Question 1

Which of the following statements is TRUE?
A) Free trade is beneficial only if your country is strong enough to stand up to foreign competition.
B) Free trade is beneficial only if your competitor does not pay unreasonably low wages.
C) Free trade is beneficial only if both countries have access to the same technology.
D) Free trade is never beneficial for developing countries.
E) Free trade can be beneficial to economic welfare of all countries involved.

Accepted Answer

Free trade can be beneficial to economic welfare of all countries involved. While there may be some challenges and criticisms of free trade, the consensus among economists is that it is generally beneficial for all parties involved. Free trade allows for specialization, economies of scale, and access to a wider range of goods and services at lower prices, which can lead to increased economic growth and higher standards of living. Developing countries can also benefit from free trade if they are able to take advantage of their comparative advantages and attract foreign investment.

Question 2

Mahatma Gandhi exhorted his followers in India to promote economic welfare by decreasing imports.This approach
A) makes no sense.
B) makes no economic sense.
C) is consistent with the the Ricardian model of comparative advantage.
D) is not consistent with the Ricardian model of comparative advantage.
E) guarantees benefits for Indian workers.

Accepted Answer

Mahatma Gandhi's approach of decreasing imports to promote economic welfare is not consistent with the Ricardian model of comparative advantage, as the model suggests that countries should specialize in producing goods in which they have a comparative advantage and import goods in which they do not. By promoting import substitution, the approach may lead to inefficiencies and higher prices due to the lack of specialization and increased production costs.

Question 3

The pauper labor theory,and the exploitation argument
A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative advantage.
B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance.
C) are not relevant because the Ricardian model is based on the labor theory of value.
D) are not relevant because the Ricardian model allows for different technologies in different countries.
E) invalidate the Ricardian model.

Accepted Answer

The pauper labor theory and the exploitation argument do not have any direct relevance to the Ricardian model. The Ricardian model is primarily concerned with the advantages of trade based on differences in relative productivity and does not focus on the distribution of gains from trade or the exploitation of labor. While these issues may be important from a normative perspective, they do not affect the validity of the Ricardian logic. Therefore, the pauper labor theory and the exploitation argument are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance.

Question 4

If a production possibilities frontier is bowed out (concave to the origin),then production occurs under conditions of
A) constant opportunity costs.
B) increasing opportunity costs.
C) decreasing opportunity costs.
D) infinite opportunity costs.
E) uncertain opportunity costs.

Accepted Answer

A bowed-out production possibilities frontier indicates increasing opportunity costs, meaning that as the production of one good increases, the opportunity cost of producing an additional unit of that good increases, leading to a bowed-out shape. This occurs due to the fact that resources are not equally efficient in the production of both goods, and as more resources are allocated towards the production of one good, they become less suited for the production of the other good.

Question 5

The Country of Rhozundia is blessed with rich copper deposits.The cost of copper produced (relative to the cost of widgets produced)is therefore very low.From this information we know that
A) Rhozundia has a comparative advantage in copper.
B) Rhozundia should import copper and export widgets.
C) Rhozundia should export both widgets and copper.
D) Rhozundia should invest in more in widget production.
E) Rhozundia may or may not have a comparative advantage in copper.

Accepted Answer

The answer of The Country of Rhozundia is blessed with...

Question 6

-Given the information in the table above.If these two countries trade these two goods in the context of the Ricardian model of comparative advantage,then what is the lower limit of the world equilibrium price of widgets?

Accepted Answer

The answer of 
-Given the information in the table above.If...

Question 7

Suppose the United States' production possibility frontier was flatter to the widget axis,whereas Germany's was flatter to the butter axis.We now learn that the German mark sharply depreciates against the U.S.dollar.We now know that
A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Germany has a comparative advantage in widgets.
E) Germany has lost its comparative advantage.

Accepted Answer

Germany's production possibility frontier being flatter to the butter axis indicates it has a comparative advantage in butter. The depreciation of the German mark does not change this inherent comparative advantage.

Question 8

If the production possibilities frontier of one trade partner ("Country A")is bowed out (concave to the origin),then increased specialization in production by that country will
A) increase the economic welfare of both countries.
B) increase the economic welfare of only Country A.
C) decrease the economic welfare of Country A.
D) decrease the economic welfare of Country B.
E) not affect the economic welfare of either country.

Accepted Answer

A bowed out PPF implies that the opportunity cost of producing one good is rising as more of it is produced. Therefore, when Country A specializes in producing the good in which it has a comparative advantage, it will give up less of the other good as compared to Country B, thereby increasing economic welfare for both countries. This is because Country B can then obtain the good from Country A at a lower price than it would have been able to produce on its own, and Country A can trade its surplus for goods that it cannot produce efficiently.

Question 9

In 1975,wage levels in South Korea were roughly 5% of those in the United States.It is obvious that if the United States had allowed Korean goods to be freely imported into the United States at that time,this would have caused devastation to the standard of living in the United States,because no producer in this country could possibly compete with such low wages.Discuss this assertion in the context of the Ricardian model of comparative advantage.

Accepted Answer

The answer of In 1975,wage levels in South Korea were...

Question 10

-Given the information in the table above.What is the opportunity cost of cloth in terms of Widgets in Foreign?

Accepted Answer

The answer of 
-Given the information in the table above.What...

Question 11

Many countries in sub-Saharan Africa have very low labor productivities in many sectors,for example in manufacturing and agriculture.They often despair of even trying to attempt to build their industries unless it is done in an autarkic context,behind protectionist walls because they do not believe they can compete with more productive industries abroad.Discuss this issue in the context of the Ricardian model of comparative advantage.

Accepted Answer

The answer of Many countries in sub-Saharan Africa have very...

Question 12

If the United States' production possibility frontier was flatter to the widget axis,whereas Germany's was flatter to the butter axis,we know that
A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the U.S. has a comparative advantage in butter.
D) Germany has comparative advantages in both products.
E) the U.S. has a comparative disadvantage in widgets.

Accepted Answer

A country has a comparative advantage in producing a good if it can produce it at a lower opportunity cost than another country. If Germany's production possibility frontier is flatter to the butter axis, it means Germany has a lower opportunity cost for producing butter, indicating a comparative advantage in butter.

Question 13

If labor productivities were exactly proportional to wage levels internationally,this would
A) not negate the logical basis for trade in the Ricardian model.
B) render the Ricardian model theoretically correct but practically useless.
C) negate the logical basis for trade in the Ricardian model.
D) negate the applicability of the Ricardian model if the number of products were greater than the number of trading partners.
E) demonstrate the validity of the Ricardian model.

Accepted Answer

The answer of If labor productivities were exactly proportional to...

Question 14

Suppose the United states production possibility frontier was flatter to the widget axis,whereas Germany's was flatter to the butter axis.We now learn that the German wage doubles,but U.S.wages do not change at all.We now know that
A) the United States has no comparative advantage.
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Not enough information is given.
E) Germany gains a comparative advantage in widgets.

Accepted Answer

Germany has a comparative advantage in butter because its production possibility frontier is flatter to the butter axis, meaning it can produce more butter with the same resources compared to the United States. When Germany's wage doubles, it becomes more expensive for Germany to produce widgets, making butter relatively cheaper to produce. This reinforces Germany's comparative advantage in butter.

Question 15

-Given the information in the table above.If these two countries trade these two goods with each other in context of the Ricardian model of comparative advantage,what is the lower limit for the price of cloth?

Accepted Answer

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-Given the information in the table above.If...

Question 16

We know that in antiquity,China exported silk because no one in any other country knew how to produce this product.From this information we know that
A) China had a comparative advantage in silk.
B) China had an absolute advantage, but not a comparative advantage in silk.
C) no comparative advantage could exist because the technology was not diffused.
D) China exported silk for political reasons even though it had no comparative advantage.
E) China was unable to profit by exporting silk because it was unknown in the rest of the world.

Accepted Answer

The fact that no other country knew how to produce silk indicates that China had a unique advantage in producing this product. This is known as a comparative advantage, where a country is able to produce a certain product more efficiently than another country, even if it does not have an absolute advantage in producing that product.

Question 17

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios),then if they both use the same currency
A) neither country has a comparative advantage.
B) only the low wage country has a comparative advantage.
C) only the high wage country has a comparative advantage.
D) consumers will still find trade worth while from their perspective.
E) it is possible that both will enjoy the conventional gains from trade.

Accepted Answer

Even if one country's wage level is higher than the other's, they can still enjoy the conventional gains from trade as long as they specialize in producing goods or services that have a comparative advantage in producing. The high-wage country can produce goods or services that require more skilled labor while the low-wage country can specialize in producing goods or services that require less skilled labor. This way, both countries can benefit from trade by exporting the goods or services that they are efficient at producing and importing the goods or services that are more expensive to produce domestically. Hence, it is possible that both will enjoy the conventional gains from trade, making option E the correct answer.

Question 18

If two countries have identical production possibility frontiers,then trade between them is likely to be beneficial if
A) their supply curves are identical.
B) their cost functions are identical.
C) their demand conditions are identical.
D) their incomes are identical.
E) their demand functions differ.

Accepted Answer

If the demand functions differ between the two countries, then there may be an opportunity for mutually beneficial trade. For example, if one country has a higher demand for a particular good than the other, then that country could specialize in producing and exporting that good while the other country specializes in producing and exporting another good. This would result in both countries being able to consume more of both goods through trade than they would be able to produce on their own. Alternatively, if there is no difference in demand between the two countries, then there would be no reason for trade as both countries would have the same preferences for the goods they produce.

Question 19

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios)then it is probable that
A) free trade will not improve either both countries welfare.
B) free trade will result in no trade taking place.
C) free trade will result in each country exporting the good in which it enjoys comparative advantage.
D) free trade will result in each country exporting the good in which it suffers the greatest comparative disadvantage.
E) free trade will not affect the economic welfare of either country.

Accepted Answer

If one country has a higher wage level than another country, it may have a comparative advantage in producing goods that rely more on skilled labor. This means that it may be more efficient for that country to produce those goods and export them to the other country. In turn, the other country may export goods that rely more on unskilled labor. This specialization and trade can increase the overall welfare of both countries by allowing them to consume more than they could produce on their own. Therefore, free trade will result in each country exporting the good in which it enjoys comparative advantage.

Question 20

In a two-country,two-product world,the statement "Germany enjoys a comparative advantage over France in autos relative to ships" is equivalent to
A) France having a comparative advantage over Germany in ships.
B) France having a comparative disadvantage compared to Germany in autos and ships.
C) Germany having a comparative advantage over France in autos and ships.
D) France having no comparative advantage over Germany.
E) France should produce autos.

Accepted Answer

The statement "Germany enjoys a comparative advantage over France in autos relative to ships" means that Germany can produce autos at a lower opportunity cost compared to France, while France can produce ships at a lower opportunity cost compared to Germany. Therefore, France has a comparative advantage in ships and Germany has a comparative advantage in autos.

Quiz 3: Labor Productivity and Comparative Advantage: The Ricardian Model

Which of the following statements is TRUE?

Mahatma Gandhi exhorted his followers in India to promote economic welfare by decreasing imports.This approach

The pauper labor theory,and the exploitation argument

If a production possibilities frontier is bowed out (concave to the origin) ,then production occurs under conditions of

The Country of Rhozundia is blessed with rich copper deposits.The cost of copper produced (relative to the cost of widgets produced) is therefore very low.From this information we know that

-Given the information in the table above.If these two countries trade these two goods in the context of the Ricardian model of comparative advantage,then what is the lower limit of the world equilibrium price of widgets?

Suppose the United States' production possibility frontier was flatter to the widget axis,whereas Germany's was flatter to the butter axis.We now learn that the German mark sharply depreciates against the U.S.dollar.We now know that

If the production possibilities frontier of one trade partner ("Country A") is bowed out (concave to the origin) ,then increased specialization in production by that country will

-Given the information in the table above.What is the opportunity cost of cloth in terms of Widgets in Foreign?

If the United States' production possibility frontier was flatter to the widget axis,whereas Germany's was flatter to the butter axis,we know that

If labor productivities were exactly proportional to wage levels internationally,this would

Suppose the United states production possibility frontier was flatter to the widget axis,whereas Germany's was flatter to the butter axis.We now learn that the German wage doubles,but U.S.wages do not change at all.We now know that

-Given the information in the table above.If these two countries trade these two goods with each other in context of the Ricardian model of comparative advantage,what is the lower limit for the price of cloth?

We know that in antiquity,China exported silk because no one in any other country knew how to produce this product.From this information we know that

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios) ,then if they both use the same currency

If two countries have identical production possibility frontiers,then trade between them is likely to be beneficial if

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios) then it is probable that

In a two-country,two-product world,the statement "Germany enjoys a comparative advantage over France in autos relative to ships" is equivalent to