Question 1

Adam Smith wrote that a person should never attempt to make at home what it will cost him more to make than to buy.

Accepted Answer

This is known as the principle of comparative advantage, which suggests that individuals and countries should specialize in producing goods and services for which they have a lower opportunity cost than others, thus allowing for greater efficiency and economic growth.

Question 2

Some countries win in international trade,while other countries lose.

Accepted Answer

International trade is generally considered a positive-sum game where all participating countries can benefit through increased efficiency, access to a broader range of goods and services, and economic growth, rather than a zero-sum game where the gains of one country directly result in the losses of another.

Question 3

Adam Smith developed the theory of comparative advantage as we know it today.

Accepted Answer

David Ricardo developed the theory of comparative advantage, not Adam Smith. Adam Smith is known for the concept of absolute advantage.

Question 4

For international trade to benefit a country,it must benefit all citizens of that country.

Accepted Answer

International trade can benefit a country overall by increasing economic growth, efficiency, and consumer choice, but it does not necessarily benefit all citizens equally. Some individuals or sectors may face job losses or reduced income due to competition from imports.

Question 5

If a country has a lower opportunity cost than its potential trading partner,the country should decide to be self-sufficient.

Accepted Answer

If a country has a lower opportunity cost than its potential trading partner, it means that it can produce that good at a lower cost compared to its trading partner. In this case, it is more beneficial for the country to specialize in producing the good with a lower opportunity cost and trade with its partner for the other goods that it needs but cannot produce as efficiently. This leads to an increase in overall efficiency and welfare for both countries. Therefore, the country should not be self-sufficient but instead engage in trade with its partner.

Question 6

David Ricardo was the author of the 1817 book Principles of Political Economy and Taxation.

Accepted Answer

This statement is true. David Ricardo did author the book Principles of Political Economy and Taxation in 1817.

Question 7

For both parties to gain from trade,the price at which they trade must lie between the two opportunity costs.

Accepted Answer

This statement is true because trade between two parties is only profitable when both parties are able to exchange goods or services at a price that is lower than their opportunity cost of producing the same goods or services. If the price is higher than a party's opportunity cost, then it would be more advantageous for them to produce the good or service themselves rather than engaging in trade.

Question 8

Ellie and Brendan both produce apple pies and vanilla ice cream.If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream,a mutually advantageous trade can be struck at a price of one apple pie for 1/3 gallon of ice cream.

Accepted Answer

Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream, which means she gives up 1/2 gallon of ice cream to produce one apple pie.
Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream, which means he gives up 1/4 gallon of ice cream to produce one apple pie.
In a mutually advantageous trade, both Ellie and Brendan should agree on a trade-off where they both gain. The price of one apple pie is 1/3 gallon of ice cream, which is less than the opportunity cost of both Ellie and Brendan. Ellie gains 1/6 gallon of ice cream (half of her opportunity cost) by producing an apple pie and trading it for 1/3 gallon of ice cream. Brendan gains 1/12 gallon of ice cream (quarter of his opportunity cost) by producing an apple pie and trading it for 1/3 gallon of ice cream. Hence, a mutually advantageous trade can be struck at a price of one apple pie for 1/3 gallon of ice cream.

Question 9

International trade may make some individuals in a nation better off,while other individuals are made worse off.

Accepted Answer

According to the theory of comparative advantage, international trade allows countries to specialize in producing the goods and services in which they have a comparative advantage. This can lead to lower prices for consumers and higher profits for businesses. However, some workers and industries may be negatively impacted by increased competition from imports, resulting in job losses and reduced wages. Overall, international trade can have both winners and losers within a country.

Question 10

Differences in opportunity cost allow for gains from trade.

Accepted Answer

Opportunity cost refers to the value of the next best alternative that must be given up in order to pursue a certain action. Since individuals and countries have different opportunity costs in producing goods and services, they can specialize in the areas where they have a comparative advantage, and then trade with others who have different comparative advantages. This leads to gains from trade as each party can obtain more goods or services at a lower opportunity cost than if they were to produce everything themselves.

Question 11

If US workers can produce everything in less time than Mexican workers,it is not possible for the US to gain from trade with Mexico.

Accepted Answer

Even if American workers can produce everything in less time than Mexican workers, there are still other factors to consider in trade such as comparative advantage, specialization, and different products being produced. Trade can still be mutually beneficial for both countries even if one country is more efficient in producing everything.

Question 12

It takes Ross 6 hours to produce a bushel of corn and 2 hours to wash and polish a car.It takes Courtney 6 hours to produce a bushel of corn and 1 hour to wash and polish a car.Courtney and Ross cannot gain from specialization and trade,since it takes each of them 6 hours to produce 1 bushel of corn.

Accepted Answer

Courtney has a comparative advantage in washing and polishing cars because she can do it in less time than Ross. Ross, by focusing on producing corn, where their productivity is the same, allows both to benefit from specialization and trade based on Courtney's lower opportunity cost for car washing.

Question 13

As long as two people have different opportunity costs,each can gain from trade with the other,since trade allows each person to obtain a good at a price lower than his or her opportunity cost.

Accepted Answer

This statement is based on the principle of comparative advantage, which states that as long as two parties have different opportunity costs in producing a good or service, they can gain from trade. By specializing in the production of the good or service with a lower opportunity cost and trading with each other, they can both obtain the good or service at a price lower than their respective opportunity costs.

Question 14

Specialization and trade can make everyone better off if a person can obtain goods at prices that are less than that person's opportunity cost.

Accepted Answer

Specialization and trade allow people and countries to focus on producing goods and services in which they have a comparative advantage, allowing them to produce more efficiently and at a lower cost. By trading with others who have different comparative advantages, individuals and countries can obtain goods and services at prices lower than their own opportunity cost of producing them, resulting in mutual gains from trade.

Question 15

For both parties to gain from trade,the price at which they trade must lie exactly in the middle of the two opportunity costs.

Accepted Answer

The statement is not entirely true. Both parties can still gain from trade even if the price does not lie exactly in the middle of their opportunity costs. As long as the price is lower than one party's opportunity cost and higher than the other party's opportunity cost, there can be gains from trade.

Question 16

Adam Smith was the author of the 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.

Accepted Answer

This statement is true. Adam Smith is widely regarded as the father of modern economics, and his book is considered one of the most influential works in the field.

Question 17

When each person specializes in producing the good in which he or she has a comparative advantage,each person can gain from trade but total production in the economy is unchanged.

Accepted Answer

When each person specializes according to their comparative advantage and then trades, total production in the economy increases because resources are being used more efficiently, leading to an increase in overall output.

Question 18

Fred trades 2 tomatoes to Barney in exchange for 1 pumpkin.Fred and Barney both gain from the exchange.We can conclude that,for Barney,the opportunity cost of producing 1 pumpkin is greater than 2 tomatoes.

Accepted Answer

The statement that both Fred and Barney gain from the exchange does not necessarily imply anything about Barney's opportunity cost of producing 1 pumpkin relative to 2 tomatoes. It only indicates that each values what they receive more than what they give up.

Question 19

Trade allows a person to obtain goods at prices that are less than that person's opportunity cost because each person specializes in the activity for which he or she has the lower opportunity cost.

Accepted Answer

This is the principle of comparative advantage, which states that trade benefits both parties when they specialize in producing goods where they have a comparative advantage (i.e. a lower opportunity cost). As a result, they can produce more and at a lower cost, allowing for mutually beneficial exchange.

Question 20

Goods produced abroad and sold domestically are called exports and goods produced domestically and sold abroad are called imports.

Accepted Answer

Goods produced abroad and sold domestically are called imports, while goods produced domestically and sold abroad are called exports.

Quiz 3: Interdependence and the Gains From Trade