Question 1

If the opportunity cost of corn to wheat is 3:1 in the United States and 5:1 in France, only the United States would benefit from trade if the actual terms of trade between corn and wheat were 2:1.

Accepted Answer

Both countries would benefit from trade if the terms of trade were 2:1. In the United States, the opportunity cost of producing 1 unit of corn is giving up the production of 3 units of wheat, while in France it is giving up 5 units of wheat. With the terms of trade at 2:1, the United States can trade 1 unit of corn for 2 units of wheat, which is better than producing wheat domestically. Similarly, France can trade 2 units of wheat for 1 unit of corn, which is also better than producing corn domestically. Therefore, both countries can gain from trade with these terms of trade.

Question 2

The economic basis for trade is based on absolute advantage.

Accepted Answer

The economic basis for trade is actually based on comparative advantage, not absolute advantage. Comparative advantage means that countries should specialize in producing the goods and services that they can produce more efficiently (at a lower opportunity cost) than other countries, and then trade with other countries for the goods and services that they cannot produce as efficiently.

Question 3

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

If each country has an absolute advantage in the production of one product, specializing in that product and trading with the other country can lead to increased efficiency and production, resulting in mutual benefits for both countries.

Question 4

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

Accepted Answer

This statement is not entirely true. Even though a country may not have an absolute advantage in producing a certain product, it can still be competitive in the global market if it has a comparative advantage in producing that product, meaning that it can produce it at a lower opportunity cost than other countries. Additionally, factors such as technological advancements, government subsidies, and access to cheap labor can also make a product competitive in world markets.

Question 5

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

There can be multiple exchange rates that lead to both countries realizing gains from specialization and comparative advantage, depending on factors such as the competitiveness of industries, the level of trade barriers, and the preferences of consumers in each country. The exchange rate is just one of many factors that affect trade between countries.

Question 6

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 with fewer resources than the other country, not if it uses more resources.

Question 7

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 8

If the domestic price is above the world price of a certain product, the domestic country will import the product.

Accepted Answer

When the domestic price of a product is above the world price, it means the product can be purchased more cheaply from foreign producers, leading the domestic country to import the product to take advantage of the lower prices.

Question 9

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, not produce outside it. The production possibility curve represents the maximum output combinations that can be produced with available resources and technology. Trade enables countries to specialize according to their comparative advantage and thus consume more than they could produce on their own, but it does not increase the physical limits of their production capabilities.

Question 10

The ratio at which a country can exchange domestic products for imported products is called the terms of trade.

Accepted Answer

The statement is true. Terms of trade refer to the ratio at which a country can exchange its exports for imports from other countries.

Question 11

If the opportunity cost of corn to wheat is 3:1 in the United States and 5:1 in France, both countries would benefit from trade if the actual terms of trade between corn and wheat were 4:1.

Accepted Answer

Both countries have a comparative advantage in producing one of the goods. In the United States, corn has a lower opportunity cost than wheat (3 units of wheat for 1 unit of corn). In France, wheat has a lower opportunity cost than corn (5 units of corn for 1 unit of wheat). Therefore, the United States should specialize in producing corn and France should specialize in producing wheat. If the terms of trade are 4 units of wheat for 1 unit of corn, both countries can benefit from trade as the United States can sell corn at a higher price and buy more wheat than it could produce domestically, while France can sell wheat at a higher price and buy more corn than it could produce domestically.

Question 12

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 is below the world price, it means that the domestic producers can sell their products at a higher price in the world market than in the domestic market. Therefore, they will increase their production and sell their products in the world market, resulting in an increase in exports.

Question 13

The quantity and quality of labor, land, and natural resources of a country are its

Accepted Answer

Factor endowments refer to the quantity and quality of a country's resources, including labor, land, and natural resources. This term is commonly used in economics to describe a country's potential for economic growth and development based on its available resources.

Question 14

If the opportunity cost of corn to wheat is 3:1 in the United States and 5:1 in France, only France would benefit from trade if the actual terms of trade between corn and wheat were 7:1.

Accepted Answer

The opportunity cost of producing corn to wheat is lower in the United States (3:1) compared to France (5:1), which means that the US has a comparative advantage in producing corn. If the terms of trade were 7:1, it would be beneficial for both countries to trade as France would be able to obtain corn at a lower opportunity cost than if it produced it domestically, while the US would be able to obtain wheat at a lower opportunity cost than if it produced it domestically. Therefore, both countries would benefit from trade.

Question 15

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 plays a key role in determining which country gains the most from trade. When the exchange rate is favorable, it helps to promote exports and improve the balance of trade. This, in turn, benefits the country with a lower exchange rate, allowing them to sell more goods and services abroad, thereby boosting their economic growth and development. Additionally, a favorable exchange rate can also help to promote foreign investment and attract foreign capital to the country, further enhancing economic prosperity.

Question 16

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

The answer of A country enjoys an absolute advantage in...

Question 17

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

Accepted Answer

If Holland decreases subsidies to its tulip growers, it will become more expensive for them to produce tulips. This could lead to lower supply of tulips in the market, which could increase the price of tulips in the United States.

Question 18

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 19

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

This is the definition of comparative advantage as explained by the theory of international trade.

Question 20

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 statement is a basic principle of international trade, known as the theory of comparative advantage. When exchange rates reflect the relative productivity and costs of different industries in different countries, each country will naturally specialize in producing the goods and services that it can produce most efficiently, leading to overall global economic efficiency and growth.

Quiz 18: International Trade, Comparative Advantage, and Protectionism