Question 1

Country A can produce both wheat and oranges using fewer resources than country

Accepted Answer

Country A having the ability to produce both wheat and oranges using fewer resources than country B indicates that Country A has an absolute advantage in producing both goods, not necessarily a comparative advantage. Comparative advantage involves producing a good at a lower opportunity cost, not necessarily with fewer resources.

Question 2

For a nation to engage in international trade on the basis of comparative advantage,it should

Accepted Answer

Engaging in international trade on the basis of comparative advantage means specializing in the production of goods that have the lowest opportunity cost per unit compared to other nations. This allows the country to produce more efficiently and at a lower cost, which can then be traded for goods that other countries produce more efficiently. Therefore, the best choice is C.

Question 3

The infant industry argument for protection makes sense if the infant industry is

Accepted Answer

The infant industry argument for protection suggests that new industries may not be able to compete with established foreign firms in the short term, but will be able to do so in the future with some temporary protection. Therefore, option (B) is the best choice as it states that the industry is not able to compete currently but will be able to in the future with the help of protection.

Question 4

A nation's comparative advantage is determined by

Accepted Answer

A nation's comparative advantage is not solely determined by the total cost of production or the quantity of resources required to produce a unit of output. Rather, it is determined by the opportunity cost of producing an item relative to a trading partner's opportunity cost of producing the same item. In other words, a nation will specialize in producing and exporting goods that it can produce at a lower opportunity cost than its trading partner, allowing both countries to benefit from trade. Specialization in the production of all goods (option D) is not a necessary condition for having a comparative advantage.

Question 5

A surplus in a country's balance of trade occurs whenever the country

Accepted Answer

A surplus in balance of trade means that the country's exports are greater than its imports, resulting in a positive balance of trade.

Question 6

A tariff is a

Accepted Answer

A tariff is a tax on imports, which makes imported goods more expensive and less attractive to domestic consumers. This is often done in order to protect domestic industries from foreign competition.

Question 7

A tariff

Accepted Answer

A tariff is a tax imposed on imported goods, making them more expensive for consumers and less competitive with domestic products. This tax revenue is collected by the government and can be used to fund various public projects. Tariffs are only applied to internationally traded goods, not domestic goods, and do not necessarily lower prices for consumers. While the increase in domestic prices may help to protect domestic manufacturers and promote domestic production, it does not necessarily increase allocative efficiency. Therefore, option C is the correct choice as it accurately describes what a tariff is.

Question 8

According to the theory of comparative advantage;a good should be produced in that nation where

Accepted Answer

The theory of comparative advantage states that a good should be produced in the nation where its opportunity cost (its cost in terms of alternative goods that might otherwise be produced) is lowest. This means that the nation has a comparative advantage in producing that good compared to other nations. Therefore, choice B is the correct answer.

Question 9

If nations trade on the basis of comparative advantage

Accepted Answer

Comparative advantage theory suggests that all trading partners can benefit from specialization and trade, but the distribution of gains may be determined by their negotiating ability. Therefore, all trading partners share in the gain, but the distribution is not necessarily equal. It does not require an absolute advantage for a nation to gain from trade.

Question 10

Which of the following statements is correct? Most economists

Accepted Answer

Most economists prefer to let the market forces of supply and demand solve trade imbalances, as protectionism can lead to reduced competition, higher prices for consumers, and retaliation from other countries, leading to a trade war. Tariffs and quotas can also result in reduced efficiency and innovation in industries that are protected from competition. Some economists may support targeted interventions, such as subsidies for industries with positive externalities or implementing regulations to address market failures, but generally, most support free trade and open markets.

Question 11

In order of preference,economists would choose

Accepted Answer

Economists generally prefer free trade as it promotes efficient allocation of resources, increased competition, and lower prices for consumers. Tariffs and quotas, on the other hand, distort the market by increasing prices and limiting competition. Therefore, free trade is the preferred option, followed by tariffs and then quotas. Thus, the correct order of preference is B) free trade, tariffs, quotas.

Question 12

The law of comparative advantage states that

Accepted Answer

The law of comparative advantage states that countries should specialize in producing and exporting goods in which they have a lower opportunity cost of production and import goods in which they have a higher opportunity cost of production. As a result, mutually beneficial trade can always take place between two countries whose pre-trade relative opportunity costs differ. This leads to increased efficiency, productivity, and economic growth for both countries involved in the trade. Option A is incorrect, as the use of gold as a standard for payment has been largely abandoned. Option C is incorrect, as even countries with similar tastes and preferences can benefit from trade by focusing on producing goods in which they have a comparative advantage. Option D is incorrect, as a country can benefit even if it has a comparative advantage in only one or a few goods or services.

Question 13

If the U.S.has a comparative advantage in almonds relative to Japan,we would expect that

Accepted Answer

If the U.S. has a comparative advantage in almonds relative to Japan, it means that the U.S. can produce almonds at a lower opportunity cost than Japan. Therefore, it would be more efficient for the U.S. to produce and export almonds to Japan, while Japan would focus on producing and exporting other goods in which it has a comparative advantage. Thus, we would expect the U.S. to export almonds to Japan, rather than the other way around. Option A is incorrect because if Japan exports almonds to the U.S., it would be against the principle of comparative advantage. Option B is incorrect because if Japan has a comparative advantage in almonds, it should not be importing almonds from the U.S. Option D is incorrect because trade based on comparative advantage is a fundamental concept in economics and is widely observed in the real world.

Question 14

Under international trade we export those goods for which we have a relatively low

Accepted Answer

Under international trade, we export those goods for which we have a relatively low opportunity cost. This means that we export goods that we can produce at a lower cost than our trading partners, even if they have an absolute advantage in producing those goods. By doing this, we can maximize our gains from trade and benefit from the goods that our trading partners have a comparative advantage in producing.

Question 15

If a nation has a comparative advantage in the production of good X,this means that the nation

Accepted Answer

Comparative advantage means that a country can produce a good at a lower opportunity cost than another country. This means that the country can give up less of alternative goods (in terms of production) than other countries in order to produce a unit of the good in question. Therefore, option B is correct. Options A, C, and D are incorrect because a country with comparative advantage can benefit from producing and trading the product, can have a different production possibilities curve than other countries, and is still subject to opportunity costs in producing the good.

Question 16

If country A has a higher opportunity cost in producing good X than does country B,then we know that

Accepted Answer

Comparative advantage exists when a country can produce a good at a lower opportunity cost than another country. Since country A has a higher opportunity cost in producing good X than country B, country B has a comparative advantage in producing good X.

Question 17

Whether exchanges are strictly domestic or across international borders,every party to any transaction

Accepted Answer

Every party to any transaction expects to gain something (e.g. money, goods, services) from the exchange, otherwise they would not participate in it. The other options are incorrect as they do not accurately reflect the nature of exchanges between parties.

Question 18

Assume a two-commodity,two-country world.Then assume that the U.S.has a comparative advantage in the production of computers and Mexico has a comparative advantage in the production of oil.Which of the following statements is true?

Accepted Answer

Since the US has a comparative advantage in computers, it will export more computers after the introduction of trade. In order to pay for the imported oil from Mexico, the US will need to export more computers. This will lead to an increase in the income of US citizens, which will increase their demand for oil. As a result, US consumption of oil will increase after the introduction of trade. Mexico's consumption of oil may increase or decrease after the introduction of trade depending on the terms of trade. However, the statement A is false as US consumption of oil will increase, not decrease after the introduction of trade. The statement C is also false as we don't have enough information to determine whether Mexico's consumption of oil will increase or decrease. Therefore, only statement B is true.

Question 19

The law of comparative advantage suggests that

Accepted Answer

The law of comparative advantage suggests that mutually beneficial trade can take place whenever the pre-trade relative costs of production differ between nations. This means that even if one country is less efficient at producing both goods compared to another country, there may still be gains from trade if both countries specialize in producing the good in which they have a comparative advantage. It is not necessary for each country to have an absolute advantage in the production of at least one good.

Question 20

Suppose California and Wisconsin produce wine and cheese.Making a bottle of wine costs $3 in California,but $12 in Wisconsin.On the other hand,making a pound of cheese costs $4 in California,and $8 in Wisconsin.Under these conditions,

Accepted Answer

Based on the comparative advantage principle, California has a comparative advantage in producing wine as it has a lower production cost for wine compared to cheese. Similarly, Wisconsin has a comparative advantage in producing cheese as it has a lower production cost for cheese compared to wine. Therefore, California should export wine and Wisconsin should export cheese to maximize their gains from trade.

Quiz 31: International Trade