Deck 3: Sources of Comparative Advantage

Question 1

The factor proportions model assumes that the residents of the two nations have different tastes for the two goods.

Answer 1

False

Question 2

________________ is the revenue received by the firm less the costs of the intermediate goods it purchased.

A) Contract manufacturing
B) Outsourcing
C) Value added
D) Economic integration

Answer 2

C

Question 3

Canada has 5,000 labor units and 2,500 capital units, while Mexico has 500 labor units and 200 capital units. The production of a car requires 200 labor units and 300 capital units. The production of a guitar requires 10 labor units and 12 capital units. According to the Heckscher-Ohlin Theorem:

A) Canada will export both cars and guitars to Mexico.
B) Canada will import both cars and guitars from Mexico.
C) Canada will export cars to Mexico and import guitars from Mexico.
D) Canada will export guitars to Mexico and import cars from Mexico.

Answer 3

C

Question 4

Computers are relatively capital intensive in their production, while wool is relatively labor intensive. Australia is relatively capital abundant and New Zealand is relatively labor abundant. According to the Heckscher-Ohlin theorem:

A) we would expect Australia to export computers to New Zealand and import wool from New Zealand.
B) we would expect Australia to export both computers and wool to New Zealand.
C) we would expect Australia to import both computers and wool from New Zealand.
D) we would expect Australia to import computers from New Zealand and export wool to New Zealand.

Question 5

Computers are relatively capital intensive in their production, while wool is relatively labor intensive. Australia is relatively capital abundant and New Zealand is relatively labor abundant. According to the Heckscher-Ohlin theorem and the factor price equalization theorem:

A) we would expect the return to capital in Australia to rise relative to the return to labor in Australia.
B) we would expect the return to capital in Australia to fall relative to the return to labor in Australia.
C) we would expect the return to capital in Australia to equal the return to labor in Australia.
D) we would expect the return to capital in Australia to fall relative to the return to labor in New Zealand.

Question 6

Germany, a relatively capital abundant nation, has extensive trade ties with South Korea, a relatively labor abundant nation. As free trade expands between the two nations, the Stolper-Samuelson theorem would predict that:

A) the real return to both labor and capital would rise in Germany.
B) the real return to both labor and capital would decline in Germany.
C) the real return to labor in Germany would rise while the real return to capital in Germany would decline.
D) the real return to labor in Germany would decline while the real return to capital in Germany would rise.

Question 7

Watches are relatively capital intensive in their production process, while handbags are relatively labor intensive. Switzerland is a relatively capital abundant nation. If Switzerland experiences an increase in its labor endowment then, according to the Rybczynski theorem, we would expect:

A) both the exports and imports of Switzerland to rise.
B) both the exports and imports of Switzerland to decline.
C) the exports of Switzerland to rise and the imports to decline.
D) the exports of Switzerland to decline and the imports to rise.

Question 8

Switzerland produces both watches and chocolate. Watches are relatively capital intensive in their production, while chocolate is relatively labor intensive. If Switzerland experiences an increase in its labor endowment, according to the Rybczynski theorem:

A) we would expect the production of both watches and chocolate to rise.
B) we would expect the production of both watches and chocolate to decline.
C) we would expect the production of watches to rise and that of chocolate to decline.
D) we would expect the production of watches to decline and that of chocolate to rise.

Question 9

Switzerland exports watches to Russia. Watches are relatively capital intensive in their production process. With trade, the price of watches rises by 10 percent in Switzerland. According to the magnification principle:

A) we would expect the price of capital to rise by more than 10 percent in Switzerland.
B) we would expect the price of capital to fall by more than 10 percent in Switzerland.
C) we would expect the price of labor to rise by more than 10 percent in Switzerland.
D) we would expect the price of capital to rise by exactly 10 percent in Switzerland.

Question 10

A production strategy in which one organization hires another organization to manufacture a good under the hiring firm-s name and to the hiring firm-s specifications is known as ________________.

A) contract manufacturing
B) outsourcing
C) diagonal integration
D) value added

Question 11

A strategy in which one organization hires another organization to complete a particular stage of the production process is known as ____________________.

A) contract manufacturing
B) outsourcing
C) value added
D) economic integration

Question 12

According to the Stolper-Samuelson theorem, free trade raises the real return of the nation-s ___________________.

A) relatively abundant factor
B) relatively scarce factor
C) relatively capital-intensive good
D) relatively-labor intensive good

Question 13

The Heckscher-Ohlin theorem is consistently supported by empirical studies.

Question 14

If nation A has more labor units than nation B, then nation A is referred to as the relatively labor-abundant nation.

Question 15

According to the Heckscher-Ohlin explanation of trade, the country that is relatively labor abundant will import relatively labor-intensive goods.

Question 16

In 1954, Wassily Leontief provided empirical evidence showing that the United States- pattern of trade was inconsistent with the Heckscher-Ohlin theorem.

Question 17

The good that uses more capital in its production process than the other good is referred to as the capital-intensive good.

Question 18

Factor price equalization can occur even if factors of production are not mobile internationally.

Question 19

Economic growth spurred by either a technological advance or an increase in resources will equally favor both sectors in an economy.

Question 20

Economic growth always leads to an increase in international trade.

Question 21

Economic growth is illustrated in the production possibilities frontier diagram as a movement from inside the frontier to the edge of the frontier.

Question 22

The magnification principle holds that a change in the price of a good is greater than the change in the price of the factor of production which the good uses intensively in its production process.

Question 23

Over the years, empirical studies show that the factor proportions approach:

A) is rather robust at explaining patterns of international trade.
B) completely fails to explain patterns of trade.
C) yields useful insights for particular types of trade, such as primary commodities.
D) is superior to any other explanation of international trade patterns.