Test Bank for International Finance: Theory and Policy, 11th Edition
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TEST BANK
Van Pham
Salem State University
International Economics: Theory and Policy
Eleventh Edition
Paul R. Krugman
Princeton University
Maurice Obstfeld
University of California, Berkeley
Marc Melitz
Harvard University
Van Pham
Salem State University
International Economics: Theory and Policy
Eleventh Edition
Paul R. Krugman
Princeton University
Maurice Obstfeld
University of California, Berkeley
Marc Melitz
Harvard University
1
International Economics: Theory and Policy, 11e (Krugman et al.)
Chapter 1 Introduction
1.1 What Is International Economics About?
1) Historians of economic thought often describe ________ written by ________ and published
in ________ as the first real exposition of an economic model.
A) "Of the Balance of Trade," David Hume, 1776
B) "Wealth of Nations," David Hume, 1758
C) "Wealth of Nations," Adam Smith, 1758
D) "Wealth of Nations," Adam Smith, 1776
E) "Of the Balance of Trade," David Hume, 1758
Answer: E
Page Ref: 1
Difficulty: Easy
2) From 1950 to 2015
A) the U.S. economy roughly tripled in size.
B) U.S. imports roughly tripled in size.
C) the share of U.S. trade in the global economy roughly tripled in size.
D) U.S. imports roughly tripled as compared to U.S. exports.
E) U.S. exports roughly tripled in size.
Answer: C
Page Ref: 1
Difficulty: Easy
3) The United States is less dependent on trade than most other countries because
A) the United States is a relatively large country with diverse resources.
B) the United States is a "Superpower."
C) the military power of the United States makes it less dependent on anything.
D) the United States invests in many other countries.
E) many countries invest in the United States.
Answer: A
Page Ref: 2
Difficulty: Easy
4) Theories of international economics from the 18th and 19th centuries are
A) not relevant to current policy analysis.
B) only of moderate relevance in today's modern international economy.
C) highly relevant in today's modern international economy.
D) the only theories that are actually relevant to modern international economy.
E) not well understood by modern mathematically oriented theorists.
Answer: C
Page Ref: 2
Difficulty: Easy
International Economics: Theory and Policy, 11e (Krugman et al.)
Chapter 1 Introduction
1.1 What Is International Economics About?
1) Historians of economic thought often describe ________ written by ________ and published
in ________ as the first real exposition of an economic model.
A) "Of the Balance of Trade," David Hume, 1776
B) "Wealth of Nations," David Hume, 1758
C) "Wealth of Nations," Adam Smith, 1758
D) "Wealth of Nations," Adam Smith, 1776
E) "Of the Balance of Trade," David Hume, 1758
Answer: E
Page Ref: 1
Difficulty: Easy
2) From 1950 to 2015
A) the U.S. economy roughly tripled in size.
B) U.S. imports roughly tripled in size.
C) the share of U.S. trade in the global economy roughly tripled in size.
D) U.S. imports roughly tripled as compared to U.S. exports.
E) U.S. exports roughly tripled in size.
Answer: C
Page Ref: 1
Difficulty: Easy
3) The United States is less dependent on trade than most other countries because
A) the United States is a relatively large country with diverse resources.
B) the United States is a "Superpower."
C) the military power of the United States makes it less dependent on anything.
D) the United States invests in many other countries.
E) many countries invest in the United States.
Answer: A
Page Ref: 2
Difficulty: Easy
4) Theories of international economics from the 18th and 19th centuries are
A) not relevant to current policy analysis.
B) only of moderate relevance in today's modern international economy.
C) highly relevant in today's modern international economy.
D) the only theories that are actually relevant to modern international economy.
E) not well understood by modern mathematically oriented theorists.
Answer: C
Page Ref: 2
Difficulty: Easy
1
International Economics: Theory and Policy, 11e (Krugman et al.)
Chapter 1 Introduction
1.1 What Is International Economics About?
1) Historians of economic thought often describe ________ written by ________ and published
in ________ as the first real exposition of an economic model.
A) "Of the Balance of Trade," David Hume, 1776
B) "Wealth of Nations," David Hume, 1758
C) "Wealth of Nations," Adam Smith, 1758
D) "Wealth of Nations," Adam Smith, 1776
E) "Of the Balance of Trade," David Hume, 1758
Answer: E
Page Ref: 1
Difficulty: Easy
2) From 1950 to 2015
A) the U.S. economy roughly tripled in size.
B) U.S. imports roughly tripled in size.
C) the share of U.S. trade in the global economy roughly tripled in size.
D) U.S. imports roughly tripled as compared to U.S. exports.
E) U.S. exports roughly tripled in size.
Answer: C
Page Ref: 1
Difficulty: Easy
3) The United States is less dependent on trade than most other countries because
A) the United States is a relatively large country with diverse resources.
B) the United States is a "Superpower."
C) the military power of the United States makes it less dependent on anything.
D) the United States invests in many other countries.
E) many countries invest in the United States.
Answer: A
Page Ref: 2
Difficulty: Easy
4) Theories of international economics from the 18th and 19th centuries are
A) not relevant to current policy analysis.
B) only of moderate relevance in today's modern international economy.
C) highly relevant in today's modern international economy.
D) the only theories that are actually relevant to modern international economy.
E) not well understood by modern mathematically oriented theorists.
Answer: C
Page Ref: 2
Difficulty: Easy
International Economics: Theory and Policy, 11e (Krugman et al.)
Chapter 1 Introduction
1.1 What Is International Economics About?
1) Historians of economic thought often describe ________ written by ________ and published
in ________ as the first real exposition of an economic model.
A) "Of the Balance of Trade," David Hume, 1776
B) "Wealth of Nations," David Hume, 1758
C) "Wealth of Nations," Adam Smith, 1758
D) "Wealth of Nations," Adam Smith, 1776
E) "Of the Balance of Trade," David Hume, 1758
Answer: E
Page Ref: 1
Difficulty: Easy
2) From 1950 to 2015
A) the U.S. economy roughly tripled in size.
B) U.S. imports roughly tripled in size.
C) the share of U.S. trade in the global economy roughly tripled in size.
D) U.S. imports roughly tripled as compared to U.S. exports.
E) U.S. exports roughly tripled in size.
Answer: C
Page Ref: 1
Difficulty: Easy
3) The United States is less dependent on trade than most other countries because
A) the United States is a relatively large country with diverse resources.
B) the United States is a "Superpower."
C) the military power of the United States makes it less dependent on anything.
D) the United States invests in many other countries.
E) many countries invest in the United States.
Answer: A
Page Ref: 2
Difficulty: Easy
4) Theories of international economics from the 18th and 19th centuries are
A) not relevant to current policy analysis.
B) only of moderate relevance in today's modern international economy.
C) highly relevant in today's modern international economy.
D) the only theories that are actually relevant to modern international economy.
E) not well understood by modern mathematically oriented theorists.
Answer: C
Page Ref: 2
Difficulty: Easy
2
5) An important insight of international trade theory is that when two countries engage in
voluntary trade
A) one country always benefits at the expense of the other.
B) it is almost always beneficial to both countries.
C) it only benefits the low wage country.
D) it only benefits the high wage country.
E) it is almost never beneficial to both countries.
Answer: B
Page Ref: 4
Difficulty: Easy
6) If there are large disparities in wage levels between countries, then
A) trade is likely to be harmful to both countries.
B) trade is likely to be harmful to the country with the high wages.
C) trade is likely to be harmful to the country with the low wages.
D) trade is likely to be harmful to neither country.
E) trade is likely to have no effect on either country.
Answer: D
Page Ref: 4
Difficulty: Easy
7) The benefits of international trade are derived from trade in
A) tangible goods only.
B) intangible goods only.
C) goods but not services.
D) services but not goods.
E) anything of value.
Answer: E
Page Ref: 4
Difficulty: Easy
8) Which of the following does NOT belong?
A) NAFTA
B) Uruguay Round
C) World Trade Organization
D) non-tariff barriers
E) major free trade agreements of the 1990s
Answer: D
Page Ref: 6
Difficulty: Easy
5) An important insight of international trade theory is that when two countries engage in
voluntary trade
A) one country always benefits at the expense of the other.
B) it is almost always beneficial to both countries.
C) it only benefits the low wage country.
D) it only benefits the high wage country.
E) it is almost never beneficial to both countries.
Answer: B
Page Ref: 4
Difficulty: Easy
6) If there are large disparities in wage levels between countries, then
A) trade is likely to be harmful to both countries.
B) trade is likely to be harmful to the country with the high wages.
C) trade is likely to be harmful to the country with the low wages.
D) trade is likely to be harmful to neither country.
E) trade is likely to have no effect on either country.
Answer: D
Page Ref: 4
Difficulty: Easy
7) The benefits of international trade are derived from trade in
A) tangible goods only.
B) intangible goods only.
C) goods but not services.
D) services but not goods.
E) anything of value.
Answer: E
Page Ref: 4
Difficulty: Easy
8) Which of the following does NOT belong?
A) NAFTA
B) Uruguay Round
C) World Trade Organization
D) non-tariff barriers
E) major free trade agreements of the 1990s
Answer: D
Page Ref: 6
Difficulty: Easy
3
9) International economics ________ use the same fundamental methods of analysis as other
branches of economics, because ________.
A) does not, the level of complexity of international issues is unique
B) does not, the interactions associated with international economic relations is highly
mathematical
C) does not, international economics takes a different perspective on economic issues
D) does not, international economic policy requires cooperation with other countries
E) does, the motives and behavior of individuals are the same in international trade as they are in
domestic transactions
Answer: E
Page Ref: 3
Difficulty: Easy
10) Because the Constitution forbids restraints on interstate trade
A) the U.S. may not impose tariffs on imports from NAFTA countries.
B) the U.S. may not affect the international value of the $ U.S.
C) the U.S. may not put restraints on foreign investments in California if it involves a financial
intermediary in New York State.
D) the U.S. may not impose export duties.
E) the U.S. may not disrupt commerce between Florida and Hawaii.
Answer: E
Page Ref: 4
Difficulty: Easy
11) Which of the following is NOT a major concern of international economic theory?
A) protectionism
B) the balance of payments
C) exchange rate determination
D) bilateral trade relations with China
E) the international capital market
Answer: D
Page Ref: 4
Difficulty: Easy
12) "Trade is generally harmful if there are large disparities between countries in wages."
A) This is generally true.
B) This is generally false.
C) Trade theory has nothing to say about this issue.
D) This is true if the trade partner ignores child labor laws.
E) This is true if the trade partner uses prison labor.
Answer: B
Page Ref: 4
Difficulty: Easy
9) International economics ________ use the same fundamental methods of analysis as other
branches of economics, because ________.
A) does not, the level of complexity of international issues is unique
B) does not, the interactions associated with international economic relations is highly
mathematical
C) does not, international economics takes a different perspective on economic issues
D) does not, international economic policy requires cooperation with other countries
E) does, the motives and behavior of individuals are the same in international trade as they are in
domestic transactions
Answer: E
Page Ref: 3
Difficulty: Easy
10) Because the Constitution forbids restraints on interstate trade
A) the U.S. may not impose tariffs on imports from NAFTA countries.
B) the U.S. may not affect the international value of the $ U.S.
C) the U.S. may not put restraints on foreign investments in California if it involves a financial
intermediary in New York State.
D) the U.S. may not impose export duties.
E) the U.S. may not disrupt commerce between Florida and Hawaii.
Answer: E
Page Ref: 4
Difficulty: Easy
11) Which of the following is NOT a major concern of international economic theory?
A) protectionism
B) the balance of payments
C) exchange rate determination
D) bilateral trade relations with China
E) the international capital market
Answer: D
Page Ref: 4
Difficulty: Easy
12) "Trade is generally harmful if there are large disparities between countries in wages."
A) This is generally true.
B) This is generally false.
C) Trade theory has nothing to say about this issue.
D) This is true if the trade partner ignores child labor laws.
E) This is true if the trade partner uses prison labor.
Answer: B
Page Ref: 4
Difficulty: Easy
4
13) Who sells what to whom
A) has been a major preoccupation of international economics.
B) is not a valid concern of international economics.
C) is not considered important for government foreign trade policy since such decisions are made
in the private competitive market.
D) is determined by political rather than economic factors.
E) is less important than international economic theory.
Answer: A
Page Ref: 5
Difficulty: Easy
14) The insight that patterns of trade are primarily determined by international differences in
labor productivity was first proposed by
A) Adam Smith.
B) David Hume.
C) David Ricardo.
D) Eli Heckscher.
E) Lerner and Samuelson.
Answer: A
Page Ref: 5
Difficulty: Easy
15) After World War II, the United States has pursued a broad policy of
A) strengthening "Fortress America" protectionism.
B) removing barriers to international trade.
C) isolating Iran and other members of the "axis of evil."
D) protecting the U.S. from the economic impact of oil producers.
E) restricting trade of manufactured goods.
Answer: B
Page Ref: 6
Difficulty: Easy
16) The balance of payments has become a central issue for the United States because
A) when the balance of payments is not balanced, society is unbalanced.
B) the U.S. economy cannot grow when the balance of payments is in deficit.
C) the U.S. has run huge trade deficits in every year since 1982.
D) the U.S. never experienced a surplus in its balance of payments.
E) the U.S. once ran a large trade surplus of about $40 billion.
Answer: C
Page Ref: 7
Difficulty: Easy
13) Who sells what to whom
A) has been a major preoccupation of international economics.
B) is not a valid concern of international economics.
C) is not considered important for government foreign trade policy since such decisions are made
in the private competitive market.
D) is determined by political rather than economic factors.
E) is less important than international economic theory.
Answer: A
Page Ref: 5
Difficulty: Easy
14) The insight that patterns of trade are primarily determined by international differences in
labor productivity was first proposed by
A) Adam Smith.
B) David Hume.
C) David Ricardo.
D) Eli Heckscher.
E) Lerner and Samuelson.
Answer: A
Page Ref: 5
Difficulty: Easy
15) After World War II, the United States has pursued a broad policy of
A) strengthening "Fortress America" protectionism.
B) removing barriers to international trade.
C) isolating Iran and other members of the "axis of evil."
D) protecting the U.S. from the economic impact of oil producers.
E) restricting trade of manufactured goods.
Answer: B
Page Ref: 6
Difficulty: Easy
16) The balance of payments has become a central issue for the United States because
A) when the balance of payments is not balanced, society is unbalanced.
B) the U.S. economy cannot grow when the balance of payments is in deficit.
C) the U.S. has run huge trade deficits in every year since 1982.
D) the U.S. never experienced a surplus in its balance of payments.
E) the U.S. once ran a large trade surplus of about $40 billion.
Answer: C
Page Ref: 7
Difficulty: Easy
Loading page 6...
5
17) The study of exchange rate determination is a relatively new part of international economics,
since
A) for much of the past century, exchange rates were fixed by government action.
B) the calculations required for this were not possible before modern computers became
available.
C) economic theory developed by David Hume demonstrated that real exchange rates remain
fixed over time.
D) dynamic overshooting asset pricing models are a recent theoretical development.
E) the exchange rate never fluctuates.
Answer: A
Page Ref: 7
Difficulty: Easy
18) A fundamental problem in international economics is how to produce
A) a perfect degree of monetary harmony.
B) an acceptable degree of harmony among the international trade policies of different countries.
C) a world government that can harmonize trade and monetary policies
D) a counter-cyclical monetary policy so that all countries will not be adversely affected by a
financial crisis in one country.
E) a worldwide form of currency.
Answer: B
Page Ref: 7
Difficulty: Easy
19) For almost 70 years international trade policies have been governed
A) by the World Trade Organization.
B) by the International Monetary Fund.
C) by the World.
D) by an international treaty known as the General Agreement on Tariffs and Trade (GATT).
E) by the North American Free Trade Agreement (NAFTA).
Answer: D
Page Ref: 7
Difficulty: Easy
20) The international capital market is
A) the place where you can rent earth moving equipment anywhere in the world.
B) a set of arrangements by which individuals and firms exchange money now for promises to
pay in the future.
C) the arrangement where banks build up their capital by borrowing from the Central Bank.
D) the place where emerging economies accept capital invested by banks.
E) exclusively concerned with the debt crisis that ended in the 1990s.
Answer: B
Page Ref: 8
Difficulty: Easy
17) The study of exchange rate determination is a relatively new part of international economics,
since
A) for much of the past century, exchange rates were fixed by government action.
B) the calculations required for this were not possible before modern computers became
available.
C) economic theory developed by David Hume demonstrated that real exchange rates remain
fixed over time.
D) dynamic overshooting asset pricing models are a recent theoretical development.
E) the exchange rate never fluctuates.
Answer: A
Page Ref: 7
Difficulty: Easy
18) A fundamental problem in international economics is how to produce
A) a perfect degree of monetary harmony.
B) an acceptable degree of harmony among the international trade policies of different countries.
C) a world government that can harmonize trade and monetary policies
D) a counter-cyclical monetary policy so that all countries will not be adversely affected by a
financial crisis in one country.
E) a worldwide form of currency.
Answer: B
Page Ref: 7
Difficulty: Easy
19) For almost 70 years international trade policies have been governed
A) by the World Trade Organization.
B) by the International Monetary Fund.
C) by the World.
D) by an international treaty known as the General Agreement on Tariffs and Trade (GATT).
E) by the North American Free Trade Agreement (NAFTA).
Answer: D
Page Ref: 7
Difficulty: Easy
20) The international capital market is
A) the place where you can rent earth moving equipment anywhere in the world.
B) a set of arrangements by which individuals and firms exchange money now for promises to
pay in the future.
C) the arrangement where banks build up their capital by borrowing from the Central Bank.
D) the place where emerging economies accept capital invested by banks.
E) exclusively concerned with the debt crisis that ended in the 1990s.
Answer: B
Page Ref: 8
Difficulty: Easy
Loading page 7...
6
21) International capital markets experience a kind of risk not faced in domestic capital markets,
namely
A) "economic meltdown" risk.
B) Flood and hurricane crisis risk.
C) the risk of unexpected downgrading of assets by Standard and Poor.
D) the risk of exchange rate fluctuations.
E) the risk of political upheaval.
Answer: D
Page Ref: 7
Difficulty: Moderate
22) Since 1994, trade rules have been enforced by
A) the WTO.
B) the G10.
C) the GATT.
D) The U.S. Congress.
E) the European Union.
Answer: A
Page Ref: 7
Difficulty: Easy
23) In 1998 an economic and financial crisis in South Korea caused it to experience
A) a surplus in their balance of payments.
B) a deficit in their balance of payments.
C) a balanced balance of payments.
D) an unbalanced balance of payments.
E) a lull in international trade.
Answer: A
Page Ref: 6
Difficulty: Easy
24) International economists cannot discuss the effects of international trade or recommend
changes in government policies toward trade with any confidence unless they know
A) their theory is the best available.
B) their theory is internally consistent.
C) their theory passes the "reasonable person" legal criteria.
D) their theory is good enough to explain the international trade that is actually observed.
E) their theory accounts for China's unique position in international trade.
Answer: D
Page Ref: 5-6
Difficulty: Easy
21) International capital markets experience a kind of risk not faced in domestic capital markets,
namely
A) "economic meltdown" risk.
B) Flood and hurricane crisis risk.
C) the risk of unexpected downgrading of assets by Standard and Poor.
D) the risk of exchange rate fluctuations.
E) the risk of political upheaval.
Answer: D
Page Ref: 7
Difficulty: Moderate
22) Since 1994, trade rules have been enforced by
A) the WTO.
B) the G10.
C) the GATT.
D) The U.S. Congress.
E) the European Union.
Answer: A
Page Ref: 7
Difficulty: Easy
23) In 1998 an economic and financial crisis in South Korea caused it to experience
A) a surplus in their balance of payments.
B) a deficit in their balance of payments.
C) a balanced balance of payments.
D) an unbalanced balance of payments.
E) a lull in international trade.
Answer: A
Page Ref: 6
Difficulty: Easy
24) International economists cannot discuss the effects of international trade or recommend
changes in government policies toward trade with any confidence unless they know
A) their theory is the best available.
B) their theory is internally consistent.
C) their theory passes the "reasonable person" legal criteria.
D) their theory is good enough to explain the international trade that is actually observed.
E) their theory accounts for China's unique position in international trade.
Answer: D
Page Ref: 5-6
Difficulty: Easy
Loading page 8...
7
25) Trade theorists have proven that the gains from international trade
A) must raise the economic welfare of every country engaged in trade.
B) must raise the economic welfare of everyone in every country engaged in trade.
C) must harm owners of "specific" factors of production.
D) will always help "winners" by an amount exceeding the losses of "losers."
E) usually outweigh the benefits of protectionist policies.
Answer: E
Page Ref: 5-6
Difficulty: Easy
26) The international financial crisis of 2007 was the result of
A) failure of the Euro currency.
B) runaway inflation in the U.S.
C) a deep global recession.
D) the collapse of global currency markets.
E) defaults on U.S. mortgage-backed securities.
Answer: E
Page Ref: 8
Difficulty: Easy
27) In September 2010, the finance minister of ________ declared that the world was "in the
midst of an international currency war" because of rapid appreciation in the value of the
country's currency, the ________.
A) England; pound sterling
B) Germany; euro
C) Japan; yen
D) China; renminbi
E) Brazil; Real
Answer: E
Page Ref: 7
Difficulty: Easy
28) Cost-benefit analysis of international trade
A) is basically useless.
B) is empirically intractable.
C) focuses attention primarily on conflicts of interest within countries.
D) focuses attention on conflicts of interest between countries.
E) never leads to government intervention in international trade.
Answer: C
Page Ref: 6
Difficulty: Moderate
25) Trade theorists have proven that the gains from international trade
A) must raise the economic welfare of every country engaged in trade.
B) must raise the economic welfare of everyone in every country engaged in trade.
C) must harm owners of "specific" factors of production.
D) will always help "winners" by an amount exceeding the losses of "losers."
E) usually outweigh the benefits of protectionist policies.
Answer: E
Page Ref: 5-6
Difficulty: Easy
26) The international financial crisis of 2007 was the result of
A) failure of the Euro currency.
B) runaway inflation in the U.S.
C) a deep global recession.
D) the collapse of global currency markets.
E) defaults on U.S. mortgage-backed securities.
Answer: E
Page Ref: 8
Difficulty: Easy
27) In September 2010, the finance minister of ________ declared that the world was "in the
midst of an international currency war" because of rapid appreciation in the value of the
country's currency, the ________.
A) England; pound sterling
B) Germany; euro
C) Japan; yen
D) China; renminbi
E) Brazil; Real
Answer: E
Page Ref: 7
Difficulty: Easy
28) Cost-benefit analysis of international trade
A) is basically useless.
B) is empirically intractable.
C) focuses attention primarily on conflicts of interest within countries.
D) focuses attention on conflicts of interest between countries.
E) never leads to government intervention in international trade.
Answer: C
Page Ref: 6
Difficulty: Moderate
Loading page 9...
8
29) An improvement in a country's balance of payments means a decrease in its balance of
payments deficit, or an increase in its surplus. In fact we know that a surplus in a balance of
payments
A) is always beneficial.
B) is usually beneficial.
C) is never harmful.
D) is sometimes harmful.
E) is always harmful.
Answer: D
Page Ref: 6
Difficulty: Moderate
30) The GATT is
A) an international agreement.
B) an international U.N. agency.
C) an international IMF agency.
D) a U.S. government agency.
E) a collection of tariffs.
Answer: A
Page Ref: 7
Difficulty: Easy
31) It is argued that global trade tends to be more important to countries with smaller economies
than the U.S. Is this empirically verified?
Answer: Yes. Figure 1-2 shows exports and imports as a percentage of national income in the
U.S. and five other countries and notes that "International trade is even more important to most
other countries than it is to the U.S."
Page Ref: 3
Difficulty: Moderate
32) It is argued that if a rich high wage country such as the United States were to expand trade
with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate
south, and U.S. wages would fall to the level of Mexico's. What do you think about this
argument?
Answer: The student may think anything. The purpose of the question is to set up a discussion,
which will lead to the models in the following chapters.
Page Ref: 4
Difficulty: Moderate
33) How are the patterns of international trade, that is the pattern of what different countries
export and import, explained?
Answer: Climate explains why Brazil exports coffee. Natural resources explains why Saudi
Arabia exports oil. More generally, differences in labor productivity and in the availability of
land, labor, and capital within different countries explain patterns of trade. More recent research
suggests that there is a significant random component involved, as well.
Page Ref: 5
Difficulty: Moderate
29) An improvement in a country's balance of payments means a decrease in its balance of
payments deficit, or an increase in its surplus. In fact we know that a surplus in a balance of
payments
A) is always beneficial.
B) is usually beneficial.
C) is never harmful.
D) is sometimes harmful.
E) is always harmful.
Answer: D
Page Ref: 6
Difficulty: Moderate
30) The GATT is
A) an international agreement.
B) an international U.N. agency.
C) an international IMF agency.
D) a U.S. government agency.
E) a collection of tariffs.
Answer: A
Page Ref: 7
Difficulty: Easy
31) It is argued that global trade tends to be more important to countries with smaller economies
than the U.S. Is this empirically verified?
Answer: Yes. Figure 1-2 shows exports and imports as a percentage of national income in the
U.S. and five other countries and notes that "International trade is even more important to most
other countries than it is to the U.S."
Page Ref: 3
Difficulty: Moderate
32) It is argued that if a rich high wage country such as the United States were to expand trade
with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate
south, and U.S. wages would fall to the level of Mexico's. What do you think about this
argument?
Answer: The student may think anything. The purpose of the question is to set up a discussion,
which will lead to the models in the following chapters.
Page Ref: 4
Difficulty: Moderate
33) How are the patterns of international trade, that is the pattern of what different countries
export and import, explained?
Answer: Climate explains why Brazil exports coffee. Natural resources explains why Saudi
Arabia exports oil. More generally, differences in labor productivity and in the availability of
land, labor, and capital within different countries explain patterns of trade. More recent research
suggests that there is a significant random component involved, as well.
Page Ref: 5
Difficulty: Moderate
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9
34) International trade theory implies that international trade is beneficial to all trading countries.
However, casual observation leads to the conclusion that official obstruction of international
trade flows is widespread. How might you reconcile these two facts?
Answer: This question is meant to allow students to offer preliminary discussions of issues,
which will be explored in depth later in the book.
Page Ref: 4
Difficulty: Moderate
1.2 International Economics: Trade and Money
1) International economics can be divided into two broad sub-fields
A) macro and micro.
B) developed and less developed.
C) monetary and barter.
D) international trade and international money.
E) static and dynamic.
Answer: D
Page Ref: 9
Difficulty: Easy
2) International monetary analysis focuses on
A) the real side of the international economy.
B) the international trade side of the international economy.
C) the international investment side of the international economy.
D) the issues of international cooperation between Central Banks.
E) the monetary side of the international economy, such as currency exchange.
Answer: E
Page Ref: 9
Difficulty: Easy
3) The distinction between international trade and international money is NOT entirely clear
because
A) real developments in the trade accounts do not have monetary implications.
B) the balance of payments includes only real measures.
C) developments caused by purely monetary changes have no real effects.
D) trade models focus on real, or barter relationships.
E) most international trade involves monetary transactions.
Answer: E
Page Ref: 9
Difficulty: Easy
34) International trade theory implies that international trade is beneficial to all trading countries.
However, casual observation leads to the conclusion that official obstruction of international
trade flows is widespread. How might you reconcile these two facts?
Answer: This question is meant to allow students to offer preliminary discussions of issues,
which will be explored in depth later in the book.
Page Ref: 4
Difficulty: Moderate
1.2 International Economics: Trade and Money
1) International economics can be divided into two broad sub-fields
A) macro and micro.
B) developed and less developed.
C) monetary and barter.
D) international trade and international money.
E) static and dynamic.
Answer: D
Page Ref: 9
Difficulty: Easy
2) International monetary analysis focuses on
A) the real side of the international economy.
B) the international trade side of the international economy.
C) the international investment side of the international economy.
D) the issues of international cooperation between Central Banks.
E) the monetary side of the international economy, such as currency exchange.
Answer: E
Page Ref: 9
Difficulty: Easy
3) The distinction between international trade and international money is NOT entirely clear
because
A) real developments in the trade accounts do not have monetary implications.
B) the balance of payments includes only real measures.
C) developments caused by purely monetary changes have no real effects.
D) trade models focus on real, or barter relationships.
E) most international trade involves monetary transactions.
Answer: E
Page Ref: 9
Difficulty: Easy
Loading page 11...
1
International Economics: Theory and Policy, 11e (Krugman et al.)
Chapter 2 World Trade: An Overview
2.1 Who Trades with Whom?
1) Approximately what percent of all world production of goods and services is exported to other
countries?
A) 10%
B) 30%
C) 50%
D) 100%
E) 90%
Answer: B
Page Ref: 10
Difficulty: Easy
2) The gravity model offers a logical explanation for the fact that
A) trade between Asia and the U.S. has grown faster than NAFTA trade.
B) trade in services has grown faster than trade in goods.
C) trade in manufactures has grown faster than in agricultural products.
D) Intra-European Union trade exceeds international trade by the European Union.
E) the U.S. trades more with Western Europe than it does with Canada.
Answer: D
Page Ref: 11-15
Difficulty: Moderate
3) The gravity model suggests that over time
A) trade between neighboring countries will increase.
B) trade between all countries will increase.
C) world trade will eventually be swallowed by a black hole.
D) trade between Earth and other planets will become important.
E) the value of trade between two countries will be proportional to the product of the two
countries' GDP.
Answer: E
Page Ref: 12
Difficulty: Easy
4) The gravity model explains why
A) trade between Sweden and Germany exceeds that between Sweden and Spain.
B) countries with oil reserves tend to export oil.
C) capital rich countries export capital intensive products.
D) intra-industry trade is relatively more important than other forms of trade between
neighboring countries.
E) European countries rely most often on natural resources.
Answer: A
Page Ref: 11-15
Difficulty: Moderate
International Economics: Theory and Policy, 11e (Krugman et al.)
Chapter 2 World Trade: An Overview
2.1 Who Trades with Whom?
1) Approximately what percent of all world production of goods and services is exported to other
countries?
A) 10%
B) 30%
C) 50%
D) 100%
E) 90%
Answer: B
Page Ref: 10
Difficulty: Easy
2) The gravity model offers a logical explanation for the fact that
A) trade between Asia and the U.S. has grown faster than NAFTA trade.
B) trade in services has grown faster than trade in goods.
C) trade in manufactures has grown faster than in agricultural products.
D) Intra-European Union trade exceeds international trade by the European Union.
E) the U.S. trades more with Western Europe than it does with Canada.
Answer: D
Page Ref: 11-15
Difficulty: Moderate
3) The gravity model suggests that over time
A) trade between neighboring countries will increase.
B) trade between all countries will increase.
C) world trade will eventually be swallowed by a black hole.
D) trade between Earth and other planets will become important.
E) the value of trade between two countries will be proportional to the product of the two
countries' GDP.
Answer: E
Page Ref: 12
Difficulty: Easy
4) The gravity model explains why
A) trade between Sweden and Germany exceeds that between Sweden and Spain.
B) countries with oil reserves tend to export oil.
C) capital rich countries export capital intensive products.
D) intra-industry trade is relatively more important than other forms of trade between
neighboring countries.
E) European countries rely most often on natural resources.
Answer: A
Page Ref: 11-15
Difficulty: Moderate
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2
5) According to the gravity model, a characteristic that tends to affect the probability of trade
existing between any two countries is
A) their cultural affinity.
B) the average weight/value of their traded goods.
C) their colonial-historical ties.
D) the distance between them.
E) the number of different product varieties produced by their industries.
Answer: D
Page Ref: 12
Difficulty: Easy
6) In general, which of the following do NOT tend to increase trade between two countries?
A) linguistic and/or cultural affinity
B) historical ties
C) larger economies
D) mutual membership in preferential trade agreements
E) the existence of well controlled borders between countries
Answer: E
Page Ref: 14-16
Difficulty: Moderate
7) Why does the gravity model work?
A) Large economies became large because they were engaged in international trade.
B) Large economies have relatively large incomes, and hence spend more on government
promotion of trade and investment.
C) Large economies have relatively larger areas, which raises the probability that a productive
activity will take place within the borders of that country.
D) Large economies tend to have large incomes and tend to spend more on imports.
E) Large economies tend to avoid trading with small economies.
Answer: D
Page Ref: 13
Difficulty: Easy
8) We see that the Netherlands, Belgium, and Ireland trade considerably more with the United
States than with many other countries.
A) This is explained by the gravity model, since these are all large countries.
B) This is explained by the gravity model, since these are all small countries.
C) This fails to be consistent with the gravity model, since these are small countries.
D) This fails to be consistent with the gravity model, since these are large countries.
E) This is explained by the gravity model, since they do not share borders.
Answer: C
Page Ref: 13
Difficulty: Easy
5) According to the gravity model, a characteristic that tends to affect the probability of trade
existing between any two countries is
A) their cultural affinity.
B) the average weight/value of their traded goods.
C) their colonial-historical ties.
D) the distance between them.
E) the number of different product varieties produced by their industries.
Answer: D
Page Ref: 12
Difficulty: Easy
6) In general, which of the following do NOT tend to increase trade between two countries?
A) linguistic and/or cultural affinity
B) historical ties
C) larger economies
D) mutual membership in preferential trade agreements
E) the existence of well controlled borders between countries
Answer: E
Page Ref: 14-16
Difficulty: Moderate
7) Why does the gravity model work?
A) Large economies became large because they were engaged in international trade.
B) Large economies have relatively large incomes, and hence spend more on government
promotion of trade and investment.
C) Large economies have relatively larger areas, which raises the probability that a productive
activity will take place within the borders of that country.
D) Large economies tend to have large incomes and tend to spend more on imports.
E) Large economies tend to avoid trading with small economies.
Answer: D
Page Ref: 13
Difficulty: Easy
8) We see that the Netherlands, Belgium, and Ireland trade considerably more with the United
States than with many other countries.
A) This is explained by the gravity model, since these are all large countries.
B) This is explained by the gravity model, since these are all small countries.
C) This fails to be consistent with the gravity model, since these are small countries.
D) This fails to be consistent with the gravity model, since these are large countries.
E) This is explained by the gravity model, since they do not share borders.
Answer: C
Page Ref: 13
Difficulty: Easy
Loading page 13...
3
9) The two neighbors of the United States do a lot more trade with the United States than
European economies of equal size.
A) This contradicts predictions from gravity models.
B) This is consistent with predictions from gravity models.
C) This is irrelevant to any inferences that may be drawn from gravity models.
D) This is because these neighboring countries have exceptionally large GDPs.
E) This relates to Belgium's trade record with the U.S.
Answer: B
Page Ref: 14-15
Difficulty: Moderate
10) Which of the following does NOT explain the extent of trade between Ireland and the U.S.?
A) historical ties
B) cultural Linguistic ties
C) Gravity Model
D) multinational corporations
E) large numbers of Irish-Americans
Answer: C
Page Ref: 13
Difficulty: Moderate
2.2 The Changing Pattern of World Trade
1) Since the early 1970s, world's trade as a share of world production has
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend.
E) increased slightly before dropping off.
Answer: B
Page Ref: 18
Difficulty: Easy
2) In the current Post-Industrial economy, international trade in services (including banking and
financial services)
A) dominates world trade.
B) does not exist.
C) is an increasingly important component of global trade.
D) is relatively stagnant.
E) far surpasses the predictions of economist Alan Blinder.
Answer: C
Page Ref: 20-21-22
Difficulty: Easy
9) The two neighbors of the United States do a lot more trade with the United States than
European economies of equal size.
A) This contradicts predictions from gravity models.
B) This is consistent with predictions from gravity models.
C) This is irrelevant to any inferences that may be drawn from gravity models.
D) This is because these neighboring countries have exceptionally large GDPs.
E) This relates to Belgium's trade record with the U.S.
Answer: B
Page Ref: 14-15
Difficulty: Moderate
10) Which of the following does NOT explain the extent of trade between Ireland and the U.S.?
A) historical ties
B) cultural Linguistic ties
C) Gravity Model
D) multinational corporations
E) large numbers of Irish-Americans
Answer: C
Page Ref: 13
Difficulty: Moderate
2.2 The Changing Pattern of World Trade
1) Since the early 1970s, world's trade as a share of world production has
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend.
E) increased slightly before dropping off.
Answer: B
Page Ref: 18
Difficulty: Easy
2) In the current Post-Industrial economy, international trade in services (including banking and
financial services)
A) dominates world trade.
B) does not exist.
C) is an increasingly important component of global trade.
D) is relatively stagnant.
E) far surpasses the predictions of economist Alan Blinder.
Answer: C
Page Ref: 20-21-22
Difficulty: Easy
Loading page 14...
4
3) In the early 20th century, the United Kingdom exported mainly
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) livestock.
Answer: A
Page Ref: 19
Difficulty: Easy
4) In the early 20th century, the United Kingdom imported mainly
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) from the United States.
Answer: C
Page Ref: 19
Difficulty: Easy
5) In the present, most of the exports from China are
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) overpriced by world market standards.
Answer: A
Page Ref: 19
Difficulty: Easy
6) When comparing the composition of world trade in the early 20th century to the early 21st
century, we find major compositional changes. These include a relative decline in trade in
agricultural and primary-products (including raw materials). How would you explain this in
terms of broad historical developments during this period?
Answer: The typical composition of world production during this period experienced major
changes. Focusing on today's Industrialized Countries (primarily members of the OECD), the
industrial-employment composition was focused primarily on agriculture. Most value was in
land. The predominant single consumption category was food. Since then, the economies shifted
from the agricultural to the manufacturing sectors (continuing trends begun over a century earlier
in the industrial revolution). Incomes rose, and consumption shifted in favor of (increasingly
affordable) manufactures. Both income and price elasticities were greater in manufactures than
in agricultural products. At the same time there was a steady tendency for synthetic
(manufactured) inputs to replace agricultural based raw materials and industrial inputs. Hence,
trade and, of course, international trade conformed to overall changes in patterns of world
production and consumption.
Page Ref: 18-21
Difficulty: Moderate
3) In the early 20th century, the United Kingdom exported mainly
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) livestock.
Answer: A
Page Ref: 19
Difficulty: Easy
4) In the early 20th century, the United Kingdom imported mainly
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) from the United States.
Answer: C
Page Ref: 19
Difficulty: Easy
5) In the present, most of the exports from China are
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) overpriced by world market standards.
Answer: A
Page Ref: 19
Difficulty: Easy
6) When comparing the composition of world trade in the early 20th century to the early 21st
century, we find major compositional changes. These include a relative decline in trade in
agricultural and primary-products (including raw materials). How would you explain this in
terms of broad historical developments during this period?
Answer: The typical composition of world production during this period experienced major
changes. Focusing on today's Industrialized Countries (primarily members of the OECD), the
industrial-employment composition was focused primarily on agriculture. Most value was in
land. The predominant single consumption category was food. Since then, the economies shifted
from the agricultural to the manufacturing sectors (continuing trends begun over a century earlier
in the industrial revolution). Incomes rose, and consumption shifted in favor of (increasingly
affordable) manufactures. Both income and price elasticities were greater in manufactures than
in agricultural products. At the same time there was a steady tendency for synthetic
(manufactured) inputs to replace agricultural based raw materials and industrial inputs. Hence,
trade and, of course, international trade conformed to overall changes in patterns of world
production and consumption.
Page Ref: 18-21
Difficulty: Moderate
Loading page 15...
5
7) In the past half century, the developing countries have experienced major compositional shifts
from exports of primary products (including agricultural and raw materials) to exports of
manufactures. How might you explain this in terms of broad historical developments during this
period?
Answer: Any discussion of the export experience of the developing countries must first clarify
the problem of definitional inclusion. In particular, the exports of the (non-OECD) developing
countries, has become increasingly dominated by the experience of a relatively small number of
countries in South-East Asia, termed the New Industrialized Countries (NICs). Since they
experienced both very rapid increases in their exports, and very rapid increases in the
manufactured component of their exports, their experience alone may explain the bulk of the
observed phenomenon. Many would exclude the NICs from the developing country category so
as to be able to focus the discussion on a more representative sample of (the over 100)
developing countries. More recently, a second wave of East Asian countries, notably including
China have replicated the experience of the NICs, and this again muddies the water for one
interested in focusing on the export experience of the increasingly heterogeneous category,
developing countries. Another explanation of the growing dependence on manufactured exports
on the part of the developing countries is the following: Since the consumer ( including
industrial consumer) markets in OECD countries were rapidly shifting away from primary
products, these markets were rapidly disappearing.
In addition, the world market for primary products was generally limited by low price and
especially income elasticities; agricultural sectors tended to be highly and rigidly protected in
potential OECD markets; and escalating effective tariff structures levied systematically large
levels of protection against the primary exports of the developing countries; export success had
to be pursued outside of the traditional primary exports of these countries.
Page Ref: 18-21
Difficulty: Difficult
7) In the past half century, the developing countries have experienced major compositional shifts
from exports of primary products (including agricultural and raw materials) to exports of
manufactures. How might you explain this in terms of broad historical developments during this
period?
Answer: Any discussion of the export experience of the developing countries must first clarify
the problem of definitional inclusion. In particular, the exports of the (non-OECD) developing
countries, has become increasingly dominated by the experience of a relatively small number of
countries in South-East Asia, termed the New Industrialized Countries (NICs). Since they
experienced both very rapid increases in their exports, and very rapid increases in the
manufactured component of their exports, their experience alone may explain the bulk of the
observed phenomenon. Many would exclude the NICs from the developing country category so
as to be able to focus the discussion on a more representative sample of (the over 100)
developing countries. More recently, a second wave of East Asian countries, notably including
China have replicated the experience of the NICs, and this again muddies the water for one
interested in focusing on the export experience of the increasingly heterogeneous category,
developing countries. Another explanation of the growing dependence on manufactured exports
on the part of the developing countries is the following: Since the consumer ( including
industrial consumer) markets in OECD countries were rapidly shifting away from primary
products, these markets were rapidly disappearing.
In addition, the world market for primary products was generally limited by low price and
especially income elasticities; agricultural sectors tended to be highly and rigidly protected in
potential OECD markets; and escalating effective tariff structures levied systematically large
levels of protection against the primary exports of the developing countries; export success had
to be pursued outside of the traditional primary exports of these countries.
Page Ref: 18-21
Difficulty: Difficult
Loading page 16...
6
2.3 Do Old Rules Still Apply?
1) The Services sector has been steadily rising in relative importance in GDP of the United
States, as well as elsewhere around the world. Since "services" have been identified as "non-
tradable" (e.g., it is difficult to export haircuts), it may be argued that this trend will likely slow
the rapid growth in international trade. Discuss.
Answer: This argument stands on questionable logical foundations. The past half century has
seen a steady growth in the absolute and relative importance of international trade. This trend has
been reversed only by global conflicts, i.e. the two World Wars. This trend has remained steady
and robust despite major compositional shifts (e.g., from primary to manufacturing), and location
shifts (e.g., the sudden rise of NICs as a significant group of exporters). The trend will probably
continue into the reasonable future, fueled by both super-regional preferential trade regions and a
growing impact of the multilateral forces, represented institutionally by the World Trade
Organization (WTO)—as illustrated by the recent abolishment of the epitome cartelized trade,
the world trade in textiles. Driven by technology—especially in the areas of communication and
transportation—a reversal of the growing trade trend is not likely in the near future. In any case,
many "services" are in fact quite tradable. Examples would be financial services, long-distance
teaching, "help-desk" outsourcing, consulting and management services and others. In fact, when
a tourist gets a haircut, we see that even haircuts become a "tradable" service.
Page Ref: 19-21
Difficulty: Difficult
2.3 Do Old Rules Still Apply?
1) The Services sector has been steadily rising in relative importance in GDP of the United
States, as well as elsewhere around the world. Since "services" have been identified as "non-
tradable" (e.g., it is difficult to export haircuts), it may be argued that this trend will likely slow
the rapid growth in international trade. Discuss.
Answer: This argument stands on questionable logical foundations. The past half century has
seen a steady growth in the absolute and relative importance of international trade. This trend has
been reversed only by global conflicts, i.e. the two World Wars. This trend has remained steady
and robust despite major compositional shifts (e.g., from primary to manufacturing), and location
shifts (e.g., the sudden rise of NICs as a significant group of exporters). The trend will probably
continue into the reasonable future, fueled by both super-regional preferential trade regions and a
growing impact of the multilateral forces, represented institutionally by the World Trade
Organization (WTO)—as illustrated by the recent abolishment of the epitome cartelized trade,
the world trade in textiles. Driven by technology—especially in the areas of communication and
transportation—a reversal of the growing trade trend is not likely in the near future. In any case,
many "services" are in fact quite tradable. Examples would be financial services, long-distance
teaching, "help-desk" outsourcing, consulting and management services and others. In fact, when
a tourist gets a haircut, we see that even haircuts become a "tradable" service.
Page Ref: 19-21
Difficulty: Difficult
Loading page 17...
1
International Economics: Theory and Policy, 11e (Krugman et al.)
Chapter 3 Labor Productivity and Comparative Advantage: The Ricardian Model
3.1 The Concept of Comparative Advantage
1) Trade between two countries can benefit both countries if
A) each country exports that good in which it has a comparative advantage.
B) each country enjoys superior terms of trade.
C) each country has a more elastic demand for the imported goods.
D) each country has a more elastic supply for the exported goods.
E) each country produces a wide range of goods for export.
Answer: A
Page Ref: 26
Difficulty: Easy
2) A country engaging in trade according to the principles of comparative advantage gains from
trade because it
A) is producing exports indirectly more efficiently than it could alternatively.
B) is producing imports indirectly more efficiently than it could domestically.
C) is producing exports using fewer labor units.
D) is producing imports indirectly using fewer labor units.
E) is producing exports while outsourcing services.
Answer: B
Page Ref: 24-26
Difficulty: Easy
3) The earliest statement of the principle of comparative advantage is associated with
A) David Hume.
B) David Ricardo.
C) Adam Smith.
D) Eli Heckscher.
E) Bertil Ohlin.
Answer: B
Page Ref: 26
Difficulty: Easy
4) The Ricardian model attributes the gains from trade associated with the principle of
comparative advantage result to
A) differences in technology.
B) differences in preferences.
C) differences in labor productivity.
D) differences in resources.
E) gravity relationships among countries.
Answer: C
Page Ref: 26
Difficulty: Easy
International Economics: Theory and Policy, 11e (Krugman et al.)
Chapter 3 Labor Productivity and Comparative Advantage: The Ricardian Model
3.1 The Concept of Comparative Advantage
1) Trade between two countries can benefit both countries if
A) each country exports that good in which it has a comparative advantage.
B) each country enjoys superior terms of trade.
C) each country has a more elastic demand for the imported goods.
D) each country has a more elastic supply for the exported goods.
E) each country produces a wide range of goods for export.
Answer: A
Page Ref: 26
Difficulty: Easy
2) A country engaging in trade according to the principles of comparative advantage gains from
trade because it
A) is producing exports indirectly more efficiently than it could alternatively.
B) is producing imports indirectly more efficiently than it could domestically.
C) is producing exports using fewer labor units.
D) is producing imports indirectly using fewer labor units.
E) is producing exports while outsourcing services.
Answer: B
Page Ref: 24-26
Difficulty: Easy
3) The earliest statement of the principle of comparative advantage is associated with
A) David Hume.
B) David Ricardo.
C) Adam Smith.
D) Eli Heckscher.
E) Bertil Ohlin.
Answer: B
Page Ref: 26
Difficulty: Easy
4) The Ricardian model attributes the gains from trade associated with the principle of
comparative advantage result to
A) differences in technology.
B) differences in preferences.
C) differences in labor productivity.
D) differences in resources.
E) gravity relationships among countries.
Answer: C
Page Ref: 26
Difficulty: Easy
Loading page 18...
2
5) The Ricardian model demonstrates that
A) trade between two countries will benefit both countries.
B) trade between two countries may benefit both regardless of which good each exports.
C) trade between two countries may benefit both if each exports the product in which it has a
comparative advantage.
D) trade between two countries may benefit one but harm the other.
E) trade between two countries always benefits the country with a larger labor force.
Answer: C
Page Ref: 26
Difficulty: Easy
6) In the Ricardian model, comparative advantage is likely to be due to
A) scale economies.
B) home product taste bias.
C) greater capital availability per worker.
D) labor productivity differences.
E) political pressure.
Answer: D
Page Ref: 26
Difficulty: Easy
7) In a two-country, two-product world, the statement "Germany enjoys a comparative advantage
over France in autos relative to ships" is equivalent to
A) France having a comparative advantage over Germany in ships.
B) France having a comparative disadvantage compared to Germany in autos and ships.
C) Germany having a comparative advantage over France in autos and ships.
D) France having no comparative advantage over Germany.
E) France should produce autos.
Answer: A
Page Ref: 25-26
Difficulty: Moderate
5) The Ricardian model demonstrates that
A) trade between two countries will benefit both countries.
B) trade between two countries may benefit both regardless of which good each exports.
C) trade between two countries may benefit both if each exports the product in which it has a
comparative advantage.
D) trade between two countries may benefit one but harm the other.
E) trade between two countries always benefits the country with a larger labor force.
Answer: C
Page Ref: 26
Difficulty: Easy
6) In the Ricardian model, comparative advantage is likely to be due to
A) scale economies.
B) home product taste bias.
C) greater capital availability per worker.
D) labor productivity differences.
E) political pressure.
Answer: D
Page Ref: 26
Difficulty: Easy
7) In a two-country, two-product world, the statement "Germany enjoys a comparative advantage
over France in autos relative to ships" is equivalent to
A) France having a comparative advantage over Germany in ships.
B) France having a comparative disadvantage compared to Germany in autos and ships.
C) Germany having a comparative advantage over France in autos and ships.
D) France having no comparative advantage over Germany.
E) France should produce autos.
Answer: A
Page Ref: 25-26
Difficulty: Moderate
Loading page 19...
3
3.2 A One-Factor Economy
1) Use the information in the table below to answer the following questions.
(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
Answer: (a) The U.S. has an absolute advantage in the production of both wheat and beef
because labor productivity in the U.S. exceeds labor productivity in Argentina for both products.
(b) In the U.S., the opportunity cost of wheat is 100/300 or 0.33 units of beef. In Argentina, the
opportunity cost of wheat is 20/20 or 1.0 unit of beef.
(c) In the U.S., the opportunity cost of beef is 300/100 or 3.0 units of wheat. In Argentina, the
opportunity cost of beef is 20/20 or 1.0 unit of wheat.
(d) The U.S. has a comparative advantage in wheat production and Argentina has a comparative
advantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.33
units of beef per unit of wheat, then the U.S. will benefit. If Argentina can trade beef to the U.S.
at a rate of more than one unit of wheat per unit of beef, then Argentina will benefit.
Page Ref: 26-30
Difficulty: Moderate
3.2 A One-Factor Economy
1) Use the information in the table below to answer the following questions.
(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
Answer: (a) The U.S. has an absolute advantage in the production of both wheat and beef
because labor productivity in the U.S. exceeds labor productivity in Argentina for both products.
(b) In the U.S., the opportunity cost of wheat is 100/300 or 0.33 units of beef. In Argentina, the
opportunity cost of wheat is 20/20 or 1.0 unit of beef.
(c) In the U.S., the opportunity cost of beef is 300/100 or 3.0 units of wheat. In Argentina, the
opportunity cost of beef is 20/20 or 1.0 unit of wheat.
(d) The U.S. has a comparative advantage in wheat production and Argentina has a comparative
advantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.33
units of beef per unit of wheat, then the U.S. will benefit. If Argentina can trade beef to the U.S.
at a rate of more than one unit of wheat per unit of beef, then Argentina will benefit.
Page Ref: 26-30
Difficulty: Moderate
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2) Use the information in the table below to answer the following questions.
(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
Answer: (a) The U.S. has an absolute advantage in the production of both wheat and beef
because labor productivity in the U.S. exceeds labor productivity in Argentina for both products.
(b) In the U.S., the opportunity cost of wheat is 100/200 or 0.5 units of beef. In Argentina, the
opportunity cost of wheat is 80/20 or 4.0 units of beef.
(c) In the U.S., the opportunity cost of beef is 200/100 or 2.0 units of wheat. In Argentina, the
opportunity cost of beef is 20/80 or 0.25 units of wheat.
(d) The U.S. has a comparative advantage in wheat production and Argentina has a comparative
advantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.5
units of beef per unit of wheat, then the U.S. will benefit. If Argentina can trade beef to the U.S.
at a rate of more than 0.25 unit of wheat per unit of beef, then Argentina will benefit.
Page Ref: 26-30
Difficulty: Moderate
3) Use the information in the table below to answer the following questions.
(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
Answer: (a) Argentina has an absolute advantage in the production of both wheat and beef
because labor productivity in Argentina exceeds labor productivity in the U.S. for both products.
(b) In the U.S., the opportunity cost of wheat is 200/100 or 2.0 units of beef. In Argentina, the
opportunity cost of wheat is 400/200 or 2.0 units of beef.
(c) In the U.S., the opportunity cost of beef is 100/200 or 0.5 units of wheat. In Argentina, the
opportunity cost of beef is 400/200 or 0.5 units of wheat.
(d) Neither country has a comparative advantage and there is, therefore, no opportunity for
beneficial trade.
Page Ref: 26-30
Difficulty: Moderate
2) Use the information in the table below to answer the following questions.
(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
Answer: (a) The U.S. has an absolute advantage in the production of both wheat and beef
because labor productivity in the U.S. exceeds labor productivity in Argentina for both products.
(b) In the U.S., the opportunity cost of wheat is 100/200 or 0.5 units of beef. In Argentina, the
opportunity cost of wheat is 80/20 or 4.0 units of beef.
(c) In the U.S., the opportunity cost of beef is 200/100 or 2.0 units of wheat. In Argentina, the
opportunity cost of beef is 20/80 or 0.25 units of wheat.
(d) The U.S. has a comparative advantage in wheat production and Argentina has a comparative
advantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.5
units of beef per unit of wheat, then the U.S. will benefit. If Argentina can trade beef to the U.S.
at a rate of more than 0.25 unit of wheat per unit of beef, then Argentina will benefit.
Page Ref: 26-30
Difficulty: Moderate
3) Use the information in the table below to answer the following questions.
(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
Answer: (a) Argentina has an absolute advantage in the production of both wheat and beef
because labor productivity in Argentina exceeds labor productivity in the U.S. for both products.
(b) In the U.S., the opportunity cost of wheat is 200/100 or 2.0 units of beef. In Argentina, the
opportunity cost of wheat is 400/200 or 2.0 units of beef.
(c) In the U.S., the opportunity cost of beef is 100/200 or 0.5 units of wheat. In Argentina, the
opportunity cost of beef is 400/200 or 0.5 units of wheat.
(d) Neither country has a comparative advantage and there is, therefore, no opportunity for
beneficial trade.
Page Ref: 26-30
Difficulty: Moderate
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3.3 Trade in a One-Factor World
1) In order to know whether a country has a comparative advantage in the production of one
particular product we need information on at least ________ unit labor requirements.
A) one
B) two
C) three
D) four
E) five
Answer: D
Page Ref: 29
Difficulty: Easy
2) Given the information in the table above
A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in cloth.
C) Foreign has a comparative advantage in cloth.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.
Answer: B
Page Ref: 29
Difficulty: Moderate
3) Given the information in the table above, if it is ascertained that Foreign uses prison-slave
labor to produce its exports, then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate
3.3 Trade in a One-Factor World
1) In order to know whether a country has a comparative advantage in the production of one
particular product we need information on at least ________ unit labor requirements.
A) one
B) two
C) three
D) four
E) five
Answer: D
Page Ref: 29
Difficulty: Easy
2) Given the information in the table above
A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in cloth.
C) Foreign has a comparative advantage in cloth.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.
Answer: B
Page Ref: 29
Difficulty: Moderate
3) Given the information in the table above, if it is ascertained that Foreign uses prison-slave
labor to produce its exports, then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate
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6
4) Given the information in the table above, if the Home economy suffered a meltdown, and the
Unit Labor Requirements doubled to 20 for cloth and 40 for widgets then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate
5) Given the information in the table above, if wages were to double in Home, then Home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate
6) Given the information in the table above
A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in widgets.
C) Foreign has a comparative advantage in widgets.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.
Answer: C
Page Ref: 29
Difficulty: Moderate
7) Given the information in the table above, Home's opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: A
Page Ref: 28-29
Difficulty: Moderate
4) Given the information in the table above, if the Home economy suffered a meltdown, and the
Unit Labor Requirements doubled to 20 for cloth and 40 for widgets then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate
5) Given the information in the table above, if wages were to double in Home, then Home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate
6) Given the information in the table above
A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in widgets.
C) Foreign has a comparative advantage in widgets.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.
Answer: C
Page Ref: 29
Difficulty: Moderate
7) Given the information in the table above, Home's opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: A
Page Ref: 28-29
Difficulty: Moderate
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8) Given the information in the table above, Home's opportunity cost of widgets is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: B
Page Ref: 28-29
Difficulty: Moderate
9) Given the information in the table above, Foreign's opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: B
Page Ref: 28-29
Difficulty: Moderate
10) Given the information in the table above, Foreign's opportunity cost of widgets is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: A
Page Ref: 28-29
Difficulty: Moderate
11) Given the information in the table above, if the world equilibrium price of widgets were 4
cloth, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.
Answer: A
Page Ref: 28-33
Difficulty: Moderate
8) Given the information in the table above, Home's opportunity cost of widgets is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: B
Page Ref: 28-29
Difficulty: Moderate
9) Given the information in the table above, Foreign's opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: B
Page Ref: 28-29
Difficulty: Moderate
10) Given the information in the table above, Foreign's opportunity cost of widgets is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: A
Page Ref: 28-29
Difficulty: Moderate
11) Given the information in the table above, if the world equilibrium price of widgets were 4
cloth, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.
Answer: A
Page Ref: 28-33
Difficulty: Moderate
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12) Given the information in the table above, if the world equilibrium price of widgets were 40
cloths, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.
Answer: A
Page Ref: 28-33
Difficulty: Moderate
13) In a two-product, two-country world, international trade can lead to increases in
A) consumer welfare only if output of both products is increased.
B) output of both products and consumer welfare in both countries.
C) total production of both products but not consumer welfare in both countries.
D) consumer welfare in both countries but not total production of both products.
E) prices of both goods in both countries.
Answer: B
Page Ref: 26-33
Difficulty: Moderate
14) A nation engaging in trade according to the Ricardian model will find its consumption
bundle
A) inside its production possibilities frontier.
B) on its production possibilities frontier.
C) outside its production possibilities frontier.
D) inside its trade-partner's production possibilities frontier.
E) on its trade-partner's production possibilities frontier.
Answer: C
Page Ref: 34
Difficulty: Moderate
15) According to Ricardo, a country will have a comparative advantage in the product in which
its
A) labor productivity is relatively low.
B) labor productivity is relatively high.
C) labor mobility is relatively low.
D) labor mobility is relatively high.
E) labor is outsourced to neighboring countries.
Answer: B
Page Ref: 26-28
Difficulty: Moderate
12) Given the information in the table above, if the world equilibrium price of widgets were 40
cloths, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.
Answer: A
Page Ref: 28-33
Difficulty: Moderate
13) In a two-product, two-country world, international trade can lead to increases in
A) consumer welfare only if output of both products is increased.
B) output of both products and consumer welfare in both countries.
C) total production of both products but not consumer welfare in both countries.
D) consumer welfare in both countries but not total production of both products.
E) prices of both goods in both countries.
Answer: B
Page Ref: 26-33
Difficulty: Moderate
14) A nation engaging in trade according to the Ricardian model will find its consumption
bundle
A) inside its production possibilities frontier.
B) on its production possibilities frontier.
C) outside its production possibilities frontier.
D) inside its trade-partner's production possibilities frontier.
E) on its trade-partner's production possibilities frontier.
Answer: C
Page Ref: 34
Difficulty: Moderate
15) According to Ricardo, a country will have a comparative advantage in the product in which
its
A) labor productivity is relatively low.
B) labor productivity is relatively high.
C) labor mobility is relatively low.
D) labor mobility is relatively high.
E) labor is outsourced to neighboring countries.
Answer: B
Page Ref: 26-28
Difficulty: Moderate
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16) Assume that labor is the only factor of production and that wages in the United States equal
$20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the
United States as compared to Japan if
A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.
B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour.
C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour.
D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour.
E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour.
Answer: A
Page Ref: 35-37
Difficulty: Moderate
17) An examination of the Ricardian model of comparative advantage yields the clear result that
trade is (potentially) beneficial for each of the two trading partners since it allows for an
expanded consumption choice for each. However, for the world as a whole the expansion of
production of one product must involve a decrease in the availability of the other, so that it is not
clear that trade is better for the world as a whole as compared to an initial situation of non-trade
(but efficient production in each country). Are there in fact gains from trade for the world as a
whole? Explain.
Answer: If we were to combine the production possibility frontiers of the two countries to create
a single world production possibility frontier, then it is true that any change in production points
(from autarky to specialization with trade) would involve a tradeoff of one good for another from
the world's perspective. In other words, the new solution cannot possibly involve the production
of more of both goods. However, since we know that each country is better off at the new
solution, it must be true that the original points were not on the trade contract curve between the
two countries, and it was in fact possible to make some people better off without making others
worse off, so that the new solution does indeed represent a welfare improvement from the
world's perspective.
Page Ref: 25-37
Difficulty: Difficult
18) Given the information in the table above. What is the opportunity cost of Cloth in terms of
Widgets in Foreign?
Answer: One half a widget.
Page Ref: 26-29
Difficulty: Moderate
16) Assume that labor is the only factor of production and that wages in the United States equal
$20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the
United States as compared to Japan if
A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.
B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour.
C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour.
D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour.
E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour.
Answer: A
Page Ref: 35-37
Difficulty: Moderate
17) An examination of the Ricardian model of comparative advantage yields the clear result that
trade is (potentially) beneficial for each of the two trading partners since it allows for an
expanded consumption choice for each. However, for the world as a whole the expansion of
production of one product must involve a decrease in the availability of the other, so that it is not
clear that trade is better for the world as a whole as compared to an initial situation of non-trade
(but efficient production in each country). Are there in fact gains from trade for the world as a
whole? Explain.
Answer: If we were to combine the production possibility frontiers of the two countries to create
a single world production possibility frontier, then it is true that any change in production points
(from autarky to specialization with trade) would involve a tradeoff of one good for another from
the world's perspective. In other words, the new solution cannot possibly involve the production
of more of both goods. However, since we know that each country is better off at the new
solution, it must be true that the original points were not on the trade contract curve between the
two countries, and it was in fact possible to make some people better off without making others
worse off, so that the new solution does indeed represent a welfare improvement from the
world's perspective.
Page Ref: 25-37
Difficulty: Difficult
18) Given the information in the table above. What is the opportunity cost of Cloth in terms of
Widgets in Foreign?
Answer: One half a widget.
Page Ref: 26-29
Difficulty: Moderate
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10
19) Given the information in the table above. What is the opportunity cost of cloth in terms of
Widgets in Foreign?
Answer: 2 widgets.
Page Ref: 26-29
Difficulty: Moderate
3.4 Misconceptions About Comparative Advantage
1) If a production possibilities frontier is a straight line, then production occurs under conditions
of
A) increasing opportunity costs.
B) constant opportunity costs.
C) decreasing opportunity costs.
D) infinite opportunity costs.
E) uncertain opportunity costs.
Answer: B
Page Ref: 38
Difficulty: Easy
2) Which of the following statements is TRUE?
A) Free trade is beneficial only if your country is strong enough to stand up to foreign
competition.
B) Free trade is beneficial only if your competitor does not pay unreasonably low wages.
C) Free trade is beneficial only if both countries have access to the same technology.
D) Free trade is never beneficial for developing countries.
E) Free trade can be beneficial to the economic welfare of all countries involved.
Answer: E
Page Ref: 37-40, 45
Difficulty: Moderate
3) Mahatma Gandhi exhorted his followers in India to promote economic welfare by decreasing
imports. This approach
A) makes no sense.
B) makes no economic sense.
C) is consistent with the the Ricardian model of comparative advantage.
D) is not consistent with the Ricardian model of comparative advantage.
E) guarantees benefits for Indian workers.
Answer: D
Page Ref: 37-40
Difficulty: Moderate
19) Given the information in the table above. What is the opportunity cost of cloth in terms of
Widgets in Foreign?
Answer: 2 widgets.
Page Ref: 26-29
Difficulty: Moderate
3.4 Misconceptions About Comparative Advantage
1) If a production possibilities frontier is a straight line, then production occurs under conditions
of
A) increasing opportunity costs.
B) constant opportunity costs.
C) decreasing opportunity costs.
D) infinite opportunity costs.
E) uncertain opportunity costs.
Answer: B
Page Ref: 38
Difficulty: Easy
2) Which of the following statements is TRUE?
A) Free trade is beneficial only if your country is strong enough to stand up to foreign
competition.
B) Free trade is beneficial only if your competitor does not pay unreasonably low wages.
C) Free trade is beneficial only if both countries have access to the same technology.
D) Free trade is never beneficial for developing countries.
E) Free trade can be beneficial to the economic welfare of all countries involved.
Answer: E
Page Ref: 37-40, 45
Difficulty: Moderate
3) Mahatma Gandhi exhorted his followers in India to promote economic welfare by decreasing
imports. This approach
A) makes no sense.
B) makes no economic sense.
C) is consistent with the the Ricardian model of comparative advantage.
D) is not consistent with the Ricardian model of comparative advantage.
E) guarantees benefits for Indian workers.
Answer: D
Page Ref: 37-40
Difficulty: Moderate
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11
4) The Country of Rhozundia is blessed with rich copper deposits. The cost of copper produced
(relative to the cost of widgets produced) is therefore very low. From this information we know
that
A) Rhozundia has a comparative advantage in copper.
B) Rhozundia should import copper and export widgets.
C) Rhozundia should export both widgets and copper.
D) Rhozundia should invest in more widget production.
E) Rhozundia may or may not have a comparative advantage in copper.
Answer: E
Page Ref: 37-40
Difficulty: Moderate
5) We know that in antiquity, China exported silk because no one in any other country knew how
to produce this product. From this information we know that
A) China had a comparative advantage in silk.
B) China had an absolute advantage, but not a comparative advantage in silk.
C) no comparative advantage could exist because the technology was not diffused.
D) China exported silk for political reasons even though it had no comparative advantage.
E) China was unable to profit by exporting silk because it was unknown in the rest of the world.
Answer: A
Page Ref: 37-40
Difficulty: Moderate
6) The pauper labor and the exploitation arguments
A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative
advantage.
B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance.
C) are not relevant because the Ricardian model is based on the labor theory of value.
D) are not relevant because the Ricardian model allows for different technologies in different
countries.
E) invalidate the Ricardian model.
Answer: B
Page Ref: 39-40
Difficulty: Easy
7) If labor productivities were exactly proportional to wage levels internationally, this would
A) not negate the logical basis for trade in the Ricardian model.
B) render the Ricardian model theoretically correct but practically useless.
C) negate the logical basis for trade in the Ricardian model.
D) negate the applicability of the Ricardian model if the number of products were greater than
the number of trading partners.
E) demonstrate the validity of the Ricardian model.
Answer: A
Page Ref: 38
Difficulty: Moderate
4) The Country of Rhozundia is blessed with rich copper deposits. The cost of copper produced
(relative to the cost of widgets produced) is therefore very low. From this information we know
that
A) Rhozundia has a comparative advantage in copper.
B) Rhozundia should import copper and export widgets.
C) Rhozundia should export both widgets and copper.
D) Rhozundia should invest in more widget production.
E) Rhozundia may or may not have a comparative advantage in copper.
Answer: E
Page Ref: 37-40
Difficulty: Moderate
5) We know that in antiquity, China exported silk because no one in any other country knew how
to produce this product. From this information we know that
A) China had a comparative advantage in silk.
B) China had an absolute advantage, but not a comparative advantage in silk.
C) no comparative advantage could exist because the technology was not diffused.
D) China exported silk for political reasons even though it had no comparative advantage.
E) China was unable to profit by exporting silk because it was unknown in the rest of the world.
Answer: A
Page Ref: 37-40
Difficulty: Moderate
6) The pauper labor and the exploitation arguments
A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative
advantage.
B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance.
C) are not relevant because the Ricardian model is based on the labor theory of value.
D) are not relevant because the Ricardian model allows for different technologies in different
countries.
E) invalidate the Ricardian model.
Answer: B
Page Ref: 39-40
Difficulty: Easy
7) If labor productivities were exactly proportional to wage levels internationally, this would
A) not negate the logical basis for trade in the Ricardian model.
B) render the Ricardian model theoretically correct but practically useless.
C) negate the logical basis for trade in the Ricardian model.
D) negate the applicability of the Ricardian model if the number of products were greater than
the number of trading partners.
E) demonstrate the validity of the Ricardian model.
Answer: A
Page Ref: 38
Difficulty: Moderate
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12
8) Many countries in sub-Saharan Africa have very low labor productivities in many sectors, for
example in manufacturing and agriculture. They often despair of even trying to attempt to build
their industries unless it is done in an autarkic context, behind protectionist walls because they do
not believe they can compete with more productive industries abroad. Discuss this issue in the
context of the Ricardian model of comparative advantage.
Answer: The Ricardian model of comparative advantage argues that every country must have a
comparative advantage in some product (assuming there are more products than countries).
However, the Ricardian model is not a growth model, and cannot be used to identify growth
modes or linkages.
Page Ref: 25-40
Difficulty: Difficult
9) In 1975, wage levels in South Korea were roughly 5% of those in the United States. It is
obvious that if the United States had allowed Korean goods to be freely imported into the United
States at that time, this would have caused devastation to the standard of living in the United
States, because no producer in this country could possibly compete with such low wages.
Discuss this assertion in the context of the Ricardian model of comparative advantage.
Answer: Regardless of relative wage levels, the United States would be able to provide its
populace with a higher standard of living than would be possible without trade. Also, low wages
tend to be associated with low productivities.
Page Ref: 39
Difficulty: Moderate
3.5 Comparative Advantage with Many Goods
1) The two-country, multi-product model differs from the two-country, two-product model in
that, in the former
A) the relative wage ratio will determine the pattern of trade ( which good is exported by which
country).
B) which country will export which product is determined entirely by labor productivity data.
C) full specialization is likely to hold in equilibrium.
D) none of the goods are potentially nontraded.
E) domestic relative prices are not relevant.
Answer: A
Page Ref: 40-44
Difficulty: Moderate
8) Many countries in sub-Saharan Africa have very low labor productivities in many sectors, for
example in manufacturing and agriculture. They often despair of even trying to attempt to build
their industries unless it is done in an autarkic context, behind protectionist walls because they do
not believe they can compete with more productive industries abroad. Discuss this issue in the
context of the Ricardian model of comparative advantage.
Answer: The Ricardian model of comparative advantage argues that every country must have a
comparative advantage in some product (assuming there are more products than countries).
However, the Ricardian model is not a growth model, and cannot be used to identify growth
modes or linkages.
Page Ref: 25-40
Difficulty: Difficult
9) In 1975, wage levels in South Korea were roughly 5% of those in the United States. It is
obvious that if the United States had allowed Korean goods to be freely imported into the United
States at that time, this would have caused devastation to the standard of living in the United
States, because no producer in this country could possibly compete with such low wages.
Discuss this assertion in the context of the Ricardian model of comparative advantage.
Answer: Regardless of relative wage levels, the United States would be able to provide its
populace with a higher standard of living than would be possible without trade. Also, low wages
tend to be associated with low productivities.
Page Ref: 39
Difficulty: Moderate
3.5 Comparative Advantage with Many Goods
1) The two-country, multi-product model differs from the two-country, two-product model in
that, in the former
A) the relative wage ratio will determine the pattern of trade ( which good is exported by which
country).
B) which country will export which product is determined entirely by labor productivity data.
C) full specialization is likely to hold in equilibrium.
D) none of the goods are potentially nontraded.
E) domestic relative prices are not relevant.
Answer: A
Page Ref: 40-44
Difficulty: Moderate
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13
2) How does the two-good, two-country version of the Ricardian model differ from the two-
country, many-good model in terms of the determination which goods are produced and exported
by each country?
Answer: In the two-good-two-country version of the Ricardian model, comparative advantage is
totally determined by physical productivity ratios. Changes in wage rates in either country do not
change physically determined comparative advantages, and therefore cannot affect which
product will be exported by which country.
However, when there are more than two goods in the two-country model, changes in wage rates
in one or the other country can in fact determine which good or goods each of the countries will
export. The physical productivity definition of comparative advantage employed in the two-good
model becomes ambiguous. Instead, changes in relative wage rates will alter international
competitiveness along the "chain of comparative advantage."
Page Ref: 40-44
Difficulty: Moderate
3.6 Adding Transport Costs and Nontraded Goods
1) Assume that transportation costs are especially high for Widgets in the two-country, two-
product Ricardian model, and Country A enjoys a comparative advantage in Widgets, then
A) country B must also enjoy a comparative advantage in Widgets.
B) country B may end up exporting Widgets.
C) country A may switch to having a comparative advantage in the other good.
D) country A will still export Widgets.
E) trade may be impossible between the two countries.
Answer: E
Page Ref: 44-45
Difficulty: Moderate
2) Which of the following is most likely to be an untraded good in a Ricardian two-country,
multi-good model?
A) steel
B) textiles
C) haircuts
D) petroleum
E) telemarketer services
Answer: C
Page Ref: 45
Difficulty: Easy
2) How does the two-good, two-country version of the Ricardian model differ from the two-
country, many-good model in terms of the determination which goods are produced and exported
by each country?
Answer: In the two-good-two-country version of the Ricardian model, comparative advantage is
totally determined by physical productivity ratios. Changes in wage rates in either country do not
change physically determined comparative advantages, and therefore cannot affect which
product will be exported by which country.
However, when there are more than two goods in the two-country model, changes in wage rates
in one or the other country can in fact determine which good or goods each of the countries will
export. The physical productivity definition of comparative advantage employed in the two-good
model becomes ambiguous. Instead, changes in relative wage rates will alter international
competitiveness along the "chain of comparative advantage."
Page Ref: 40-44
Difficulty: Moderate
3.6 Adding Transport Costs and Nontraded Goods
1) Assume that transportation costs are especially high for Widgets in the two-country, two-
product Ricardian model, and Country A enjoys a comparative advantage in Widgets, then
A) country B must also enjoy a comparative advantage in Widgets.
B) country B may end up exporting Widgets.
C) country A may switch to having a comparative advantage in the other good.
D) country A will still export Widgets.
E) trade may be impossible between the two countries.
Answer: E
Page Ref: 44-45
Difficulty: Moderate
2) Which of the following is most likely to be an untraded good in a Ricardian two-country,
multi-good model?
A) steel
B) textiles
C) haircuts
D) petroleum
E) telemarketer services
Answer: C
Page Ref: 45
Difficulty: Easy
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14
3.7 Empirical Evidence on the Ricardian Model
1) Which of the following has been confirmed by empirical tests of the Ricardian model?
A) All predictions of the model for a multi-product, multi-country world are highly unrealistic.
B) The existence of nontraded goods results in a high degree of specialization among countries.
C) International trade has no impact on income distribution.
D) The unimportance of economies of scale as a cause of trade.
E) Companies tend to export goods in which they have a relatively high level of productivity.
Answer: E
Page Ref: 45-46
Difficulty: Moderate
2) When compared with China, the growth of clothing exports originating in Bangladesh clearly
illustrates the difference between absolute and comparative advantage. Discuss and explain.
Answer: While Bangladesh has an absolute disadvantage in clothing (and, on average,
everything else), the country has a comparative advantage in clothing manufacture and export.
Exports of clothing from Bangladesh have consequently surpassed those from China.
Page Ref: 47
Difficulty: Moderate
3) When compared with China, the growth of clothing exports originating in Bangladesh clearly
illustrates the Ricardian model of comparative advantage. Discuss and explain.
Answer: While Bangladesh has an absolute disadvantage in clothing (and, on average,
everything else), the country has a comparative advantage in clothing manufacture and export.
Exports of clothing from Bangladesh have consequently surpassed those from China.
Page Ref: 47
Difficulty: Moderate
4) When compared with China, the growth of clothing exports originating in Bangladesh is the
result of
A) the comparative advantage that Bangladesh has in the production of clothing for export.
B) the absolute advantage that China has in the production of clothing for export.
C) the absolute advantage that Bangladesh has in the production of clothing for export.
D) the comparative and absolute advantage that China has in the production of clothing for
export.
E) the comparative and absolute advantage that Bangladesh has in the production of clothing for
export.
Answer: A
Page Ref: 47
Difficulty: Easy
3.7 Empirical Evidence on the Ricardian Model
1) Which of the following has been confirmed by empirical tests of the Ricardian model?
A) All predictions of the model for a multi-product, multi-country world are highly unrealistic.
B) The existence of nontraded goods results in a high degree of specialization among countries.
C) International trade has no impact on income distribution.
D) The unimportance of economies of scale as a cause of trade.
E) Companies tend to export goods in which they have a relatively high level of productivity.
Answer: E
Page Ref: 45-46
Difficulty: Moderate
2) When compared with China, the growth of clothing exports originating in Bangladesh clearly
illustrates the difference between absolute and comparative advantage. Discuss and explain.
Answer: While Bangladesh has an absolute disadvantage in clothing (and, on average,
everything else), the country has a comparative advantage in clothing manufacture and export.
Exports of clothing from Bangladesh have consequently surpassed those from China.
Page Ref: 47
Difficulty: Moderate
3) When compared with China, the growth of clothing exports originating in Bangladesh clearly
illustrates the Ricardian model of comparative advantage. Discuss and explain.
Answer: While Bangladesh has an absolute disadvantage in clothing (and, on average,
everything else), the country has a comparative advantage in clothing manufacture and export.
Exports of clothing from Bangladesh have consequently surpassed those from China.
Page Ref: 47
Difficulty: Moderate
4) When compared with China, the growth of clothing exports originating in Bangladesh is the
result of
A) the comparative advantage that Bangladesh has in the production of clothing for export.
B) the absolute advantage that China has in the production of clothing for export.
C) the absolute advantage that Bangladesh has in the production of clothing for export.
D) the comparative and absolute advantage that China has in the production of clothing for
export.
E) the comparative and absolute advantage that Bangladesh has in the production of clothing for
export.
Answer: A
Page Ref: 47
Difficulty: Easy
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