Question 1

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

Accepted Answer

This is because Argentina's comparative advantage in beef means that they can produce beef at a lower opportunity cost than Brazil. Therefore, it makes sense for Argentina to focus on producing and exporting beef, while Brazil focuses on producing and exporting coffee, in order to maximize overall output and trade.

Question 2

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

This is because labor productivity is more important in determining the cost of production than wage levels. If Germany's labor productivity is significantly higher than France's, it can produce the same commodity with less labor input and thus, lower costs, despite having higher wage levels.

Question 3

Because the Ricardian theory of comparative advantage was based only on a nation's demand conditions,it could not fully explain the distribution of the gains from trade among trading partners.

Accepted Answer

The Ricardian theory of comparative advantage is based on differences in labor productivity, not on demand conditions. It explains trade benefits through opportunity costs and relative efficiency, not demand.

Question 4

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

Accepted Answer

The marginal rate of transformation (MRT) is the rate at which one good must be sacrificed in order to produce more of another good. It is equal to the absolute slope of a country's production possibilities schedule (PPS), which shows the various combinations of goods that a country can produce given its resources and technology. Therefore, the statement is true.

Question 5

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.

Question 6

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 is focused on the efficiency of production and does not factor in demand conditions. It assumes that there is perfect competition and that countries will specialize in producing the goods they can produce most efficiently.

Question 7

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

This is correct. MacDougall's study was based on the relationship between a product's labor cost, which is determined by both labor productivity and the wage rate.

Question 8

The Ricardian theory of comparative advantage could fully explain the distribution of the gains from trade among trading partners.

Accepted Answer

The Ricardian theory of comparative advantage only explains the benefits of trade, but not how those benefits are distributed among trading partners. The distribution of gains from trade depends on factors such as the bargaining power of each party, the terms of the trade agreement, and the pattern of trade flows.

Question 9

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

Accepted Answer

Modern trade theory holds that the pattern of global trade arises from both demand and supply factors. Demand factors include the preferences and desires of consumers in different countries, while supply factors include the availability and relative costs of production inputs (such as labor, land, and capital) in different locations. Together, these factors help to shape the pattern and volume of international trade.

Question 10

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

Accepted Answer

In autarky equilibrium, a nation consumes what it produces, but it does not necessarily achieve the lowest possible level of satisfaction; it achieves a level of satisfaction based on its production possibilities without trade.

Question 11

A nation benefits from international trade if it can achieve a higher indifference curve than it can in autarky.

Accepted Answer

International trade allows a country to specialize in the production of goods and services in which it has a comparative advantage, and acquire goods and services it cannot produce efficiently from other countries. This can lead to a higher level of consumption and a higher indifference curve than what can be achieved in autarky.

Question 12

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 or deficit would eventually lead to a change in the country's money supply and prices, which would then cause a shift in the direction of trade. This meant that trade imbalances could not be sustained over the long run.

Question 13

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 14

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 15

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 16

A nation achieves autarky equilibrium at the point where its community indifference curve is tangent to its production possibilities schedule.

Accepted Answer

Autarky equilibrium occurs when a country produces and consumes everything it needs without importing or exporting anything. At this point, the country's community indifference curve (representing the people's satisfaction with consumption) is tangent to the production possibilities schedule (representing the country's capacity to produce goods and services). This is because any point beyond the tangent point would mean the country is producing more than it needs and sacrificing its people's satisfaction, while any point before the tangent point would mean the country is not producing enough to meet the people's needs.

Question 17

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

Accepted Answer

Adam Smith believed in the concept of comparative advantage, where each country produces goods and services that they are relatively more efficient at producing, and then trading with other countries to obtain goods and services that they are less efficient at producing. This creates gains from trade for all countries involved. Hence, Smith believed international trade to be a "win-win" situation.

Question 18

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 MacDougall study actually hypothesized the opposite - that in industries where U.S. labor productivity was relatively high, U.S. exports to the world should be higher than U.K. exports to the world after adjusting for wage differentials.

Question 19

A nation realizes maximum gains from trade at the point where the international terms-of-trade line is tangent to its community indifference curve.

Accepted Answer

This statement is true according to the theory of comparative advantage, which suggests that a nation should specialize in producing and exporting goods in which it has a comparative advantage and import goods in which it has a comparative disadvantage. The point where the international terms of trade are tangent to the community indifference curve represents the maximum possible gain from trade. This is also known as the point of maximum joint productivity.

Question 20

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.

Quiz 2: Foundations of Modern Trade Theory: Comparative Advantage