Deck 7: Comparative Advantage and the Gains From International Trade

Question 1

Exports are domestically produced goods and services

A)sold to other countries.
B)sold to the government.
C)sold at home.
D)which are used to produce other goods and services.

Answer 1

A

Question 2

Twenty-seven countries in Europe have eliminated all tariffs with each other.This group of countries is known as the

A)European Union.
B)United Federation of Europe.
C)Gruppo Euro.
D)European Free Trade Association.

Answer 2

A

Question 3

How have Canadian imports and exports, as a fraction of GDP, changed from 1981 to the present?

Answer 3

Since 1981, both exports and imports have been steadily increasing as a fraction of GDP.In 1981, exports were about 17 percent of GDP and imports were about 14 percent of GDP.In 2012, exports were about 30 percent of GDP and imports were about 34 percent of GDP.

Question 4

A tariff is a tax imposed by a government on

A)exports.
B)services.
C)imports.
D)luxury items.

Question 5

In 2012 ________ of Magna International sales were outside Canada.

A)23 percent
B)more than 75 percent
C)less than half
D)95 percent

Question 6

The intention of the "Buy American" provision in the 2009 stimulus bill was to

A)increase jobs in the United States.
B)prevent foreign firms from dumping product in the United States.
C)insure that products used to build roads and bridges meet U.S. quality and safety standards.
D)save the government money by restricting the sale of more expensive foreign-made products.

Question 7

Which of the following statements is true?

A)Japan is more dependent on foreign trade than Canada.
B)Imports and exports account for over one-half of the GDP of the Netherlands.
C)France is the leading exporting country, accounting for 10 percent of total world exports.
D)Because the cost of labour used on farms is so high, Canada exports very little of its wheat, canola, and barley crops.

Question 8

NAFTA refers to a 1994 agreement that eliminated most tariffs among which countries?

A)Canada, the United Kingdom and Mexico
B)the United States, the United Kingdom and Mexico
C)the United States, Canada and Mexico
D)the United States, Mexico and Cuba

Question 9

In Canada, imports and exports combined make up more than half of GDP.

Question 10

Absolute advantage is

A)the ability to produce more of a good or service than competitors when using the same amount of resources.
B)the ability to produce higher quality goods compared to one's competitors.
C)the ability to produce a good or service at a higher opportunity cost than one's competitors.
D)the ability to produce more of a good or service than competitors that have more resources.

Question 11

Which of the following statements is true?

A)Exports benefit trading countries because exports create jobs. Imports do not benefit trading countries because they result in a loss of jobs.
B)China plays little role in global trade.
C)Most of the leading exporting countries are high-income countries.
D)All sectors of the Canadian economy are affected equally by international trade.

Question 12

Workers in industries protected by tariffs and quotas are likely to support these trade restrictions because

A)they do not want to offend their employers who want them.
B)politicians lobby to convince workers the restrictions will make them better off.
C)they believe the restrictions will protect their jobs.
D)they don't understand that the restrictions will threaten their jobs.

Question 13

When Roxanne, a Canadian citizen, purchases a designer dress from Holt Renfrew that was made in Milan (Italy), the purchase is

A)a Canadian import and an Italian export.
B)a Canadian export and an Italian import.
C)both a Canadian and an Italian import.
D)neither an export nor an import for either country.

Question 14

Early international trade in Canada involved

A)exporting consumer goods and importing raw materials.
B)greater costs than in any other country.
C)importing consumer goods and exporting furs and agricultural products.
D)importing raw materials and exporting intermediate goods.

Question 15

In 2012, Magna International sold ________ of what it made to countries outside the North American Free Trade Agreement.

A)more than 75 percent
B)a little more than half
C)almost 80 percent
D)less than 20 percent

Question 16

Magna International's sales are larger outside Canada than inside Canada.

Question 17

Why would Canadian firms that sell products in foreign markets protest a "Buy Canadian" policy?

A)Foreign countries would likely retaliate by limiting Canadian exports.
B)Foreign firms would stop selling all products in Canada.
C)Canadian firms would never be able to meet the increased demand for Canadian-produced goods.
D)Eventually the government would demand price cuts from Canadian manufacturers.

Question 18

Which of the following statements about the importance of trade to the Canadian economy is true?

A)Since 1981, both exports and imports have steadily decreased as a fraction of U.S. gross domestic product.
B)Overall, about 80 percent of Canadian jobs depend directly or indirectly on exports.
C)Canadian exports account for approximately one-third of GDP.
D)International trade plays very little part in the Canadian economy.

Question 19

Goods and services bought domestically but produced in other countries are referred to as

A)exports.
B)imports.
C)transfer payments.
D)foreign consumption.

Question 20

Over the last 50 years, most countries have

A)increased tariffs
B)completely eliminated tariffs
C)doubled tariffs
D)dramatically reduced tariffs

Question 21

________ is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

A)Absolute advantage
B)Specialization
C)Autarky
D)Comparative advantage

Question 22

If Japanese workers are more productive than French workers, then trade between Japan and France

A)can take place only if France has an absolute advantage in producing a good or service Japanese buyers want.
B)cannot take place because Japanese goods and services will be less expensive than French goods and services.
C)cannot take place until French workers become more productive.
D)will take place so long as each country has a comparative advantage in a good or service that buyers in the other country want.

Question 23

Table 7.1
$\begin{array}{|c|c|c|} \hline& \text { Bathing } & \text { Grooming } \\\hline \text { Linda } & 60 & 20 \\\hline \text { Sandy } & 50 & 25 \\\hline\end{array}$
Linda and Sandy own The Preppy Puppy, a dog grooming business. Table 7.1 lists the number of dogs Linda and Sandy can each bathe and groom in one week.

-Refer to Table 7.1.Select the statement that accurately interprets the data in the table.

A)Sandy has a greater opportunity cost than Linda for dog grooming.
B)Sandy's opportunity cost for dog grooming is less than Linda's.
C)Linda has a greater opportunity cost than Sandy for dog bathing.
D)Sandy's opportunity cost for dog grooming and dog bathing are both greater than Linda's.

Question 24

The ratio at which a country can trade its exports for imports from other countries is called

A)a trade barrier.
B)the terms of trade.
C)autarky.
D)a free trade agreement.

Question 25

Examples of ________ show how trade between two countries can make each better off.

A)absolute advantage
B)comparative advantage
C)autarky
D)trade barriers

Question 26

If Canada has a comparative advantage relative to Mexico in the production of timber, then

A)the explicit cost of production for timber is lower in Canada than in Mexico.
B)the opportunity cost of production for timber is lower in Canada than in Mexico.
C)the implicit costs of production for timber are lower in Canada than in Mexico.
D)the average cost of production for timber is lower in Canada than in Mexico.

Question 27

Table 7.1
$\begin{array}{|c|c|c|} \hline& \text { Bathing } & \text { Grooming } \\\hline \text { Linda } & 60 & 20 \\\hline \text { Sandy } & 50 & 25 \\\hline\end{array}$
Linda and Sandy own The Preppy Puppy, a dog grooming business. Table 7.1 lists the number of dogs Linda and Sandy can each bathe and groom in one week.

-Refer to Table 7.1.Select the statement that accurately interprets the data in the table.

A)Linda has an absolute advantage in dog bathing and Sandy has an absolute advantage in dog grooming.
B)Sandy has an absolute advantage in dog bathing and Linda has an absolute advantage in dog grooming.
C)Sandy has an absolute advantage in dog bathing and dog grooming.
D)Linda has an absolute advantage in dog bathing and dog grooming.

Question 28

A situation in which a country does not trade with other countries is called

A)autarky.
B)self-actualization.
C)autonomy.
D)independence.

Question 29

Countries that engage in trade will tend to specialize in the production of goods and services in which they have ________ and will ________ these goods and services.

A)a comparative advantage; import
B)an absolute advantage; export
C)a comparative advantage; export
D)an absolute advantage; import

Question 30

Whenever a buyer and a seller agree to trade,

A)the agreement is made based on absolute advantage.
B)they must have identical opportunity costs in producing their respective products.
C)one party will always be worse off.
D)both must believe they will be made better off.

Question 31

If the opportunity cost of production for two goods is different between two countries, then

A)trade cannot benefit either country.
B)only one country can be made better off by trade.
C)mutually beneficial trade is possible.
D)trade will only benefit both countries if one can lower its opportunity costs.

Question 32

The ability of a firm or country to produce a good or service at a lower opportunity cost than other producers is called absolute advantage.

Question 33

Table 7.2
Output Per Hour of Work

Table 7.2 shows the output per hour of work for handbags and jackets in Cambodia and in Thailand.
Refer to Table 7.2.
a.Which country has an absolute advantage in the production of handbags and jackets?
b.Which country has a comparative advantage in the production of handbags?
c.Which country has a comparative advantage in the production of jackets?

Question 34

Assume that China has a comparative advantage in producing corn and exports corn to Japan.We can conclude that

A)China also has an absolute advantage in producing corn relative to Japan.
B)China has a lower opportunity cost of producing corn relative to Japan.
C)Japan has an absolute disadvantage in producing corn relative to China.
D)labour costs are higher for corn producers in Japan than in China.

Question 35

If Canada imports fishing poles from Mexico and Mexico imports bacon from Canada, which of the following would explain this pattern of trade?

A)Mexico has a lower opportunity cost of producing bacon than Mexico and Mexico has a comparative advantage in producing fishing poles.
B)The opportunity cost of producing fishing poles in Canada is higher than the opportunity cost of producing bacon in Mexico.
C)Mexico must have an absolute advantage in producing fishing poles and Canada must have an absolute advantage in bacon.
D)Mexico has a higher opportunity cost of producing fishing poles than Canada, and Canada has a higher opportunity cost of producing bacon.

Question 36

If Estonia has an absolute advantage in the production of two goods compared to Norway, Estonia can not benefit from trade with Norway.

Question 37

An economic principle that explains why countries produce different goods and services is

A)absolute advantage.
B)trade as a percentage of GDP.
C)comparative advantage.
D)NAFTA.

Question 38

Table 7.1
$\begin{array}{|c|c|c|} \hline& \text { Bathing } & \text { Grooming } \\\hline \text { Linda } & 60 & 20 \\\hline \text { Sandy } & 50 & 25 \\\hline\end{array}$
Linda and Sandy own The Preppy Puppy, a dog grooming business. Table 7.1 lists the number of dogs Linda and Sandy can each bathe and groom in one week.

-Refer to Table 7.1.Select the statement that accurately interprets the data in the table.

A)Linda has a comparative advantage in dog bathing.
B)Sandy has an absolute advantage in dog bathing.
C)Sandy has a comparative advantage in dog bathing.
D)Linda has a comparative advantage in dog grooming and dog bathing.

Question 39

Table 7.1
$\begin{array}{|c|c|c|} \hline& \text { Bathing } & \text { Grooming } \\\hline \text { Linda } & 60 & 20 \\\hline \text { Sandy } & 50 & 25 \\\hline\end{array}$
Linda and Sandy own The Preppy Puppy, a dog grooming business. Table 7.1 lists the number of dogs Linda and Sandy can each bathe and groom in one week.

-Refer to Table 7.1.Select the statement that accurately interprets the data in the table.

A)Sandy has a comparative advantage in dog grooming.
B)Linda has a comparative advantage in dog grooming.
C)Linda has a comparative advantage in dog grooming and dog bathing.
D)Sandy has a comparative advantage in dog bathing.

Question 40

Table 7.2
Output Per Hour of Work

Table 7.2 shows the output per hour of work for handbags and jackets in Cambodia and in Thailand.
Refer to Table 7.2.Fill in the following table with the opportunity costs of producing handbags and jackets for Cambodia and Thailand.

Question 41

Suppose in Finland a worker can produce either 32 cell phones or 4 kayaks, while in Canada a worker can produce either 40 cell phones or 10 kayaks.
a.Which country has an absolute advantage in cell phone production? In kayak production?
b.What is the opportunity cost of 1 cell phone in Finland? In Canada?
c.What is the opportunity cost of 1 kayak in Finland? In Canada?
d.Which country has a comparative advantage in cell phone production? In kayak production?
e.Suppose each country has 1,000 workers.Currently, each country devotes 40 percent of its labour force to cell phone production and 60 percent to kayak production.What is the output of cell phones and kayaks for each country and what is the total output of cell phones and kayaks between the two countries?
f.Suppose each country specializes in the production of the good in which it has a comparative advantage.What is the total output of cell phones and kayaks in the two countries?
g.Provide a numerical example to show how Finland and Canada can both gain from trade.Assume that the terms of trade are established at 6 cell phones for 1 kayak.

Question 42

Canada is a leading exporter of wheat.What explains the comparative advantage of Canada in wheat production?

A)positive externalities
B)investment by large firms such as Viterra and Pioneer
C)climate and soil conditions in Canada which are well-suited for wheat production
D)a large supply of unskilled labour

Question 43

A consequence of increasing marginal costs of producing digital music players in Japan is

A)Japan will not export digital music players.
B)Japan will stop short of complete specialization in the production of digital music players.
C)Japan will import digital music players from countries that don't experience increasing marginal costs.
D)Japan will likely impose trade restrictions on imported digital music players.

Question 44

In the 1970s and 1980s, North America lost its comparative advantage in consumer electronics goods to Japan.What factor was most responsible for the development of Japan's comparative advantage in consumer electronics goods?

A)Japanese firms benefited from external economies.
B)Japan has abundant supplies of labour.
C)Japanese firms excelled in process technology.
D)Japan has abundant supplies of natural resources needed to produce electronics goods.

Question 45

What is autarky?

Question 46

Tastes for products such as beer differ.As a result

A)we see countries specializing completely in the production of beer.
B)consumers of beer have difficulty deciding what type of imported beer to buy.
C)the quality of imported beer is less than it could be.
D)different countries may each have a comparative advantage in producing different types of beer.

Question 47

What are the four main sources of comparative advantage? Briefly explain each source and provide examples.

Question 48

Once a country has lost its comparative advantage in producing a good, its income will be ________ and its economy will be ________ if it switches from producing the good to importing it.

A)higher; less efficient
B)higher; more efficient
C)lower; less efficient
D)lower; more efficient

Question 49

Japan has developed a comparative advantage in designing and producing automobiles.The source of its comparative advantage in these products is

A)abundant supplies of natural resources.
B)a favorable climate.
C)a strong central government.
D)technology.

Question 50

One of the main sources of comparative advantage is internal economies.

Question 51

Which of the following is not a source of comparative advantage?

A)relative abundance of labour and capital
B)technology
C)climate and natural resources
D)a strong foreign currency exchange rate

Question 52

The first example used to explain comparative advantage used two countries (England and Portugal)and two goods (wine and cloth)to show that

A)each country would be better off from trade if it had an absolute advantage in producing one of the goods.
B)each country would have a comparative advantage in the production of the good for which it had an absolute advantage.
C)mutually beneficial trade was possible between two countries even if one had an absolute advantage in the production of both goods.
D)mutually beneficial trade was possible between two countries even if one had a comparative advantage in the production of both goods.

Question 53

In the real world we don't observe countries completely specializing in the production of goods for which they have a comparative advantage.One reasons for this is

A)comparative advantage works better in theory than in practice.
B)some countries have more resources than other countries.
C)tastes for many traded goods are similar in many countries because of globalization.
D)production of most goods involves increasing opportunity costs.

Question 54

Which of the following statements is true?

A)All individuals in both countries are made better off as a result of international trade.
B)Within each country, some individuals are made better off as a result of international trade, but one of the countries will be worse off overall.
C)Although some individuals are made better off as a result of international trade, both countries may be made worse off overall.
D)Each country as a whole is made better off as a result of international trade, but individuals within each country may be made worse off.

Question 55

Bay Street, in Toronto, is the heart of the Canadian financial system, where banks, brokerage houses, other financial firms, and the Toronto Stock Exchange are all located.What is the reason for Toronto's comparative advantage in the financial market?

A)the development of superior information technology
B)an abundant supply of skilled labour
C)Toronto has a central location in the country
D)external economies

Question 56

Many proponents of globalization claim "Trade is a win-win situation for all countries that participate." This statement is

A)false since it ignores the workers who lose their jobs as result of international trade.
B)false since not all countries participate in international trade.
C)true because it refers to countries; individuals may be losers as a result of international trade.
D)true because all consumers and workers benefit from international trade.

Question 57

The simple trade model demonstrates that countries can expand consumption by specializing in the production of goods and services in which they have a comparative advantage.In reality we do not see complete specialization in production.State three reasons why this is case.

Question 58

One reason a country does not specialize completely in production is that not all goods and services are traded internationally.

Question 59

________ refers to reductions in a firm's costs that result from an increase in the size of an industry.

A)Internal economies
B)External economies
C)Autarkial dominance
D)Streamlining

Question 60

China has developed a comparative advantage in the production of clothing.The source of this comparative advantage is

A)a large supply of natural resources.
B)a large supply of unskilled workers and relatively little capital.
C)investment in capital used to produce clothing.
D)superior process technology.

Question 61

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.The tariff revenue collected by the government equals the area

A)D + E + F.
B)E)
C)B + D + E + F.
D)C + D + E + F.

Question 62

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.Without the tariff in place, Canadians consume

A)9 thousand kilograms of rice.
B)15 thousand kilograms of rice.
C)31 thousand kilograms of rice.
D)42 thousand kilograms of rice.

Question 63

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.Without the tariff in place, Canadians produce

A)9 thousand kilograms of rice.
B)15 thousand kilograms of rice.
C)31 thousand kilograms of rice.
D)42 thousand kilograms of rice.

Question 64

A numerical limit imposed by a government on the quantity of a good that can be imported into the country is called a

A)tariff.
B)quota.
C)quantity floor.
D)barricade.

Question 65

A tariff is

A)a limit placed on the quantity of goods that can be imported into a country.
B)a tax imposed by a government on goods imported into a country.
C)a subsidy granted to importers of a vital input.
D)a health and safety restriction imposed on an imported product.

Question 66

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.If the tariff was replaced by a quota which limited rice imports to 16 thousand kilograms, the amount of revenue received by rice importers would equal

A)$6.4 thousand.
B)$9.6 thousand.
C)$16 thousand.
D)$19.8 thousand.

Question 67

Which of the following is not an example of a trade restriction?

A)tariffs
B)quotas and voluntary export restraints
C)legislation requiring that cars sold in a country have a 50 percent domestic content
D)consumer preferences for goods produced domestically

Question 68

Trade between countries that is without restrictions is called

A)unobstructed commerce.
B)unabated trade.
C)free trade.
D)unencumbered trade.

Question 69

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.The tariff causes domestic consumption of rice

A)to fall by 27 thousand kilograms.
B)to fall by 11 thousand kilograms.
C)to rise by 6 thousand kilograms.
D)to rise by 16 thousand kilograms.

Question 70

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.As a result of the tariff, domestic producers increase their quantity supplied by

A)31 thousand kilograms of rice.
B)22 thousand kilograms of rice.
C)15 thousand kilograms of rice.
D)6 thousand kilograms of rice.

Question 71

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.The increase in domestic producer surplus as a result of the tariff is equal to the area

A)C)
B)C + G.
C)A + C + G.
D)C + D + G + H + I.

Question 72

A tariff on imports

A)makes domestic consumers worse off.
B)makes both domestic producers and consumers worse off.
C)makes everyone better off.
D)makes domestic producers worse off.

Question 73

Figure 7.1

Figure 7.1 shows Canadian demand and supply for leather footwear.
Refer to Figure 7.1.Suppose the government allows imports of leather footwear into the United States.What happens to the market price and what is the quantity of imports?

A)The price equals $24 and imports equal 20 units.
B)The price falls to $24 and imports equal 5 units.
C)The price falls to $18 and imports equal 15 units.
D)The price equals $18 and imports equal 10 units.

Question 74

Figure 7.1

Figure 7.1 shows Canadian demand and supply for leather footwear.
Refer to Figure 7.1.Under autarky, the consumer surplus is ________ and the producer surplus is ________.

A)$195; $105
B)$300; $285
C)$260; $40
D)$555; $105

Question 75

Under autarky, consumer surplus is represented by the area

A)above the supply curve and below the equilibrium price.
B)above the supply curve and below the demand curve.
C)below the demand curve and above the equilibrium price.
D)above the demand curve and below the supply curve.

Question 76

Figure 7.1

Figure 7.1 shows Canadian demand and supply for leather footwear.
Refer to Figure 7.1.Suppose the government allows imports of leather footwear into Canada.The market price falls to $18.What are the values of consumer surplus and domestic producer surplus?

A)Consumer surplus = $270; producer surplus = $40.
B)Consumer surplus = $320; producer surplus = $40.
C)Consumer surplus = $320; producer surplus = $360.
D)Consumer surplus = $305; producer surplus = $320.

Question 77

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.The loss in domestic consumer surplus as a result of the tariff is equal to the area

A)B + D + E + F.
B)D + E + F.
C)C + D + E + F.
D)B)

Question 78

Which of the following is the best example of a tariff?

A)a subsidy from the Canadian government to domestic manufacturers of residential air conditioners to enable them to compete more effectively with foreign producers
B)a limit on the quantity of residential air conditioners that can be imported from a foreign country
C)a $150 fee imposed on all imported residential air conditioners
D)a tax placed on all residential air conditioners sold in the domestic market to help offset the impact of emissions on the environment

Question 79

Figure 7.1

Figure 7.1 shows Canadian demand and supply for leather footwear.
Refer to Figure 7.1.Under autarky, the deadweight loss is

A)$0.
B)$15.
C)$30.
D)$40.

Question 80

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff.
Refer to Figure 7.2.With the tariff in place, Canada

A)imports 16 thousand kilograms of rice.
B)imports 9 thousand kilograms of rice.
C)imports 15 thousand kilgrams of rice.
D)exports 31 thousand kilograms of rice.