MacroEconomics 32.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange

The following table gives the labor requirements for the production of one unit of each good in each country. For​ example, the production of one movie in Germany requires the use of 10​ worker-days. The opportunity cost of movies in the U.S. is​ ______ and the opportunity cost of movies in Germany is​ ______.

0.5​ autos; 0.67 autos

In the graph shown​ below, both world trade and world real GDP are measured as index numbers and are arbitrarily set equal to 100 for 1950. By​ 2005, the index for world trade has increased to a little over​ 2,400.

24

The following figure gives the shares of U.S. imports​ (red) and exports​ (blue) in its GDP since 1950. According to this​ figure, the combined share of U.S. imports and exports in the U.S. GDP in 2005 is approximately

25 Import % + Export %

Restricting imports to protect domestic jobs will ultimately lead to an increase in​ employment, output, and incomes.

False

Since​ 1980, U.S. exports of goods and services have exceeded U.S. imports of goods and services.

False

Which of the following is not​ true?

Import restrictions will not elicit retaliation.

According to the economic data shown​ above, from 1950 to 2005 world economic activity as measured by GDP increased seven ​-fold. On the other​ hand, over the same time period world trade increased twenty ​-fold. Using only the 2005​ data, for which nation does trade have the highest share of national economic​ activity?

Seven Twenty A

Which of the following is consistent with international trade​ theory?

The standard of living within a country is a function of the strength of the economy and not of its relative position.

Which of the following statements is true about the importance of international trade in the world​ economy?

Trade accounts for an increasingly higher share of a​ country's economic activity.

According to the Institute for Management Development in​ Lausanne, Switzerland, the United States is among the top ten nations in overall productive efficiency.

True

Not only does comparative advantage result in an overall increase in the output of goods produced and​ consumed, it also aids in the transmission of ideas.

True

When nations specialize in producing goods for which they have a comparative advantage and engage in international​ trade, consumption gains are possible for those nations. When using all resources​ available, Canada can produce either 100 hockey pucks or 5 snowmobiles per​ day, and Finland can produce 150 hockey pucks or 5 snowmobiles per day.​ ________ has a comparative advantage in producing hockey pucks and​ ________ has a comparative advantage in producing snowmobiles.

True Finland; Canada

​Ultimately, imports are paid for by

exports

In the long​ run, imports are paid for by exports because

for the most​ part, foreigners want U.S. produced goods in exchange for the goods that are shipped to the United States.

The United States economy is considered by the Institute for Management Development to be the most competitive economy because

of widespread entrepreneurship

A producer of a product has a comparative advantage over other producers of the product if it can

produce the product at a lower opportunity cost.

During the Great Depression of the​ 1930s, many industrial countries tried protecting domestic jobs by imposing tariffs. According to economic​ theory, the likely outcome would be

reduced exports and volume of trade for everyone.

All of the following have been cited as factors explaining​ America's top-rated competitiveness except

simplifying the federal tax code.

If a country has a comparative advantage in the production of some good then

that country can produce the good at a lower opportunity cost compared to other producers.

If a country has an absolute advantage in the production of some good then

that country has the ability to produce more output from given inputs of resources than other producers can.

If​ Germany's 1,500 workers specialize and produce only the good for which it has a comparative advantage and the U.S.​ 1,000 person labor force specializes and produces only the good for which it has a comparative​ advantage, then

the U.S. will produce 200 movies and Germany will produce 100 autos.

According to the Swiss Institute for Management​ Development, the top country in terms of overall productive efficiency is

the United States