Question 1

Trade is a zero sum game.

Accepted Answer

Trade can result in mutual benefits for both parties, making it a positive sum game. Both parties can gain from the exchange due to comparative advantages and specialization.

Question 2

The principle of absolute advantage states that a country should import a commodity that can be produced at a lower cost than can other nations.

Accepted Answer

The principle of absolute advantage actually states that a country should specialize in producing and exporting goods for which it has an absolute advantage (can produce more efficiently than other countries) and import goods that it produces less efficiently.

Question 3

If one nation has absolute advantage for all products, trade will not take place.

Accepted Answer

Even if one nation has absolute advantage for all products, trade can still take place if the other nation has a comparative advantage in producing certain goods. Both nations can benefit from trading the goods they have a comparative advantage in producing, resulting in increased efficiency and economic growth.

Question 4

As long as the domestic exchange ratio of the United States and that of Canada are identical, the United States should trade with Canada even though the United States may have absolute advantage in all products.

Accepted Answer

The answer of As long as the domestic exchange ratio...

Question 5

If the domestic exchange ratio of the United States and that of Canada are identical, the United States should not trade with Canada even though the United States may have absolute advantage in all products.

Accepted Answer

If the domestic exchange ratio of the United States and that of Canada are identical, then the United States will not gain from trade with Canada, even if it has an absolute advantage in all products. This is because the United States can produce all goods more efficiently than Canada, but it cannot produce them all more efficiently relative to each other. Therefore, the United States will not be able to gain from trade by specializing in the production of goods in which it has an absolute advantage.

Question 6

According to the principle of relative advantage, absolute production costs are irrelevant.

Accepted Answer

The principle of relative advantage states that the focus should be on the relative costs of producing goods or services compared to another country, not absolute production costs. This means that a country may have higher absolute production costs, but still have a relative advantage in producing a particular good or service compared to another country with even higher absolute production costs.

Question 7

Relative production costs can determine whether trade should take place, but they do not determine what items to export or import.

Accepted Answer

Relative production costs not only determine whether trade should take place but also influence what items a country exports or imports. Countries tend to export goods for which they have a comparative advantage (lower relative production costs) and import goods for which they have a comparative disadvantage (higher relative production costs).

Question 8

The principle of relative advantage suggests that a country should produce a product with the least comparative disadvantage.

Accepted Answer

The principle of relative advantage states that a country should specialize in the production and export of products that it can produce relatively more efficiently and at a lower opportunity cost compared to other countries. This means producing products with the least comparative disadvantage.

Question 9

Because of trade, the two different domestic exchange ratios will be replaced by a new ratio called the world market exchange ratio or terms of trade.

Accepted Answer

This is because when countries engage in trade with each other, the prices of goods and services will adjust based on supply and demand in the global market, leading to a new exchange ratio that reflects the terms of trade between the two countries.

Question 10

International trade is a function of the unequal domestic exchange ratios.

Accepted Answer

International trade occurs when countries specialize in producing goods or services in which they have a comparative advantage and then exchange these goods with other countries. The exchange ratios are conditioned by domestic exchange ratios. Domestic exchange ratios can be influenced by factors like relative input costs, labor productivity, technology, and economies of scale, which can vary across countries, resulting in unequal exchange ratios. Hence, international trade is a function of the unequal domestic exchange ratios.

Question 11

A country that has absolute advantage in all products has nothing to gain from trading with other nations.

Accepted Answer

Even if a country has absolute advantage in all products, it can still benefit from trading with other nations through specialization and trade. By focusing on producing the products in which it has the greatest absolute advantage and importing others, the country can increase its overall productivity and wealth. Additionally, trade can lead to lower prices for consumers and increased competition, which can drive innovation and efficiency.

Question 12

Comparative advantage is a dynamic concept.

Accepted Answer

Comparative advantage is a dynamic concept because it can change over time due to changes in technology, resources, trade policies, and other factors. It is not a static concept that remains constant.

Question 13

One basic assumption of the principles of absolute and relative advantage is that the advantage is solely determined by labor.

Accepted Answer

The classical theories of absolute and relative advantage, as proposed by Adam Smith and David Ricardo, respectively, primarily focus on labor as the key factor in determining production efficiency and trade benefits.

Question 14

German and Japanese firms are successful in international trade because of their low labor costs.

Accepted Answer

German and Japanese firms are successful in international trade due to their high levels of technology, innovation, quality, and efficiency, not solely because of their low labor costs.

Question 15

Countries can remain competitive in spite of their higher wages.

Accepted Answer

Countries can remain competitive in spite of their higher wages by focusing on education and skills, innovation, automation, and specialization in high-value industries or niche markets. They can also improve their infrastructure, regulatory environment, and overall business climate to attract and retain investment and talent. Additionally, higher wages often lead to higher productivity and consumer demand, which can stimulate economic growth and enhance competitiveness in the long run.

Question 16

country's labor cost may be absolutely high and yet relatively low.

Accepted Answer

A country's labor costs may be high in terms of absolute numbers (e.g. wages), but still relatively low when compared to the productivity and output of the workforce. This is known as labor productivity, which is a measure of the amount of output produced per unit of labor input. If a country's labor force is highly skilled and efficient, they may be able to generate a larger amount of output per hour worked, making their labor cost relatively low in comparison to their productivity.

Question 17

Comparative advantage can be determined by abundance of factor endowments.

Accepted Answer

Comparative advantage is determined by the abundance of factor endowments. Countries that have an abundance of a particular factor such as natural resources, technology, or skilled labor have a comparative advantage in producing goods or services that use that factor intensively. This allows them to produce those goods or services at a lower opportunity cost than other countries, giving them a competitive advantage.

Question 18

According to the theory of factor endowment, the various regions of the world are equally well endowed with regard to production factors.

Accepted Answer

The theory of factor endowment suggests that different regions of the world have different factor endowments, meaning they have different levels of access to factors of production such as land, capital, and labor. This influences what goods and services are produced in each region and how they are traded.

Question 19

According to the factor endowment theory, a country's comparative advantage is in the production factor that it lacks.

Accepted Answer

According to the factor endowment theory, a country's comparative advantage is in the production of goods that intensively use its abundant factors of production, not the factors it lacks.

Question 20

The theory of factor endowment holds that the inequality of relative prices is a function of regional factor endowments.

Accepted Answer

The theory of factor endowment argues that regions or countries with an abundance of a certain factor, such as labor or natural resources, will have a comparative advantage in producing goods that require that factor. This results in differences in relative prices among regions and countries. Therefore, the inequality of relative prices is indeed a function of regional factor endowments according to this theory.

Quiz 2: Trade Theories and Economic Cooperation