Chapter 9: Comparative Advantage, Exchange Rates, and Globalization

Currency Depreciation

A __________ is a change in the exchange rate so that one currency buys fewer units of a foreign currency.

Currency Appreciation

A __________ is a change in the exchange rate so that one currency buys more units of a foreign currency.

Trade Surplus

A __________ occurs when exports exceed imports.

Trade Deficit

A __________ occurs when imports exceed exports.

Inherent Comparative Advantage

A comparative advantage that is based on factors that are relatively unchangeable.

Exchange Rate

An __________ is the rate at which one country's currency can be traded for another country's currency.

Cheaper and Increase

As the price of euros in terms of dollars rises, U.S. goods become __________ (cheaper/more expensive) for Europeans, so Europeans will __________ (decrease/increase) the quantity of euros supplied to buy more U.S. goods.

C. cost.

By definition, comparative advantage in trade refers to differences in relative: A. revenue. B. satisfaction. C. cost. D. restrictions.

B. all sectors in an economy.

Comparative advantage is best defined in terms of: A. the service sector. B. all sectors in an economy. C. the organizing of trade services sector. D. the manufacturing sector.

Transferable Comparative Advantage

Comparative advantages based on factors that can change relatively easily.

Economies of Scale and Reduce

Greater gains of trade tend to go to countries producing goods that exhibit __________ (diseconomies of scale/economies of scale) because increased production will (increase/reduce) the cost of production.

C. there will be no benefits to trade.

If Country A and Country B must give up 5 pounds of sugar to produce 1 pound of honey, A. both Country A and B will benefit from trade. B. only Country A will benefit from trade. C. there will be no benefits to trade. D. only Country B will benefit from trade.

C. B

If Country X and Country Y specialized and traded, which point represents a maximum combination of bananas and apples that each country could consume? A. C B. A C. B D. D

D. gain comparative advantage from a combination of a decline in its wages and its exchange rate.

If a country has a trade deficit, there will be pressures for the country to: A. gain comparative advantage from a combination of a rise in its wages and its exchange rate. B. lose comparative advantage from a combination of a rise in its wages and its exchange rate. C. lose comparative advantage from a combination of a decline in its wages and its exchange rate. D. gain comparative advantage from a combination of a decline in its wages and its exchange rate.

High and Fewer (Complications in exchange rates)

If the demand for a country's assets is high, the value of its currency will be relatively __________ (high/low), leading to __________ (fewer/more) sectors with a comparative advantage in the production of traded goods.

A. 300

If two U.S. dollars can be traded for 200 Japanese yen, how many Japanese yen does it take to buy three U.S. dollars? A. 300 B. 400 C. 200 D. 100

A. factors that are relatively unchangeable over time.

Inherent comparative advantage is best characterized by comparative advantage based on: A. factors that are relatively unchangeable over time. B. factors that can change relatively easy over time. C. technology and a highly educated population. D. government policies, regulations, and institutions.

Lower and Higher

Paradoxically, when considering the effect of a country's natural resources on the value of its currency, countries with an abundance of resources tend to have __________ (higher/lower) economic growth and __________ (higher/lower) unemployment than countries with fewer natural resources.

C. demand for euros from D1 to D0 and a depreciation of the euro.

Refer to the graph. The effect lower U.S. demand for European assets on the value of the euro can be shown by a shift in the: A. supply of euros from S1 to S0 and an appreciation of the euro. B. demand for euros from D0 to D1 and an appreciation of the euro. C. demand for euros from D1 to D0 and a depreciation of the euro. D. supply of euros from S0 to S1 and a depreciation of the euro.

C. supply of dollars from S1 to S0 and an appreciation of the dollar.

Refer to the graph. The effect of a decrease in travel by American to Europe on the value of the dollar can be shown by a shift in the: A. demand for euros from D0 to D1 and an appreciation of the euro. B. demand for dollars from D0 to D1 and a depreciation of the dollar. C. supply of dollars from S1 to S0 and an appreciation of the dollar. D. supply of dollars from S0 to S1 and a depreciation of the dollar.

C. supply of dollars from S0 to S1 and a depreciation of the dollar.

Refer to the graph. The effect of an increase in the demand for European assets by Americans on the value of the dollar can be shown by a shift in the: A. demand for dollars from D0 to D1 and a depreciation of the dollar. B. supply of dollars from S0 to S1 and an appreciation of the dollar. C. supply of dollars from S0 to S1 and a depreciation of the dollar. D. demand for dollars from D0 to D1 and an appreciation of the dollar.

D. demand for euros from D0 to D1 and an appreciation of the euro.

Refer to the graph. The effect of higher U.S. demand for European goods on the value of the euro can be shown by a shift in the: A. supply of euros from S1 to S0 and a depreciation of the euro. B. demand for euros from D0 to D1 and a depreciation of the euro. C. supply for euros from S0 to S1 and an appreciation of the euro. D. demand for euros from D0 to D1 and an appreciation of the euro.

B. appreciated because it could buy more Canadian dollars.

Suppose on Monday the U.S. dollar could buy 1.2 Canadian dollars and on Tuesday it could buy 1.5 Canadian dollars. The dollar has: A. appreciated because the U.S. has lost comparative advantage in trade. B. appreciated because it could buy more Canadian dollars. C. depreciated because the U.S. has lost comparative advantage in trade. D. depreciated because it could buy more Canadian dollars.

B. exports minus imports.

The balance of trade is: A. the ratio of exports to imports. B. exports minus imports. C. imports minus exports. D. the ratio of relative gains of trade.

Comparative Advantage

The basic idea of the principle of __________ is that as long as the relative opportunity costs of producing goods (what must be given up of one good in order to get another good) differ among countries, then there are potential gains from trade.

Fall and More

The demand curve for euros is downward sloping because as the exchange rate value of the euro falls, the price of European goods will __________ (fall/rise) for foreigners and they will purchase __________ (less/more) euros.

Rise and Less

The demand curve for euros is downward sloping because as the exchange rate value of the euro falls, the price of European goods will __________ (fall/rise) for foreigners and they will purchase __________ (less/more) euros.

Balance of Trade

The difference between the value of exports and the value of imports.

A. all consumers. (Trade has distributional effects)

The group that generally benefit from free trade are: A. all consumers. B. all economists. C. all taxpayers. D. all producers.

A. move production across national boundaries.

The law of one price depends on the ability of firms to: A. move production across national boundaries. B. post prices in foreign currencies. C. post prices in domestic currencies. D. meet consumer demand in one's own country first.

Resource Curse

The paradox that countries with an abundance of resources tend to have lower economic growth and more unemployment than countries with fewer natural resources.

More, Decrease, and Fewer (Determination of exchange rates and trade)

The supply curve of euros is upward sloping because as the price of euros falls, U.S. goods become __________ (less/more) expensive for Europeans, so Europeans will __________ (decrease/increase) the quantity of euros supplied to buy __________ (fewer/more) U.S. goods.

A. there is less competition among traders.

Traders are likely to get bigger gains from trade when: A. there is less competition among traders. B. both countries experience economies of scale. C. both countries are small. D. one country has an overwhelming comparative advantage.

D. factors that can change relatively easily over time.

Transferable comparative advantage consists of comparative advantages originated by: A. government policies, regulations, and institutions. B. factors that are relatively unchangeable over time. C. technology and a highly educated population. D. factors that can change relatively easily over time.

True (Trade is broader than manufactured goods)

True or false: Countries can have a comparative advantage in organizing trade.

True (Law of one price)

True or false: If the law of one price holds, labor should cost the same in all countries after accounting for differences in skills, experience, and institutional structures.

False

True or false: Laypeople are correct to oppose international trade since comparative advantage between countries is absolute.

True (Gains are often stealth)

True or false: Laypeople often overlook the gains from trade since they are stealth gains.

C. depreciated.

When a currency can buy less foreign currency than before, it is said to have: A. appreciated. B. expanded. C. depreciated. D. contracted.

B. Country Y

Which country has a comparative advantage in producing socks? A. Neither has a comparative advantage because each is producing the most it is able. B. Country Y C. Country X

B., E., and F. (Sources of U.S. comparative advantage)

Which of the following are sources of U.S. comparative advantage? (Check all that apply.) A. Absolute advantage B. Abundant natural resources C. Trade restrictions D. Cheap unskilled labor E. English as an international language F. U.S. cachet

Both A. and D. (Dividing up the gains from trade)

Which of the following correctly states economists' insights about how the gains from trade are divided? A. Countries producing goods with economies of scale tend to get a larger gain from trade. B. The country characterized by a market economy will tend to get a larger proportion of the gains from trade. C. The country that has the greater comparative advantage will tend to get a larger proportion of the gains from trade. D. Small countries tend to get a larger proportion of the gain than larger countries.

D. Because the markets are so small, trade opens up relatively more opportunities for smaller countries.

Why do smaller countries tend to benefit more from trade? A. Because the gains are so small, traders are less likely to be interested in facilitating trade to smaller countries. B. Because there are fewer lobbyists, governments in small countries are better at negotiating terms of trade. C. Because set up costs are high, smaller countries are more likely to experience economies of scale. D. Because the markets are so small, trade opens up relatively more opportunities for smaller countries.