Deck 3: The Classical Model of International Trade

Question 1

If factors of production cannot flow between countries

A) there is no reason to expect that wages should be equal worldwide.
B) multinational corporations would not exist.
C) trade in goods could still occur.
D) All of the above.

Answer 1

D

Question 2

Countries with low wages will always be able to export to countries with high wages.

Answer 2

False

Question 3

Which of the following statements about international trade is true?

A) Potentially, a country can have absolute advantage in all goods.
B) Potentially, a country can have relative advantage in all goods.
C) After trade, countries tend to specialize in the production of those goods in which they enjoy absolute advantage.
D) None of the above is true.

Answer 3

A

Question 4

The classical theory predicts that

A) countries will completely specialize in the production of export goods.
B) considerable trade will occur between countries with different levels of technology.
C) small countries could obtain all of the gains from trade when trading with large countries.
D) All of the above.

Question 5

A country gains more from international trade the more its terms of trade differ from its autarky price.

Question 6

The gains from international trade are closely related to

A) the labor theory of value.
B) how much the autarky price differs from the international price (i.e. the terms of trade).
C) the fact that one country must lose from trade.
D) All of the above.

Question 7

An international division of labor will have no effect on total world output because resources are limited.

Question 8

If country A has a larger trade triangle than country B, reciprocal demand will lead to an increase in the relative price of A's imports.

Question 9

A country must have absolute advantage in a good in order to have comparative advantage in that good.

Question 10

The labor theory of value

A) is what economists believe determines prices today.
B) says that wages must always be greater than prices.
C) says that the price of a good is determined by the amount of labor required to produce it.
D) All of the above.

Question 11

Once trade begins, a country will tend to specialize completely in the production of its export good.

Question 12

Comparative advantage is determined by the relative levels of autarky prices.

Question 13

According to the classical theory of international trade

A) only countries with low wages will export.
B) only countries with high wages will import.
C) countries with high wages will have higher relative prices of all goods.
D) All the above are false.

Question 14

Countries with high wages cannot export to low wage countries.

Question 15

Absolute advantage is determined by

A) actual differences in labor productivity between countries.
B) relative differences in labor productivity between countries.
C) Both A and B.
D) Neither A nor B.

Question 16

Mercantilism

A) is the philosophy of free international trade.
B) was a system of export promotion and barriers to imports practiced by governments, especially in the 17th and 18th centuries.
C) was praised by Adam Smith in The Wealth of Nations.
D) Both A and C.

Question 17

A country must have comparative advantage in a good in order to have absolute advantage in that good.

Question 18

The various bundles of goods that a country can obtain by taking advantage of international trade is known as

A) the non-indifference curve.
B) the consumption possibility frontier.
C) the production possibility frontier.
D) the trade possibility frontier.

Question 19

In a two country world, at least one country must lose from trade.

Question 20

In the classical model, the direction of trade is determined by

A) absolute advantage.
B) comparative advantage.
C) physical advantage.
D) which way the wind blows.

Question 21

Suppose that workers in A can produce 1 unit of S in 3 hours and 1 unit of T in 9 hours. Suppose that the relative price of S in B is 2. Graph the PPF for country A. Indicate the exact slope of the PPF. Show how the autarky equilibrium is determined. Illustrate a hypothetical international trade equilibrium, including production and consumption points, and trade volumes for a given (your assumption-be explicit) but permissible value of the international terms of trade.

Question 22

A country in autarky does not trade.

Question 23

Can a country have comparative advantage in all products?

Question 24

Starting from a situation where country A which exports good S and imports good T has a larger trade triangle than country B, explain how the process of reciprocal demand leads to international trade equilibrium.

Question 25

Adam Smith was an American economist that published The Wealth of Nations, one of the most important books in the history of economic thought.

Question 26

Mercantilism is another name given to the version of capitalism that has emerged in the globalized world of the 21st century.