CH 3
The relative price of wine in Spain is ________ and the relative price of wine in italy is _______
Spain: .125 Italy: .5
the opportunity cost of wine in spain is ____ suits and the opportunity cost of wine in italyis ___ suits
Spain: .25 italy: 1
the trade priec of wine has an upper bound of ___ suits and a lower bound of ____ suits.
1 and .25
Assume the U.S. currently grows 2.3 million tons of fresh winter fruit and that the resources absorbed in the production of this fruit could have produced 300,000 laptop computers. Therefore, the opportunity cost of those 2.3 million tons of fruit is __________computers.
300,000 computers
If a nation has no absolute advantage, then it A. still gains from trade. B. can only gain from trade if it raises its productivity levels. C. can only gain from trade if it produces outside its production possibilities curve. D. cannot gain from trade.
A
Suppose that Canada can produce 15 units of timber or 3 units of grain. Suppose that Mexico can produce 6 units of timber or 2 units of grain. Which of the following is CORRECT? A. Mexico has a comparative advantage in grain production. B. The countries would find trade mutually beneficial at a trading ratio of 1 grain for 2 timber. C. Canada has a comparative advantage in grain production. D. Mexico has an absolute advantage in timber production.
A
The potential for gains from the rearrangement of production among countries is due to A. differing opportunity costs. B. trade-offs. C. scarcity. D. absolute advantage.
A Differing opportunit costs
When countries such as the U.S. promote production of domestic cotton, developing countries that produce cotton are hurt. Why? A. By increasing cotton supply, the U.S. limits ability of comparative advantage cotton producers to exploit their production opportunities. B. The U.S. subsidies force poor countries to offer their own subsidies. C. The U.S. production of cotton makes it difficult for developing countries to produce in related industries such as clothing and apparel. D. The U.S. does not hurt developing countries, since all countries benefit from lower cotton prices.
A. By increasing cotton supply, the U.S. limits ability of comparative advantage cotton producers to exploit their production opportunities.
Economic nationalists in developed countries worry that international trade is destroying the national economy. A common complaint is that trade agreements open the economy to increased trade with countries where workers are paid a fraction of what they earn at home. This argument is faulty since it fails to recognize that A. wage differentials reflect productivity differences. B. the supposed "low" wages are totally fictitious. C. unions in the home economy have made wages there too high. D. trade agreements require a wage-equalization tax on low-wage countries.
A. wage differentials reflect productivity differences. Low-wage workers in general are paid less because they produce less output during each hour of labor.
How does competitive advantage contrast with comparative advantage? A. Comparative advantage is when you're relatively more efficient in production than your competition in another country, whereas competitive advantage happens when a market is not efficient. B. Competitive advantage is when your profit is larger than your competition in another country, whereas comparative advantage is when your market is comparatively larger. C. Comparative advantage is when your money price is lower than your competition in another country, whereas competitive advantage is when your costs are lower. D. None of the above; competitive advantage and comparative advantage are the same thing.
A. Comparative advantage is when you're relatively more efficient in production than your competition in another country, whereas competitive advantage happens when a market is not efficient.
Consider Home's production possibilities curve shown to the right. Which of the following does the absolute value of its slope convey? A. The opportunity cost of candy in terms of whiskey. B. The production cost of whiskey in Home currency. C. The comparative advantage of candy D. The opportunity cost of whiskey in terms of candy.
A. The opportunity cost of candy in terms of whiskey. The absolute value of the slope of a PPF always reflects the opportunity cost of the horizontally measured good.
Suppose that South America could have instead produced those 2.3 million tons of fruit at an opportunity cost of 150,000 laptops. Because of the difference in opportunity costs between the two regions, it can be shown that trade gives the possibility of A. a mutually beneficial rearrangement of world production. B. unfair competition for U.S. winter fruit producers. C. unfair competition for South American laptop makers. D. Exploitation of South American countries, making them worse off.
A. a mutually beneficial rearrangement of world production. Because opportunity costs differ, specialization by the two regions will raise total global output.
The Ricardian trade model put forth by British economist David Ricardo nearly two centuries ago is one that A. expounds principles still valid in today's world. B. is relevant only to agrarian-based economies. C. holds little relevance in today's world. D. is not valid in a world dominated by technological change.
A. expounds principles still valid in today's world.
Adam Smith was critical of trade barriers, since he believed that trade barriers A. are a good and appropriate source of government revenue. B. reduce specialization, technological progress and wealth creation. C. harm a country's relations with its colonies. D. All of the above.
B
For each hour worked, a U.S. worker can produce 4 loaves of bread, or 2 tons of steel. Canadian workers can produce 2 loaves of bread, or 1 ton of steel per hour. The information indicates that A. Canada has absolute advantage in bread, and the U.S. has absolute advantage in steel. B. the U.S. has absolute advantage in bread, and the U.S also has absolute advantage in steel. C. the U.S. has absolute advantage in bread, and Canada has absolute advantage in steel. D. Canada has absolute advantage in bread, and Canada also has absolute advantage in steel.
B
Given that Sandy can produce 10 economics reports or make 2 sales calls and Tim can produce 2 economics reports or make 1 sales call, we can conclude that A. Sandy should produce both economics reports and sales calls since she cannot possibly gain from trade with Tim. B. Sandy should specialize in economics reports, and Tim should specialize in sales calls. C. Tim should produce both economics reports and sales calls. D. Tim should specialize in producing economics reports, and Sandy should specialize in producing sales calls.
B
Mercantilism advocated that a country A. prohibit all exports because it viewed trade as zero sum, believing that one nation's gain was another nation's loss. B. promote exports over imports because it viewed trade as zero sum, believing that one nation's gain was another nation's loss. C. should pursue free trade because it viewed trade as zero sum, and therefore, that trade would always be balanced. D. use tariffs rather than quotas, because mercantilism views trade as zero sum, transparent trade barriers are viewed as best.
B
Gains from trade can only be achieved if: A. a country's economy is centrally controlled. B. a country has a comparative productivity advantage. C. a country's economy is based on free enterprise principles. D. a country has an absolute productivity advantage. E. None of the above.
B. a country has a comparative productivity advantage.
Many people believe that the goal of international trade should be to create jobs. Consequently, when they see workers laid off due to a firm's inability to compete against cheaper and better imports, they assume that trade must be bad for the economy. This assumption is A. incorrect since empirical evidence shows that trade has a neutral effect on economies. B. incorrect since trade is about improving living standards through a more efficient allocation of resources. C. incorrect since trade always results in an increase in total employment. D. correct since job creation matters above all else.
B. incorrect since trade is about improving living standards through a more efficient allocation of resources. The goal of trade is to improve a nation's allocation of its resources so that they are directed to their most valuable use. Trade is not about creating jobs, but is about raising the standard of living through a more efficient allocation of resources.
When a country trades according to principles of comparative advantage, A. all workers will gain. B. some workers will be hurt due to dislocation, though their losses could be offset if the gains from trade were shared. C. all workers will lose due to foreign competition. D. some workers will be hurt due to dislocation. Their loses are so large that it is impossible to offset these losses through the sharing of the gains from trade.
B. some workers will be hurt due to dislocation, though their losses could be offset if the gains from trade were shared. C.
Suppose that Home uses one hour of labor to produce whiskey. Then it trades that output for the other good at a price ratio of Pc/Pw = 1. Through trade Home can gain: A. 6pounds of chocolate. B.2 pounds of chocolate. C.1 pound of chocolate. D.4 pounds of chocolate.
B. 2 pounds of chocolate
This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the output per unit of labor in Foreign and Home for each of two goods. Use this information to answer the question that follows. Chocolate Wine Home 5 pounds 4 gallons Foreign 1 pound 3 gallons which of the following statements is true? A Foreign has the absolute advantage in both chocolate and wine production and the comparative advantage in chocolate production. B.Home has the absolute advantage in both chocolate and wine production and the comparative advantage in chocolate production. C.Home has the absolute advantage in both chocolate and wine production and the comparative advantage inwine production. D.Foreign has the absolute and comparative advantage in wine production.
B. Home has the absolute advantage in both chocolate and wine production and the comparative advantage in chocolate production.
This exercise applies the basic Ricardian model of one factor (labor) and two goods to the national economy of Home. Assume the following: qS=units of steel produced in Home by one hour of labor; qC=units of calicocalico produced in Home by one hour of labor; P s/h= the price per ton of steelsteel in Home in terms of bolts of calicocalico; P c/h= the price per bolt of calicocalico in Home in terms of tons of steel. Which of the following represents the opportunity cost of calicocalico? A. Ps/h B qs/qc c. P c/h / P s/h
B. qs/qc
A nation gains from trade even though some individuals benefit while others are hurt because A. those who come out ahead deserve the fruits of their success. B. the economic gains of the winners exceed the economic losses of the losers. C. those who suffer are largely unproductive and thus undeserving. D. the strong always prevail over the weak.
B. the economic gains of the winners exceed the economic losses of the losers. Theoretically, the winners could compensate the losers for their "pain" and still be better off than without trade.
Suppose that Germany decides to become self sufficient in bananas and even to export them. In order to accomplish these goals, large tax incentives are granted to companies that will invest in banana production. Soon, the German industry is competitive and able to sell bananas at the lowest price anywhere. A comparative advantage for Germany in bananas A. now exists since the tax incentives lower German production costs for bananas. B. does not exist since comparative advantage cannot be acquired (or lost). C. does not exist since the tax incentives do not reduce the high opportunity cost for German banana production. D. now exists since German bananas are cheaper than bananas from elsewhere.
C. does not exist since the tax incentives do not reduce the high opportunity cost for German banana production.
Economists use the term opportunity cost to refer to A. only those goods which are in short supply. B. the value of all alternatives forgone as a result of making a particular choice. C. the value of the next best alternative occurring as a result of making a particular choice. D. either B or C.
C. the value of the next best alternative occurring as a result of making a particular choice.
Suppose that the resource base in Country X can produce either 100 units of alpha or 300 units of beta. Similarly, suppose that Country Y's resource base is capable of producing 100 units of alpha or 200 betas. Clearly, the opportunity cost of 100 alphas is lower in ________ Based on this result, it would be best for Country X to concentrate on good _____
Country Y beta
Before trade, suppose the cost of steel is 5 loaves of bread per ton in Russia, and 10 loaves of bread per ton in Turkey. If Russia and Turkey decide to trade the world price for steel will be A. higher than 10 loaves of bread per ton. B. less than 5 loaves per ton, if Turkey specializes in steel. C. less than 5 loaves per ton, if Russia specializes in steel. D. more than 5 loaves of bread per ton and less than 10 loaves of bread per ton.
D
If two countries agree to specialize and trade based on comparative advantage, which of the following is most likely to be TRUE? A. One of the countries will both consume and produce on its production possibilities curve. B. One of the countries will end up receiving all of the gains from trade. C. Only one of the countries will produce on and consume outside its production possibilities curve. D. Both of the countries will consume outside their respective production possibilities curves.
D
When changes in an economy require some industries to grow and others to shrink or disappear, the term is called A. replacement phenomenon. B. business as usual. C. creative destruction. D. economic restructuring.
D
What are the consequences for the overall economy? A. Labor and capital are used up in a relatively inefficient endeavor. B. Tax revenues are diverted from other uses, creating an additional opportunity cost. C. Economic welfare falls. D. All of the above.
D. All of the above
Competitive advantage and comparative advantage will differ for China if A. the Chinese currency (the Renimbi or "yuan") is overvalued. B. true production costs are inaccurately measured due to production externalities such as pollution. C. None of the above. Competitive advantage and comparative advantage are always the same. D. Both A and B.
D. Both A and B
The following table defines terms relevant to the basic Ricardian model of one factor and two goods. qc= units of candycandy produced in Home by one hour of labor; qo =units of orange juiceorange juice produced in Home by one hour of labor; qc *= units of candycandy produced in Foreign by one hour of labor; qo*=units of orange juiceorange juice produced in Foreign by one hour of labor; P c/w= the world price of candycandy (the trade price); P o/w =the world price of orange juiceorange juice (the trade price). Which of the following conditions will induce Foreign to specialize in candy? A. P c/w < (qo*/qc*) B. P o/w > (qc*/qo*) C. P o/w / P c/w > (qo* qc*) D. P c/w > (qo* / qc*)
D. P c/w > (qo* / qc*)
In general, which of the following does not tend to promote the probability of trade volumes between two countries: A. linguistic and/or cultural affinity. B. ability to produce at a cheaper opportunity cost than another country. C. mutual membership in preferential trade agreements. D. ability to produce more than another country. E. None of the above; all will promote the probability of trade.
D. ability to produce more than another country.
An important insight of international trade theory is that when countries exchange goods and services one with the other, it A. does not benefit both countries, and is typically harmful to the technologically lagging country. B. does not benefit both countries, but is typically more beneficial to the low wage trade partner country. C. does not benefit both countries, because it tends to create unemployment in both countries. D. benefits both countries, and is usually not equally beneficial to both countries. E. benefits both countries, and is usually equally beneficial to both countries.
D. benefits both countries, and is usually not equally beneficial to both countries.
A country has a comparative advantage in producing a good if A. it produces the good at a lower money cost. B. it is more economically advanced compared to its trading partners. C. it can produce more of the good compared to other countries. D. its opportunity cost of producing that good is lower than elsewhere.
D. its opportunity cost of producing that good is lower than elsewhere.
his exercise applies the basic Ricardian model of one factor and two goods. The table below contains the output per unit of labor in Foreign and Home for each of two goods. Use this information to answer the question that follows. Chocolate Whiskey Home 2 pounds 4 gallons Foreign 6 pounds 5 gallons which of the following statements is true? A. Foreign specializes in the production of whiskey. B.Foreign specializes in the production of chocolate and whiskey C.Home specializes in the production of chocolate and whiskey D.Home specializes in the production of whiskey
D.Home specializes in the production of whiskey
In a diagram showing Home's PPC with steel plotted on the vertical axis and calico on the horizontal, the opportunity cost of calico is given by the _______of the slope of the PPC.
Negative
Assume Spain has 55 hours it can allocate toward the production of wine and suits. Carefully follow the steps below to draw the required objects on the figure to the right.
see screenshot on laptop
The opportunity cost of wine in spain is _____ suits and the opportunity cost of wine in italy is ____ suits
spain: .125 italy: .5
the relative price of wine in spain is ____ suits and the relative price of wine in italy is ____
spain: .25 Italy: 1
the trade price of wine has an upper bound of ____ suits and a lower bound of _____ suits
upper: .5 lower: .125
Use the information in the following table on labor productivities in SpainSpain and ItalyItaly to answer questions a through f. Output per hour worked Spain Wine: 8 liters Spain Suits: 1 Italy Wine: 4 Liters Italy Suits: 2 Liters a. The absolute advantage in wine is held by ____and the absolute advantage in suits held by _____
wine held by Spain and suits is held by italy
Use the information in the following table on labor productivities in Spain and Italy to answer questions a through f. Spain Wine: 4 liters Spain Suits: 1 Italy Wine: 8 liters Italy Suits: 8 a. the absolute dvantage in wine is held by _____ and the absolute advantage in suits is held by _____
wine: Italy suits: italy
the comparitive advantage in wine is held by _____ and the comparative advantage in suits is held ____
wine: spain Suits: italy
the comparitive advantage in wine is held by _____ and the advanatage in suits is held by ____
wine: spain suits: italy A country possesses a comparative advantage in a good if it produces the good at a lower opportunity cost than other countries.
