Chapter 9 ECON 202

Which of the following is not a source of U.S. comparative advantage?

A relatively closed immigration policy (Many of the brightest students in the world come to the U.S. to study and remain in the U.S., creating jobs and helping to maintain U.S. comparative advantages in a number of fields.)

Transferable comparative advantage:

Are based on factors that are relatively unchangeable. (Transferable comparative advantages are based on factors that can change relatively easily and will tend to erode over time. Technological innovations are turning inherent comparative advantages into transferable comparative advantages.)

Large trade in-balances will right themselves unless:

Government policy or private investments cause capital to flow from nations with trade surpluses to nations with trade deficits. (If a country has a trade deficit, it is importing more than it is exporting, which means that it is buying more than it is producing. A nation cannot afford to do this unless capital is flowing in.)

Trade:

Is broader than manufactured goods. (Trade is much broader than just trade in manufactured goods, and includes the services that traders provide. Countries, like the U.S., can have comparative advantages in trade itself.)

If a nation has a comparative advantage in the production of good X then:

It can produce X at a lower opportunity cost. (The nation can produce that good with a lower opportunity cost. Because the nation is relatively more efficient at producing X, it will specialize in its production and export this good. It is possible to have a comparative advantage in X without having the absolute advantage (being able to produce more of X than any other nation)

Production possibility curves for widgets and wadgets for both Saudi Arabia and the U.S. Given these production possibility curves, you would suggest that:

Saudi Arabia specialize in widgets and the United States in wadgets. (The opportunity cost for Saudi Arabia of wadgets in terms of widgets is higher than the opportunity cost for the United States. Thus, the U.S. has the comparative advantage in wadgets; Saudi Arabia must have the comparative advantage in widgets.)

In considering the distribution of the gains from trade:

Smaller countries usually get a larger portion of the gains from trade. (See the textbook for a discussion of the three determinants of the distribution of the gains from trade. One of them is size: smaller countries, other things equal, benefit more from trade with larger countries.)

Other things remaining the same, when Americans want to buy more goods in Europe, this causes:

The demand for Euros to increase along with their price. (In order for Americans to buy goods made in Europe, they must also buy the correct currency in order to make these transactions. So an increase in demand for European goods increases demand for the Euro.)

Which of the following statements correctly summarizes a difference between the layperson's view of trade and the economist's?

The gains from trade in the form of low consumer prices tend to be widespread and not easily recognizable while the costs in jobs lost tend to be concentrated and readily identifiable. (It is because the costs of trade are more visible than the benefits that many laypeople oppose free trade. Switching "economists" and "laypeople" would make options B through D correct.)

Suppose your friend argues that due to low wages in China, all goods will eventually be produced in China, and the U.S. will produce nothing. Your friend is:

Wrong, because in this case the U.S. dollar would depreciate, eliminating China's comparative advantage in at least some goods. (If all goods were produced in China, the demand for the yuan would increase and the demand for the dollar would decrease. This would make Chinese goods more expensive for Americans and American goods less expensive for Chinese buyers.)