Question 1

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

Accepted Answer

Ricardo's theory focuses on comparing the relative costs of producing goods between countries, and assumes that each country will specialize in producing the goods that it can produce at a lower opportunity cost. The theory does not consider the impact of demand conditions on commodity prices.

Question 2

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

Accepted Answer

This statement accurately describes the concept of autarky equilibrium, where a nation is completely self-sufficient and produces at the point where its utility is maximized and its production is as efficient as possible.

Question 3

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, it would experience an inflow of gold and an increase in the money supply, which would lead to price inflation and make its exports less competitive, eventually reducing its trade surplus. Similarly, a nation with a trade deficit would experience an outflow of gold and a decrease in the money supply, leading to price deflation and making its imports more expensive, eventually reducing its trade deficit. Therefore, nations could not maintain trade imbalances over the long run.

Question 4

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

Accepted Answer

Domestic cost ratios refer to the relative costs of producing goods and services within a nation. The equilibrium terms of trade, which refer to the exchange rates that make international trade mutually beneficial, cannot go beyond the domestic cost ratios because it would become cheaper for countries to produce goods domestically rather than importing them. Therefore, the statement is true.

Question 5

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 6

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 7

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 8

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

Accepted Answer

According to the principle of comparative advantage, countries should specialize in the production of goods in which they have a lower opportunity cost compared to other countries. If Argentina has a comparative advantage in producing beef relative to coffee compared to Brazil, then it should focus on producing more beef and exporting it to Brazil or other countries where demand for beef is high. This is because Argentina can produce beef more efficiently and cost-effectively than Brazil, while Brazil can produce coffee more efficiently and cost-effectively than Argentina. In this way, both countries can benefit from trade and exchange goods that they can produce at a lower opportunity cost.

Question 9

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 overall gains from trade, but it does not fully explain the distribution of those gains among trading partners. Factors such as differences in bargaining power, market structure, and other trade policies can also affect the distribution of gains.

Question 10

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

Accepted Answer

Modern trade theory takes into account the demand conditions and supply conditions in determining the pattern of world trade. Demand conditions refer to the preferences and purchasing power of consumers in different countries, while supply conditions refer to the availability of factors of production such as labor, capital, and natural resources in different regions. Therefore, both demand and supply factors are important in shaping international trade.

Question 11

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 Ricardian theory of comparative advantage did not take into account demand conditions, so it could only give a general idea of the possible range of equilibrium terms of trade.

Question 12

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 point of maximum gains from trade according to the theory of comparative advantage. At this point, the nation is able to maximize its consumption of all goods while also maximizing its exports and imports.

Question 13

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 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

This statement is true as labor productivity plays a major role in determining the cost of production. If Germany has higher productivity levels, it means that it can produce goods faster and more efficiently than France. This productivity advantage can offset the higher wage levels in Germany, making its products cheaper to produce than France. Therefore, Germany can produce a commodity more cheaply than France if its productivity differential more than offsets its wage differential.

Question 15

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 16

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 specialize in producing goods in which it has a comparative advantage and to consume goods in which it has a comparative disadvantage. By doing so, it can achieve a higher level of utility and reach a higher indifference curve than it could in autarky.

Question 17

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 18

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 19

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 true according to the theory of comparative advantage. When the terms of trade are between the two countries' domestic cost ratios, both countries can benefit from specialization and trade. Any terms of trade outside this range would result in one country benefiting at the expense of the other.

Question 20

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

Accepted Answer

The marginal rate of transformation (MRT) is defined as the rate at which one good must be sacrificed to produce an additional unit of another good, while keeping the level of production of the first good constant. This is equivalent to the absolute slope of the production possibilities schedule, which represents the maximum combinations of two goods that a country can produce with a given amount of resources and technology. Therefore, the statement is true.

Quiz 2: Foundations of Modern Trade Theory: Comparative Advantage