Question 1

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

Accepted Answer

Absolute advantage refers to a country's ability to produce a good more efficiently (using fewer resources or less time) than another country, not necessarily at a lower cost in terms of other goods.

Question 2

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 can fluctuate due to market forces, and there can be multiple exchange rates (official, black market, etc.) between countries. The realization of gains from specialization and comparative advantage depends on various factors, including trade policies, not just the exchange rate.

Question 3

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

A country has a comparative advantage in producing a good if it can produce it at a lower opportunity cost compared to other countries, meaning it sacrifices less of other goods to produce it.

Question 4

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 affects the relative prices of goods between countries, influencing which country can export more competitively and thus potentially gain more from trade.

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. Given this information, trade will flow in both directions if the price of a dollar is between

Accepted Answer

For trade to flow in both directions, the relative prices of the goods must favor each country in at least one product. In the U.S., the price ratio of cognac to handbags is 1:4 ($20:$80), meaning 1 bottle of cognac is equivalent to 1/4 of a handbag. In Spain, the price ratio is 3:4 (30 euros:40 euros), meaning 1 bottle of cognac is equivalent to 3/4 of a handbag. For the U.S. to export cognac to Spain, 1 dollar must be worth less than 30/20 (1.5) euros, so that cognac is cheaper in the U.S. when priced in euros. For Spain to export handbags to the U.S., 1 dollar must be worth more than 40/80 (0.5) euros, so that handbags are cheaper in Spain when priced in dollars. Therefore, the exchange rate must be between 0.67 (2/3, which is the inverse of 1.5) and 2.0 euros per dollar for trade to flow in both directions.

Question 6

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 is based on the principle of comparative advantage, which suggests that countries will specialize in producing goods for which they have a lower opportunity cost, leading to more efficient global production and trade. Exchange rates that reflect the true economic value of currencies help in accurately determining comparative advantages.

Question 7

If Holland decreases subsidies to its tulip growers, the price of tulips in the United States will rise.

Accepted Answer

If Holland, a major supplier, decreases subsidies to its tulip growers, production costs may increase, leading to higher prices for tulips. As a result, the price of tulips in the United States, which imports tulips from Holland, could rise due to the increased cost of importing these flowers.

Question 8

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 9

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 suggests that countries can benefit from trade by specializing in the production of goods for which they have a lower opportunity cost, and trading for goods where other countries have a comparative advantage. This principle does not rely on a single exchange rate; rather, a range of exchange rates can facilitate trade that is mutually beneficial, as long as the relative prices allow countries to exploit their comparative advantages.

Question 10

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

Accepted Answer

Trade allows the people of a country to consume outside their production possibility curve, but they still produce within it.

Question 11

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

Accepted Answer

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

Question 12

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 price of U.S. goods in Greece will increase because the euro has become more expensive relative to the dollar. This means that it will take more euros to buy the same amount of U.S. goods.

Question 13

A country is said to have an absolute advantage over another country in the production of a product if it uses more resources to produce that product than the other country does.

Accepted Answer

A country is said to have an absolute advantage over another country in the production of a product if it can produce that product using fewer resources or in less time than the other country.

Question 14

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

Accepted Answer

Trade enables countries to specialize in the production of goods and services in which they have a comparative advantage and then exchange them. This specialization and exchange allow countries to consume more than they would be able to produce on their own, effectively consuming outside their production possibility curve.

Question 15

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

Accepted Answer

The answer of For any pair of nations and goods,...

Question 16

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 17

The economic basis for trade is based on absolute advantage.

Accepted Answer

The economic basis for trade is primarily based on comparative advantage, not absolute advantage. Comparative advantage suggests that even if one country is less efficient at producing all goods compared to another country, there can still be benefits from trade if each country specializes in producing the goods for which it has the lowest opportunity cost.

Question 18

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

When each country specializes in the production of the good in which it has an absolute advantage and then trades with the other, both countries can end up with more of both goods than they would have been able to produce on their own, thus benefiting from the trade.

Question 19

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

Accepted Answer

When the domestic price of a product is below the world price, it means the domestic country can produce the product more cheaply than it is sold for on the world market, making it profitable for the country to export the product.

Question 20

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

Accepted Answer

Countries can also be competitive in products where they have a comparative advantage, which means they can produce a good at a lower opportunity cost than other countries, even if they don't have an absolute advantage.

Quiz 20: International Trade, Comparative Advantage, and Protectionism