Question 1

A country enjoys a comparative advantage in the production of a good if that good can be produced at a lower cost in terms of other goods.

Accepted Answer

This is the definition of comparative advantage.

Question 2

The Heckscher-Ohlin theorem explains why the U.S. both imports and exports cars.

Accepted Answer

The answer of The Heckscher-Ohlin theorem explains why the U.S....

Question 3

If Spain decreases subsidies to its olive growers, the price of olives in the U.S. will fall.

Accepted Answer

Decreasing subsidies to olive growers in Spain would likely increase the cost of production for those growers, potentially leading to higher prices for olives globally, including in the U.S., as Spain is a significant producer of olives.

Question 4

A country is said to enjoy a comparative advantage over another country in the production of a product if it uses fewer resources to produce that product than the other country does.

Accepted Answer

Comparative advantage refers to a country's ability to produce a particular good or service at a lower opportunity cost than another country, not necessarily using fewer resources.

Question 5

A country with a lot of human capital is likely to have a comparative advantage in highly technical goods.

Accepted Answer

Human capital refers to the education, skills, and knowledge of a country's workforce. A country with a highly educated and skilled workforce is likely to have a comparative advantage in industries that require technical knowledge and expertise, such as engineering, pharmaceuticals, and advanced manufacturing. This is because the workforce can produce high-quality and innovative products that are difficult for other countries to replicate or compete against.

Question 6

An example of an acquired comparative advantage is

Accepted Answer

This is an example of an acquired comparative advantage because it is based on the reputation of Japanese companies for producing high-quality TVs. The United States does not have a natural advantage in producing TVs, but has acquired a comparative advantage through its willingness to import and sell Japanese TVs. Choices A, C, and D are examples of absolute advantages or ascribed advantages related to natural resources or legal restrictions.

Question 7

For any pair of nations and goods, if each country has an absolute advantage in the production of one product, it is reasonable to expect that specialization and trade will benefit both countries.

Accepted Answer

If each country has an absolute advantage in the production of one product, then they can specialize in producing that product and trade with each other, leading to gains in efficiency and productivity for both countries. This is the principle of comparative advantage, which suggests that even if one country has an absolute advantage in the production of both goods, it is still beneficial for both countries to trade based on their relative strengths and weaknesses.

Question 8

The Heckscher-Ohlin theorem looks to ________ to explain trade flows.

Accepted Answer

The Heckscher-Ohlin theorem is based on the idea that countries with different relative factor endowments will specialize in the production of goods that use their abundant factors more intensively and trade with each other. In other words, countries will export goods that require the abundant factors of production and import goods that require scarce factors.

Question 9

A significant portion of actual world trade patterns results from

Accepted Answer

The answer of A significant portion of actual world trade...

Question 10

Within the range of exchange rates that permits specialization and trade to take place, the exchange rate will determine which country gains the most from trade.

Accepted Answer

The exchange rate plays a crucial role in determining the terms of trade between two countries. A favorable exchange rate can make a country's exports more competitive and increase demand for its goods, leading to increased production and employment. Conversely, an unfavorable exchange rate can make a country's exports relatively more expensive and reduce demand, leading to reduced production and employment. Therefore, within the range of exchange rates that allows for specialization and trade to take place, the exchange rate will determine which country gains the most from trade.

Question 11

Which of the following phenomena CANNOT be explained by the simple comparative advantage theory?

Accepted Answer

The simple comparative advantage theory does not explain why a country would both import and export the same goods. This phenomenon might be explained by other factors, such as transportation costs or differences in product quality.

Question 12

An example of acquired comparative advantage is that

Accepted Answer

In this scenario, the acquired comparative advantage is the reputation for safety that German cars have built up over time. This is not a natural advantage based on factors like climate or resources, but rather a reputation that has been acquired through marketing and quality control.

Question 13

Only those products in which a country has an absolute advantage will be competitive in world markets.

Accepted Answer

Even if a country does not have an absolute advantage in a certain product, it may still be competitive in world markets through comparative advantage. In other words, a country may specialize in producing goods in which it has a lower opportunity cost and trade with other countries for goods in which they have a comparative advantage.

Question 14

The quantity and quality of labor, land, and natural resources of a country are its

Accepted Answer

Factor endowments refer to a country's stock of labor, land, and natural resources. These factors are the inputs used to produce goods and services, and their quantity and quality determine a country's productive capacity and economic potential. Choice A (capital stock) refers specifically to the equipment and machinery used in production, while choice B (productive capacity) is a broader term that can refer to a country's ability to produce goods and services using various inputs. Choice D (economic potential) is a general term that does not specifically refer to any particular inputs or factors.

Question 15

The software industry depends on highly trained workers, who are abundantly available in Country A. The heavy equipment industry depends on the availability of a large stock of physical capital with which Country B is well endowed. According to Heckscher-Ohlin theorem

Accepted Answer

The Heckscher-Ohlin theorem suggests that countries will export goods that require resources (factors of production) that are relatively abundant and import goods that require resources that are relatively scarce. Since Country A has an abundance of highly trained workers, it would specialize and export software, which relies on such labor. Conversely, Country B, with its large stock of physical capital, would specialize and export heavy equipment. Thus, Country B would import software, aligning with the theorem's prediction.

Question 16

If the exchange rate between the United States and Greece changes from $1 = 1 euro to $1 = 2 euros, then holding everything else constant, the price of U.S. goods in Greece will increase.

Accepted Answer

A stronger euro means that Greek consumers can buy more euros with their money, making imports from the United States relatively more expensive. This would lead to an increase in the price of U.S. goods in Greece.

Question 17

If the domestic price is below the world price of a certain product, the domestic country will export the product.

Accepted Answer

If the domestic price is lower than the world price, domestic producers can sell their products at a higher price in the international market and earn more profit. This would lead to an increase in exports from the domestic country.

Question 18

If exchange rates end up in the right ranges, the free market will drive each country to shift resources into those sectors in which it enjoys a comparative advantage.

Accepted Answer

This statement is true. When exchange rates are in the right ranges, it creates a level playing field for countries to compete in their respective areas of comparative advantage. This results in resources being shifted towards the sectors where the country has a competitive edge, leading to increased efficiency and economic growth.

Question 19

For any pair of countries, there is only one single exchange rate that can lead automatically to both countries realizing the gains from specialization and comparative advantage.

Accepted Answer

Exchange rates are not the only factor in realizing gains from specialization and comparative advantage. Other factors include differences in technology, resources, and labor. Additionally, exchange rate movements are subject to fluctuations and can be influenced by external factors such as political events and economic policies. Therefore, there may be different exchange rates that can lead to the realization of gains from specialization and comparative advantage for different pairs of countries.

Question 20

The Heckscher-Ohlin theorem says that a country is likely to have a comparative advantage in a labor intensive product if it has a large labor supply.

Accepted Answer

The Heckscher-Ohlin theorem states that a country is likely to have a comparative advantage in producing goods that use the factors of production (land, labor, and capital) that are most abundant and cheapest in that country. So, if a country has a large labor supply, it is more likely to have a comparative advantage in producing goods that require a lot of labor, such as labor-intensive products.

Quiz 20: International Trade, Comparative Advantage, and Protectionism