Question 1

In comparative advantage,the assumption is that resources can move freely from production of one good to another.Why is this assumption unrealistic?

Accepted Answer

Resources do not always move easily from one economic activity to another.The process creates friction and human suffering too.While the comparative advantage theory predicts that the benefits of free trade outweigh the costs by a significant margin,this is of cold comfort to those who bear the costs.

Question 2

It is more realistic to assume diminishing returns to specialization when evaluating the theory of comparative advantage.This is because:

Accepted Answer

While applying the Ricardian theory of comparative advantage to a simplified model with two nations,it is more realistic to assume diminishing returns for two reasons.First,not all resources are of the same quality.A second reason for diminishing returns is that different goods use resources in different proportions.

Question 3

One of the rebuttals of Samuelson's critique of the free trade model is that:

Accepted Answer

While not questioning Samuelson's analysis,some economists note that developing nations are unlikely to be able to upgrade the skill level of their workforce rapidly enough to give rise to the situation in Samuelson's model.In other words,the countries will quickly run into diminishing returns.

Question 4

According to the Heckscher-Ohlin theory,the pattern of international trade is determined by differences in:

Accepted Answer

Unlike Ricardo's theory,the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments,rather than differences in productivity.

Question 5

_____ and _____ created a measure of how "open" to international trade an economy was and then looked at the relationship between "openness" and economic growth for a sample of more than 100 countries from 1970 to 1990.

Accepted Answer

Many economic studies have looked at the relationship between trade and economic growth.Jeffrey Sachs and Andrew Warner created a measure of how "open" to international trade an economy was and then looked at the relationship between "openness" and economic growth for a sample of more than 100 countries from 1970 to 1990.

Question 6

The units of resources required to produce a good are assumed to remain unchanged no matter where one is on a country's production possibility frontier.This is known as:

Accepted Answer

Constant returns to specialization means that the units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier (PPF).

Question 7

The difference between Ricardo's theory and the Heckscher-Ohlin theory is that they attributed the rise of comparative advantage to differences in _____ and _____,respectively.

Accepted Answer

Unlike Ricardo's theory,the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments,rather than differences in productivity.

Question 8

According to Samuelson,the ability to offshore service jobs that traditionally were not internationally mobile,coupled with rapid advances in communications technology and the productivity of foreign labor due to better education have an effect on middle-class wages in the United States that can be similar to:

Accepted Answer

When coupled with rapid advances in the productivity of foreign labor due to better education,the effect on middle-class wages in the United States,according to Samuelson,may be similar to mass inward migration into the United States-it will lower the market clearing wage rate,perhaps by enough to outweigh the positive benefits of international trade.

Question 9

Dynamic gains in both the stock of a country's resources and the efficiency with which resources are utilized will:

Accepted Answer

Dynamic gains in both the stock of a country's resources and the efficiency with which resources are utilized will cause a country's PPF to shift outward.As a consequence of this outward shift,the country can produce more of both goods than it did before introduction of free trade.

Question 10

The United States has an abundance of arable land,but faces a shortage of low-cost labor.In contrast,China excels in the production of labor-intensive goods,such as footwear and textiles.According to the Heckscher-Ohlin theory:

Accepted Answer

Heckscher and Ohlin argued that comparative advantage arises from differences in national factor endowments.Their theory predicts that countries will export those goods that make intensive use of factors that are locally abundant,while importing goods that make intensive use of factors that are locally scarce.

Question 11

Diminishing returns to specialization occurs when:

Accepted Answer

Diminishing returns to specialization occurs when more units of resources are required to produce each additional unit.

Question 12

Which theory predicts that countries will export those goods that make intensive use of factors that are locally abundant,while importing goods that make intensive use of factors that are locally scarce?

Accepted Answer

The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant,while importing goods that make intensive use of factors that are locally scarce.Thus,the Heckscher-Ohlin theory attempts to explain the pattern of international trade that we observe in the world economy.

Question 13

Nations have varying factor endowments,and different factor endowments explain differences in _____.

Accepted Answer

Nations have varying factor endowments,and different factor endowments explain differences in factor costs;specifically,the more abundant a factor,the lower its cost.

Question 14

According to the text,most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because:

Accepted Answer

The Heckscher-Ohlin theory has been one of the most influential theoretical ideas in international economics.Most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because it makes fewer simplifying assumptions.

Question 15

_____ argued that contrary to the standard interpretation,in certain circumstances,the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor nation.

Accepted Answer

Nobel Prize winning economist Paul Samuelson argued that contrary to the standard interpretation,in certain circumstances the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor nation.

Question 16

U.S.exports were less capital-intensive than U.S.imports,despite the relative abundance of capital in the country.This phenomenon runs contrary to what the Heckscher-Ohlin theory would predict and is termed the _____ paradox.

Accepted Answer

Using the Heckscher-Ohlin theory,Wassily Leontief postulated that since the United States was relatively abundant in capital compared to other nations,the United States would be an exporter of capital-intensive goods and an importer of labor-intensive goods.However,he found that U.S.exports were less capital intensive than U.S.imports and this has become known as the Leontief paradox.

Question 17

The comparative advantage theory is considered to have ignored which of the following statements?

Accepted Answer

Constant returns to specialization means the units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier (PPF).It is more realistic to assume diminishing returns to specialization as not all resources are of the same quality and different goods use resources in different proportions.

Question 18

In general,economic studies on the relationship between trade and economic growth suggest that:

Accepted Answer

Many economic studies have looked at the relationship between trade and economic growth.In general,these studies suggest that,as predicted by the standard theory of comparative advantage,countries that adopt a more open stance toward international trade enjoy higher growth rates than those that close their economies to trade.

Question 19

The simple model of comparative advantage used in the text is based on assuming away:

Accepted Answer

The conclusion that free trade is universally beneficial is a rather bold one to draw from such a simple model as comparative advantage as it assumes away the effects of trade on income distribution within a country.

Question 20

What was Samuelson's criticism of free trade?

Accepted Answer

Paul Samuelson's model suggests that in certain cases,the lower prices that consumers in rich countries pay for goods imported from poor countries following the introduction of a free trade regime may not be enough to produce a net gain for the richer economy if the dynamic effect of free trade is to lower real wage rates in the rich country.

Quiz 5: International Trade Theory