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CHAPTER 1
THE INTERNATIONAL ECONOMY AND
GLOBALIZATION
MULTIPLE CHOICE
1. A
primary reason why nations conduct international trade is because:
a. Some nations prefer to produce one
thing while others produce other things
b. Resources are not equally distributed
among all trading nations
c. Trade enhances opportunities to
accumulate profits
d. Interest rates are not identical in all
trading nations
2. A
main advantage of specialization results from:
a. Economies of large-scale production
b. The specializing country behaving as a
monopoly
c. Smaller production runs resulting in
lower unit costs
d. High wages paid to foreign workers
3. International
trade in goods and services is sometimes used as a substitute for all of the
following except:
a. International movements of capital
b. International movements of labor
c. Domestic production of the same goods
and services
d. Domestic production of different goods
and services
4. If
a nation has an open economy, it means that the nation:
a. Allows private ownership of capital
b. Has flexible exchange rates
c. Has fixed exchange rates
d. Conducts trade with other countries
5. International
trade forces domestic firms to become more competitive in terms of:
a. The introduction of new products
b. Product design and quality
c. Product price
d. All of the above
6. The
movement to free international trade is most likely to generate short-term
unemployment in which industries?
a. Industries in which there are neither
imports nor exports
b. Import-competing industries
c. Industries that sell to domestic and
foreign buyers
d. Industries that sell to only foreign
buyers
7. International
trade is based on the idea that:
a. Exports should exceed imports
b. Imports should exceed exports
c. Resources are more mobile internationally
than are goods
d. Resources are less mobile
internationally than are goods
8. Arguments
for free trade are sometimes disregarded by politicians because:
a. Maximizing domestic efficiency is not
considered important
b. Maximizing consumer welfare may not be
a chief priority
c. There exist sound economic reasons for
keeping one's economy isolated from other economies
d. Economists tend to favor highly
protected domestic markets
9. How
much physical output a worker producers in an hour's work depends on:
a. The worker's motivation and skill
b. The technology, plant, and equipment in
use
c. How easy the product is to manufacture
d. All of the above
10. The
largest amount of trade with the United States in recent years has been conducted
by:
a. Canada
b. Germany
c. Chile
d. United Kingdom
11. Increased
foreign competition tends to:
a. Intensify inflationary pressures at
home
b. Induce falling output per worker-hour
for domestic workers
c. Place constraints on the wages of domestic
workers
d. Increase profits of domestic
import-competing industries
12. ____
is the ability of a firm/industry, under free and fair market conditions, to
design, produce, and market goods and services that are better and/or cheaper
than those of other firms/industries.
a. Competitiveness
b. Protectionism
c. Comparative advantage
d. Absolute advantage
13. A
firm's ____, relative to that of other firms, is generally regarded as the most
important determinant of competitiveness.
a. Income level
b. Tastes and preferences
c. Governmental regulation
d. Productivity
14. Free
traders maintain that an open economy is advantageous in that it provides all
of the following except:
a. Increased competition for world
producers
b. A wider selection of products for
consumers
c. The utilization of the most efficient
production methods
d. Relatively high wage levels for all
domestic workers
15. Recent
pressures for protectionism in the United States have been motivated by all of
the following except:
a. U.S. firms shipping component
production overseas
b. High profit levels for American
corporations
c. Sluggish rates of productivity growth
in the United States
d. High unemployment rates among American
workers
16. International
trade tends to cause welfare losses to at least some groups in a country:
a. The less mobile the country's resources
b. The more mobile the country's resources
c. The lower the country's initial living
standard
d. The higher the country's initial living
standard
17. For
a nation to maximize its productivity in a global economy:
a. Only imports are necessary
b. Only exports are necessary
c. Both imports and exports are necessary
d. Neither imports nor exports are
necessary
18. A
feasible effect of international trade is that:
a. A monopoly in the home market becomes
an oligopoly in the world market
b. An oligopoly in the home market becomes
a monopoly in the world market
c. A purely competitive firm becomes an
oligopolist
d. A purely competitive firm becomes a
monopolist
19. International
trade in goods and services tends to:
a. Increase all domestic costs and prices
b. Keep all domestic costs and prices at
the same level
c. Lessen the amount of competition facing
home manufacturers
d. Increase the amount of competition
facing home manufacturers
20. The
real income of domestic producers and consumers can be increased by:
a. Technological progress, but not
international trade
b. International trade, but not
technological progress
c. Technological progress and
international trade
d. Neither technological progress nor
international trade
21. In
the United States, automobiles are
a. Imported, but not exported
b. Exported, but not imported
c. Imported and exported
d. Neither exported nor imported
22. Technological
improvements are similar to international trade since they both:
a. Provide benefits for all producers and
consumers
b. Increase the nation's aggregate income
c. Reduce unemployment for all domestic
workers
d. Ensure that industries can operate at
less than full capacity
23. A
sudden shift from import tariffs to free trade may induce short-term
unemployment in:
a. Import-competing industries
b. Industries that are only exporters
c. Industries that sell domestically as
well as export
d. Industries that neither import nor
export
24. Recent
empirical studies indicate that productivity performance in industries is:
a. Directly related to globalization of
industries
b. Inversely related to globalization of
industries
c. Not related to globalization of
industries
d. Any of the above
25. Empirical
research indicates that ____ best enhances productivity gains for firms and
industries.
a. Local competition
b. Regional competition
c. Global competition
d. No competition
26. Increased
globalization is fostered by:
a. Increased tariffs and quotas
b. Restrictions on the migration of labor
c. Reduced transportation costs
d. Restrictions on investment flows
27. A
reduced share of the world export market for the United States would be
attributed to:
a. Decreased productivity in U.S.
manufacturing
b. High incomes of American households
c. Relatively low interest rates in the
United States
d. High levels of investment by American
corporations
28. The
dominant trading nation in the world market following World War II was:
a. United Kingdom
b. Germany
c. South Korea
d. United States
29. A
closed economy is one in which:
a. Imports exactly equal exports, so that
trade is balanced
b. Domestic firms invest in industries
overseas
c. The home economy is isolated from
foreign trade
d. Saving exactly equals investment at
full employment
30. Relative
to countries with low ratios of exports to gross domestic product, countries
having high export to gross domestic product ratios are ____ vulnerable to
changes in the world market.
a. Less
b. More
c. Equally
d. Any of the above
31. Which
of the following is a fallacy of international trade?
a. Trade is a zero-sum activity
b. Exports increase employment in
exporting industries
c. Import restrictions increase employment
in import-competing industries
d. Tariffs and quotas reduce trade volume
32. Foreign
ownership of U.S. financial assets
a. Has decreased since the 1960's
b. Has increased since the 1960's
c. Has made the U.S. a net borrower since
the late 1980's
d. Both a and c
33. The
first wave of globalization was brought to an end by
a. The Great Depression
b. The Second World War
c. The First World War
d. The Smoot-Hawley Act
34. Multilateral
trade negotiations have led to
a. Continued trade liberalization
b. Financial liberalization
c. Increased investment
d. All of the above
TRUE/FALSE
1. Important
trading partners of the United States include Canada, Mexico, Japan, and China.
2. The
United States exports a larger percentage of its gross domestic product than
Japan, Germany, and Canada.
3. Opening
the economy to international trade tends to lessen inflationary pressures at
home.
4. The
benefits of international trade accrue in the forms of lower domestic prices,
development of more efficient methods and new products, and a greater range of
consumption choices.
5. In
an open trading system, a country will import those commodities that it
produces at relatively low cost while exporting commodities that can be
produced at relatively high cost.
6. Although
free trade provides benefits for consumers, it is often argued that import
protection should be provided to domestic producers of strategic goods and
materials vital to the nation's security.
7. In
the long run, competitiveness depends on an industry's natural resources, its
stock of machinery and equipment, and the skill of its workers in creating
goods that people want to buy.
8. If
a nation has an open economy, it means that the nation allows private ownership
of capital.
9. Increased
foreign competition tends to increase profits of domestic import-competing
companies.
10. Restrictive
trade policies have resulted in U.S. producers of minerals and metals supplying
all of the U.S. consumers' needs.
SHORT ANSWER
1. What
is the most important factor which contributes to competitiveness?
2. What
are the challenges of the international trading system?
ESSAY
1. Does
exposure to competition with the world leader in a particular industry improve
a firm's productivity?
2. What
are the essential arguments in favor of free trade?
CHAPTER 2—FOUNDATIONS OF MODERN
TRADE THEORY: COMPARATIVE ADVANTAGE
MULTIPLE CHOICE
1. The
mercantilists would have objected to:
a. Export promotion policies initiated by
the government
b. The use of tariffs or quotas to
restrict imports
c. Trade policies designed to accumulate
gold and other precious metals
d. International trade based on open
markets
2. Unlike
the mercantilists, Adam Smith maintained that:
a. Trade benefits one nation only at the
expense of another nation
b. Government control of trade leads to
maximum economic welfare
c. All nations can gain from free
international trade
d. The world's output of goods must remain
constant over time
3. The
trading principle formulated by Adam Smith maintained that:
a. International prices are determined
from the demand side of the market
b. Differences in resource endowments determine
comparative advantage
c. Differences in income levels govern
world trade patterns
d. Absolute cost differences determine the
immediate basis for trade
4. Unlike
Adam Smith, David Ricardo's trading principle emphasizes the:
a. Demand side of the market
b. Supply side of the market
c. Role of comparative costs
d. Role of absolute costs
5. When
a nation requires fewer resources than another nation to produce a product, the
nation is said to have a:
a. Absolute advantage in the production of
the product
b. Comparative advantage in the production
of the product
c. Lower marginal rate of transformation
for the product
d. Lower opportunity cost of producing the
product
6. According
to the principle of comparative advantage, specialization and trade increase a
nation's total output since:
a. Resources are directed to their highest
productivity
b. The output of the nation's trading
partner declines
c. The nation can produce outside of its
production possibilities curve
d. The problem of unemployment is
eliminated
7. In
a two-product, two-country world, international trade can lead to increases in:
a. Consumer welfare only if output of both
products is increased
b. Output of both products and consumer
welfare in both countries
c. Total production of both products, but
not consumer welfare in both countries
d. Consumer welfare in both countries, but
not total production of both products
8. As
a result of international trade, specialization in production tends to be:
a. Complete with constant costs--complete
with increasing costs
b. Complete with constant
costs--incomplete with increasing costs
c. Incomplete with constant
costs--complete with increasing costs
d. Incomplete with constant
costs--incomplete with increasing costs
9. A
nation that gains from trade will find its consumption point being located:
a. Inside its production possibilities
curve
b. Along its production possibilities
curve
c. Outside its production possibilities
curve
d. None of the above
Table
2.1. Output Possibilities of the U.S. and the U.K.
Output per Worker per day
Country Tons of Steel Televisions
United
States 15 45
United
Kingdom 10 20
10. Referring
to Table 2.1, the United States has the absolute advantage in the production
of:
a. Steel
b. Televisions
c. Both steel and televisions
d. Neither steel nor televisions
11. Referring
to Table 2.1, the United Kingdom has a comparative advantage in the production
of:
a. Steel
b. Televisions
c. Both steel and televisions
d. Neither steel nor televisions
12. Refer
to Table 2.1. If trade opens up between the United States and the United
Kingdom, American firms should specialize in producing:
a. Steel
b. Televisions
c. Both steel and televisions
d. Neither steel nor televisions
13. Referring
to Table 2.1, the opportunity cost of producing one ton of steel in the United
States is:
a. 3 televisions
b. 10 televisions
c. 20 televisions
d. 45 televisions
14. Refer
to Table 2.1. Mutually advantageous trade will occur between the United States
and the United Kingdom so long as one ton of steel trades for:
a. At least 1 television, but no more than
2 televisions
b. At least 2 televisions, but no more
than 3 televisions
c. At least 3 televisions, but no more
than 4 televisions
d. At least 4 televisions, but no more
than 5 televisions
15. Referring
to Table 2.1, the United Kingdom gains most from trade if:
a. 1 ton of steel trades for 2 televisions
b. 1 ton of steel trades for 3 televisions
c. 2 tons of steel trade for 4 televisions
d. 2 tons of steel trade for 5 televisions
16. Concerning
international trade restrictions, which of the following is false? Trade
restrictions:
a. Limit specialization and the division
of labor
b. Reduce the volume of trade and the
gains from trade
c. Cause nations to produce inside their
production possibilities curves
d. May result in a country producing some
of the product of its comparative disadvantage
17. If
a production possibilities curve is bowed out (i.e., concave) in appearance,
production occurs under conditions of:
a. Constant opportunity costs
b. Increasing opportunity costs
c. Decreasing opportunity costs
d. Zero opportunity costs
18. Increasing
opportunity costs suggest that:
a. Resources are not perfectly shiftable
between the production of two goods
b. Resources are fully shiftable between
the production of two goods
c. A country's production possibilities
curve appears as a straight line
d. A country's production possibilities
curve is bowed inward (i.e., convex) in appearance
19. The
trading-triangle concept is used to indicate a nation's:
a. Exports, marginal rate of
transformation, terms of trade
b. Imports, terms of trade, marginal rate
of transformation
c. Marginal rate of transformation,
imports, exports
d. Terms of trade, exports, imports
20. Assuming
increasing cost conditions, trade between two countries would not be likely if
they have:
a. Identical demand conditions but
different supply conditions
b. Identical supply conditions but
different demand conditions
c. Different supply conditions and
different demand conditions
d. Identical demand conditions and
identical supply conditions
Table
2.2. Output possibilities for South Korea and Japan
Output per worker per day
Country Tons of steel VCRs
South
Korea 80 40
Japan 20 20
21. Referring
to Table 2.2, the opportunity cost of one VCR in Japan is:
a. 1 ton of steel
b. 2 tons of steel
c. 3 tons of steel
d. 4 tons of steel
22. Referring
to Table 2.2, the opportunity cost of one VCR in South Korea is:
a. 1/2 ton of steel
b. 1 ton of steel
c. 1 1/2 tons of steel
d. 2 tons of steel
23. Refer
to Table 2.2. According to the principle of absolute advantage, Japan should:
a. Export steel
b. Export VCRs
c. Export steel and VCRs
d. None of the above; there is no basis
for gainful trade
24. Refer
to Table 2.2. According to the principle of comparative advantage:
a. South Korea should export steel
b. South Korea should export steel and
VCRs
c. Japan should export steel
d. Japan should export steel and VCRs
25. Refer
to Table 2.2. With international trade, what would be the maximum amount of
steel that South Korea would be willing to export to Japan in exchange for each
VCR?
a. 1/2 ton of steel
b. 1 ton of steel
c. 1-1/2 tons of steel
d. 2 tons of steel
26. Refer
to Table 2.2. With international trade, what would be the maximum number of
VCRs that Japan would be willing to export to South Korea in exchange for each
ton of steel?
a. 1 VCR
b. 2 VCRs
c. 3 VCRs
d. 4 VCRs
27. The
earliest statement of the principle of comparative advantage is associated
with:
a. Adam Smith
b. David Ricardo
c. Eli Heckscher
d. Bertil Ohlin
28. If
Hong Kong and Taiwan had identical labor costs but were subject to increasing
costs of production:
a. Trade would depend on differences in
demand conditions
b. Trade would depend on economies of
large-scale production
c. Trade would depend on the use of
different currencies
d. There would be no basis for gainful
trade
29. If
the international terms of trade settle at a level that is between each
country's opportunity cost:
a. There is no basis for gainful trade for
either country
b. Both countries gain from trade
c. Only one country gains from trade
d. One country gains and the other country
loses from trade
30. International
trade is based on the notion that:
a. Different currencies are an obstacle to
international trade
b. Goods are more mobile internationally
than are resources
c. Resources are more mobile
internationally than are goods
d. A country's exports should always
exceed its imports
Figure
2.1. Production Possibilities Schedule
31. Referring
to Figure 2.1, the relative cost of steel in terms of aluminum is:
a. 4.0 tons
b. 2.0 tons
c. 0.5 tons
d. 0.25 tons
32. Referring
to Figure 2.1, the relative cost of aluminum in terms of steel is:
a. 4.0 tons
b. 2.0 tons
c. 0.5 tons
d. 0.25 tons
33. Refer
to Figure 2.1. If the relative cost of steel were to rise, then the production
possibilities schedule would:
a. Become steeper
b. Become flatter
c. Shift inward in a parallel manner
d. Shift outward in a parallel manner
34. Refer
to Figure 2.1. If the relative cost of aluminum were to rise, then the
production possibilities schedule would:
a. Become steeper
b. Become flatter
c. Shift inward in a parallel manner
d. Shift outward in a parallel manner
35. When
a nation achieves autarky equilibrium:
a. Input price equals final product price
b. Labor productivity equals the wage rate
c. Imports equal exports
d. Production equals consumption
36. When
a nation is in autarky and maximizes its living standard, its consumption and
production points are:
a. Along the production possibilities
schedule
b. Above the production possibilities
schedule
c. Beneath the production possibilities
schedule
d. Any of the above
37. If
Canada experiences increasing opportunity costs, its supply schedule of steel
will be:
a. Downward-sloping
b. Upward-sloping
c. Horizontal
d. Vertical
38. If
Canada experiences constant opportunity costs, its supply schedule of steel
will be:
a. Downward-sloping
b. Upward-sloping
c. Horizontal
d. Vertical
39. The
gains from international trade increase as:
a. A nation consumes inside of its
production possibilities schedule
b. A nation consumes along its production
possibilities schedule
c. The international terms of trade rises
above the nation's autarky price
d. The international terms of trade
approaches the nation's autarky price
40. In
a two-country, two-product world, the statement "Japan enjoys a
comparative advantage over France in steel relative to bicycles" is
equivalent to:
a. France having a comparative advantage
over Japan in bicycles relative to steel
b. France having a comparative
disadvantage against Japan in bicycles and steel
c. Japan having a comparative advantage
over France in steel and bicycles
d. Japan having a comparative disadvantage
against Japan in bicycles and steel
41. Ricardo's
theory of comparative advantage was of limited real-world validity because it
was founded on the:
a. Labor theory of value
b. Capital theory of value
c. Land theory of value
d. Entrepreneur theory of value
42. Assume
that labor is the only factor of production and that wages in the United States
equal $20 per hour while wages in the United Kingdom equal $10 per hour.
Production costs would be lower in the United States than the United Kingdom
if:
a. U.S. labor productivity equaled 40
units per hour while U.K. labor productivity equaled 15 units per hour
b. U.S. labor productivity equaled 30
units per hour while U.K. labor productivity equaled 20 units per hour
c. U.S. labor productivity equaled 20
units per hour while U.K. labor productivity equaled 30 units per hour
d. U.S. labor productivity equaled 15 units
per hour while U.K. labor productivity equaled 25 units per hour
43. According
to Ricardo, a country will have a comparative advantage in the product in which
its:
a. Labor productivity is relatively low
b. Labor productivity is relatively high
c. Labor mobility is relatively low
d. Labor mobility is relatively high
44. The
Ricardian model of comparative advantage is based on all of the following
assumptions except:
a. Only two nations and two products
b. Product quality varies among nations
c. Labor is the only factor of production
d. Labor can move freely within a nation
45. The
writings of G. MacDougall emphasized which of the following as an explanation
of a country's competitive position?
a. National income levels
b. Relative endowments of natural
resources
c. Domestic tastes and preferences
d. Labor compensation and productivity
levels
46. The
introduction of community indifference curves into our trading example focuses
attention on the nation's:
a. Income level
b. Resource prices
c. Tastes and preferences
d. Productivity level
47. Introducing
indifference curves into our trade model permits us to determine:
a. Where a nation chooses to locate along
its production possibilities curve in autarky
b. The precise location of a nation's
production possibilities curve
c. Whether absolute cost or comparative
cost conditions exist
d. The currency price of one product in
terms of another product
48. In
the absence of trade, a nation is in equilibrium where a community indifference
curve:
a. Lies above its production possibilities
curve
b. Is tangent to its production
possibilities curve
c. Intersects its production possibilities
curve
d. Lies below its production possibilities
curve
49. The
use of indifference curves helps us determine the point:
a. Along the terms-of-trade line a country
will choose
b. Where a country maximizes its resource
productivity
c. At which a country ceases to become
competitive
d. Where the marginal rate of
transformation approaches zero
50. With
trade, a country will maximize its satisfaction when it:
a. Moves to the highest possible
indifference curve
b. Forces the marginal rate of
substitution to its lowest possible value
c. Consumes more of both goods than it
does in autarky
d. Finds its marginal rate of substitution
exceeding its marginal rate of transformation
51. Trade
between two nations would not be possible if they have:
a. Identical community indifference curves
but different production possibilities curves
b. Identical production possibilities
curves but different community indifference curves
c. Different production possibilities
curves and different community indifference curves
d. Identical production possibilities
curves and identical community indifference curves
52. Given
a two-country and two-product world, the United States would enjoy all the
attainable gains from free trade with Canada if it:
a. Trades at the U.S. rate of
transformation
b. Trades at the Canadian rate of
transformation
c. Specializes completely in the
production of both goods
d. Specializes partially in the production
of both goods
53. John
Stuart Mill's theory of reciprocal demand best applies when trading partners:
a. Are of equal size and importance in the
market
b. Produce under increasing cost
conditions
c. Partially specialize in the production
of commodities
d. Have similar taste and preference
levels
54. The
equilibrium prices and quantities established after trade are fully determinate
if we know:
a. The location of all countries'
indifference curves
b. The shape of each country's production
possibilities curve
c. The comparative costs of each trading
partner
d. The strength of world supply and demand
for each good
55. "The
equilibrium relative commodity price at which trade takes place is determined
by the conditions of demand and supply for each commodity in both nations.
Other things being equal, the nation with the more intense demand for the other
nation's exported good will gain less from trade than the nation with the less
intense demand." This statement was first proposed by:
a. Alfred Marshall with offer curve
analysis
b. John Stuart Mill with the theory of
reciprocal demand
c. Adam Smith with the theory of absolute
advantage
d. David Ricardo with the theory of
comparative advantage
56. Which
of the following terms-of-trade concepts is calculated by dividing the change
in a country's export price index by the change in its import price index
between two points in time, multiplied by 100 to express the terms of trade in
percentages?
a. Commodity terms of trade
b. Marginal rate of transformation
c. Marginal rate of substitution
d. Autarky price ratio
57. The
best explanation of the gains from trade that David Ricardo could provide was
to describe only the outer limits within which the equilibrium terms of trade
would fall. This is because Ricardo's theory did not recognize how market
prices are influenced by:
a. Demand conditions
b. Supply conditions
c. Business expectations
d. Profit patterns
58. Under
free trade, Sweden enjoys all of the gains from trade with Holland if Sweden:
a. Trades at Holland's rate of
transformation
b. Trades at Sweden's rate of
transformation
c. Specializes completely in the
production of its export good
d. Specializes partially in the production
of its export good
59. Because
the Ricardian trade theory recognized only how supply conditions influence
international prices, it could determine:
a. The equilibrium terms of trade
b. The outer limits for the terms of trade
c. Where a country chooses to locate along
its production possibilities curve
d. Where a country chooses to locate along
its trade triangle
60. The
terms of trade is given by the prices:
a. Paid for all goods imported by the home
country
b. Received for all goods exported by the
home country
c. Received for exports and paid for
imports
d. Of primary products as opposed to
manufactured products
Table
2.3. Terms of Trade
Export
Price Index Import Price Index
Country 1990 2004 1990 2004
Mexico 100 220 100 200
Sweden 100 160 100 150
Spain 100 155 100 155
France 100 170 100 230
Denmark 100 120 100 125
61. Referring
to Table 2.3, which countries' terms of trade improved between 1990 and 2004?
a. Mexico and Denmark
b. Sweden and Denmark
c. Sweden and Spain
d. Mexico and Sweden
62. Referring
to Table 2.3, which countries' terms of trade worsened between 1990 and 2004?
a. Spain and Mexico
b. Mexico and France
c. France and Denmark
d. Denmark and Sweden
63. Referring
to Table 2.3, which country's terms of trade did not change between 1990 and
2004?
a. Spain
b. Sweden
c. France
d. Denmark
64. Given
free trade, small nations tend to benefit the most from trade since they:
a. Are more productive than their large
trading partners
b. Are less productive than their large
trading partners
c. Have demand preferences and income
levels lower than their large trading partners
d. Enjoy terms of trade lying near the
opportunity costs of their large trading partners
65. A
terms-of-trade index that equals 150 indicates that compared to the base year:
a. It requires a greater output of
domestic goods to obtain the same amount of foreign goods
b. It requires a lesser amount of domestic
goods to obtain the same amount of foreign goods
c. The price of exports has risen from
$100 to $150
d. The price of imports has risen from
$100 to $150
66. A
term-of-trade index that equals 90 indicates that compared to the base year:
a. It requires a greater output of
domestic goods to obtain the same amount of foreign goods
b. It requires a lesser amount of domestic
goods to obtain the same amount of foreign goods
c. The price of exports has fallen from
$100 to $90
d. The price of imports has fallen from
$100 to $90
67. The
theory of reciprocal demand does not well apply when one country:
a. Produces under constant cost conditions
b. Produces along its production
possibilities curve
c. Is of minor economic importance in the
world marketplace
d. Partially specializes the production of
its export good
68. The
terms of trade is given by:
a. (Price of exports/price of imports)
100
b. (Price of exports/price of imports) +
100
c. (Price of exports/price of imports)
100
d. (Price of exports/price of imports)
100
69. If
Japan and France have identical production possibilities curves and identical
community indifference curves:
a. Japan will enjoy all the gains from
trade
b. France will enjoy all the gains from
trade
c. Japan and France share equally in the
gains from trade
d. Gainful specialization and trade are
not possible
70. A
rise in the price of imports or a fall in the price of exports will:
a. Improve the terms of trade
b. Worsen the terms of trade
c. Expand the production possibilities
curve
d. Contract the production possibilities
curve
71. A
fall in the price of imports or a rise in the price of exports will:
a. Improve the terms of trade
b. Worsen the terms of trade
c. Expand the production possibilities
curve
d. Contract the production possibilities
curve
72. Under
free trade, Canada would not enjoy any gains from trade with Sweden if Canada:
a. Trades at the Canadian rate of
transformation
b. Trades at Sweden's rate of
transformation
c. Specializes completely in the
production of its export good
d. Specializes partially in the production
of its export good
Figure
2.2 illustrates trade data for Canada. The figure assumes that Canada attains
international trade equilibrium at point C.
Figure
2.2. Canadian Trade Possibilities
73. Consider
Figure 2.2. In the absence of trade, Canada would produce and consume:
a. 8 televisions and 16 refrigerators
b. 12 televisions and 16 refrigerators
c. 8 televisions and 12 refrigerators
d. 12 televisions and 8 refrigerators
74. Referring
to Figure 2.2, Canada has a comparative advantage in:
a. Televisions
b. Refrigerators
c. Televisions and refrigerators
d. Neither televisions nor refrigerators
75. Consider
Figure 2.2. With specialization, Canada produces:
a. 16 televisions
b. 12 televisions and 8 refrigerators
c. 8 televisions and 16 refrigerators
d. 24 refrigerators
76. Consider
Figure 2.2. With trade, Canada consumes:
a. 12 televisions and 8 refrigerators
b. 12 televisions and 16 refrigerators
c. 8 televisions and 16 refrigerators
d. 24 refrigerators
77. According
to Figure 2.2, exports for Canada total:
a. 16 refrigerators
b. 8 refrigerators
c. 12 refrigerators
d. 16 refrigerators
78. According
to Figure 2.2, imports for Canada total:
a. 6 televisions
b. 8 televisions
c. 12 televisions
d. 16 televisions
79. Concerning
possible determinants of international trade, which are sources of comparative
advantage? Differences in:
a. Methods of production
b. Tastes and preferences
c. Technological know-how
d. All of the above
80. Ricardo's
model of comparative advantage assumed all of the following except:
a. In each nation, labor is the only input
b. Costs do not vary with the level of
production
c. Perfect competition prevails in all
markets
d. Transportation costs rise as distance
increases between countries
81. Ricardo's
model of comparative advantage assumed all of the following except:
a. Trade is balanced, thus ruling out
flows of money between nations
b. Firms make production decisions in an
attempt to maximize profits
c. Free trade occurs between nations
d. Labor is immobile within a country, but
is incapable of moving between countries
82. The
dynamic gains from trade include all of the following except:
a. Economies of large-scale production
resulting in decreasing unit cost
b. Increased saving and investment
resulting in economic growth
c. Increased competition resulting in
lower prices and wider range of output
d. Increasing comparative advantage
leading to specialization
83. All
of the following may be exit barriers except
a. Employee health benefit costs
b. Treatment, storage and disposal costs
c. Penalties for terminating contracts
with raw material suppliers
d. Increasing opportunity cost of
production
84. Incomplete
specialization may be caused by
a. Increasing opportunity cost
b. Unrestricted trade
c. Constant opportunity cost
d. Decreasing opportunity cost
85. Improvements
in productivity may lead to decreasing comparative costs if
a. The assumption of fixed technologies
under constant costs is relaxed
b. Technologies available to each nation
is allowed to differ
c. Resource endowments are allowed to vary
d. All of the above
86. Adam
Smith
a. Was a leading advocate of free trade
b. Developed the concept of absolute
advantage
c. Maintained that labor costs represent
the major determinant of production cost
d. All of the above
87. Modern
trade theory contends that the pattern of world trade is governed by
a. Differences in supply conditions and
demand conditions
b. Supply conditions only
c. Demand conditions only
d. None of the above
88. When
nations are of similar size, and have similar taste patterns, the gains from
trade
a. Are shared equally between them
b. Are impossible to determine
c. Are too small, so that trading is not
beneficial
d. Are determined by the nation that has
comparative advantage in the more essential product
89. The
commodity terms of trade measures
a. The rate at which exports exchange for
imports
b. The influence trade has on productivity
levels
c. The effect on income of the trading
nation
d. The improvement in a nation's welfare
TRUE/FALSE
1. According
to the mercantilists, a nation's welfare would improve if it maintained a
surplus of exports over imports.
2. The
mercantilists maintained that a free-trade policy best enhances a nation's
welfare.
3. The
mercantilists contended that because one nation's gains from trade come the
expense of its trading partners, not all nations could simultaneously realize
gains from trade.
4. According
to the price-specie-flow-doctrine, a trade-surplus nation would experience gold
outflows, a decrease in its money supply, and a fall in its price level.
5. The
trade theories of Adam Smith and David Ricardo viewed the determination of competitiveness
from the demand side of the market.
6. According
to the principle of absolute advantage, international trade is beneficial to
the world if one nation has an absolute cost advantage in the production of one
good while the other nation has an absolute cost advantage in the other good.
7. The
principle of absolute advantage asserts that mutually beneficial trade can
occur even if one nation is absolutely more efficient in the production of all
goods.
8. The
basis for trade is explained by the principle of absolute advantage according
to David Ricardo and the principle of comparative advantage according to Adam
Smith.
9. The
principle of comparative advantage contends that a nation should specialize in
and export the good in which its absolute advantage is smallest or its absolute
disadvantage is greatest.
10. The
Ricardian theory of comparative advantage assumes only two nations and two
products, labor can move freely within a nation, and perfect competition exists
in all markets.
11. Assume
that the United States is more efficient than the United Kingdom in the
production of all goods. Mutually beneficial trade is possible according to the
principle of absolute advantage, but is impossible according to the principle
of comparative advantage.
12. It
is possible for a nation not to have an absolute advantage in anything; but it
is not possible for one nation to have a comparative advantage in everything
and the other nation to have a comparative advantage in nothing.
13. Ricardo's
theory of comparative advantage was of limited relevance to the real world
since it assumed that labor was only one of several factors of production.
14. Compared
to Ricardian trade theory, modern trade theory provides a more general view of
comparative advantage since it is based on all factors of production rather
than just labor.
15. Constant
opportunity costs suggest that the relative cost of producing one product in
terms of the other will remain the same no matter where a nation chooses to
locate on its production-possibilities schedule.
16. There
are two explanations of constant opportunity costs: (1) factors of production
are imperfect substitutes for each other; (2) all units of a given factor have
different qualities.
17. With
increasing opportunity costs, a nation totally specializes in the production of
the commodity of its comparative advantage; with constant opportunity costs, a
nation partially specializes in the production of the commodity of its comparative
advantage.
18. A
nation's trade triangle denotes its exports, imports, and terms of trade.
19. International
trade leads to increased welfare if a nation can achieve a post-trade
consumption point lying inside of its production-possibilities schedule.
20. If
the U.S. post-trade consumption point lies along its production possibilities
schedule, the United States achieves a higher level of welfare with trade than
without trade.
21. If
productivity in the German computer industry grows faster than it does in the
Japanese computer industry, the opportunity cost of each computer produced in
Japan increases relative to the opportunity cost of a computer produced in
Germany.
22. If
Japan loses competitiveness in computers, Japanese computer workers lose jobs
to foreign computer workers and the wages of Japanese computer workers tend to
fall relative to the wages of foreign computer workers.
23. With
constant opportunity costs, a nation will achieve the greatest possible gains
from trade if it partially specializes in the production of the commodity of
its comparative disadvantage.
24. By
reducing the overall volume of trade, import restrictions tend to reduce a
nation's gains from trade.
25. With
increasing opportunity costs, comparative advantage depends on a nation's
supply conditions and demand conditions; with constant opportunity costs,
comparative advantage depends only on demand conditions.
26. According
to the principle of comparative advantage, an open trading system results in
resources being channeled from uses of low productivity to those of high
productivity.
27. The
existence of exit barriers tends to delay the closing of inefficient firms that
face international competitive disadvantages.
28. MacDougall's
empirical study of comparative advantage was based on the notion that a
product's labor cost is underlaid by labor productivity and the wage rate.
29. The
MacDougall study of comparative advantage hypothesized that in those industries
in which U.S. labor productivity was relatively high, U.S. exports to the world
should be lower than U.K. exports to the world, after adjusting for wage
differentials.
30. The
basic idea of mercantilism was that wealth consisted of the goods and services
produced by a nation.
31. According
to Adam Smith, international trade was a "win-win" situation since
all nations could enjoy gains from trade.
32. The
price-specie-flow mechanism illustrated why one nation's gains from trade were
accompanied by another country's losses.
33. Complete
specialization usually occurs under the assumption of increasing opportunity
costs.
34. Adam
Smith contended that gold, silver, and other precious metals constituted the
wealth of a nation.
35. The
price-specie-flow mechanism illustrated why nations could not maintain trade
surpluses or trade deficits over the long run.
36. The
marginal rate of transformation equals the absolute slope of a country's
production possibilities schedule.
37. Assume
that Germany has higher labor productivity and higher wage levels than France.
Germany can produce a commodity more cheaply than France if its productivity
differential more than offsets its wage differential.
38. Ricardo's
theory of comparative advantage does not take into account demand conditions
when determining relative commodity prices.
39. If
Canada has a higher wage level and higher labor productivity than Mexico,
Canada will necessarily produce a good at a higher labor cost than Mexico.
40. If
Argentina has a comparative advantage over Brazil in beef relative to coffee,
Argentina will specialize in beef production.
41. Modern
trade theory recognizes that the pattern of world trade is governed by both
demand conditions and supply conditions.
42. A
nation achieves autarky equilibrium at the point where its community
indifference curve is tangent to its production possibilities schedule.
43. In
autarky equilibrium, a nation realizes the lowest possible level of satisfaction
given the constraint of its production possibilities schedule.
44. A
nation benefits from international trade if it can achieve a higher
indifference curve than it can in autarky.
45. A
nation realizes maximum gains from trade at the point where the international
terms-of-trade line is tangent to its community indifference curve.
46. The
Ricardian theory of comparative advantage could fully explain the distribution
of the gains from trade among trading partners.
47. Because
the Ricardian theory of comparative advantage was based only on a nation's
demand conditions, it could not fully explain the distribution of the gains
from trade among trading partners.
48. Because
the Ricardian theory of comparative advantage was based only on a nation's
supply conditions, it could only determine the outer limits within which the
equilibrium terms of trade would lie.
49. The
domestic cost ratios of nations set the outer limits to the equilibrium terms
of trade.
50. Mutually
beneficial trade for two countries occurs if the equilibrium terms of trade
lies between the two countries' domestic cost ratios.
51. Assume
that the United States and Canada engage in trade. If the international terms
of trade coincides with the U.S. cost ratio, the United States realizes all of
the gains from trade with Canada.
52. Assume
that the United States and Canada engage in trade. If the international terms
of trade coincides with the Canadian cost ratio, the United States realizes all
of the gains from trade with Canada.
53. If
the international terms of trade lies beneath (inside) the Mexican cost ratio,
Mexico is worse off with trade than without trade.
54. Although
J. S. Mill recognized that the region of mutually beneficial trade is bounded
by the cost ratios of two countries, it was not until David Ricardo developed
the theory of reciprocal demand that the equilibrium terms of trade could be
determined.
55. According
to J. S. Mill, if we know the domestic demand expressed by both trading
partners for both products, the equilibrium terms of trade can be defined.
56. The
theory of reciprocal demand asserts that as the U.S. demand for Canadian wheat
rises, the equilibrium terms of trade improve for the United States.
57. Assume
that Canada has a comparative advantage in wheat and a comparative disadvantage
in autos. As the Canadian demand for wheat increases, Canada's equilibrium
terms of trade improves.
58. The
theory of reciprocal demand best applies when two countries are of equal
economic size, so that the demand conditions of each nation have a noticeable
impact on market prices.
59. The
theory of reciprocal demand best applies when one country has a
"large" economy and the other country has a "small"
economy.
60. If
two nations of approximately the same size and with similar taste patterns
participate in international trade, the gains from trade tend to be shared
about equally between them.
61. The
expression "importance of being unimportant" suggests that if one
nation is much larger than the other, the larger nation realizes most of the
gains from trade while the smaller nation realizes fewer gains from trade.
62. An
improvement in a nation's terms of trade occurs if the prices of its exports
rise relative to the prices of its imports over a given time period.
63. If
a country's terms of trade worsen, it must exchange fewer exports for a given
amount of imports.
64. If
a country's terms of trade improve, it must exchange more exports for a given
amount of imports.
65. The
terms of trade represents the rate of exchange between a country's exports and
imports.
66. Assume
1990 to be the base year. If by the end of 2004 a country's export price index
rose from 100 to 130 while its import price index rose from 100 to 115, its
terms of trade would equal 113.
67. Assume
1990 to be the base year. If by the end of 2004 a country's export price index
rose from 100 to 140 while its import price index rose from 100 to 160, its
terms of trade would equal 120.
68. Assume
1990 to be the base year. If by the end of 2004 a country's export price index
rose from 100 to 125 while its import price index rose from 100 to 125, its
terms of trade would equal 100.
69. The
commodity terms of trade are found by dividing a country's import price index
by its export price index.
70. For
the commodity terms of trade to improve, a country's export price index must
rise relative to its import price index over a given time period.
71. For
the commodity terms of trade to improve, a country's import price index must
rise relative to its export price index over a given time period.
SHORT ANSWER
1. Is
it possible to add up the preferences of all consumers in an entire nation?
2. Who
gains more from trade, when nations are of unequal economic size?
3. Is
it possible for comparative advantage to change, thus changing the direction of
trade?
4. Do
national security concerns lead to incomplete specialization?
ESSAY
1. Will
it be impossible to keep low-skilled jobs in the U.S.?
2. Is
it possible to estimate the gains from trade?
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