Chapter 8

Which of the following is likely to shift the production possibilities curve of a nation rightward? A) An increase in the education and experience of the workforce B) An increase in the demand for the nationʹs exports C) An improvement in the terms of trade that the nation faces D) An increase in the price of raw materials used by the nation

A) An increase in the education and experience of the workforce

Which of the following can be a source of comparative advantage? A) Resources that are available B) The demand for domestic products abroad C) The world price of goods and services D) The domestic price of finished goods

A) Resources that are available

Which of the following statements is true of the U.S.? A) Trade between states in the U.S. values more than its international trade. B) The U.S. has always been a net exporter of goods and services. C) The U.S. exports more crude oil than it imports. D) The level of imports of the U.S. has dramatically decreased since 1960.

A) Trade between states in the U.S. values more than its international trade.

Points lying below a production possibilities curve are: A) inefficient because more can be produced with the available resources. B) inefficient because they represent the production of only one good. C) efficient because combinations represented by those points are attainable. D) efficient because production is maximum on those points with the available resources.

A) inefficient because more can be produced with the available resources.

It takes a machine 2 hours to make a unit of Good X, and 1 hour to make a unit of Good Y. If the machine can be used for 10 hours, which of the following combinations will lie on its production possibilities curve? A) 5 units of Good X and 2 units of Good Y B) 3 units of Good X and 4 units of Good Y C) 2unitsofGoodXand2unitsofGoodY D) 6 units of Good X only

B) 3 units of Good X and 4 units of Good Y

If a country is a price taker for a good in the world market, ________. A) its consumption and production decisions of the good plays a key role in determining world prices B) its consumption and production decisions of the good does not affect the world prices C) its demand for the good remains the same irrespective of changes in the world prices D) it is the only exporter of the good in the world market

B) its consumption and production decisions of the good does not affect the world prices

The use of government regulations and barriers in order to control trade is referred to as: A) globalization. B) protectionism. C) liberalization. D) actualization.

B) protectionism.

Taxes levied on goods and services transported across political boundaries are referred to as: A) service taxes. B) tariffs. C) value added taxes. D) transport taxes.

B) tariffs.

Infant industries often refer to: A) the foreign industries. B) the fledgling domestic industries. C) the public sector undertakings. D) the agriculture-based industries.

B) the fledgling domestic industries.

The terms of trade is the: A) rules and regulations that govern trade between nations. B) product of the opportunity cost of producing the same good in two trading nations. C) exchange rate of goods for goods. D) amount of money that has to be given up to import an additional quantity of a good.

C) exchange rate of goods for goods.

The shift toward more open, integrated economies that participate in foreign trade and investment is referred to as: A) protectionism. B) fair trade promotion. C) globalization. D) traditionalism.

C) globalization.

Compensation of losers from opening an economy to international trade is not common because: A) losers donʹt lose so much that they would require to be compensated. B) the loss is made up through the availability of a wider array of goods and services. C) it is difficult for governments to carry out such compensation policies. D) the government will have to transfer huge amounts of money to compensate losers.

C) it is difficult for governments to carry out such compensation policies.

What is meant by the term ʺcomparative advantageʺ? How is it different from absolute advantage?

Comparative advantage is the ability of an individual, firm, or country to produce a certain good at a lower opportunity cost than other producers. Absolute advantage, on the other hand, is the ability of an individual, firm, or country to produce more of a certain good than other competing producers, given the same number of resources.

A production possibilities curve is plotted for a nation producing chairs and tables. Which of the following will cause a parallel shift in the production possibilities curve? A) An intensive training program that increases the productivity of employees engaged in the production of tables B) An intensive training program that increases the productivity of employees engaged in the production of chairs C) An increase in the price of both chairs and tables D) An increase in the availability of raw materials required for the production of both chairs and tables

D) An increase in the availability of raw materials required for the production of both chairs and tables

Which of the following CANNOT be a source of comparative advantage? A) Climate B) Resource stock available C) Education of workforce D) Domestic prices of goods and services

D) Domestic prices of goods and services

The ability of an individual, firm, or country to produce a certain good at a lower opportunity cost than other producers is referred to as: A) marginal advantage. B) absolute advantage. C) cardinal advantage. D) comparative advantage

D) comparative advantage

How are the domestic sellers and buyers of a good affected if a country starts exporting the good?

If the country starts exporting the good, sellers can sell the good at a higher price than the domestic price. Therefore, sellers gain. On the other hand, buyers have to pay a higher price for the good, therefore they lose.

What are the determinants of a countryʹs comparative advantage?

The determinants of a countryʹs comparative advantage are: a) Natural resources b) Stocks of man-made resources c) Technology d) Education, work habits, and experience of the labor force e) Relative abundance of labor and capital f) Climate

List the various arguments against free trade.

The various arguments against free trade are: a) National security concerns b) Fear of effects of globalization on a nationʹs culture. c) Environmental and resource concerns d) Infant industry concerns e) Potential negative effect on local wages and jobs

A few decades ago, there were hardly any Subway restaurants in India. Now, they are present in almost every big city. This is an outcome of: A) fair trade union practices. B) traditionalism. C) the protectionist policies adopted by the Indian government. D) globalization.

D) globalization.

Points inside a production possibilities curve are ________ and ________. A) efficient; unattainable B) inefficient; unattainable C) efficient; attainable D) inefficient; attainable

D) inefficient; attainable

How are the domestic sellers and buyers of a good affected if a country starts importing the good?

If a country starts importing the good, buyers can buy the good at a lower price than the domestic price. Therefore, buyers gain. On the other hand, sellers face competition because of a lower world price, which reduces the quantity they can sell. Therefore, sellers lose.

What is meant by world price of a good? How do the domestic price and the world price of a good together determine whether a country will be an importer or exporter of a certain good?

The world price of a good is the prevailing price of the good in the world market. The domestic price and the world price of a good play an important role in determining whether a country will export the good or import the good. If the domestic price of a good in a country is lower than the world price of the good, the country should export the good. On the contrary, if the domestic price of a good is higher than the world price of the good, the country should import the good.

In Lithasia, the opportunity cost of producing a chair is two tables and in Barylia, the opportunity cost of producing a chair is 1/2 tables. Which of the following statements is true? A) Barylia has a comparative advantage in producing chairs. B) Lithasia has a comparative advantage in producing chairs. C) Barylia has a comparative advantage in producing tables. D) Lithasia has a comparative disadvantage in producing tables.

A) Barylia has a comparative advantage in producing chairs.

Which of the following correctly identifies an argument against free trade? A) Free trade can lead to excessive exploitation of resources in poor countries. B) Free trade can lead to loss in the income of the sellers in the exporting countries. C) Free trade causes a reduction in total surplus in all the countries. D) Free trade leads to a minimization of world production.

A) Free trade can lead to excessive exploitation of resources in poor countries

Which of the following statements is true? A) If the domestic price of a good in a country is lower than the world price, the country will become an exporter of the good. B) Whether a country becomes an importer or an exporter of a good depends only on the domestic price of the good and is independent of the world price of the good. C) If the domestic price of a good in a country is lower than the world price, the country will become an importer of the good. D) Whether a country becomes an importer or an exporter of a good depends only on the world price of the good and is independent of the domestic price of the good.

A) If the domestic price of a good in a country is lower than the world price, the country will become an exporter of the good.

Specialization occurs when each individual, firm, or country: A) produces only a few specific goods and relies on trade for the other goods and services it needs. B) is self-sufficient and produces all the goods and services it needs, without relying on imports. C) produces only those goods for which it has a higher opportunity cost of producing than the opportunity cost in other nations. D) produces only those goods which are in demand in the global market and allow for high rates of profitability.

A) produces only a few specific goods and relies on trade for the other goods and services it needs.

Trade between two nations: A) results in the maximization of total production. B) reduces global production. C) leads to a maximization of production in one nation and minimization of production in the other. D) is inefficient compared to when both do not indulge in international trade.

A) results in the maximization of total production.

Fair trade products consist of goods: A) that are usually imported from the developing nations. B) the production of which involves child labor. C) that are available in all countries across the globe. D) that are exported only by the developed nations.

A) that are usually imported from the developing nations.

Which of the following statements is true? A) When a nation has an absolute advantage over other nations in producing all the goods and services, it cannot gain from trade. B) Absolute advantage relates to production per units of inputs and comparative advantage involves the opportunity cost of producing different goods. C) When a nation has an absolute disadvantage over other nations in producing a good, it cannot gain from trade. D) Absolute advantage involves the opportunity cost of producing different goods and comparative advantage relates to production per units of inputs.

B) Absolute advantage relates to production per units of inputs and comparative advantage involves the opportunity cost of producing different goods.

Which of the following organizations keeps track of all interstate commodity shipments by state of origin and state of destination in the United States? A) Bureau of Trade Statistics B) Bureau of Transportation Statistics C) Bureau for Foreign Assistance D) Bureau of the Treasury Department

B) Bureau of Transportation Statistics

Which of the following statements is true? A) The U.S. economy has discouraged trade with Mexico and Canada over time. B) Most of the workers who were displaced because of NAFTAʹs passage soon found gainful employment. C) The U.S. economy is a net exporter of manufactured goods. D) People who are made worse off by free trade can be easily identified and compensated.

B) Most of the workers who were displaced because of NAFTAʹs passage soon found gainful employment. C) The U.S. economy is a net exporter of manufactured goods.

Suppose a nation opens up to free trade and becomes an exporter of goods. Which of the following is then true of this nation? A) The nation as a whole suffers losses. B) Sellers gain. C) Buyers gain. D) Both buyers and sellers gain.

B) Sellers gain.

Which of the following statements is true? A) The growth rate of manufactured exports from the U.S. exceeded the growth rate of manufactured goods from China in the early 2000s. B) The U.S. economy has failed to meet the demand for manufactured goods domestically. C) U.S. exports are worth more than its imports. D) The import of crude oil by the U.S. has been declining since 1960.

B) The U.S. economy has failed to meet the demand for manufactured goods domestically.

Which of the following statements is true of the gains to trade? A) The gains to trade expand as trading partners become more alike. B) The gains to trade shrink as trading partners become more alike. C) The trading nations can enjoy gains to trade even when none of these countries has a comparative advantage in the production of any good. D) The gains to trade are equal for all trading partners.

B) The gains to trade shrink as trading partners become more alike.

Which of the following statements is true? A) When two firms have exactly the same opportunity cost of producing two goods, each firm will always have a comparative advantage in the production of both the goods. B) When two firms have different opportunity costs of producing the same two goods, each firm will always have a comparative advantage in the production of one of the goods. C) The firm that has a lower opportunity cost of producing a good is said to have a comparative disadvantage in the production of that good. D) The firm that faces a lower opportunity cost in producing a good is said to have an absolute disadvantage in the production of that good.

B) When two firms have different opportunity costs of producing the same two goods, each firm will always have a comparative advantage in the production of one of the goods.

The curvature of an economyʹs production possibilities curve represents: A) an increasing marginal cost of producing both goods. B) an increasing opportunity cost of producing each good. C) diminishing marginal returns to inputs. D) increasing terms of trade between both goods.

B) an increasing opportunity cost of producing each good.

Points outside the production possibilities curves: A) are feasible and maximize efficiency. B) are not feasible because of a resource constraint. C) are feasible but not preferred because they are inefficient. D) are not feasible because they donʹt utilize all of the available resource.

B) are not feasible because of a resource constraint.

A production possibilities curve shows the relationship between: A) the price of a good and its quantity supplied. B) the maximum production of one good for a given level of production of another good. C) the different combinations of two inputs used to produce a given quantity of output. D) the quantity of output produced and the amount of inputs required for the production of the output.

B) the maximum production of one good for a given level of production of another good.

Free trade refers to the ability: A) of the developing countries to make payments for imports of goods at the end of every year. B) to trade without hindrance or encouragement from the government. C) of the developed countries to set the world prices of most goods and services. D) of the developed countries to provide financial aid to the developing nations.

B) to trade without hindrance or encouragement from the government.

Which of the following will cause an inward shift of the production possibilities curve of an economy? A) A decrease in the demand for goods and services B) Introduction of better technology C) A decline in the size of the labor force D) An increase in the opportunity cost of the goods being produced

C) A decline in the size of the labor force

A production possibilities curve is plotted for a nation producing cotton and jute. Which of the following will cause a parallel rightward shift of the production possibilities curve? A) An invention of a new fertilizer that increases cotton production by ten percent, without any effect on jute production B) An invention of a new fertilizer that increases jute production by five percent, without any effect on cotton production C) An invention of a new fertilizer that increases production of both cotton and jute by ten percent D) A two-times increase in the price of all cotton products and a three-times increase in the price of all jute products

C) An invention of a new fertilizer that increases production of both cotton and jute by ten percent

Suppose a nation opens up to free trade and becomes an exporter of goods. Which of the following is then true? A) The nation as a whole suffers losses. B) Sellers lose. C) Buyers lose. D) Buyers gain.

C) Buyers lose.

Which of the following can be a source of comparative advantage? A) The rate of inflation in the domestic economy B) The level of unemployment C) Education and experience of the workforce D) Domestic demand for goods produced abroad

C) Education and experience of the workforce

Which of the following correctly identifies an argument against globalization? A) Globalization limits the bundle of goods and services available in smaller countries. B) Globalization leads to an exploitation of developed countries. C) Globalization can lead to a loss of indigenous culture and tradition. D) Globalization works against free trade.

C) Globalization can lead to a loss of indigenous culture and tradition.

Which of the following statements is true? A) If the domestic price of a good in a country is higher than the world price, the country will become an exporter of the good. B) Whether a country becomes an importer or an exporter of a good depends only on the domestic price of the good and is independent of the world price of the good. C) If the domestic price of a good in a country is higher than the world price, the country will become an importer of the good. D) Whether a country becomes an importer or an exporter of a good depends only on the world price of the good and is independent of the domestic price of the good.

C) If the domestic price of a good in a country is higher than the world price, the country will become an importer of the good.

Which of the following correctly identifies an argument against free trade? A) Free trade leads to a loss of revenue for exporting countries. B) Buyers in importing nations suffer losses due to free trade. C) Infant domestic industries fail to compete with the advanced foreign competitors. D) Free trade limits the bundle of goods and services available in smaller countries.

C) Infant domestic industries fail to compete with the advanced foreign competitors.

Which of the following is a tool used for protectionism? A) Service tax B) Bank rate C) Tariffs D) Open market operations

C) Tariffs

Which of the following statements is true? A) An economyʹs production possibilities curve is convex to the origin. B) The opportunity cost of producing a good decreases as more resources are used for its production. C) The production possibilities curve of a country is fixed in the short run. D) The slope of the production possibilities curve represents the terms of trade between two states.

C) The production possibilities curve of a country is fixed in the short run.

Which of the following statements is true? A) The production possibilities curve of a nation is fixed in the long run. B) The production possibilities curve can only shift to the right. C) The production possibilities curve of an economy is concave to the origin. D) The slope of the production possibilities curve represents the ratio of the marginal cost of producing goods.

C) The production possibilities curve of an economy is concave to the origin.

Two countries, A and B, produce Good X. Which of the following statements is true of the trading price of Good X? A) The trading price of Good X is less than the opportunity cost of producing the good in both nations. B) The trading price of Good X is greater than the opportunity cost of producing the good in both nations. C) The trading price of Good X lies between the opportunity costs of producing the good in both nations. D) The trading price of Good X is always equal to the opportunity cost of producing the good in Country A.

C) The trading price of Good X lies between the opportunity costs of producing the good in both nations.

Which of the following statements is true? A) When two nations specialize and trade, there is a loss of efficiency and both the nations are made worse off. B) Trade between two nations is most beneficial when neither has a comparative advantage in the production of any goods and services. C) Trade between nations allows each nation to specialize in the production of goods in which it has comparative advantage. D) Trade between two nations is possible only when the opportunity costs of producing goods and services in both nations are identical.

C) Trade between nations allows each nation to specialize in the production of goods in which it has comparative advantage.

The ability of an individual, firm, or country to produce more of a certain good than other competing producers, given the same amount of resources, is referred to as: A) marginal advantage. B) comparative disadvantage. C) absolute advantage. D) perfect advantage.

C) absolute advantage.

Points on a production possibilities curve are ________ and ________. A) inefficient; attainable B) inefficient; unattainable C) efficient; attainable D) efficient; unattainable

C) efficient; attainable

ʺBanana republicsʺ refers to: A) nations that do not participate in free trade. B) nations that are net importers. C) nations that specialize in the production of only one good. D) nations that produce only agricultural products.

C) nations that specialize in the production of only one good

If a nation is a net importer it means that the: A) nation only imports goods and services and does not export any good. B) nation only imports those goods in which it has an absolute disadvantage. C) nationʹs imports are worth more than exports over a given period of time. D) nation prohibits the import of goods and services that can be produced domestically.

C) nationʹs imports are worth more than exports over a given period of time.

An import is any good that is: A) produced and consumed domestically. B) priced through an auction mechanism. C) produced abroad, but sold domestically. D) rationed and licensed by the government.

C) produced abroad, but sold domestically.

The slope of a production possibilities curve represents: A) the marginal cost of producing the good measured on the horizontal axis. B) the marginal cost of producing the good measured on the vertical axis. C) the opportunity cost of producing the goods. D) the ratio of the average cost of producing both goods.

C) the opportunity cost of producing the goods.

Which of the following correctly identifies an argument against free trade? A) Free trade reduces world production. B) Free trade hampers technology transfers. C) Free trade increases the wages in importing countries. D) Free trade may result in job loss in some specific industries in the domestic economy.

D) Free trade may result in job loss in some specific industries in the domestic economy.

Which of the following statements is true? A) The principle of comparative advantage provides a basis for trade when two nations have the same opportunity cost of producing a good. B) The principle of absolute advantage provides a basis for the determination of the terms of trade between two trading nations. C) The principle of absolute advantage forms the basis of trade when a nation can produce more of all the goods and services compared to the other nations. D) The principle of comparative advantage provides a range of prices within which trade will occur.

D) The principle of comparative advantage provides a range of prices within which trade will occur.

A firm producing calculators and cell phones purchases new machinery that increases the productivity of producing calculators. Assuming that the number of calculators produced is measured on the horizontal axis and the number of cell phones produced is measured on the vertical axis, how will the introduction of the new machinery change the firmʹs production possibilities curve? A) The production possibilities curve will shift to the left. B) The production possibilities curve will shift rightward. C) The production possibilities curve will pivot rightward about the vertical axis. D) The production possibilities curve will pivot rightward about the horizontal axis.

D) The production possibilities curve will pivot rightward about the horizontal axis.

A world price of a good: A) is the lowest price for which the good is available in any country in the world. B) is the price prevailing in the country with the highest production of the good. C) is equal to the lowest opportunity cost of producing the good in any country in the world. D) is the prevailing price of the good on the global market.

D) is the prevailing price of the good on the global market.

An export is any good that is: A) rationed and licensed by the government. B) produced and consumed domestically. C) produced by public-sector firms. D) produced domestically, but sold abroad.

D) produced domestically, but sold abroad.

A curve that shows the various combinations of goods and services that are possible for an economy to produce with a given amount of resources is referred to as a(n): A) supply curve. B) isocost curve. C) budget constraint. D) production possibilities curve.

D) production possibilities curve.

Protectionism refers to: A) subsidizing imports. B) reduction of trade barriers. C) increased export of goods and services. D) reducing the competition faced by domestic firms.

D) reducing the competition faced by domestic firms.

How can national security possibly be threatened when a nation engages in free trade and specializes on the basis of comparative advantage?

Free trade is based on comparative advantage and specialization. A country specializes in the production of a good in which it has a comparative advantage. Hence, when a nation engages in free trade, resources that are required for strengthening the defense of a country are likely to be guided toward the production of goods that have an export potential. Moreover, specialization may cause a nation to import military weaponry if it does not have a comparative advantage in its production. If a crisis develops with the country from which such weapons are being imported, it is unlikely that they may continue to export. This hampers the ability of a country to preserve its integrity in the times of war and thus, acts as a threat to national security.

What are the effects of a tariff on a good on various groups and total surplus in the country that imposes the tariff?

Imposition of a tariff increases the price of the good in the importing country and makes the sellers better off. The domestic sellers enjoy a greater surplus. Consumers have to pay a higher price for the imported good, so they are made worse off. The government earns revenue equal to the product of the tariff rate and the number of units of the good imported. Overall, due to the imposition of the tariff there is a fall in the total surplus compared to the pre-tariff situation. The loss in total surplus is referred to as the deadweight loss of the tariff.

What is understood by infant industry arguments against free trade?

Infant industries are fledgling domestic industries. When an economy opens up to free trade, domestic industries face competition from foreign industries. Initially, these infant industries may not have a comparative advantage in production, but if provided protection from foreign trade, they are eventually likely to develop some comparative advantage. On the other hand, foreign industries may have access to better technology, human resources, and can also enjoy economies of scale. Thus, they may be able to produce at a cost lower than that of new domestic industries. This allows them to price the goods lower than domestic industries. Therefore, domestic infant industries are adversely affected when a country opens up to free trade and the infant industry argument against free trade suggests that they should be protected until they develop some sort of comparative advantage.

Country A produces 10 chairs and 6 tables using its resources. Country B produces 12 chairs and 18 tables. Determine the comparative advantage and the absolute advantage that both countries enjoy.

The opportunity costs of producing each good in the two countries are shown below. Opportunity cost of producing a chair in Country A = 0.6 tables. Opportunity cost of producing a chair in Country B = 1.5 tables. Hence, Country A has a comparative advantage in producing chairs. Opportunity cost of producing a table in Country A = 1.67 chairs. Opportunity cost of producing a table in Country B = 0.67 chairs. Hence, Country B has a comparative advantage in the production of tables. Because the opportunity cost of producing tables is less in Country B, Country B has a comparative advantage in the production of tables. On the other hand, Country A has a comparative advantage in producing chairs. Country B can produce more of both the goods than Country A, therefore, it enjoys an absolute advantage in the production of both goods.

a) The demand for shoes in Cadbia is given by Qd = 300 - 25P and the supply of shoes is given by Qs = 100 + 25P. If the world price of shoes is $8, will Cadbia import or export shoes? b) The demand for dark chocolates in Cadbia is given by Qd = 300 - 10P and the supply of dark chocolates is given by Qs = 100 + 10 P. If the world price of dark chocolates is $6, will Cadbia import or export chocolates?

a) The domestic price of shoes in Cadbia is the price at which quantity demanded of shoes equals the quantity supplied of shoes. This implies: 300 - 25P = 100 + 25P 50P = 200 P = $4 Because the domestic price of shoes in Cadbia is less than the world price of shoes, Cadbia will export shoes. b) The domestic price of dark chocolates in Cadbia is the price at which quantity demanded of dark chocolates equals the quantity supplied of dark chocolates. This implies: 300 - 10P = 100 + 10P 20P = 200 P = $10. Because the domestic price of dark chocolates in Cadbia is more than the world price of dark chocolates, Cadbia will import chocolates.

How are the following events likely to affect an economyʹs production possibilities curve? a. An increase in the working population of the economy b. The import of better production technology c. A natural disaster that destroys some of the economyʹs resources d. Emigration of workers to other countries

a. An increase in the working population of the economy implies an increase in the amount of resources available for production in the economy. Hence, the production possibilities curve will shift rightward. b. The import of better technology implies that more can be produced with the amount of resources available in the economy. Hence, the production possibilities curve will shift rightward. c. A natural disaster that destroys some of the resource available for production will lead to an inward shift of the production possibilities curve. This is because fewer resources are now available for production purposes. d. If workers migrate to other countries, fewer workers will be available for domestic production. This will cause an inward shift in the economyʹs production possibilities curve.