Question 1

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.

Accepted Answer

With increasing opportunity costs, a nation may not fully specialize in the production of the commodity of its comparative advantage because the cost of reallocating resources becomes too high. With constant opportunity costs, a nation is more likely to fully specialize in the production of the commodity of its comparative advantage, as the cost of reallocating resources does not increase.

Question 2

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.

Accepted Answer

Ricardo's theory of comparative advantage is highly relevant to the real world despite its simplifying assumption that labor is the only factor of production. The core principle—that countries benefit from specializing in and trading goods for which they have a comparative advantage—applies even when multiple factors of production are considered.

Question 3

The mercantilists maintained that a free-trade policy best enhances a nation's welfare.

Accepted Answer

The mercantilists actually believed in protectionist policies, such as tariffs and subsidies, to promote exports and achieve favorable trade balances. They did not believe in free trade.

Question 4

The mercantilists contended that because one nation's gains from trade come from the expense of its trading partners, not all nations could simultaneously realize gains from trade.

Accepted Answer

Mercantilists believed that the amount of wealth in the world was fixed, so one nation's gain in trade was necessarily another nation's loss, implying not all nations could benefit from trade at the same time.

Question 5

If the U.S.post-trade consumption point lies along its production possibilities frontier, the United States achieves a higher level of welfare with trade than without trade.

Accepted Answer

The answer of If the U.S.post-trade consumption point lies along...

Question 6

A nation's trade triangle denotes its exports, imports, and terms of trade.

Accepted Answer

A trade triangle is a graphical representation in international economics that shows a country's exports, imports, and terms of trade, illustrating the balance between them.

Question 7

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.

Accepted Answer

Modern trade theory, also known as the factor-proportions theory, takes into account all factors of production, including capital and natural resources, in determining comparative advantage. Ricardo's theory, on the other hand, focused solely on labor as the source of comparative advantage. Therefore, option A is correct.

Question 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.

Accepted Answer

The principle of absolute advantage is attributed to Adam Smith, while the principle of comparative advantage is attributed to David Ricardo.

Question 9

International trade leads to increased welfare if a nation can achieve a post-trade consumption point lying inside of its production-possibilities frontier.

Accepted Answer

International trade leads to increased welfare if a nation can achieve a post-trade consumption point lying outside of its production-possibilities frontier, as it allows for consumption beyond what the country could produce on its own.

Question 10

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.

Accepted Answer

The principle of comparative advantage suggests that a nation should specialize in and export goods for which it has the lowest opportunity cost of production, not necessarily where its absolute advantage is smallest or its absolute disadvantage is greatest.

Question 11

The trade theories of Adam Smith and David Ricardo viewed the determination of competitiveness from the demand side of the market.

Accepted Answer

The trade theories of Adam Smith and David Ricardo viewed the determination of competitiveness from the supply side of the market. They believed that a country's competitiveness was determined by its ability to produce goods and services efficiently and at a lower cost than other countries.

Question 12

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.

Accepted Answer

Constant opportunity costs occur when factors of production are perfectly substitutable for each other, not when they are imperfect substitutes or have different qualities. This scenario typically results in a straight-line production possibility frontier, indicating that the opportunity cost of producing one good over another remains constant.

Question 13

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.

Accepted Answer

The principle of absolute advantage suggests that mutually beneficial trade can occur when different nations have absolute advantages in producing different goods. It does not support the idea of beneficial trade if one nation is more efficient in all goods; that concept is addressed by the principle of comparative advantage.

Question 14

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.

Accepted Answer

The principle of absolute advantage suggests that if each country specializes in the production of goods for which it has an absolute cost advantage and then trades with others, overall world production and consumption can increase, benefiting all countries involved.

Question 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 frontier.

Accepted Answer

Constant opportunity costs mean that the trade-off between producing one product over the other remains the same, regardless of where the nation is located on its production-possibilities frontier. Therefore, the relative cost of producing one product in terms of the other remains constant.

Question 16

The Ricardian theory of comparative advantage assumes only two nations and two products, that labor can move freely within a nation, and that perfect competition exists in all markets.

Accepted Answer

This is a correct statement about the assumptions of the Ricardian theory of comparative advantage.

Question 17

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.

Accepted Answer

When productivity in the German computer industry grows faster than that of the Japanese computer industry, the production possibilities frontier (PPF) of Germany shifts outward, allowing for more efficient production of computers. This results in a decrease in the opportunity cost of producing computers in Germany. As a result, the opportunity cost of producing computers in Japan relative to Germany increases, making it more costly for Japan to produce computers.

Question 18

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.

Accepted Answer

According to the price-specie-flow mechanism, a trade-surplus nation would experience gold inflows, an increase in its money supply, and a rise in its price level, opposite to what is stated.

Question 19

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.

Accepted Answer

The answer of It is possible for a nation not...

Question 20

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.

Accepted Answer

The statement is incorrect. Even if the United States is more efficient in the production of all goods, mutually beneficial trade is still possible according to the principle of comparative advantage. Comparative advantage takes into account the opportunity cost of producing each good, not just the absolute efficiency in production. Therefore, the country with the lower opportunity cost should specialize in producing and exporting that good, while the other country should specialize in producing and exporting the other good. This leads to gains from trade for both countries.

Quiz 2: Foundations of Modern Trade Theory Comparative Advantage