Question 1

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 occurs when a country can produce a good at a lower opportunity cost than another country, not necessarily using fewer resources.

Question 2

Refer to the information provided in Table 18.6 below to answer the questions that follow.
Table 18.6 
-Refer to Table 18.6. Trade will flow in both directions between countries only if the price of the euro is between

Accepted Answer

According to the table, the exchange rate between the US dollar and the Euro is shown in the table. Trade will occur when the exchange rate falls within the bid-ask spread, which is $.44 to $1.00 for one euro. Therefore, trade will flow in both directions between countries if the price of the Euro falls between $.44 and $1.00.

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

Trade allows the people of a country to consume outside their production possibility curve.

Accepted Answer

Trade allows a country to consume goods and services that it cannot produce on its own. This allows the country to consume beyond its production possibility curve, which shows the maximum amount of goods and services that a country can produce with its available resources. By engaging in trade, a country can import products that it cannot produce domestically and export products that it can produce more efficiently than other countries. This leads to a larger variety of goods and services available for consumption, as well as potentially lower prices for consumers.

Question 5

Suppose that the United States and Spain both produce cognac and handbags. In the United States, cognac sells for $20 a bottle and handbags sell for $80. In Spain, cognac sells for 30 euros a bottle and handbags sell for 40 euros. If the current exchange rate is 0.8 euro to the dollar, then

Accepted Answer

The answer of Suppose that the United States and Spain...

Question 6

If the exchange rate between the United States and Mexico changes from $1 = 8 pesos to $1 = 9 pesos, then, ceteris paribus, the price of American goods in Mexico

Accepted Answer

With an increase in the exchange rate, the pesos are now worth less compared to the dollar. This means that American goods in Mexico will become relatively more expensive, and so the price of American goods in Mexico will increase.

Question 7

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

The answer of If the exchange rate between the United...

Question 8

Initially trade between Australia and the United States is balanced. Then, if a change in the exchange rate increases the U.S. dollar price of Australian goods, ceteris paribus, we would expect

Accepted Answer

The answer of Initially trade between Australia and the United...

Question 9

Refer to the information provided in Table 18.6 below to answer the questions that follow.
Table 18.6 
-Refer to Table 18.6. If the exchange rate is $1 = 2 euros, then

Accepted Answer

Looking at the table, we can see that the opportunity cost of producing peas in the United States is 2 carrots, while in France it is only 1 carrot. This means that France has a comparative advantage in producing peas, while the United States has a comparative advantage in producing carrots. Therefore, if the exchange rate is $1 = 2 euros, it would be cheaper for the United States to import peas from France, and for France to import carrots from the United States. Thus, the United States will import peas and France will import carrots.

Question 10

In general, for any two countries, there are many exchange rates that will lead to gains from trade, based on comparative advantage.

Accepted Answer

Comparative advantage is the ability of a country to produce a particular good or service at a lower opportunity cost than another country. As a result, there can be many exchange rates that will make it beneficial for both countries to trade, allowing each country to specialize in producing what they are relatively better at and exchanging with each other.

Question 11

If the exchange rate between the United States and India changes from $1 = 60 rupees to $1 = 10 rupees, ceteris paribus

Accepted Answer

When the exchange rate between two countries changes, it affects the relative prices of goods and services in those countries. In this case, the US dollar has appreciated in value compared to the Indian rupee. This means that US goods and services become relatively more expensive for Indian consumers, while Indian goods and services become relatively cheaper for US consumers. As a result, the demand for US exports to India decreases, while the demand for Indian exports to the US increases. Therefore, the correct answer is C: the United States exports to India increase.

Question 12

Refer to the information provided in Table 18.6 below to answer the questions that follow.
Table 18.6 
-Refer to Table 18.6. If the exchange rate is $1 = 1 euro, then

Accepted Answer

The answer of Refer to the information provided in Table...

Question 13

If the price of a truck in the United States is $18,000, and the exchange rate between the dollar and the Argentine peso falls from 10 pesos to 8 pesos per dollar, then the price of the American truck in Argentina will

Accepted Answer

The answer of If the price of a truck in...

Question 14

Suppose that the United States and Spain both produce cognac and handbags. In the United States, cognac sells for $20 a bottle and handbags sell for $80. In Spain, cognac sells for 30 euros a bottle and handbags sell for 40 euros. Given this information, trade will flow in both directions if the price of a dollar is between

Accepted Answer

To determine if trade will flow in both directions, we need to compare the relative prices of cognac and handbags in the two countries using the exchange rate between the dollar and the euro. If the relative prices are different in the two countries, then there are potential gains from trade.

First, we need to convert the prices in euros to dollars. Assuming an exchange rate of 1 euro = $1.20, the prices in dollars are:

- In the United States, cognac sells for $20 and handbags sell for $80.
- In Spain, cognac sells for $36 and handbags sell for $48.

Next, we compare the relative prices of cognac and handbags between the two countries. In the United States, the price of a bottle of cognac is four times the price of a handbag ($20/$80 = 0.25). In Spain, the price of a bottle of cognac is also four times the price of a handbag (30 euros/40 euros = 0.75).

If the exchange rate between the dollar and the euro is such that the price ratio of cognac to handbags is the same in both countries, then there will be no gains from trade. For example, if 1 euro = $1.20, then the price ratio of cognac to handbags in the United States is 0.25 and the price ratio in Spain is 0.75. These ratios are the same, so there is no incentive to trade.

However, if the exchange rate is such that the price ratio of cognac to handbags is different in the two countries, then there will be potential gains from trade. In particular, if the exchange rate makes the price ratio of cognac to handbags in the United States lower than in Spain, then the United States will have a comparative advantage in producing cognac and will export cognac to Spain. Conversely, if the exchange rate makes the price ratio of cognac to handbags in the United States higher than in Spain, then Spain will have a comparative advantage in producing cognac and will export cognac to the United States.

In this case, we want the exchange rate to make the price ratio of cognac to handbags in the United States lower than in Spain. That is,

$20/$80 < 30 euros/40 euros

0.25 < 0.75

Multiplying both sides by $1.20/euro gives:

0.30 < 0.90

which is true for any exchange rate between 0.67 and 2.0 euros per dollar. Therefore, trade will flow in both directions if the price of a dollar is between 0.67 and 2.0 euros.

Question 15

If you are traveling in Thailand and you purchase a meal that costs 1,400 baht and the current exchange rate is 35 baht to the dollar, then the price of the meal in U.S. currency is

Accepted Answer

To find the price of the meal in U.S. currency, we need to divide the cost in baht by the exchange rate:

1,400 baht ÷ 35 baht/dollar = $40

Question 16

When trade is ________, patterns of trade and trade flows result from the independent decisions of thousands of importers and exporters, as well as millions of private households and firms.

Accepted Answer

When trade is free, there are no restrictions or barriers on imports and exports. Therefore, patterns of trade and trade flows are determined by the choices made by the participants in the market, including importers, exporters, private households, and firms.

Question 17

Refer to the information provided in Table 18.6 below to answer the questions that follow.
Table 18.6 
-Refer to Table 18.6. If the exchange rate is $1 = 3 euros, then

Accepted Answer

The answer of Refer to the information provided in Table...

Question 18

For ________, there is a range of exchange rates that can lead automatically to both countries realizing the gains from specialization and comparative advantage.

Accepted Answer

The principle of comparative advantage applies to any pair of countries, regardless of their level of industrialization or type of government. As long as the exchange rate allows both countries to specialize in producing the goods and services in which they have a comparative advantage, both countries can benefit from international trade.

Question 19

If the price of a truck in the United States is $25,000, and the exchange rate between the dollar and the euro falls from $1.50 to $1.30 per euro, then the price of the American truck in the EU will

Accepted Answer

When the exchange rate between the dollar and the euro falls, it means that the dollar is weaker compared to the euro. Therefore, the price of the American truck in the EU will increase because it now costs more euros to buy the same amount of dollars needed to purchase the truck.

Question 20

Suppose a U.S. dollar exchanges for 0.8 euros, then each euro is worth

Accepted Answer

If one dollar exchanges for 0.8 euros, then we can divide 1 by 0.8 to find how many euros one dollar is worth. 1 divided by 0.8 is 1.25, so each euro is worth $1.25. Therefore, the answer is choice A.

Quiz 18: International Trade, Comparative Advantage, and Protectionism