Question 1

With increasing opportunity costs, comparative advantage depends on a nation's supply conditions and demand conditions; with constant opportunity costs, comparative advantage depends only on demand conditions.

Accepted Answer

With constant opportunity costs, comparative advantage depends on supply conditions and demand conditions, not just demand conditions.

Question 2

According to the principle of comparative advantage, an open trading system results in resources being channeled from uses of low productivity to those of high productivity.

Accepted Answer

The principle of comparative advantage states that an open trading system allows resources to be allocated to where they are most productive, resulting in increased overall productivity.

Question 3

The price-specie-flow mechanism illustrated why nations could not maintain trade surpluses or trade deficits over the long run.

Accepted Answer

The price-specie-flow mechanism showed that a nation's trade surplus would lead to an inflow of specie (money) and an increase in the money supply, which would cause prices to rise and exports to become more expensive, ultimately eliminating the trade surplus. Similarly, a trade deficit would lead to an outflow of specie and a decrease in the money supply, causing prices to fall and imports to become more expensive, ultimately eliminating the trade deficit. Therefore, nations could not maintain trade imbalances over the long run according to the price-specie-flow mechanism.

Question 4

According to Adam Smith, international trade was a "win-win" situation since all nations could enjoy gains from trade.

Accepted Answer

Adam Smith's theory of comparative advantage suggests that even if a country can produce all goods more efficiently than another country, it is still beneficial for them to trade and specialize in the production of goods in which they have a comparative advantage. In this way, all countries can benefit from trade and it is considered a "win-win" situation.

Question 5

MacDougall's empirical study of comparative advantage was based on the notion that a product's labor cost is underlaid by labor productivity and the wage rate.

Accepted Answer

MacDougall's empirical study of comparative advantage was based on the notion that a product's labor cost is underlaid by labor productivity and the wage rate.

Question 6

Adam Smith contended that gold, silver, and other precious metals constituted the wealth of a nation.

Accepted Answer

Adam Smith argued that the wealth of a nation was not determined by its accumulation of gold and silver, but rather by its production and commerce capabilities.

Question 7

The marginal rate of transformation equals the absolute slope of a country's production possibilities frontier.

Accepted Answer

This statement is true. The marginal rate of transformation (MRT) is the rate at which one good must be sacrificed in order to produce an additional unit of another good. This is illustrated by the slope of the production possibilities frontier (PPF), which shows the maximum amount of one good that can be produced for every level of production of another good. The absolute slope of the PPF is equal to the MRT at any given point on the frontier.

Question 8

If Argentina has a comparative advantage over Brazil in beef relative to coffee, Argentina will specialize in beef production.

Accepted Answer

If Argentina has a comparative advantage in beef production, it means that they can produce beef at a lower opportunity cost than Brazil. Therefore, it would make economic sense for Argentina to specialize in beef and trade with Brazil for coffee, where Brazil has a comparative advantage.

Question 9

With constant opportunity costs, a nation will achieve the greatest possible gains from trade if it partially specializes in the production of the commodity of its comparative disadvantage.

Accepted Answer

With constant opportunity costs, a nation achieves the greatest possible gains from trade by specializing in the production of the commodity of its comparative advantage, not its comparative disadvantage. Comparative advantage means producing goods at a lower opportunity cost than trading partners.

Question 10

The price-specie-flow mechanism illustrated why one nation's gains from trade were accompanied by another country's losses.

Accepted Answer

The price-specie-flow mechanism, as described by David Hume, explains how imbalances in trade between countries are naturally corrected over time through the flow of gold and silver (specie), without implying that one nation's gains are necessarily another country's losses. It suggests that countries with trade surpluses will experience an inflow of gold, leading to inflation and higher prices, which eventually makes their goods less competitive abroad, restoring balance. Conversely, countries with trade deficits will see gold flow out, leading to deflation and lower prices, making their goods more competitive abroad, also helping to restore balance. This mechanism operates under the assumption of a gold standard and free movement of gold between nations.

Question 11

Modern trade theory recognizes that the pattern of world trade is governed by both demand conditions and supply conditions.

Accepted Answer

Modern trade theory recognizes that the pattern of world trade is influenced by both demand and supply factors.

Question 12

By reducing the overall volume of trade, import restrictions tend to reduce a nation's gains from trade.

Accepted Answer

Import restrictions limit a nation's access to foreign markets, reducing the potential gains from trade.

Question 13

In autarky equilibrium, a nation realizes the lowest possible level of satisfaction given the constraint of its production possibilities frontier.

Accepted Answer

In autarky equilibrium, a nation realizes a level of satisfaction based on its own production and consumption without engaging in trade. This does not necessarily mean it is the lowest possible level of satisfaction, but rather it is limited to what the country can produce and consume within its own resources.

Question 14

Assume that Germany has higher labor productivity and higher wage levels than France.Germany can produce a commodity more cheaply than France if its productivity differential more than offsets its wage differential.

Accepted Answer

Labor productivity is a measure of how much output is produced per unit of labor input. If Germany has higher labor productivity than France, it can produce more output per unit of labor input, making it more efficient in production. This means that even if Germany has higher wage levels than France, it can still produce goods more cheaply due to its higher productivity, as long as the productivity differential more than offsets the wage differential.

Question 15

The MacDougall study of comparative advantage hypothesized that in those industries in which U.S.labor productivity was relatively high, U.S.exports to the world should be lower than U.K.exports to the world, after adjusting for wage differentials.

Accepted Answer

The information presented in the first sentence is not directly related to the production possibilities frontier shown in Figure 2.3. The MacDougall study is discussing comparative advantage and wage differentials, whereas the production possibilities frontier illustrates the concept of trade-offs between two goods or services when resources are limited.

Question 16

Ricardo's theory of comparative advantage does NOT take into account demand conditions when determining relative commodity prices.

Accepted Answer

Ricardo's theory of comparative advantage focuses solely on the production efficiency of different goods in different countries, not on the demand for those goods. Therefore, it does not take into account demand conditions when determining relative commodity prices.

Question 17

Complete specialization usually occurs under the assumption of increasing-opportunity costs.

Accepted Answer

Complete specialization often occurs under the assumption of constant opportunity costs, not increasing opportunity costs. Increasing opportunity costs suggest that resources are not equally efficient in producing every good, leading to partial rather than complete specialization.

Question 18

If Canada has a higher wage level and higher labor productivity than Mexico, Canada will necessarily produce a good at a higher labor cost than Mexico.

Accepted Answer

Higher labor productivity in Canada can offset the higher wage levels, potentially resulting in a lower labor cost per unit of output compared to Mexico.

Question 19

The existence of exit barriers tends to delay the closing of inefficient firms that face international competitive disadvantages.

Accepted Answer

Exit barriers, such as high fixed costs, contractual agreements, or government regulations, make it difficult for firms to exit the market. This delay in exit can lead to the persistence of inefficient firms that cannot compete with foreign competitors, ultimately hindering the growth of the economy.

Question 20

The basic idea of mercantilism was that wealth consisted of the goods and services produced by a nation.

Accepted Answer

Mercantilism primarily held that wealth consisted of precious metals like gold and silver, and that a nation's economic strength was built on exporting more than it imported to accumulate these metals.

Quiz 2: Foundations of Modern Trade Theory Comparative Advantage

With increasing opportunity costs, comparative advantage depends on a nation's supply conditions and demand conditions; with constant opportunity costs, comparative advantage depends only on demand conditions.

According to the principle of comparative advantage, an open trading system results in resources being channeled from uses of low productivity to those of high productivity.

The price-specie-flow mechanism illustrated why nations could not maintain trade surpluses or trade deficits over the long run.

According to Adam Smith, international trade was a "win-win" situation since all nations could enjoy gains from trade.

MacDougall's empirical study of comparative advantage was based on the notion that a product's labor cost is underlaid by labor productivity and the wage rate.

Adam Smith contended that gold, silver, and other precious metals constituted the wealth of a nation.

The marginal rate of transformation equals the absolute slope of a country's production possibilities frontier.

If Argentina has a comparative advantage over Brazil in beef relative to coffee, Argentina will specialize in beef production.

With constant opportunity costs, a nation will achieve the greatest possible gains from trade if it partially specializes in the production of the commodity of its comparative disadvantage.

The price-specie-flow mechanism illustrated why one nation's gains from trade were accompanied by another country's losses.

Modern trade theory recognizes that the pattern of world trade is governed by both demand conditions and supply conditions.

By reducing the overall volume of trade, import restrictions tend to reduce a nation's gains from trade.

In autarky equilibrium, a nation realizes the lowest possible level of satisfaction given the constraint of its production possibilities frontier.

Assume that Germany has higher labor productivity and higher wage levels than France.Germany can produce a commodity more cheaply than France if its productivity differential more than offsets its wage differential.

The MacDougall study of comparative advantage hypothesized that in those industries in which U.S.labor productivity was relatively high, U.S.exports to the world should be lower than U.K.exports to the world, after adjusting for wage differentials.

Ricardo's theory of comparative advantage does NOT take into account demand conditions when determining relative commodity prices.

Complete specialization usually occurs under the assumption of increasing-opportunity costs.

If Canada has a higher wage level and higher labor productivity than Mexico, Canada will necessarily produce a good at a higher labor cost than Mexico.

The existence of exit barriers tends to delay the closing of inefficient firms that face international competitive disadvantages.

The basic idea of mercantilism was that wealth consisted of the goods and services produced by a nation.