Chapter 20: Quiz Review

Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata: Canswicki: 1 can baby formula = 5 cans tuna fish Tunata: 1 can baby formula = 7 cans tuna fish In what product should each nation specialize? Would the following terms of trade be acceptable to both nations?

Canswicki should produce baby formula and Tunata should produce tuna 1 can baby formula ≡ 5.5 cans tuna fish: Yes 1 can baby formula ≡ 4 cans tuna fish: No 1 can baby formula ≡ 8 cans tuna fish: No

Consider the following statement: "The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China." Which ideas of Adam Smith and David Ricardo are represented?

China does not need Smith's absolute advantage to specialize in toys, rather it needs Ricardo's comparative advantage.

In Country A, a worker can make 5 bicycles per hour. In Country B, a worker can make 7 bicycles per hour. Which country has an absolute advantage in making bicycles?

Country B.

True or False: If Country B has an absolute advantage over Country A in producing bicycles, it must also have a comparative advantage over Country A in producing bicycles.

False

The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U. Are comparative-cost conditions such that the two countries should specialize? If so, what product should each produce? What is the total gain in apparel and chemical output that would result from such specialization? What are the limits of the terms of trade? Suppose that the actual terms of trade are 1 unit of apparel for 1½ units of chemicals and that 20,000 units of apparel are exchanged for 30 units of chemicals. What are the gains from specialization and trade for each nation?

Yes China should produce apparel. The United States should produce chemicals. Apparel: 10,000 units Chemicals: 10 tons. 1000 units of apparel for 1 ton of chemicals and 1000 units of apparel for 2 tons of chemicals. China has a gain of 10,000 units of apparel. The United States has a gain of 10 tons of chemicals.

The WTO is a

group that oversees trade agreements reached by member nations and arbitrates trade disputes among them.

Consider the following statement: "The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China." We import these toys from China because

the U.S. has an absolute advantage in producing toys, but China has a comparative advantage in producing toys.

NAFTA is a

trade bloc made up of the United Sates, Canada, and Mexico whose purpose is to reduce tariffs and other trade barriers among the three countries.