Question 1

Initially trade between the United States and Canada is balanced. Then, if a change in the exchange rate reduces the U.S. dollar price of Canadian goods, ceteris paribus, we would expect
A) a trade surplus in the United States.
B) a trade surplus in Canada.
C) a trade deficit in Canada.
D) a trade deficit in both countries.

Accepted Answer

If the exchange rate reduces the U.S. dollar price of Canadian goods, Canadian goods will become relatively cheaper for Americans, which will increase demand for Canadian goods. This will lead to an increase in Canadian exports and a trade surplus for Canada. On the other hand, as Americans buy more Canadian goods, they will be selling more U.S. dollars to buy Canadian dollars, which will cause the value of the U.S. dollar to fall relative to the Canadian dollar. This fall in the value of the U.S. dollar will increase the price of American goods for Canadians, which will reduce demand for American goods. As a result, Canadian imports will decrease, leading to a trade surplus for Canada and a trade deficit for the United States. However, the question asks for the initial effect only, so the correct answer is B, a trade surplus in Canada.

Question 2

The purpose of the ________ was to discourage imports and encourage exports, and thus keep the price of food high.
A) Banana Tax
B) Soybean Wars
C) Sugar Legislation
D) Corn Laws

Accepted Answer

The Corn Laws were a set of tariffs and restrictions on imported grain imposed in Great Britain in the early 19th century. The laws were intended to protect domestic farmers from cheap foreign imports, and to keep the price of British grain high. The laws were eventually repealed in 1846 after being a subject of controversy and protests from urban areas who were hurt by high food prices.

Question 3

If the price of a car in the United States is $22,000, and the exchange rate between the dollar and the Japanese yen falls from 125 yen to 105 yen per dollar, then the price of the American car in Japan will
A) fall.
B) rise.
C) remain the same.
D) be irrelevant, because the Japanese government will impose restrictions on imports from the United States.

Accepted Answer

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

Question 4

Suppose a U.S. dollar exchanges for 2 British pounds, then each pound is worth
A) $.25.
B) $.50.
C) $1.
D) $4.

Accepted Answer

If 1 U.S. dollar exchanges for 2 British pounds, then each British pound is worth half a dollar, or $0.50.

Question 5

For any pair of countries, there is
A) a range of exchange rates that can lead automatically to both countries realizing the gains from specialization and comparative advantage.
B) one single exchange rate that will lead indirectly to one country realizing the gains from specialization and comparative advantage, but not the other country.
C) a range of exchange rates that can lead indirectly to one country realizing the gains from specialization and comparative advantage, but not the other country.
D) one single exchange rate that will lead automatically to both countries realizing the gains from specialization and comparative advantage.

Accepted Answer

A range of exchange rates can lead both countries to realize the gains from specialization and comparative advantage because there is always a range where both countries benefit from trading with each other. If the exchange rate is too high, one country may be at a disadvantage and vice versa if the exchange rate is too low. However, there is always a range where both countries can benefit, and it is up to them to find that range through negotiations and agreements.

Question 6

Assume that Blade Runner specializes in producing in-line skates and Hang Ten specializes in producing surfboards. After trade Blade Runner exports 800 pairs of in-line skates and imports 200 surfboards. The terms of trade
A) are 1:4 in-line skates to surfboards.
B) are 4:1 in-line skates to surfboards.
C) are 1/4:1 in-line skates to surfboards.
D) cannot be determined from this information.

Accepted Answer

The terms of trade can be calculated by dividing the amount of exports by the amount of imports. In this case, Blade Runner exports 800 pairs of in-line skates and imports 200 surfboards. Therefore, the terms of trade are 4:1 in-line skates to surfboards (800/200 = 4).

Question 7

Suppose that the United States and Italy both produce wine and shoes. In the United States, wine sells for $10 a bottle and shoes sell for $40 a pair. In Italy, wine sells for 15 euros a bottle and shoes sell for 20 euros a pair. Given this information, trade will flow in both directions if the price of a dollar is between
A) .5 and .75 euro.
B) .67 and 2 euros.
C) 1.5 and 2.5 euros.
D) 2.0 and 3.0 euros.

Accepted Answer

To determine whether trade will flow in both directions, we need to compare the opportunity cost of producing each good in each country.
In the US:
- The opportunity cost of producing one bottle of wine is 4 pairs of shoes (10/40)
- The opportunity cost of producing one pair of shoes is 0.25 bottles of wine (40/10)
In Italy:
- The opportunity cost of producing one bottle of wine is 0.75 pairs of shoes (15/20)
- The opportunity cost of producing one pair of shoes is 1.33 bottles of wine (20/15)
If the price of a dollar is too high relative to the euro, then US goods will be relatively more expensive than Italian goods, which means it will be cheaper for Italy to produce shoes and import wine from the US, while the US will have little incentive to import Italian shoes. 
Conversely, if the price of a dollar is too low relative to the euro, then Italian goods will be relatively more expensive than US goods, which means it will be cheaper for the US to produce shoes and import wine from Italy, while Italy will have little incentive to import US shoes.
Therefore, trade will flow in both directions if the exchange rate is such that the opportunity cost of producing each good is more or less equal in both countries. From our previous calculations, we see that this occurs when 1 dollar is worth approximately 0.67 to 2 euros. Therefore, the answer is B.

Question 8

Refer to the information provided in Figure 33.2 below to answer the question(s) that follow.  Figure 33.2
-Refer to Figure 33.2. The United States has an absolute advantage in producing
A) trucks.
B) both cars and trucks.
C) cars.
D) neither cars nor trucks.

Accepted Answer

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

Question 9

Refer to the information provided in Table 33.3 below to answer the question(s) that follow.
Table 33.3 
-Refer to Table 33.3. Trade will flow in both directions between countries only if the price of the euro is between
A) $.40 and $.50.
B) $1.00 and $2.25.
C) $.60 and $.75.
D) $.44 and $1.00.

Accepted Answer

Trade will only flow between countries if the exchange rate is such that the euro can be bought by either country at a price within the range of their domestic currency values. From the table, we can see that the range of exchange rates where trade will occur is when the euro is priced between $.44 and $1.00. Therefore, the correct choice is D.

Question 10

If the price of a car in the United States is $26,000, and the exchange rate between the dollar and the British pound rises from $1.50 to $2.00 per pound, then the price of the American car in Britain will
A) fall.
B) rise.
C) remain the same.
D) be irrelevant, because the British government will impose restrictions on imports from the United States.

Accepted Answer

When the exchange rate rises from $1.50 to $2.00 per pound, it means that fewer pounds are needed to buy the same amount of dollars. Therefore, the price of the American car in Britain, when converted to pounds, will fall because it costs fewer pounds to buy the car at $26,000.

Question 11

Refer to the information provided in Table 33.3 below to answer the question(s) that follow.
Table 33.3 
-Refer to Table 33.3. If the exchange rate is $1 = 1 euro, then
A) the United States will import both raspberries and chocolate.
B) Belgium will import both raspberries and chocolate.
C) the United States will import chocolate and Belgium will import raspberries.
D) Belgium will import chocolate.

Accepted Answer

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

Question 12

Refer to the information provided in Table 33.3 below to answer the question(s) that follow.
Table 33.3 
-Refer to Table 33.3. If the exchange rate is $1 = 2 euros, then
A) the United States will import both raspberries and chocolate.
B) Belgium will import both raspberries and chocolate.
C) the United States will import raspberries and Belgium will import chocolate.
D) Belgium will import chocolate.

Accepted Answer

According to the table, Belgium has a comparative advantage in producing chocolate with a lower opportunity cost of 1.5 units of raspberries per unit of chocolate, while the United States has a comparative advantage in producing raspberries with a lower opportunity cost of 0.67 units of chocolate per unit of raspberries. Therefore, if the exchange rate is $1 = 2 euros, then it would be cheaper for the United States to import raspberries from Belgium at a price of 1 euro per unit, and for Belgium to import chocolate from the United States at a price of 2 dollars per unit. Therefore, the United States will import raspberries and Belgium will import chocolate.

Question 13

Refer to the information provided in Figure 33.2 below to answer the question(s) that follow.  Figure 33.2
-Refer to Figure 33.2. England has an absolute advantage in producing
A) trucks.
B) both cars and trucks.
C) cars.
D) neither cars nor trucks.

Accepted Answer

England has a lower opportunity cost of producing trucks than cars, meaning it can produce more trucks with the same resources.

Question 14

If the exchange rate between the United States and Japan changes from $1 = 100 yen to $1 = 110 yen, then, ceteris paribus, the price of American goods in Japan
A) could either increase or decrease.
B) will decrease.
C) will remain the same.
D) will increase.

Accepted Answer

With an appreciation of the U.S. dollar and a corresponding depreciation of the Japanese yen, American goods become relatively more expensive for the Japanese consumers. As a result, the price of American goods in Japan is likely to increase.

Question 15

When trade is free, patterns of trade and trade flows result from
A) the collective decisions of a few importers and exporters, as well as the governments of the countries in which they reside.
B) the collective decisions of a few importers and exporters, as well as millions of private households and firms.
C) the independent decisions of thousands of importers and exporters, as well as millions of private households and firms.
D) the independent decisions of thousands of importers and exporters, as well as the governments of the countries in which they reside.

Accepted Answer

When trade is free, individual firms and private households are free to make independent decisions about what goods and services they want to buy and sell with other countries. These decisions collectively create patterns of trade and trade flows. While governments may have some influence over trade through policies and regulations, ultimately it is the choices made by millions of individual economic actors that determine the shape of international trade.

Question 16

Refer to the information provided in Figure 33.2 below to answer the question(s) that follow.  Figure 33.2
-Refer to Figure 33.2. The opportunity cost of 1 ________ is 0.25 ________ in the United States and 0.67 ________ in England.
A) car; truck; truck
B) truck; car; car
C) car; car; truck
D) truck; truck; car

Accepted Answer

In the United States, the opportunity cost of producing 1 car is 0.25 trucks, and in England, the opportunity cost of producing 1 car is 0.67 trucks.

Question 17

If the exchange rate between the United States and Mexico changes from $1 = 100 pesos to $1 = 5 pesos, ceteris paribus
A) U.S. imports from Mexico increase.
B) Mexican exports to the United States increase.
C) U.S. exports to Mexico increase.
D) the trade deficit in the United States increases.

Accepted Answer

When the exchange rate changes from $1 = 100 pesos to $1 = 5 pesos, it means that the dollar has appreciated in value relative to the peso. This makes U.S. goods more expensive for Mexicans to buy, while Mexican goods become much cheaper for Americans. As a result, U.S. exports to Mexico are likely to increase, while Mexican exports to the United States may decrease as their goods become more expensive. Therefore, the correct choice is C.

Question 18

Suppose that the United States and Italy both produce wine and shoes. In the United States, wine sells for $10 a bottle and shoes sell for $40 a pair. In Italy, wine sells for 15 euros a bottle and shoes sell for 20 euros a pair. If the current exchange rate is 0.8 euro to the dollar, then
A) Italy will import both shoes and wine from the United States.
B) the United States will import both shoes and wine from Italy.
C) the United States will import shoes from Italy and Italy will import wine from the United States.
D) the United States will import wine from Italy and Italy will import shoes from the United States.

Accepted Answer

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

Question 19

Refer to the information provided in Table 33.3 below to answer the question(s) that follow.
Table 33.3 
-Refer to Table 33.3. If the exchange rate is $1 = 3 euros, then
A) the United States will import both raspberries and chocolate.
B) Belgium will import both raspberries and chocolate.
C) the United States will import chocolate and Belgium will import raspberries.
D) the United States will import raspberries and Belgium will import chocolate.

Accepted Answer

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

Question 20

If you are traveling in China and you purchase a meal that costs 140 yuan and the current exchange rate is 7 yuan to the dollar, then the price of the meal in U.S. currency is
A) $200.
B) $20.
C) $10.
D) $2.

Accepted Answer

To convert yuan to dollars, we divide by the exchange rate. 
140 yuan ÷ 7 yuan/dollar = $20.

Quiz 33: International Trade, Comparative Advantage, and Protectionism

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

The purpose of the ________ was to discourage imports and encourage exports, and thus keep the price of food high.

If the price of a car in the United States is $22,000, and the exchange rate between the dollar and the Japanese yen falls from 125 yen to 105 yen per dollar, then the price of the American car in Japan will

Suppose a U.S. dollar exchanges for 2 British pounds, then each pound is worth

For any pair of countries, there is

Assume that Blade Runner specializes in producing in-line skates and Hang Ten specializes in producing surfboards. After trade Blade Runner exports 800 pairs of in-line skates and imports 200 surfboards. The terms of trade

Refer to the information provided in Figure 33.2 below to answer the question(s) that follow. Figure 33.2 -Refer to Figure 33.2. The United States has an absolute advantage in producing

Refer to the information provided in Table 33.3 below to answer the question(s) that follow. Table 33.3 -Refer to Table 33.3. Trade will flow in both directions between countries only if the price of the euro is between

If the price of a car in the United States is $26,000, and the exchange rate between the dollar and the British pound rises from $1.50 to $2.00 per pound, then the price of the American car in Britain will

Refer to the information provided in Table 33.3 below to answer the question(s) that follow. Table 33.3 -Refer to Table 33.3. If the exchange rate is $1 = 1 euro, then

Refer to the information provided in Table 33.3 below to answer the question(s) that follow. Table 33.3 -Refer to Table 33.3. If the exchange rate is $1 = 2 euros, then

Refer to the information provided in Figure 33.2 below to answer the question(s) that follow. Figure 33.2 -Refer to Figure 33.2. England has an absolute advantage in producing

If the exchange rate between the United States and Japan changes from $1 = 100 yen to $1 = 110 yen, then, ceteris paribus, the price of American goods in Japan

When trade is free, patterns of trade and trade flows result from

Refer to the information provided in Figure 33.2 below to answer the question(s) that follow. Figure 33.2 -Refer to Figure 33.2. The opportunity cost of 1 is 0.25 in the United States and 0.67 in England.

If the exchange rate between the United States and Mexico changes from $1 = 100 pesos to $1 = 5 pesos, ceteris paribus

Suppose that the United States and Italy both produce wine and shoes. In the United States, wine sells for $10 a bottle and shoes sell for $40 a pair. In Italy, wine sells for 15 euros a bottle and shoes sell for 20 euros a pair. If the current exchange rate is 0.8 euro to the dollar, then

Refer to the information provided in Table 33.3 below to answer the question(s) that follow. Table 33.3 -Refer to Table 33.3. If the exchange rate is $1 = 3 euros, then

If you are traveling in China and you purchase a meal that costs 140 yuan and the current exchange rate is 7 yuan to the dollar, then the price of the meal in U.S. currency is