Economics Today (the Macro View): Chapter 32: Comparative Advantage and the Open Economy

The following table shows production possibilities for Singapore and Peru​, assuming that there is no trade. Each number represents units of product produced per​ hour, if all resources are fully employed. Suppose that workers in both nations work a​ ten-hour day and split their time evenly between producing the two goods. Total world output of computers will be _____. Total world output of textiles will be _____. If Singapore specializes in computers and Peru specializes in textiles​, total production of computers will be _____ and total production of textiles will be _____.

1500; 4500 (200+100= 300x10 hours= 3000 \ 2, time split between producing 2 product = 1500) ------------------ 2000; 6000

Residents of the nation of Northland can forgo production of digital televisions and utilize all available resources to produce 300 bottles of​ high-quality wine per hour.​ Alternatively, they can forgo producing wine and instead produce 60 digital TVs per hour. In the neighboring country of West​ Coast, residents can forgo production of digital TVs and use all resources to produce 150 bottles of​ high-quality wine per​ hour, or they can forgo wine production and produce 50 digital TVs per hour. In both​ nations, the opportunity costs of producing the two goods are constant. ​Note: Throughout this problem enter each numeric response as a whole number or fraction. The opportunity cost of producing 1 digital TV in Northland is ___ bottles of​ wine,and the opportunity cost of producing 1 bottle of wine in Northland is ___ digital TVs. The opportunity cost of producing 1 digital TV in West Coast is ___ bottles of​ wine,and the opportunity cost of producing 1 bottle of wine in West Coast is ___ digital TVs.

5, 0.2 3, one third (enter one third as a fraction)

Quota System

A government-imposed restriction the quantity of a specific good that another country is allowed to sell in the United States. Restrictions on imports. These restrictions are usually applied to one or several specific countries.

Regional Trade Bloc

A group of nations that grant members special trade privileges.

Which of the following best describes the winners and losers from a tariff​? A. Consumers lose, domestic producers gain, and the government gains. B. Consumers​ gain, domestic producers​ gain, and foreign producers lose. C. Consumers lose, domestic producers gain, and licensed importers gain. D. Consumers​ lose, domestic producers​ lose, and foreign producers gain.

A. Consumers lose, domestic producers gain, and the government gains.

Which of the following statements is FALSE? A. When it comes to overall productive efficiency, compared to Japan, Germany, and the rest of the European Union, the United States lags far behind. B. Sophisticated financial systems have given U.S. productive efficiency a boost. C. The United States' international competitive position has been helped by its long history of widespread entrepreneurship. D. Economic restructuring and investments in information technology have added to productive efficiency in the United States.

A. When it comes to overall productive efficiency, compared to Japan, Germany, and the rest of the European Union, the United States lags far behind.

If a country voluntarily agrees to have its companies import more goods from another country, the country has A. a voluntary import expansion (VIE) agreement. B. a voluntary restraint (VR) agreement. C. a mandated tariff. D. a mandated agreement.

A. a voluntary import expansion (VIE) agreement.

U.S. job losses cited by anti-trade critics A. are mostly a short-term problem in isolated industries. B. are nonexistent. C. affect only capital-intensive U.S. industries. D. are mostly due to poor training by U.S. firms.

A. are mostly a short-term problem in isolated industries.

When a​ firm's production is subsidized by its government and then the firm sells its products in a foreign country at a price below the cost of​ production, this is called A. dumping. B. a tariff. C. a quota. D. involuntary export expansion.

A. dumping.

Goods that are produced domestically and then sold in other countries are called A. exports. B. imports. C. tariffs. D. quotas.

A. exports.

In the long run, imports will most likely be paid for with A. exports. B. the sale of real and financial assets. C. the extension of credit. D. higher domestic unemployment.

A. exports.

The concept of "global competitiveness" A. is not practical because economic well-being is evaluated within each country. B. means that the economic well-being of each nation must be compared with nations with same size population. C. means that the economic well-being of each nation must be compared with nations on the same continent. D. means that the export-import ratio of each nation must be compared.

A. is not practical because economic well-being is evaluated within each country.

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. 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 A. the U.S. will produce 200 movies and Germany will produce 100 autos. B. the U.S. will produce 150 autos and Germany will produce 200 movies. C. the U.S. will produce 200 movies and Germany will produce 75 autos. D. the U.S. will produce 100 autos and Germany will produce 150 movies.

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

The North American Free Trade Agreement and the European Union are examples of A. trade blocs. B. labor agreements designed only for industrialized countries. C. defense treaties. D. agriculturally based economies.

A. trade blocs.

For the United States since 1950, imports as a percentage of GDP has A. tripled. B. increased slightly. C. remained constant. D. decreased.

A. tripled.

General Agreement on Tariffs and Trade (GATT)

An International agreement established in 1947 to further world trade by reducing barriers an tariffs. The GATT was replaced by the World Trade Organization in 1995.

Voluntary Import Expansion (VIE)

An official agreement with another country in which it agrees to import more from the United States.

Voluntary Restraint Agreement (VRA)

An official agreement with another country that "voluntarily" restricts the quantity of its exports to the United States.

Which of the following best describes a quota​? A. A tax on imports. B. A government - imposed restriction on the quantity of goods that can be imported. C. An official agreement to restrict imports to the U.S. D. An official agreement to expand imports to the U.S.

B. A government - imposed restriction on the quantity of goods that can be imported.

Which of the following statements is true about the importance of international trade in the world​ economy? A. Trade accounts for a constant share of a​ country's economic activity. B. Trade accounts for an increasingly higher share of a​ country's economic activity. C. Trade is not important in the world economy. D. Trade accounts for an increasingly lower share of a​ country's economic activity.

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

One main difference between tariffs and quotas is that A. tariffs raise the price of imported products but quotas do not. B. consumers can import any amount of the imports that have tariffs placed on​ them, but they are restricted to a set maximum amount they can import for goods subject to quotas. C. tariffs benefit domestic producers but quotas do not. D. All of the above.

B. consumers can import any amount of the imports that have tariffs placed on​ them, but they are restricted to a set maximum amount they can import for goods subject to quotas.

If a firm in China sells its product in the U.S. at a price below its cost of​ production, the firm is said to be A. experiencing diseconomies of scale. B. dumping its goods in the U.S. market. C. acting in the interest of consumers and producers in U.S. market. D. None of the above.

B. dumping its goods in the U.S. market.

​Ultimately, imports are paid for by A. gold. B. exports. Your answer is correct. C. the foreign currency. D. dollars.

B. exports.

​Ultimately, imports are paid for by A. gold. B. exports. C. the foreign currency. D. dollars.

B. exports.

The basic proposition in international trade is that A. trade is determined by absolute advantage. B. in the long run, imports are paid for by exports. C. everyone is made better off by free trade. D. fair trade is more important than free trade.

B. in the long run, imports are paid for by exports.

Trade deflection means A. creating rules of origin to delineate product lines eligible for trading preferences. B. moving partially assembled goods into a trading bloc country in order to​ re-export to other trading bloc members. C. shifting existing trade from countries outside a trading bloc to countries within the bloc. D. creating common external tariffs and quotas against countries that are not members of the trading bloc.

B. moving partially assembled goods into a trading bloc country in order to​ re-export to other trading bloc members.

One reason why​ "protecting domestic​ jobs" is a poor argument against free trade is because A. there is little evidence that trade protection saves domestic jobs. B. the cost of protecting jobs is much higher than the value of the jobs. C. labor in other countries is not priced lower than U.S. labor. D. any outsourcing of jobs from the U.S. is completely offset by outsourcing of jobs from other countries.

B. the cost of protecting jobs is much higher than the value of the jobs.

People who focus on the "competitiveness" of the United States are A. focusing on the right thing if the United States is to stay a leading economic power. B. treating the United States as if it is a business firm. C. also focusing on the importance of education. D. correctly recognizing that trade is a zero-sum game.

B. treating the United States as if it is a business firm.

Which of the following best explains the dumping argument against free​ trade? A. Trade barriers are necessary to protect domestic jobs from​ lower-priced labor in other countries. B. New industries require protection until they can become technologically efficient. C. Tariffs are required to prevent foreign producers from selling excess goods at prices below cost. D. Since other countries subsidize​ production, it is necessary to have tariffs so that domestic producers can compete.

C. Tariffs are required to prevent foreign producers from selling excess goods at prices below cost.

Which of the following is consistent with international trade​ theory? A. A country should strive for comparative advantage in manufacturing. B. The United States has been falling behind Europe and Japan because its economy is too open. C. The standard of living within a country is a function of the strength of the economy and not of its relative position. D. The United States needs trade restrictions to stay competitive.

C. 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 is consistent with international trade​ theory? A. The United States needs trade restrictions to stay competitive. B. A country should strive for comparative advantage in manufacturing. C. The standard of living within a country is a function of the strength of the economy and not of its relative position. D. The United States has been falling behind Europe and Japan because its economy is too open.

C. 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 is not a regional trading​ bloc? A. ASEAN. B. the EU. C. WTO. D. NAFTA.

C. WTO.

In the long​ run, imports are paid for by exports because A. the regulations of the World Bank stipulate that this is how international accounts must be settled. B. all U.S. dollars ultimately must be held in the United States. C. for the most​ part, foreigners want U.S. produced goods in exchange for the goods that are shipped to the United States. D. All of the above.

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

For infant industry tariff protection to be valid requires that A. the tariff must be allowed to last forever. B. only industries that currently are producing efficiently should be protected. C. government officials must predict which industries will eventually be able to compete with more established foreign producers. D. the industries protected must have substantial monopoly power in the absence of foreign competition.

C. government officials must predict which industries will eventually be able to compete with more established foreign producers.

The World Trade Organization​ (WTO) A. makes it impossible for member nations to have any tariffs or quotas. B. ensures that all trade is free and fair. C. handles trade disputes among member nations. D. is an organization that includes all countries in the world. E. All of the above.

C. handles trade disputes among member nations.

A new industry develops, and our government wants to protect it from foreign competition. Which one of the following arguments would appropriately describe this type of protection? A. national security B. cartelization C. infant industry D. protecting American jobs

C. infant industry

Assume that U.S. producers can manufacture cookies at a lower opportunity cost than Canadian producers. If this is the case, A. it will not be possible for Canada to have an comparative advantage in the production of any other products. B. Canada could still have the comparative advantage in cookie production. C. it would still be possible for Canada to have a comparative advantage in trade for some other products. D. Canada would have the comparative advantage in all products compared to the United States.

C. it would still be possible for Canada to have a comparative advantage in trade for some other products.

Trade diversion results in A. an increase in the total amount of trade in the world. B. a decrease in the total amount of trade in the world. C. no change in the total amount of trade in the world. D. either an increase or decrease in the amount of trade in the world, depending on where trade takes place.

C. no change in the total amount of trade in the world.

The United States economy is considered by the Institute for Management Development to be the most competitive economy because A. of selected restrictions on imports from Japan and Europe. B. Americans are willing to work harder than anyone else is. C. of widespread entrepreneurship. D. of a high saving rate.

C. of widespread entrepreneurship.

Groups of nations that grants members trade privileges are called A. local trade protectionists. B. trade settlements. C. regional trade blocs. D. allies.

C. regional trade blocs.

Since World War II, world trade has A. decreased in importance as nations turn inward due to security concerns. B. increased, but not as dramatically as annual world real GDP has climbed. C. risen sharply, outpacing gains in annual world real GDP. d. increased in relative importance for most nations, but not for the United States.

C. risen sharply, outpacing gains in annual world real GDP.

Suppose that the opportunity cost of producing goods differs between two nations. We can correctly state that A. the two nations should not specialize in the production of goods. B. specialization can lead to an increase in the production of all goods. C. specialization can lead to an increase in the consumption of all goods. D. neither country has a comparative advantage in the production of any good.

C. specialization can lead to an increase in the consumption of all goods.

If a country has a comparative advantage in the production of some good then A. that country should specialize in the production of that good and not trade with other nations so that they can keep all the gains for themselves. B. that country should let other nations produce that good so that they may focus on new products that will expand job opportunities for their citizens. C. that country can produce the good at a lower opportunity cost compared to other producers. D. All of the above.

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

The General Agreement on Tariffs and Trade is an international agreement A. to establish the North American continent as a free trade area. B. to encourage peaceful settlements of trade disputes, but has no particular point of view about the desirability of higher or lower tariffs. C. to encourage world trade by lowering tariffs and other trade barriers. D. to make all tariffs illegal.

C. to encourage world trade by lowering tariffs and other trade barriers.

Suppose that the two nations in the table to the right decide to specialize in producing the good for which they have a comparative advantage and to engage in trade. ​Note: The table to the right reproduces the opportunity cost data that formed the basis for the determination of comparative advantage. Will residents of both nations agree to trade wine for digital TVs at a rate of exchange of 4.0 bottles of wine for 1 digital​ TV? A. ​No, because the residents of Northland will be worse off. B. ​No, because the residents of West Coast will be worse off. C. ​Yes, because doing so will be mutually beneficial. D. The data is insufficient to make this determination.

C. ​Yes, because doing so will be mutually beneficial.

Suppose that the two nations in the table to the right decide to specialize in producing the good for which they have a comparative advantage and to engage in trade. Will residents of both nations agree to trade wine for digital TVs at a rate of exchange of 3.0 bottles of wine for 1 digital​ TV? A. ​No, because the residents of Northland will be worse off. B. ​No, because the residents of West Coast will be worse off. C. ​Yes, because doing so will be mutually beneficial. D. The data is insufficient to make this determination.

C. ​Yes, because doing so will be mutually beneficial.

Which of the following best describes a tariff​? A. An official agreement to expand imports to the U.S. B. A government - imposed restriction on the quantity of goods that can be imported. C. An official agreement to restrict imports to the U.S. D. A tax on imports.

D. A tax on imports.

Import restrictions due to the imposition of tariffs by the U.S. government A. will ultimately cause inefficient resource allocation in the United States. B. will lead to lower incomes in the economy of U.S. trade partners. C. will lead to a decline in the quantity of the product consumed in the United States. D. All of the above are likely to occur.

D. All of the above are likely to occur.

You are a policymaker of a major exporting nation. Your main export good has a price elasticity of demand of -0.50. Which of the following qualifies as an economic reason why you would voluntarily agree to export​ restraints? A. Voluntary restraints would forestall potentially more restrictive barriers in the future. B. Because the demand is​ elastic, the voluntary restraints will generate higher revenue for the exporting nation. C. Because the demand is​ inelastic, the voluntary restraints will generate a higher price for the​ exporter's main good. D. Because the demand is​ inelastic, the voluntary restraints will generate higher revenue for the exporting nation.

D. Because the demand is​ inelastic, the voluntary restraints will generate higher revenue for the exporting nation. ----explanation---- An inelastic demand means that the price increase on the export good is more than enough to offset the fact that fewer units are sold. The end result is higher revenues for the exporting nation.

The World Trade Organization is a successor organization to the A. United Nations. B. World Bank. C. International Court of Justice. D. GATT.

D. GATT.

U.S. automakers have an interest to make it more difficult for European competitors to locate assembly plants in Canada or Mexico and thereby ship finished automobiles to the United States duty-free. This is an example of A. trade deflection. B. trade diversion. C. quotas. D. rules of origin.

D. rules of origin.

The domestic market for​ U.S.-made laptops is shown in the graph to the right . Imports​ (not shown) are 12 million units at a price of​ $1,000. If a tariff is imposed on​ foreign-made laptops, A. the supply of​ U.S.-made laptops will decrease and the demand for​ U.S.-made laptops will increase. B. the supply of​ U.S.-made laptops will increase and the quantity demanded by U.S. producers will increase. C. the demand for​ U.S.-made laptops will increase and the supply of​ U.S.-made laptops will increase. D. the demand for​ U.S.-made laptops will increase and the quantity supplied of​ U.S.-made laptops will increase.

D. the demand for​ U.S.-made laptops will increase and the quantity supplied of​ U.S.-made laptops will increase.

Trade Deflection

Moving partially assembled products into a member nation of a regional trade bloc, completing assembly, and then exporting them to other nations within the bloc, so as to benefit from preferences granted by the trade bloc.

The table to the right is for the neighboring nations of Northland and West Coast and lists maximum feasible hourly rates of production of pastries if no sandwiches are produced and maximum feasible hourly rates of production of sandwiches if no pastries are produced. Assume that the opportunity costs of producing these goods are constant in both nations. The opportunity cost of producing 1 pastry in Northland is 0.50 sandwiches and the opportunity cost of 1 sandwich is 2.00 pastries. The opportunity cost of producing 1 sandwich in West Coast is 0.50 ​pastries, and the opportunity cost of 1 pastry is 2.00 sandwiches. The comparative advantage in producing pastries is held by _____, while __________ the comparative advantage in producing sandwiches

Northland; West Coast possesses

Rules of Origin

Regulations that nations in regional trade blocs establish to delineate product categories eligible for trading preferences.

Dumping

Selling a good or a service abroad below the price charged in the home market or at a price below its cost of production.

Trade Diversion

Shifting existing international trade from countries outside a regional trade bloc to nations within the bloc.

Under the U.S.​ Constitution, from an economic standpoint the United States is essentially a regional free trade bloc. No U.S. state government can establish a tariff on goods manufactured in another U.S. state.​ Recently, the U.S. government placed a 55 percent​ anti-dumping duty on cement imported from Mexico. a. Major Mexican cement firms have responded by buying U.S. cement manufacturing operations in Texas and other states. A few of the Mexican firms have periodically transported some of the resources used to produce cement to those U.S.​ operations, manufactured​ cement, and sold the cement to customers throughout the United States. The Mexican firms are engaging in A. voluntary import expansion. B. trade diversion. C. a voluntary restraint agreement. D. trade deflection. --------------------------------------------------- b. Some critics of this Mexican practice have suggested that cement sold in the United States by​ Mexican-owned operations in the United States should be subjected to rules of origin. Rules of origin may A. protect against trade​ deflections; it may also pose a serious threat to gains from trade made possible by regional trade agreements. B. cause trade diversions and thus help solidify the regional trade agreements. C. not work in this particular case as the U.S. is not really considered to be a regional free trade bloc. D. promote voluntary import expansion from certain countries.

a. D. trade deflection. b. A. protect against trade​ deflections; it may also pose a serious threat to gains from trade made possible by regional trade agreements.

Consider the table to the​ right, which shows possible combinations of hourly outputs of modems and flash memory drives in South Shore and neighboring East​ Isle, in which opportunity costs of producing both products are constant. In South​ Shore, the opportunity cost of producing 1 modem is 2.0 flash drives. In East​ Isle, the opportunity cost of producing 1 modem is 0.50 flash drives. The nation having a comparative advantage in producing modems is therefore _____​, while the nation with the comparative advantage in flash drive production is _____. 1) Which one of the following rates of exchange of modems for flash memory drives will be acceptable to both ​nations? A. 3.0 modems for 1 flash drive. B. 1.0 modem for 1 flash drive. C. 1 flash drive for 2.5 modems. D. None are acceptable to both countries. Now suppose that each nation decides to use all available resources to produce only the good for which it has a comparative advantage and to engage in trade at the single feasible rate of exchange you identified above. Prior to specialization and​ trade, residents of South Shore chose to produce and consume 30 modems per hour and 90 flash drives per​ hour, and residents of East Isle chose to produce and consume 40 modems per hour and 30 flash drives per hour. ​Now, residents of South Shore agree to export to East Isle the same quantity of South​ Shore's specialty good that East Isle residents were consuming prior to engaging in international trade. The quantity of East​ Isle's specialty good that South Shore will import is 2) A. 40 modems. B. 20 modems. C. 30 modems. D. 60 modems.

East Isle, South Shore 1) B. 1.0 modem for 1 flash drive. 2) C. 30 modems.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than other producers.

Infant Industry Argument

The contention that tariffs should be imposed to protect form import competition an industry that is trying to get started. Presumably, after the industry becomes technologically efficient, the tariff can be lifted.

World Trade Organization (WTO)

The successor organization to the GATT that handles trade disputes among its members nations.