Deck 2: The Power of Trade and Comparative Advantage

Question 1

Which of the following is NOT a commonly recognized benefit of trade?

A) Trade makes people better off when preferences differ.
B) Trade creates the need for institutions such as the World Trade Organization.
C) Trade increases productivity through specialization and the division of knowledge.
D) Trade increases productivity through comparative advantage.

Answer 1

B

Question 2

Which of the following is NOT true of trade?

A) Trade makes people better off when preferences differ.
B) Trade increases productivity through specialization and the division of knowledge.
C) Trade makes rich people richer and poor people poorer.
D) Trade increases productivity through comparative advantage.

Answer 2

C

Question 3

Which of the following is NOT an outcome of trade?

A) People with different preferences are made better off.
B) Specialization and increased productivity develop.
C) A division of knowledge among trading partners develops.
D) People in poor countries are made worse off.

Answer 3

D

Question 4

Which of the following statements is incorrect?

A) Trade makes people better off when preferences differ.
B) Trade increases productivity through specialization and the division of knowledge.
C) Non-fraudulent voluntary trade produces both winners and losers.
D) Trade increases productivity through comparative advantage.

Question 5

If each of us had to grow our own food:

A) civilization as we know it would collapse and billions of people would have much less food to eat.
B) we would have more time for other pursuits.
C) people would be richer since they would no longer have to spend money on groceries.
D) the total amount of knowledge in society would increase since everyone would have to learn about farming.

Question 6

eBay creates value by:

A) helping sellers trick buyers into purchasing broken items.
B) moving goods like broken laser pointers from people who don't want them to people who do.
C) helping people with the same preferences find each other.
D) moving toys from children who want them to children who don't.

Question 7

If instead of specialized doctors (neurologists, cardiologists, gastroenterologists, etc.) we had doctors who each knew the same things about all aspects of medicine it would be:

A) better because we could just go to one doctor who could handle all our needs.
B) better because total medical knowledge in society would increase.
C) worse because the human brain is unlimited.
D) worse because total medical knowledge in society would decrease.

Question 8

The benefits of trade include: I. higher output due to specialization. II. higher output due to comparative advantage. III. increased welfare when preferences differ.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 9

Division of knowledge, as discussed in the text, increases economic prosperity because: I. Each person can develop extensive knowledge about a single activity. II. The human brain's capacity to know everything about all productive activities is limited. III. Specialized knowledge increases productivity, which increases total output.

A) I and II only
B) I and III only
C) II and III only
D) I, II, and III

Question 10

Which of the following statements is TRUE? I. Trade allows people to specialize in their area of expertise, increasing society's output of goods and services. II. Specialization and the division of knowledge decreased with the fall of the Berlin Wall and opening of China's economy to the world. III. Society's knowledge is limited if everybody produces the same thing.

A) I only
B) II and III only
C) I and III only
D) II only

Question 11

Which of the following is least likely a consequence of the division of knowledge?

A) The development of the computer tablet.
B) A totally self-sufficient family farm.
C) A new delivery method for cancer-fighting drugs.
D) The provision of a new bike path in your community.

Question 12

Facilitators of trade (such as Pierre Omidyar, the developer of eBay):

A) may become very rich since they are creating value for many individuals.
B) find it very hard to profit from their services since they are not directly involved in the trades.
C) typically only profit from their services if they are able to obtain government patent rights.
D) are usually seen as taking advantage of consumers.

Question 13

A very small portion of people who use microwaves know how they work. This is an example of:

A) a production possibility frontier.
B) specialization.
C) absolute advantage.
D) opportunity cost.

Question 14

Trade creates value because:

A) people get what they want.
B) raw materials are transformed into finished products.
C) people exchange things they do not want for things they do.
D) idle resources are put to use.

Question 15

Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

A) This trade makes Ella worse off by $200.
B) This trade makes Mark better off by $200.
C) Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800.
D) This trade creates value by moving the guitar and drum set to people who value them more.

Question 16

Which of the following is TRUE regarding trade? I. Trade creates value by moving goods from people that value them less to people that value them more. II. Trade makes everyone better off. III. The only potential losses from trade come when the seller values the good more than the buyer.

A) I only
B) I and II only
C) I and III only
D) I, II, and III

Question 17

Which of the following is NOT a reason trade increases wealth?

A) to take advantage of differences in productivity
B) to take advantage of differences in preferences
C) to take advantage of differences in knowledge
D) to take advantage of differences in security

Question 18

Which statement best describes why people choose to specialize?

A) Training is too expensive to specialize in multiple occupations.
B) Trade creates value.
C) Specialization increases productivity.
D) Specialization and trade allow them to consume more than they could produce individually.

Question 19

Jim has an old (working) television that he would like to get rid of now that he has purchased a new high-definition, flat-screen television. The old television is no longer worth anything to him now that he has his new flat-screen TV. Veronica on the other hand has an even older television that has just broken down. She would pay up to $50 for any working TV. Which of the following statements is NOT true?

A) If Jim trades Veronica his old television for $50, total value in society increases by $50.
B) If Jim trades Veronica his old television for $50, both are better off but total value in society does not increase.
C) If a middleman facilitates the $50 trade between Jim and Veronica, but takes a $10 finders' fee, Jim and Veronica will still both be better off.
D) If Jim and Veronica do not trade, both are worse off than if they did trade.

Question 20

David sells his car, which he considers worthless, to Cameron for $200. Which of the following statements is true?

A) David and Cameron must have different preferences for the car.
B) This trade did not create value because Cameron is buying a car that David considers worthless.
C) Cameron is the only one made better off by the trade.
D) David is made better off by the trade, but Cameron is made worse off.

Question 21

Specialization and trade:

A) increase the costs of production because of decreased output.
B) decrease the per-unit costs of production because of economies of scale associated with large-scale production.
C) create diseconomies of scale, raising the per-unit costs of production.
D) only work within countries, not across countries.

Question 22

Jesse is good at math and excellent at making friends and Addae is equally good at both. Mathematically and socially challenged Jordan wants to hire tutors to help in each area. Who should tutor Jordan in which area to maximize Jordan's college experience?

A) Jesse and Addae should tutor Jordan in both math and social skills.
B) Jesse should teach math and Addae should teach how to make friends.
C) Jesse and Addae should both teach how to make friends.
D) Jesse should teach how to make friends and Addae should teach math.

Question 23

A country has an absolute advantage in production if:

A) it can produce the same good using fewer inputs than another country.
B) it can produce a good using fewer inputs than it takes another country to produce a different good.
C) other countries can produce the same good using fewer inputs.
D) it has the lowest opportunity cost of producing a good.

Question 24

As trade becomes more widespread, specialization ______, which in turn ______ productivity.

A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases

Question 25

Why is specialization so advantageous to trade? I. Through specialization, people and firms can achieve economies of scale. II. Through specialization, people and firms can use specialized machinery and techniques. III. Trade exists only between people and firms that have complete specialization in the goods they are best at producing.

A) I only
B) I, II, and III
C) I and III only
D) I and II only

Question 26

Which of the following statements is true? I. Compared to a modern economy, the division of knowledge was greater in a primitive economy because every family grew its own food, made their own clothing, and constructed their own shelter. II. Nobody understands the entire process of producing even the simplest of products in a modern economy, like a lead pencil. III. The collapse of communism and the opening of the Chinese economy to the rest of the world have increased the division of knowledge, leading to increased world output.

A) I only
B) III only
C) II and III only
D) I, II, and III

Question 27

Which of the following best describes the principle of comparative advantage?

A) Some people can produce the same good better than other producers can.
B) Someone has the ability to produce the same good using fewer inputs than another producer.
C) Someone has the ability to produce the same good for the lowest opportunity cost.
D) To produce more of one good, people have to produce less of another good.

Question 28

Economic growth in the modern era is primarily due to the creation of new:

A) inventions.
B) money.
C) nations.
D) knowledge.

Question 29

Many universities employ graduate students to teach introductory undergraduate courses, even though full professors at these universities have more experience and could potentially teach these courses better. Which of the following best explains why universities choose to utilize graduate students instead of full professors to teach their introductory courses?

A) Graduate students are cheaper.
B) The opportunity cost of teaching an introductory course is higher for full professors than for graduate students.
C) The opportunity cost of teaching an introductory course is higher for graduate students than for full professors.
D) Introductory classes are the best place for graduate students to build their teaching skills.

Question 30

The benefits of economies of scale and increased competition to an economy include: I. lower unit costs. II. lower consumer prices. III. lower output levels.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 31

Knowledge increases ____________ and specialization __________ total output.

A) education; increases
B) productivity; increases
C) perception; increases
D) economies of scale; decreases

Question 32

Division of knowledge refers to:

A) dividing tasks into different subtasks and having one person perform all these subtasks.
B) people learning different tasks for which they each have a comparative advantage.
C) assigning one person to learn all the different ways to perform the same task.
D) limiting what each person knows about another person.

Question 33

Absolute advantage derives from which of the following?

A) the lowest cost production
B) the most suitable climate
C) the least expensive labor force
D) the best educated labor force

Question 34

Which of the scenarios below best displays how international trade allows for specialization?

A) You are better at mowing lawns than your neighbor who is better at gardening.
B) Truck drivers stay awake on long routes by drinking Colombian coffee.
C) The United States and Canada can both produce lumber, but the U.S. buys lumber from Canada because it has a greater yield per acre.
D) Cuba does not have a comparative advantage in producing antibiotics, but due to economic sanctions, relies on its own supply of medicines.

Question 35

The United States and the European Union are groups of semi- independent states that have come together under an agreement whereby resources can travel freely across borders and a common currency is in use. Which of the following statements best explains how this allows for the achievement of economies of scale?

A) Each state or country can now target larger markets and can thus earn more export revenue.
B) States and countries no longer have to worry about borders impeding trade.
C) Each state or country can adopt large-scale production techniques that allow lower per unit costs of production.
D) The removal of trade borders and a common currency enhances trade between member states.

Question 36

To benefit from trade, a person should:

A) specialize in an activity for which she has an absolute advantage.
B) specialize in an activity for which she has a comparative advantage.
C) do everything she possibly can.
D) do nothing at all.

Question 37

The main reason why specialization can raise productivity is that:

A) knowledge in human brains is limited.
B) some persons have more knowledge than others.
C) it is always good to know less than more.
D) it is impossible to learn anything well.

Question 38

Which of the following situations would lead to more starvation?

A) a world where everyone grows his or her own food and there is no trade
B) a world with trade and lots of specialization
C) a world with immense division of knowledge
D) a world where only some people specialize in food and everyone else produces something else

Question 39

Utilizing comparative advantage can best be exemplified as:

A) your lawyer word-processing her own legal briefs.
B) the CEO of Microsoft programming his own computer.
C) the president of your university teaching a class again.
D) a world-renowned chef hiring someone to cook meals for his family.

Question 40

Why does specialization become more profitable on a larger scale? I. Large firms are more profitable than small firms. II. Cost efficiencies become possible when the production scale is significantly large relative to the cost of the machines being used. III. Large-scale production justifies the acquisition of more knowledge on a specific activity.

A) I and II only
B) I, II, and III
C) I and III only
D) II and III only

Question 41

Reference: Ref 2-1 (Table: iPhone and iPod Production) According to the table on iPhone and iPod Production, the opportunity cost of producing one iPhone is:

A) 4/3 of one iPod for Canada, and two iPods for the United States.
B) two iPods for Canada, and four iPods for the United States.
C) 3/4 of one iPod for Canada, and one iPod for the United States.
D) one iPod for Canada, and 3/4 of one iPod for the United States.

Question 42

Suppose a famous baseball player, Alex Rodriguez, hires a high school student to paint his house. Which of the following is most likely TRUE?

A) The opportunity cost of painting a house is higher for Alex Rodriguez than for the high school student.
B) The opportunity cost of painting a house is lower for Alex Rodriguez than for the high school student.
C) The opportunity cost of painting a house is the same for Alex Rodriguez as for the high school student.
D) The opportunity cost of painting a house is zero for Alex Rodriguez and is negative for the high school student.

Question 43

Owen Wilson is an actor who has acted in many action comedy films. In contrast, Tom Cruise has acted in many serious action films. How might the theory of specialization be applied to them?

A) Owen Wilson has fully specialized in action comedy movies while Tom Cruise has fully specialized in serious action movies.
B) Due to filmography protectionism, Owen Wilson is unable to secure serious action roles, and Tom Cruise is unable to secure action comedy roles.
C) Casting directors see Owen Wilson as relatively better at action comedy roles and Tom Cruise as relatively better at serious action roles and cast them accordingly.
D) All of these statements are correct.

Question 44

The ability of one producer to produce one good or service using fewer inputs than another producer is:

A) comparative advantage.
B) absolute advantage.
C) opportunity cost.
D) competition.

Question 45

According to the theory of comparative advantage:

A) every country can produce some good with a lower opportunity cost.
B) every country should produce goods that involve high opportunity costs.
C) some countries have a comparative advantage in producing every good.
D) some countries should import every good from other countries.

Question 46

The concept of comparative advantage implies that:

A) there are winners and losers when people trade without specializing.
B) people have to be self-sufficient.
C) people can benefit from specializing and trading with each other.
D) only those people who are productive benefit from trade.

Question 47

According to the textbook, the reason why Martha Stewart does not do her own ironing is that:

A) she has never learned how to iron.
B) running her business enterprises just do not leave her enough time.
C) she does not have any real interest in ironing.
D) it costs her more to do her own ironing than to pay someone to iron.

Question 48

Reference: Ref 2-1 (Table: iPhone and iPod Production) According to the table on iPhone and iPod Production, which of the following is TRUE about Canadian and U.S. comparative advantages?

A) Canada has a comparative advantage in producing both iPhones and iPods.
B) The United States has a comparative advantage in producing both iPhones and iPods.
C) Canada has a comparative advantage in producing iPhones, and the United States has a comparative advantage in producing iPods.
D) Canada has a comparative advantage in producing iPods, and the United States has a comparative advantage in producing iPhones.

Question 49

Reference: Ref 2-1 (Table: iPhone and iPod Production) According to the table on iPhone and iPod Production, which of the following is TRUE?

A) Canada has an absolute advantage in producing both iPhones and iPods.
B) The United States has an absolute advantage in producing both iPhones and iPods.
C) Canada has an absolute advantage in producing iPhones, and the United States has an absolute advantage in producing iPods.
D) The United States has an absolute advantage in producing iPhones, and Canada has an absolute advantage in producing iPods.

Question 50

Who wrote, "It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy"?

A) Richard Nixon
B) Dr. Spock
C) Adam Smith
D) David Ricardo

Question 51

A producer has a comparative advantage over other producers if his production of the good involves:

A) more inputs.
B) fewer inputs.
C) a higher opportunity cost.
D) a lower opportunity cost.

Question 52

According to the theory of comparative advantage, a country should specialize in producing a good that involves:

A) more inputs than those in other countries.
B) fewer inputs than those in other countries.
C) a higher opportunity cost than that of other countries.
D) a lower opportunity cost than that of other countries.

Question 53

Which of the following best explains the term specialization with respect to trade?

A) Specialization occurs when a people concentrate their productive resources on the goods and services they can produce most efficiently.
B) Specialization occurs when one person can produce more of a particular good than another person.
C) Specialization refers to the absolute advantage that a person enjoys in the production of goods and services.
D) Specialization refers to the ability of a person to produce more of a good than his or her trading partners.

Question 54

Suppose France can produce four phones or three computers with one unit of labor, and Sweden can produce one phone or two computers with one unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that:

A) France should specialize in producing phones and import computers from Sweden.
B) France should specialize in producing computers and import phones from Sweden.
C) France should produce both phones and computers, and import nothing from Sweden.
D) France should import both phones and computers from Sweden.

Question 55

Which of the following statements shows how absolute advantage can be distinguished from comparative advantage? I. Absolute advantage refers to the ability to produce a good using fewer inputs, while comparative advantage is based on the monthly amount. II. Absolute advantage is based on the yearly production amount that a country can produce, while comparative advantage is based on the monthly production amount. III. Absolute advantage refers to the ability to produce a larger amount of goods with the same number of inputs, whereas comparative advantage refers to the ability to have the lowest opportunity cost of production.

A) I and III only
B) II and III only
C) I, II, and III
D) III only

Question 56

The real cost of producing a good is:

A) the dollar cost of inputs used to make the item.
B) the opportunity cost of producing the good.
C) the resources that were used to make the good.
D) the dollar amount it costs to sell the good.

Question 57

Reference: Ref 2-2 (Figure: PPF Goods X & Y) Refer to the figure. Which of the points representing various consumption possibilities for the country portrayed above is only attainable through foreign trade?

A) Point A
B) Point B
C) Point C

Question 58

The theory of comparative advantage is:

A) rarely relevant for identifying whether gains from trade can be obtained.
B) always relevant for identifying whether gains from trade can be obtained.
C) not true for nations, though it may be true for individuals.
D) true for nations, but is not true for business or individuals.

Question 59

Comparative advantage is determined by which of the following?

A) efficiency
B) bargaining power
C) opportunity cost
D) productivity

Question 60

Reference: Ref 2-2 (Figure: PPF Goods X & Y) Refer to the figure. Point A represents an allocation of resources that is:

A) efficient.
B) inefficient.
C) impossible.
D) the result of trade.

Question 61

A country has a comparative advantage in a good if:

A) it can produce more of that good than any other country.
B) it does not have an absolute advantage in that gooB.
C) it has the lowest opportunity cost of producing that gooC.
D) no other country is willing to buy that good from it.

Question 62

Reference: Ref 2-4 (Figure: PPF Mexico & U.S.) Use the figure in which both Mexico and the United States each have 24 units of labor. The opportunity costs of producing one shirt are:

A) one computer for Mexico and 1/6 of a computer for the United States.
B) 1/6 of a computer for Mexico and one computer for United States.
C) one computer for both Mexico and the United States.
D) 1/6 of computer for both Mexico and the United States.

Question 63

The production possibilities frontier shows:

A) the combinations of outputs a country can produce given its resources and productivity.
B) the combinations of inputs that a country has given its outputs and productivity.
C) the combinations of outputs and resources that a country possesses given its productivity.
D) the maximum level of a country's productivity given its resources and outputs.

Question 64

Reference: Ref 2-3 (Figure: PPF Nickel & Textiles) Refer to the figure. What is the maximum amount of textiles China can produce?

A) 10 tons
B) 8 tons
C) 6 tons
D) 4 tons

Question 65

Reference: Ref 2-4 (Figure: PPF Mexico & U.S.) Use the figure in which both Mexico and the United States each have 24 units of labor. The opportunity costs of producing one computer are:

A) six shirts for Mexico and one shirt for the United States.
B) 1/6 of a shirt for both Mexico and the United States.
C) one shirt for Mexico and 1/6 of a shirt for the United States.
D) six shirts for both Mexico and the United States.

Question 66

On a production possibilities frontier a trade-off can be illustrated as:

A) an outward shift.
B) an inward shift.
C) a movement from a point inside the frontier to one on the frontier.
D) a movement along the frontier itself.

Question 67

Traders should specialize in the good in which:

A) they have the lowest opportunity cost.
B) they have an absolute advantage.
C) their trading partner has the lowest opportunity cost.
D) they do not have an absolute advantage.

Question 68

Suppose a country without any international trade opens its borders to international trade. How will its location on its production possibility frontier change?

A) The country moves from inside the PPF to on the PPF.
B) The country moves from on the PPF to beyond the PPF.
C) The country moves along the PPF toward its comparative advantage.
D) The country moves along the PPF away from its comparative advantage.

Question 69

Reference: Ref 2-4 (Figure: PPF Mexico & U.S.) Use the above figure in which both Mexico and the United States each have 24 units of labor. Mexico has a comparative advantage in ______ and the United States has a comparative advantage in ______.

A) computers; shirts
B) shirts; computers
C) computers; computers
D) shirts; shirts

Question 70

Anita is a wonderful baker and can bake 10 cakes in a day, but then has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John can make equally delicious cakes and cookies but can only make seven cakes or 100 cookies in a day. Based on this information, which of the following statements is true?

A) Anita should split her time between cakes and cookies. John should bake cakes.
B) Anita should bake cakes and John should bake cookies.
C) Anita and John should split their time equally between cakes and cookies.
D) Anita should bake cookies and John should bake cakes.

Question 71

A fundamental idea behind the production possibilities frontier is:

A) the idea of absolute advantage.
B) the presence of trade-offs in production.
C) that economic growth is unlimited.
D) that incentives matter.

Question 72

The opportunity cost of producing a particular good refers to:

A) how much of something else must be given up to produce one additional unit of the good.
B) how much of a good can be produced with the existing technology and resources.
C) the total cost of production, including wages, for all units of the good.
D) the marginal cost of production in order to produce one additional unit of the good.

Question 73

Reference: Ref 2-5 (Table: Production Possibilities for the United States and Mexico) According to the table on Production Possibilities for the United States and Mexico, Mexico has an absolute advantage in ________ and a comparative advantage in _________.

A) neither good; corn
B) corn; potatoes
C) potatoes; corn
D) neither good; potatoes

Question 74

Suppose the United States is more productive than China at producing both T-shirts and cell phones. The theory of comparative advantage suggests that consumption in both countries will:

A) increase if the United States produces both goods.
B) increase if each country produces the good for which it has the lowest opportunity cost.
C) not change if China produces either T-shirts or cell phones.
D) remain the same since nothing can be done to increase production in the two countries.

Question 75

Reference: Ref 2-3 (Figure: PPF Nickel & Textiles) Refer to the figure. How many tons of textiles does Australia give up to produce one ton of nickel?

A) 1/3
B) 1/2
C) 2
D) 3

Question 76

The slope of the production possibilities frontier at a point indicates ________.

A) the preferences of a country
B) a country's total gains from trade
C) a country's opportunity cost of production
D) a country's trade balance

Question 77

Which of the following is NOT true regarding the production possibilities frontier (PPF)?

A) The PPF shows the combination of goods that a country can produce given its current productivity and supply of resources.
B) The PPF illustrates the trade-offs that exist in the production of goods.
C) The PPF shows that gains from trade are maximized when countries produce those goods for which they have the absolute advantage in production.
D) The PPF illustrates the fundamental ideas of scarcity and opportunity cost.

Question 78

Anita is a wonderful baker and can bake 10 cakes in a day, but then has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John can make equally delicious cakes and cookies but can only make seven cakes or100 cookies in a day. Based on this information, which of the following statements is true?

A) Anita has the comparative advantage in the production of cakes.
B) John has the comparative advantage in the production of cakes.
C) John has the absolute advantage in the production of cookies.
D) Anita has the comparative advantage in the production of both cakes and cookies.

Question 79

The production possibility frontier shows:

A) how society can produce more of one good without giving up the production of another good.
B) what people can consume given different combinations of goods produced.
C) the combinations of output that an economy can produce given its productivity and inputs.
D) the types of goods and services that society should produce to satisfy social interest.

Question 80

Reference: Ref 2-3 (Figure: PPF Nickel & Textiles) Refer to the figure. What is the maximum amount of nickel China can produce?

A) 10 tons
B) 8 tons
C) 6 tons
D) 4 tons