, eventually leading to a reduction in the surplus. Conversely, if a nation had a trade deficit, its currency would depreciate, making its exports cheaper and increasing demand for them, eventually leading to a reduction in the deficit. Therefore, over the long run, nations could not maintain persistent trade surpluses or deficits.

Question 2

Ricardo's theory of comparative advantage does not take into account demand conditions when determining relative commodity prices.

Accepted Answer

Ricardo's theory only focuses on comparative costs of producing a good between countries, not on the demand conditions or preferences of consumers.

Question 3

A nation benefits from international trade if it can achieve a higher indifference curve than it can in autarky.

Accepted Answer

International trade allows a nation to access a wider variety of goods and services, often at lower prices than it could produce domestically. This means that the nation can consume more goods and services than it could in autarky, allowing it to move to a higher indifference curve.

Question 4

A nation achieves autarky equilibrium at the point where its community indifference curve is tangent to its production possibilities schedule.

Accepted Answer

This statement is true. Autarky equilibrium is achieved when a nation is self-sufficient and does not engage in international trade. At this point, the community indifference curve representing the welfare of its citizens is tangent to the production possibilities schedule representing the nation's production efficiency.

Question 5

In autarky equilibrium,a nation realizes the lowest possible level of satisfaction given the constraint of its production possibilities schedule.

Accepted Answer

The answer of In autarky equilibrium,a nation realizes the lowest...

Question 6

Because the Ricardian theory of comparative advantage was based only on a nation's demand conditions,it could not fully explain the distribution of the gains from trade among trading partners.

Accepted Answer

The answer of Because the Ricardian theory of comparative advantage...

Question 7

A nation realizes maximum gains from trade at the point where the international terms-of-trade line is tangent to its community indifference curve.

Accepted Answer

This is the definition of the optimal point for a nation's trade. At this point, the nation is able to consume more goods than it could produce on its own, and it is also able to obtain these goods at the lowest possible cost. Therefore, the nation realizes maximum gains from trade at this point.

Question 8

If Argentina has a comparative advantage over Brazil in beef relative to coffee,Argentina will specialize in beef production.

Accepted Answer

If a country has a comparative advantage in producing a particular good or service, it means that it can produce that good or service at a lower opportunity cost than another country. Therefore, it is beneficial for the country to specialize in that good or service and trade with other countries to obtain goods or services that it cannot produce efficiently. In this case, if Argentina has a comparative advantage in beef production relative to Brazil's production of coffee, then Argentina should specialize in producing beef and trade with Brazil for coffee.

Question 9

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 10

The marginal rate of transformation equals the absolute slope of a country's production possibilities schedule.

Accepted Answer

This is because the MRT represents the rate at which a country can trade off one good for another and move along the PPF. The absolute slope of the PPF shows the opportunity cost of producing one good in terms of the other. Therefore, the MRT equals the absolute slope of the PPF.

Question 11

Adam Smith contended that gold,silver,and other precious metals constituted the wealth of a nation.

Accepted Answer

Adam Smith argued that the wealth of a nation was not determined by its accumulation of gold and silver, but rather by its production and commerce capabilities.

Question 12

If Canada has a higher wage level and higher labor productivity than Mexico,Canada will necessarily produce a good at a higher labor cost than Mexico.

Accepted Answer

Higher labor productivity in Canada can offset the higher wage levels, potentially resulting in a lower labor cost per unit of output compared to Mexico.

Question 13

The price-specie-flow mechanism illustrated why one nation's gains from trade were accompanied by another country's losses.

Accepted Answer

The price-specie-flow mechanism, as described by David Hume, explains how imbalances in trade between countries are naturally corrected over time through the flow of gold and silver (specie), without implying that one nation's gains are necessarily another country's losses. It suggests that countries with trade surpluses will experience an inflow of gold, leading to inflation and higher prices, which eventually makes their goods less competitive abroad, restoring balance. Conversely, countries with trade deficits will see gold flow out, leading to deflation and lower prices, making their goods more competitive abroad, also helping to restore balance. This mechanism operates under the assumption of a gold standard and free movement of gold between nations.

Question 14

Assume that Germany has higher labor productivity and higher wage levels than France.Germany can produce a commodity more cheaply than France if its productivity differential more than offsets its wage differential.

Accepted Answer

Germany's higher labor productivity means that each worker in Germany can produce more output per hour than a worker in France. This means that the cost of producing a unit of output in Germany is lower than it is in France, even if Germany has higher wage levels. Therefore, if the productivity differential between the two countries is higher than the wage differential, Germany can produce a commodity more cheaply than France.

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 based on the theory of comparative advantage, which states that countries should specialize in producing goods in which they have a lower opportunity cost and trade with other countries to maximize overall production and consumption. The equilibrium terms of trade occur where the domestic cost ratios (the opportunity cost of producing a certain good in terms of the alternative goods that could have been produced) of the two countries intersect, meaning that both countries can benefit from trade by exchanging goods at a mutually advantageous price.

Question 16

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.

Question 17

Complete specialization usually occurs under the assumption of increasing opportunity costs.

Accepted Answer

Complete specialization often occurs under the assumption of constant opportunity costs, not increasing opportunity costs. Increasing opportunity costs suggest that resources are not equally efficient in producing every good, leading to partial rather than complete specialization.

Question 18

The Ricardian theory of comparative advantage could fully explain the distribution of the gains from trade among trading partners.

Accepted Answer

The Ricardian theory of comparative advantage explains the gains from trade between countries, but it does not fully explain the distribution of those gains among trading partners. Other factors such as market power, bargaining power, and institutional factors can also affect the distribution of gains among trading partners.

Question 19

Modern trade theory recognizes that the pattern of world trade is governed by both demand conditions and supply conditions.

Accepted Answer

Modern trade theory considers both demand and supply conditions as factors that influence the pattern of world trade. It recognizes that consumer preferences and income levels in different countries affect demand for various goods and services, while a country's factor endowment (such as labor, capital, natural resources) and technology determine its comparative advantage in producing certain goods.

Question 20

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 efficiency of production of different goods in each country. This, in turn, sets the range of possible terms of trade that are mutually beneficial for both countries. Any terms of trade outside this range would result in one country being worse off than before, and therefore unsustainable in the long run.

Quiz 2: Foundations of Modern Trade Theory: Comparative Advantage