Deck 3: Why Everybody Trades: Comparative Advantage

Question 1

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. Which of the following statements is true? $$\begin{array} { | c | c | c | } \hline \text { Labor hours to make: } & \text { In the Urited Kingdorn } & \text { In the Rest of the World } \\\hline \text { l umbrella } & 3.00 & 2.00 \\\hline \text { 1 bushel of corn} & 1.00 & 0.25 \\\hline\end{array}$$

A)The United Kingdom has a comparative advantage in the production of corn.
B)The United Kingdom has an absolute advantage in the production of umbrellas.
C)The United Kingdom has a comparative advantage in the production of umbrellas.
D)The United Kingdom has a comparative advantage in the production of both the goods.

Answer 1

The United Kingdom has a comparative advantage in the production of umbrellas.

Question 2

Consider a two-country, two-commodity model. The table given below shows the units of good X and good Y produced in country A and country B per labor hour. The number of labor hours required to produce 1 unit of good X in country A is: $$\begin{array} { | c | c | c | } \hline \text { Productivity } & \text { Country A } & \text { Country B } \\\hline \text { Good X } & 1.00 & 0.50 \\\hline \text { Good Y } & 0.20 & 0.70 \\\hline\end{array}$$

A)0.5.
B)1.
C)1.43.
D)2.

Answer 2

1.

Question 3

Which of the following is true of mercantilism?

A)Mercantilists believed that free trade is always beneficial for the trading nations.
B)Mercantilists believed that under free trade each of the trading countries benefit equally.
C)Mercantilists believed that a nation does not benefit directly from its exports.
D)Mercantilism believed that national well-being was based on national holdings of gold and silver.

Answer 3

D

Question 4

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. The Rest of the World has an absolute advantage in the production of _____. $$\begin{array} { | c | c | c | } \hline \text { Labor hours to make: } & \text { In the Urited Kingdorn } & \text { In the Rest of the World } \\\hline \text { l umbrella } & 3.00 & 2.00 \\\hline \text { 1 bushel of corn} & 1.00 & 0.25 \\\hline\end{array}$$

A)both corn and umbrella
B)only umbrella
C)only corn
D)neither corn nor umbrella

Question 5

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. What is the opportunity cost of producing a bushel of corn in the United Kingdom? $$\begin{array} { | c | c | c | } \hline \text { Labor hours to make: } & \text { In the Urited Kingdorn } & \text { In the Rest of the World } \\\hline \text { l umbrella } & 3.00 & 2.00 \\\hline \text { 1 bushel of corn} & 1.00 & 0.25 \\\hline\end{array}$$

A)1/8 of an umbrella
B)1/3 of an umbrella
C)3 umbrellas
D)8 umbrellas

Question 6

Consider a two-country, two-commodity model. The table given below shows the units of good X and good Y produced in country A and country B per labor hour. Country B has an absolute advantage in the production of: $$\begin{array} { | c | c | c | } \hline \text { Productivity } & \text { Country A } & \text { Country B } \\\hline \text { Good X } & 1.00 & 0.50 \\\hline \text { Good Y } & 0.20 & 0.70 \\\hline\end{array}$$

A)neither good X nor good Y.
B)both good X and good Y.
C)only good X.
D)only good Y.

Question 7

Consider a two-country, two-commodity model. The table given below shows the units of good X and good Y produced in country A and country B per labor hour. If country A transfers 1 labor hour from the production of good Y to the production of good X, total world production of good X will _____ by _____ units. $$\begin{array} { | c | c | c | } \hline \text { Productivity } & \text { Country A } & \text { Courntry B } \\\hline \text { Good X } & 1.00 & 0.50 \\\hline \text { Good Y } & 0.20 & 0.70 \\\hline\end{array}$$

A)increase; 1
B)decrease; 1.43
C)increase; 0.5
D)decrease; 0.7

Question 8

When Adam Smith presented his theory of absolute advantage, he assumed that all "value" in an economy was determined by and measured in terms of the _____ used in the production of the various goods.

A)area of land
B)labor hours
C)amount of physical capital
D)amount of money

Question 9

Consider a two-country, two-commodity model. The table given below shows the units of good X and good Y produced in country A and country B per labor hour. If country B transfers 1 labor hour from the production of good X to the production of good Y, total world production of good Y will _____ by _____ units. $$\begin{array} { | c | c | c | } \hline \text { Productivity } & \text { Country A } & \text { Courntry B } \\\hline \text { Good X } & 1.00 & 0.50 \\\hline \text { Good Y } & 0.20 & 0.70 \\\hline\end{array}$$

A)increase; 0.7
B)decrease; 1
C)decrease; 1.5
D)increase; 0.5

Question 10

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. If the U.K. and the Rest of the World begin to trade with each other, the international price of umbrellas will lie between _____ and _____. $$\begin{array} { | c | c | c | } \hline \text { Labor hours to make: } & \text { In the Urited Kingdorn } & \text { In the Rest of the World } \\\hline \text { l umbrella } & 3.00 & 2.00 \\\hline \text { 1 bushel of corn} & 1.00 & 0.25 \\\hline\end{array}$$

A)1/3 of a bushel of corn per umbrella; 3 bushels of corn per umbrella
B)3 bushels of corn per umbrella; 8 bushels of corn per umbrella
C)1/8 of a bushel of corn per umbrella; 1/3 of a bushel of corn per umbrella
D)1/8 of a bushel of corn per umbrella; 8 bushels of corn per umbrella

Question 11

Consider a two-country, two-commodity model. The table given below shows the units of good X and good Y produced in country A and country B per labor hour. The number of labor hours required to produce 1 unit of good Y in country B is: $$\begin{array} { | c | c | c | } \hline \text { Productivity } & \text { Country A } & \text { Country B } \\\hline \text { Good X } & 1.00 & 0.50 \\\hline \text { Good Y } & 0.20 & 0.70 \\\hline\end{array}$$

A)0.5.
B)1.
C)1.43.
D)2.

Question 12

Consider a two-country, two-commodity model. The table given below shows the units of good X and good Y produced in country A and country B per labor hour. Which of the following statements is true? $$\begin{array} { | c | c | c | } \hline \text { Productivity } & \text { Country A } & \text { Country B } \\\hline \text { Good X } & 1.00 & 0.50 \\\hline \text { Good Y } & 0.20 & 0.70 \\\hline\end{array}$$

A)Country B has an absolute advantage in the production of both good X and good Y.
B)Country A has an absolute advantage in the production of good X.
C)Country A has an absolute advantage in the production of both good X and good Y.
D)Country B has an absolute advantage in the production of good X.

Question 13

The theory of comparative advantage was proposed by:

A)Adam Smith.
B)Karl Marx.
C)David Ricardo.
D)Eli Heckscher.

Question 14

If country X has higher labor productivity in the production of umbrellas than the rest of the world, we would say that country X has a(n) _____ in the production of umbrellas.

A)comparative advantage
B)absolute advantage
C)absolute disadvantage
D)comparative disadvantage

Question 15

If a country exports the good that it can produce at a low opportunity cost and imports those goods that it would otherwise produce at a high opportunity cost, we say that such trade is based on:

A)the theory of absolute advantage.
B)the arbitrage pricing theory.
C)theory of factor endowments.
D)the theory of comparative advantage.

Question 16

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. The United Kingdom has an absolute advantage in the production of _____. $$\begin{array} { | c | c | c | } \hline \text { Labor hours to make: } & \text { In the Urited Kingdorn } & \text { In the Rest of the World } \\\hline \text { l umbrella } & 3.00 & 2.00 \\\hline \text { 1 bushel of corn} & 1.00 & 0.25 \\\hline\end{array}$$

A)neither corn nor umbrella
B)both corn and umbrella
C)only corn
D)only umbrella

Question 17

_____ wrote the Wealth of Nations

A)David Ricardo
B)Paul Samuelson
C)Adam Smith
D)Karl Marx

Question 18

According to the Mercantilists, governments should:

A)subsidize and encourage imports.
B)subsidize and encourage exports.
C)allow for free trade unencumbered by government regulations and restrictions.
D)not spend much on national defense.

Question 19

Labor productivity refers to:

A)the number of units of output that a worker can produce in one hour.
B)the total number of units of a good that all workers in a firm produce in one day.
C)the number of hours it takes a worker to produce one unit of output.
D)the total numbers of hours it takes all the workers in a firm to produce a given amount of the output in one day.

Question 20

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. Calculate the opportunity cost of producing an umbrella in the Rest of the World. $$\begin{array} { | c | c | c | } \hline \text { Labor hours to make: } & \text { In the Urited Kingdorn } & \text { In the Rest of the World } \\\hline \text { l umbrella } & 3.00 & 2.00 \\\hline \text { 1 bushel of corn} & 1.00 & 0.25 \\\hline\end{array}$$

A)1/8 of a bushel of corn
B)1/3 of a bushel of corn
C)3 bushels of corn
D)8 bushels of corn

Question 21

Which of the following is NOT true of a nation's production-possibility curve?

A)The production-possibility curve shows all combinations of amounts of different products that an economy can produce when its resources are fully employed.
B)Points inside the production-possibility curve are feasible, but may represent unemployment of some of the economy's resources.
C)Points outside the production-possibility curve are not feasible production points given the resources in the economy.
D)The negative slope of the production-possibility curve indicates declining productivity.

Question 22

The table given below shows the number of umbrellas and bushels of corn produced in the United Kingdom and the Rest of the World per labor hour. If the U.K. and the Rest of the World begin to trade with each other, the international price of umbrellas will lie between _____ and _____. $$\begin{array} { l c c } \hline\text { Productivity } & \text { In the United Kingdorn } & \text { In the Rest of the World } \\\hline \text { Umbrellas per labor hour } & 0.25 & 1 \\\text { Bushels of corn per labor hour } & 0.5 & 0.67\\\hline\end{array}$$

A)2/3 bushels of corn per umbrella; 2 bushels of corn per umbrella
B)2/3 bushels of corn per umbrella; 3/2 bushels of corn per umbrella
C)3/2 bushels of corn per umbrella; 3 of a unit of corn
D)1/3 bushels of corn per umbrella; 3 bushels of corn per umbrella

Question 23

The figure given below shows the production possibility curves for Canada (AB) and the Rest of the World (CD). The opportunity cost of producing a bushel of corn in Canada and in the Rest of the World are _____ liters and _____ liters of maple syrup respectively.

A)9/7; 2
B)7/9; 2
C)9/7; 1/2
D)7/9; 1/2

Question 24

The table given below shows the number of umbrellas and bushels of corn produced in the United Kingdom and the Rest of the World per labor hour. If the U.K. and the Rest of the World begin to trade with each other, the international price of corn will lie between _____ and _____. $$\begin{array} { l c c } \hline\text { Productivity } & \text { In the United Kingdorn } & \text { In the Rest of the World } \\\hline \text { Umbrellas per labor hour } & 0.25 & 1 \\\text { Bushels of corn per labor hour } & 0.5 & 0.67\\\hline\end{array}$$

A)2/3 of an umbrella per bushel of corn; 3 umbrellas per bushel of corn
B)2/3 of an umbrella per bushel of corn; 3/2 umbrellas per bushel of corn
C)1/2 of an umbrella per bushel of corn; 3/2 of an umbrella per bushel of corn
D)3/2 umbrellas per bushel of corn; 3 umbrellas per bushel of corn

Question 25

The table given below shows the number of umbrellas and bushels of corn produced in the United Kingdom and the Rest of the World per labor hour. The United Kingdom has a comparative advantage in the production of _____. $$\begin{array} { l c c } \hline\text { Productivity } & \text { In the United Kingdorn } & \text { In the Rest of the World } \\\hline \text { Umbrellas per labor hour } & 0.25 & 1 \\\text { Bushels of corn per labor hour } & 0.5 & 0.67\\\hline\end{array}$$

A)both the goods.
B)neither umbrella nor corn
C)only umbrella
D)only corn

Question 26

The table given below shows the number of labor hours required to produce 1 gallon of wine and 1 pound of cheese in the U.S. and France. The opportunity cost of producing cheese the United States is _____. $$\begin{array} { l c c } \hline \text { Labor hours to make: } & \text { In the United States } & \text { In France } \\\hline \text { 1 gallon of wine } & 4.00 & 1.00 \\\text { 1 pourd of cheese } & 1.00 & 2.00 \\\hline\end{array}$$

A)1 gallon of wine
B)4 gallons of wine
C)0.25 gallons of wine
D)0.5 gallons of wine

Question 27

The table given below shows the number of labor hours required to produce 1 gallon of wine and 1 pound of cheese in the U.S. and France. If the U.S. and France engage in free trade with each other, the international price of wine will lie between _____ and _____. $$\begin{array} { l c c } \hline \text { Labor hours to make: } & \text { In the United States } & \text { In France } \\\hline \text { 1 gallon of wine } & 4.00 & 1.00 \\\text { 1 pourd of cheese } & 1.00 & 2.00 \\\hline\end{array}$$

A)1 pound of cheese per gallon; 4 pounds of cheese per gallon
B)0.5 pounds of cheese per gallon; 4 pounds of cheese per gallon
C)1 pound of cheese per gallon; 2 pounds of cheese per gallon
D)0.5 pounds of cheese per gallon; 2 pounds of cheese per gallon

Question 28

Which of the following is true of a constant cost production-possibility curve?

A)A constant cost production possibilities curve is drawn as a positively sloped straight line.
B)Along a constant cost production possibilities curve, the opportunity cost of producing more of a good is constant.
C)When a country engages in free trade, the constant cost production-possibility curve shifts to the right.
D)A country with a constant cost production-possibility curve partially specializes in the production of goods when it engages in free trade with other nations.

Question 29

The table given below shows the number of umbrellas and bushels of corn produced in the United Kingdom and the Rest of the World per labor hour. The Rest of the World has an absolute advantage in the production of _____. $$\begin{array} { l c c } \hline\text { Productivity } & \text { In the United Kingdorn } & \text { In the Rest of the World } \\\hline \text { Umbrellas per labor hour } & 0.25 & 1 \\\text { Bushels of corn per labor hour } & 0.5 & 0.67\\\hline\end{array}$$

A)both the goods
B)neither corn nor umbrella
C)only umbrella
D)only corn

Question 30

The figure given below shows the production possibility curves for Canada (AB) and the Rest of the World (CD). The opportunity cost of producing one liter of maple syrup in Canada and in the Rest of the World are _____ bushels and _____ bushels of corn respectively.

A)9/7; 2
B)7/9; 2
C)9/7; 1/2
D)7/9; 1/2

Question 31

The table given below shows the number of umbrellas and bushels of corn produced in the United Kingdom and the Rest of the World per labor hour. The opportunity cost of producing a bushel of corn in the United Kingdom is _____. $$\begin{array} { l c c } \hline\text { Productivity } & \text { In the United Kingdorn } & \text { In the Rest of the World } \\\hline \text { Umbrellas per labor hour } & 0.25 & 1 \\\text { Bushels of corn per labor hour } & 0.5 & 0.67\\\hline\end{array}$$

A)2/3 of an umbrella
B)3 umbrellas
C)1/2 of an umbrella
D)2 umbrellas

Question 32

The table given below shows the number of labor hours required to produce 1 gallon of wine and 1 pound of cheese in the U.S. and France. The United States has an absolute advantage in the production of _____. $$\begin{array} { l c c } \hline \text { Labor hours to make: } & \text { In the United States } & \text { In France } \\\hline \text { 1 gallon of wine } & 4.00 & 1.00 \\\text { 1 pourd of cheese } & 1.00 & 2.00 \\\hline\end{array}$$

A)neither wine nor cheese
B)only wine
C)both wine and cheese
D)only cheese

Question 33

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. If the U.K. and the Rest of the World begin to trade with each other, the international price of corn will lie between _____ and _____. $$\begin{array} { | c | c | c | } \hline \text { Labor hours to make: } & \text { In the Urited Kingdorn } & \text { In the Rest of the World } \\\hline \text { l umbrella } & 3.00 & 2.00 \\\hline \text { 1 bushel of corn} & 1.00 & 0.25 \\\hline\end{array}$$

A)1/3 of an umbrella per bushel of corn; 3 umbrellas per bushel of corn
B)3 umbrellas per bushel of corn; 8 umbrellas per bushel of corn
C)1/8 of an umbrella per bushel of corn; 1/3 of an umbrella per bushel of corn
D)1/8 of an umbrella per bushel of corn; 8 umbrellas per bushel of corn

Question 34

The table given below shows the number of labor hours required to produce 1 gallon of wine and 1 pound of cheese in the U.S. and France. If the U.S. and France engage in free trade with each other, the international price of cheese will lie between _____ and _____. $$\begin{array} { l c c } \hline \text { Labor hours to make: } & \text { In the United States } & \text { In France } \\\hline \text { 1 gallon of wine } & 4.00 & 1.00 \\\text { 1 pourd of cheese } & 1.00 & 2.00 \\\hline\end{array}$$

A)0.5 gallons of wine per pound;1 gallon of wine per pound
B)2 gallons of wine per pound; 4 gallons of wine per pound
C)0.25 gallons of wine per pound; 2 gallons of wine per pound
D)1 gallon of wine per pound; 4 gallons of wine per pound

Question 35

Vintland and Moonited Republic produce wine and cheese. The opportunity cost for the production of a bottle of wine in Vintland is 2 pounds of cheese, and in the Moonited Republic is 2.5 pounds of cheese. Based on this information, it can be concluded that:

A)trade between the two countries based on comparative advantage is not possible.
B)Vintland has a comparative advantage in the production of wine.
C)Vintland has a comparative advantage in the production of cheese and Moonited has a comparative advantage in the production of wine.
D)Vintland has an absolute disadvantage in the production of both goods.

Question 36

The table given below shows the number of labor hours required to produce 1 gallon of wine and 1 pound of cheese in the U.S. and France. The United States has a comparative advantage in the production of _____. $$\begin{array} { l c c } \hline \text { Labor hours to make: } & \text { In the United States } & \text { In France } \\\hline \text { 1 gallon of wine } & 4.00 & 1.00 \\\text { 1 pourd of cheese } & 1.00 & 2.00 \\\hline\end{array}$$

A)both the goods
B)only cheese
C)only wine
D)neither cheese nor wine

Question 37

The figure given below shows the production possibility curves for Canada (AB) and the Rest of the World (CD). Suppose Canada begins to trade with the Rest of the World. If in the international market 1 bushel of corn is exchanged for 1 liter of maple syrup, Canada will produce _____ bushels of corn and the Rest of the World will produce _____ liters of maple syrup.

A)35; 32.5
B)70; 50
C)0; 0
D)90; 100

Question 38

The table given below shows the number of labor hours required to produce 1 gallon of wine and 1 pound of cheese in the U.S. and France. What is the relative price of cheese (the price of cheese in terms of wine) in France under no trade situation? $$\begin{array} { l c c } \hline \text { Labor hours to make: } & \text { In the United States } & \text { In France } \\\hline \text { 1 gallon of wine } & 4.00 & 1.00 \\\text { 1 pourd of cheese } & 1.00 & 2.00 \\\hline\end{array}$$

A)2 gallons of wine per pound
B)1 gallon of wine per pound
C)0.5 gallons of wine per pound
D)0.25 gallons of wine per pound

Question 39

The table given below shows the number of umbrellas and bushels of corn produced in the United Kingdom and the Rest of the World per labor hour. The opportunity cost of producing an umbrella in the United Kingdom is _____. $$\begin{array} { l c c } \hline\text { Productivity } & \text { In the United Kingdorn } & \text { In the Rest of the World } \\\hline \text { Umbrellas per labor hour } & 0.25 & 1 \\\text { Bushels of corn per labor hour } & 0.5 & 0.67\\\hline\end{array}$$

A)2 bushels of corn
B)3 bushels of corn
C)3/2 of a bushel of corn
D)1/3 of a bushel of corn

Question 40

A bottle of wine can be produced in France with 2 labor hours, and in the United States with 4 labor hours. A pound of beef can be produced in France with 1 labor hour, and in the United States with ½ labor hours. Which of the following is true in this context?

A)France has a comparative advantage in the production of beef.
B)France has an absolute advantage in the production of beef.
C)The United States has an absolute, but not a comparative advantage in the production of beef.
D)The United States has both comparative and absolute advantage in the production of beef.

Question 41

Adam Smith's theory of absolute advantage is based on the labor theory of value.

Question 42

Briefly discuss the primary features of the mercantilist philosophy. Mention any two major criticisms of the mercantilist theory as put forward by Adam Smith and other economists.

Question 43

Explain how products produced by high-wage workers in the United States can compete with the products manufactured in countries whose workers earn much lower wages.

Question 44

In the two-country two-good model, both countries can gain from trade as long as their relative advantages and disadvantages in producing different goods are different.

Question 45

The opportunity cost of producing a good is the additional labor cost incurred to produce an extra unit of the good.

Question 46

In a two-country two-good model, if a country has an absolute advantage in the production of a certain good, it implies that:

A)it is not possible that this country can gain by importing this good from the other country.
B)this country also has a comparative advantage in the production of this good.
C)it has greater resources than the other country.
D)this country has higher labor productivity in the production of this good.

Question 47

Mercantilists believed that a country gains from international trade only at the expense of another country or countries.

Question 48

Using relevant diagrams, illustrate a two-country two-good model in which one country has an absolute advantage in the production of both goods, but each has a comparative advantage in the production of only one good.

Question 49

In a two-country two-commodity model, if a country has higher labor productivity in producing both the goods, it must produce and export both the goods to the other country.

Question 50

Arbitrage is the act of buying at one place and selling at another place in order to profit from the price differences that exist between the two places.

Question 51

With the help of a suitable diagram, explain how in a two-country two commodity model, one of the countries may fail to specialize completely despite enjoying comparative advantage in one of the goods.

Question 52

Explain how a mutually beneficial trade is possible in a two-country two-good model even when one of the countries has absolute advantage in the production of both the commodities.

Question 53

The production-possibility curve shows various bundles of quantities of two goods that lead to the same level of well-being to the consumers.

Question 54

The act of buying at a low price in one place and selling at a high price in another place is called relative pricing.

Question 55

If country X has a higher labor productivity than the rest of the world in the production of a good, then country X has a comparative advantage in the production of the good.

Question 56

According to the theory of comparative advantage, trade will not occur if one country is less efficient in the production of all products.

Question 57

In a two-country two-good model, if a country has a comparative advantage in the production of a certain good, it implies that this country:

A)also has an absolute advantage in the production of this good.
B)will start importing this good from the other country.
C)can produce this good at a lower opportunity cost than the other country.
D)uses most of its resources in the production of this good .

Question 58

Straight-line production-possibility curves indicate that the opportunity cost of producing additional units of each good is constant.

Question 59

If a country does not have an absolute advantage in the production of at least one commodity, then it cannot gain from free trade.