Question 1

Assume that one day's labor in England can produce either 20 units of cloth or 2 units of wine, while in Portugal, one day's labor can produce either 24 units of cloth or 12 units of wine. If England transfers 2 units of labor from wine to cloth and Portugal transfers 1 unit of labor from cloth to wine, the increase in combined output by those two workers will be

Accepted Answer

Before the transfers, England produces 40 units of cloth (2 workers * 20 units of cloth per worker) and 4 units of wine (2 workers * 2 units of wine per worker). After transferring 2 units of labor from wine to cloth, England will produce 60 units of cloth (2 workers * 30 units of cloth per worker) and 2 units of wine (2 workers * 1 unit of wine per worker).

Before the transfers, Portugal produces 48 units of cloth (2 workers * 24 units of cloth per worker) and 24 units of wine (2 workers * 12 units of wine per worker). After transferring 1 unit of labor from cloth to wine, Portugal will produce 36 units of cloth (1 worker * 36 units of cloth per worker) and 36 units of wine (3 workers * 12 units of wine per worker).

Therefore, the combined output after the transfers will be 98 units of cloth (60 from England + 36 from Portugal + 2 unused) and 38 units of wine (36 from Portugal + 2 from England). The increase in output is 16 units of wine and 16 units of cloth, so the answer is D.

Question 2

Compared to the no-trade situation, when a country imports a good:

Accepted Answer

When a country imports a good, domestic consumers gain access to a wider variety of goods at lower prices, resulting in a consumer surplus. At the same time, domestic producers face increased competition, causing a decrease in their profits and a reduction in the domestic production of the good. However, the gains from consumer surplus generally outweigh the losses from producer surplus, resulting in a net gain for the country as a whole. Therefore, choice A is the correct answer.

Question 3

The supply and demand mechanism will bring an international market into equilibrium

Accepted Answer

The supply and demand mechanism will bring an international market into equilibrium when the quantity of exports supplied by the exporters beyond their domestic consumption is equal to the quantity of imports demanded by the importers. This is the point at which the price is determined and the market is balanced. Choice A is incorrect because if the price is below the domestic price, then the exporters will not be willing to export, leading to a shortage of supply. Choice B is incorrect because if domestic supplies are less than domestic demand, then the exporting countries may restrict exports to their own population before exporting to other countries. Choice C is incorrect because the prices in an exporting and importing country may be different due to various factors such as transportation costs and tariffs.

Question 4

The difference between the price the consumer is willing to pay for a good or service and what he would have to pay for that unit is called:

Accepted Answer

The difference between the price the consumer is willing to pay for a good or service and what he would have to pay for that unit is called consumer surplus. It represents the benefit that consumers receive from paying less than their maximum willingness to pay for a product. Total gains from trading, gain in producer surplus, and total surplus refer to different measures of welfare in a market, but they do not capture the specific benefit to consumers from paying a lower price than their valuation.

Question 5

If an exporter's supply curve of a commodity is upward sloping, and if a change in import demands in other countries leads them to increase their exports, other things equal, we would expect

Accepted Answer

An upward sloping supply curve indicates that as the quantity supplied increases, the price also increases. If there is an increase in export due to higher import demand in other countries, this would lead to a reduction in domestic supply, pushing the domestic price higher.

Question 6

If a nation has "cheap" labor,

Accepted Answer

All of the above statements are true. Even if a nation has cheap labor, it may still have a comparative advantage in producing goods that require lower levels of capital and skill. However, it is unlikely to have a comparative advantage in producing goods that are highly capital-intensive as those goods require expensive machinery and highly skilled workers. Furthermore, no country can have a comparative advantage in everything, and therefore, countries must specialize in producing certain goods where they have a comparative advantage in order to maximize economic efficiency and gain from international trade.

Question 7

Assume that Germany can produce 10 million bottles of beer or 4 million bottles of vodka. Further assume that Russia can produce 7 million bottles of beer or 3 million bottles of vodka. As a result, which of the following is true with regard to absolute and comparative advantage?

Accepted Answer

Germany can produce more bottles of beer and vodka than Russia, so it has the absolute advantage in both products. However, comparative advantage considers the opportunity cost of producing one good over the other. In this case, Germany's opportunity cost of producing one bottle of beer is 0.4 bottles of vodka (10 million beer / 4 million vodka) while Russia's opportunity cost of producing one bottle of beer is 0.43 bottles of vodka (7 million beer / 3 million vodka). Thus, Germany has the comparative advantage in beer because it gives up less vodka to produce one unit of beer than Russia.

Question 8

In Bangladesh one person can produce 330 pounds of rice or 110 shirts in one year. In Singapore one person can produce 400 pounds of rice or 200 shirts in one year. Which of the following statements is true?

Accepted Answer

Bangladesh has a lower opportunity cost of producing rice since they can produce 330 pounds of rice or 110 shirts in one year while in Singapore an individual produces 400 pounds of rice or 200 shirts in one year. This means that Bangladesh has a comparative advantage in the production of rice, as it can produce rice at a lower opportunity cost than Singapore.

Question 9

If discussing trade, it is ____ which matters, rather than ____. absolute advantage; comparative advantage

Accepted Answer

When discussing trade, it is comparative advantage that matters, rather than absolute advantage. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than another producer. Absolute advantage, on the other hand, refers to the ability to produce more of a good or service than another producer with the same amount of resources. While absolute advantage is important, it is not the sole determinant of trade patterns.

Question 10

The difference between the price the seller receives for a good or service and the minimum price he would be willing to accept for that unit is called:

Accepted Answer

The minimum price a seller is willing to accept for a unit is the cost of producing that unit, so the difference between the selling price and the minimum price is the gain in producer surplus. Consumer surplus refers to the difference between the maximum price a buyer is willing to pay for a unit and the actual selling price, while total surplus is the sum of consumer and producer surplus. Total gains from trading that unit is not a commonly used economic term.

Question 11

When markets reach the ____ price all the opportunities for mutually beneficial trade have taken place and the sum of consumer and producer surplus is ____.

Accepted Answer

Equilibrium is the price at which quantity demanded equals quantity supplied. At this price, all possible trades that are mutually beneficial have already taken place. At any other price, either there will be excess demand (shortage) or excess supply (surplus), which implies that some mutually beneficial trades are still possible. At equilibrium, the sum of consumer and producer surplus is maximized because it reflects the total gains from trade. Both consumers and producers get a portion of the gains from trade, and this is reflected in the prices they pay and receive, respectively. Choice A is incorrect because the minimum price is either a price floor imposed by the government or a price that is so low that quantity demanded is much higher than quantity supplied, indicating a shortage. In this case, some mutually beneficial trades cannot take place. Choice B is incorrect because the maximum price is either a price ceiling imposed by the government or a price that is much higher than equilibrium price, indicating a surplus. In this case, some mutually beneficial trades cannot take place at the maximum price. Choice D is incorrect because consumer and producer surplus are not shared equally between them; rather, the size of the surplus depends on the elasticity of demand and supply, and the distribution of bargaining power between them.

Question 12

The idea behind comparative advantage reflects the possibility that one party

Accepted Answer

The concept of comparative advantage is based on the idea that one party has an advantage in producing a good or service, either because they can produce it more efficiently, with a lower opportunity cost, or at a cheaper cost, compared to another party. Therefore, all of the above options are correct.

Question 13

If a nation has a comparative disadvantage in the production of some commodity,

Accepted Answer

Even if a nation has a comparative disadvantage in the production of some commodity, it can still gain from international trade in that commodity by importing it from another country at a lower opportunity cost than if they produced it domestically. This allows the nation to allocate its resources towards producing goods and services that it has a comparative advantage in, leading to overall economic gains from trade. Therefore, option B is the correct choice.

Question 14

Compared to the no-trade situation, when a country exports a good:

Accepted Answer

When a country exports a good, domestic producers will benefit as they are able to sell their goods at a higher price in the world market. However, domestic consumers will have to pay a higher price for the good. The gains to producers will outweigh the losses to consumers, resulting in an overall net gain for the country.

Question 15

If nations begin to expand their specialization in production for the purpose of trade,

Accepted Answer

When nations specialize in production and engage in trade, they can produce more efficiently and at a lower cost, leading to an increase in total world output. This increase in output also leads to an increase in consumer surplus as consumers can purchase goods at a lower price. Therefore, both total world output and consumer surplus will increase when nations expand their specialization in production for trade.

Question 16

Suppose that the U.S. can make 15 cars or 20 bottles of wine with one year's worth of labor. France can make 10 cars or 18 bottles of wine with one year's worth of labor. From these numbers, we can conclude

Accepted Answer

The U.S. has an absolute advantage in both cars and wine because it can produce more of both with the same amount of labor compared to France. However, the U.S. has a comparative advantage in cars because it sacrifices fewer bottles of wine to produce an additional car (20/15 = 1.33 bottles of wine per car) compared to France (18/10 = 1.8 bottles of wine per car). France has a comparative advantage in wine production because it sacrifices fewer cars to produce an additional bottle of wine (10/18 = 0.56 cars per bottle of wine) compared to the U.S. (15/20 = 0.75 cars per bottle of wine).

Question 17

Which of the following is true?

Accepted Answer

A nation cannot have a comparative advantage in the production of every good because comparative advantage is based on the relative efficiency of producing goods compared to another country. If one country has a comparative advantage in one good, another country must have a comparative advantage in another good, as it's all about the relative opportunity costs.

Question 18

One country will have a comparative advantage over another if its production possibilities

Accepted Answer

A country has a comparative advantage if its production possibilities curve has a different slope, indicating it can produce a good at a lower opportunity cost than another country.

Question 19

The world price of a commodity will settle at the level where

Accepted Answer

The world price of a commodity will settle at the level where the excess demand of the importing country is just equal to the excess supply of the exporting country. This is because if there is excess demand in the importing country and excess supply in the exporting country, prices will increase in the importing country and decrease in the exporting country until the excess demand is eliminated and excess supply is used up. This process will continue until the excess demand in the importing country is equal to the excess supply in the exporting country, resulting in a stable world price.

Question 20

If two countries each are currently producing two goods, and each begins to specialize in the good in which it has a comparative advantage, what will happen to total world output?

Accepted Answer

By specializing in producing the good in which they have a comparative advantage, each country can increase their efficiency and productivity, resulting in an increase in total world output. This is the result of the principle of comparative advantage, which asserts that when each country specializes in producing the good it is relatively more efficient in producing, both countries can benefit by trading with each other.

Quiz 20: Economic Growth in the Global Economy