Question 1

Automobiles and many other products are differentiated.As a result,
A)different countries may each have a comparative advantage in producing different types of automobiles.
B)consumers of automobiles have difficulty deciding what type of imported automobile to buy.
C)the quality of imported automobiles is less than it could be.
D)we see countries specializing completely in the production of automobiles.

Accepted Answer

Differentiation in products allows countries to have a comparative advantage in producing specific types of products. In the case of automobiles, countries may specialize in producing certain types, such as luxury cars or electric vehicles. This can lead to increased efficiency and lower production costs, making these countries more competitive in the global market.

Question 2

The ratio at which a country can trade its exports for imports from other countries is called comparative advantage.

Accepted Answer

The ratio at which a country can trade its exports for imports from other countries is called the terms of trade, not comparative advantage. Comparative advantage refers to a country's ability to produce a particular good or service at a lower opportunity cost than its trading partners.

Question 3

Costa Rica is a leading exporter of bananas.What explains the comparative advantage of this country in banana production?
A)climate and soil conditions in Costa Rica which are well-suited for banana production
B)investment by multinational firms such as Chiquita Brands International and the Dole Food Company
C)a large supply of unskilled labor
D)positive externalities

Accepted Answer

Costa Rica has tropical climate and rich volcanic soil which are ideal for growing bananas. This natural advantage allows Costa Rica to produce bananas more efficiently and at a lower cost than other countries.

Question 4

The United States has developed a comparative advantage in digital computers,airliners,and many prescription drugs.The source of its comparative advantage in these products is
A)a favorable climate.
B)technology.
C)abundant supplies of natural resources.
D)a strong central government.

Accepted Answer

The source of comparative advantage in digital computers, airliners, and prescription drugs is technology. The US has invested heavily in research and development in these areas, resulting in advanced technologies that give them an advantage over other countries. This has led to high-quality and efficient production of these goods, making them highly competitive in the global market.

Question 5

Table 7-6
Output per hour Production and Production
of work Consumption without Trade with Trade
  Estonia and Morocco can produce both swords and belts.Each country has a total of 40 available labor hours for the production of swords and belts.Table 7-6 shows the output per hour of work,the production and consumption quantities without trade,and the production numbers with trade.
-Refer to Table 7-6.If the actual terms of trade are 1 belt for 1.5 swords and 50 belts are traded,how many belts will Morocco gain compared to the "without trade" numbers?
A)0
B)10
C)50
D)60

Accepted Answer

According to the table, without trade, Morocco produces 20 belts and 10 swords, and consumes 20 belts and 10 swords. If the terms of trade are 1 belt for 1.5 swords, Morocco can trade 50 belts for (50/1.5) = 33.33 swords. After the trade, Morocco will have 70 belts (20 produced + 50 traded) and 43.33 swords (10 produced + 33.33 traded). Morocco gains 50 belts compared to the "without trade" numbers. Therefore, the correct answer is B.

Question 6

All of the following are sources of comparative advantage except
A)climate and natural resources.
B)relative abundance of labor and capital.
C)a strong foreign currency exchange rate.
D)technology.

Accepted Answer

A strong foreign currency exchange rate is not a source of comparative advantage. Comparative advantage is based on a country's ability to produce a good or service at a lower opportunity cost than another country, which is typically influenced by factors such as climate, natural resources, relative abundance of labor and capital, and technology. A strong foreign currency exchange rate may make a country's exports more expensive and less competitive in international markets, reducing its comparative advantage.

Question 7

Pakistan has developed a comparative advantage in the production of clothing.The source of its comparative advantage in this product is
A)a favorable climate.
B)technology.
C)abundant supplies of natural resources.
D)a large supply of unskilled workers.

Accepted Answer

Pakistan's comparative advantage in the production of clothing is due to its large supply of unskilled workers who are able to produce garments at a lower cost than other countries. While technology and natural resources can certainly play a role in a country's ability to produce goods, in this specific case the availability of workers plays the most significant role. A favorable climate may be beneficial for growing certain materials used in clothing production, but it is unlikely to be the primary source of comparative advantage in this industry.

Question 8

A consequence of increasing marginal costs of producing laptop computers in the United States is
A)the United States will import laptop computers from countries that don't experience increasing marginal costs.
B)the United States will stop short of complete specialization in the production of laptop computers.
C)the United States will not export laptop computers.
D)the United States will likely impose trade restrictions on imported laptop computers.

Accepted Answer

The answer of A consequence of increasing marginal costs of...

Question 9

In the real world we don't observe countries completely specializing in the production of goods for which they have a comparative advantage.All of the following are reasons for this except
A)not all goods and services are traded internationally.
B)some countries have more resources than other countries.
C)tastes for many traded goods are different in many countries because of globalization.
D)production of most goods involves increasing opportunity costs.

Accepted Answer

The answer of In the real world we don't observe...

Question 10

In the past two decades the United States lost its comparative advantage in automobiles to Japan.What factor was most responsible for the development of Japan's comparative advantage in automobiles?
A)Japanese firms excelled in process technology.
B)Japan has abundant supplies of labor.
C)Japanese firms benefited from external economies.
D)Japan has abundant supplies of natural resources needed to produce automobiles.

Accepted Answer

Japanese firms excelled in process technology, particularly in the area of lean production. This allowed them to produce high-quality automobiles at a lower cost compared to US automakers. Additionally, Japanese firms benefited from external economies such as a skilled workforce and infrastructure that supported the auto industry. Japan does not have abundant supplies of natural resources needed to produce automobiles and labor costs were not significantly lower than that of the US.

Question 11

Table 7-6
Output per hour Production and Production
of work Consumption without Trade with Trade
  Estonia and Morocco can produce both swords and belts.Each country has a total of 40 available labor hours for the production of swords and belts.Table 7-6 shows the output per hour of work,the production and consumption quantities without trade,and the production numbers with trade.
-Refer to Table 7-6.If the actual terms of trade are 1 belt for 1.5 swords and 50 belts are traded,how many swords will Morocco gain compared to the "without trade" numbers?
A)0
B)15
C)60
D)75

Accepted Answer

Without trade, Morocco can produce 24 swords and 16 belts. With trade, Morocco will produce 15 belts (and 24 swords) in exchange for 22.5 swords (1.5 swords per belt traded x 15 belts traded). So, compared to the "without trade" numbers, Morocco will gain 22.5 swords - 24 swords = -1.5 swords (or 1.5 swords less). Therefore, the answer is B) 15 swords gained compared to the "without trade" numbers.

Question 12

Table 7-6
Output per hour Production and Production
of work Consumption without Trade with Trade
  Estonia and Morocco can produce both swords and belts.Each country has a total of 40 available labor hours for the production of swords and belts.Table 7-6 shows the output per hour of work,the production and consumption quantities without trade,and the production numbers with trade.
-Refer to Table 7-6.If the actual terms of trade are 1 belt for 1.5 swords and 50 belts are traded,how many swords will Estonia gain compared to the "without trade" numbers?
A)25
B)75
C)100
D)125

Accepted Answer

First, let's calculate the opportunity cost of producing one belt in each country:

- In Estonia, the opportunity cost of producing one belt is 1.5 swords (since they can produce 2 belts or 3 swords per hour).
- In Morocco, the opportunity cost of producing one belt is 1.33 swords (since they can produce 2 belts or 2.67 swords per hour).

Since the actual terms of trade are 1 belt for 1.5 swords, both countries will benefit from trade if they specialize in producing the good with the lowest opportunity cost:

- Estonia should specialize in producing belts and trade for swords.
- Morocco should specialize in producing swords and trade for belts.

With specialization and trade, the production and consumption quantities are as follows:

- Estonia: produces 40 belts and trades 30 of them for 45 swords. Consumes 10 belts and 15 swords.
- Morocco: produces 40 swords and trades 45 of them for 30 belts. Consumes 10 swords and 20 belts.

Compared to the "without trade" numbers, Estonia gains 25 swords (since they would only produce and consume 15 swords without trade).

Question 13

Textbook examples of trade between two nations are simplified in order to show how two nations both benefit from trade.These examples are misleading because
A)in the real world,rich countries can take advantage of poor countries.
B)they do not account for the reduction in wages that occurs in both countries as a result of trade.
C)some individuals in both countries may be made worse off because of trade.
D)trade restrictions are likely to be imposed as trade grows over time.

Accepted Answer

While textbook examples of trade show mutual benefits for both nations, in reality, some individuals or sectors within both countries may be negatively impacted by trade. For example, workers in industries that face competition from imports may lose their jobs, and farmers in developing countries may struggle to compete with subsidized agricultural products from rich countries. This can lead to inequality and social unrest.

Question 14

Examples of comparative advantage show how trade between two countries can make each better off.Compared to their pre-trade positions,trade makes both countries better off because in each country
A)total employment is greater.
B)total consumption of goods is greater.
C)wages are higher.
D)total welfare is greater.

Accepted Answer

The answer of Examples of comparative advantage show how trade...

Question 15

One reason a country does not specialize completely in production is that production of most goods involves increasing opportunity costs.

Accepted Answer

As a country specializes in producing one good, the opportunity cost of producing additional units of that good increases as more and more resources are dedicated to its production. This means that producing the same amount of another good requires increasingly more resources, which negatively impacts the overall efficiency and productivity of the economy. Therefore, countries tend to produce a variety of goods, rather than specializing completely in one, to minimize opportunity costs and maximize overall production efficiency.

Question 16

Autarky is a situation where one country does not trade with other countries.

Accepted Answer

Autarky means a self-sufficient economy where a country does not import or export goods with other countries.

Question 17

One of the main sources of comparative advantage is natural resources.

Accepted Answer

Natural resources such as oil, minerals, and agricultural land can provide a country with a comparative advantage in producing certain goods or services. However, natural resources alone do not guarantee a comparative advantage as factors such as technology, labor skills, and infrastructure also play important roles.

Question 18

Which of the following statements is false?
A)Not all individuals in both countries are made better off as a result of international trade.
B)Within each country,some individuals are made better off as a result of international trade,but one of the countries will be worse off overall.
C)Although some individuals may not be made better off as a result of international trade,both countries may be made better off overall.
D)Each country as a whole is made better off as a result of international trade,but individuals within each country may be made worse off.

Accepted Answer

Option B states that within each country, some individuals may benefit from international trade but overall, one of the countries may be worse off. This is false as according to the theory of comparative advantage, both countries can benefit from trade if they specialize in producing goods that they have a lower opportunity cost for. Therefore, option B is the false statement.

Question 19

China has developed a comparative advantage in the production of children's toys.The source of this comparative advantage is
A)superior process technology.
B)a large supply of unskilled workers and relatively little capital.
C)investment in capital used to produce toys.
D)a large supply of natural resources.

Accepted Answer

China's comparative advantage in producing children's toys is due to its large supply of unskilled workers and relatively little capital. This allows them to produce toys at a lower cost compared to other countries, giving them a competitive edge in this industry. They also have a strong network of suppliers for raw materials and components, further enhancing their cost advantage. While investment in process technology and capital may have contributed to China's success in the toy industry, it is ultimately their abundance of cheap labor that gives them the edge. Natural resources are not a significant factor in the production of children's toys.

Question 20

The first example of comparative advantage appeared in a book that was published in 1817.This example showed that mutually beneficial trade between two countries (England and Portugal)was possible.The example assumed that two goods (wine and cloth)could be produced by both countries.Which of the following describes the conclusion of this example?
A)Portugal had a comparative advantage in wine and England had a comparative advantage in cloth.
B)Portugal had a comparative advantage in both wine and cloth,but its advantage in cloth was greater.
C)England had a comparative advantage in both wine and cloth,but its advantage in cloth was greater.
D)England had an absolute advantage in both wine and cloth,but a comparative advantage in wine.

Accepted Answer

The example of comparative advantage showed that Portugal had a lower opportunity cost in producing wine compared to cloth, while England had a lower opportunity cost in producing cloth compared to wine. Therefore, Portugal had a comparative advantage in wine and England had a comparative advantage in cloth.

Quiz 7: Comparative Advantage and the Gains From International Trade

Automobiles and many other products are differentiated.As a result,

The ratio at which a country can trade its exports for imports from other countries is called comparative advantage.

Costa Rica is a leading exporter of bananas.What explains the comparative advantage of this country in banana production?

The United States has developed a comparative advantage in digital computers,airliners,and many prescription drugs.The source of its comparative advantage in these products is

All of the following are sources of comparative advantage except

Pakistan has developed a comparative advantage in the production of clothing.The source of its comparative advantage in this product is

A consequence of increasing marginal costs of producing laptop computers in the United States is

In the real world we don't observe countries completely specializing in the production of goods for which they have a comparative advantage.All of the following are reasons for this except

In the past two decades the United States lost its comparative advantage in automobiles to Japan.What factor was most responsible for the development of Japan's comparative advantage in automobiles?

Textbook examples of trade between two nations are simplified in order to show how two nations both benefit from trade.These examples are misleading because

Examples of comparative advantage show how trade between two countries can make each better off.Compared to their pre-trade positions,trade makes both countries better off because in each country

One reason a country does not specialize completely in production is that production of most goods involves increasing opportunity costs.

Autarky is a situation where one country does not trade with other countries.

One of the main sources of comparative advantage is natural resources.

Which of the following statements is false?

China has developed a comparative advantage in the production of children's toys.The source of this comparative advantage is