Test Bank for International Finance: Theory and Policy, 11th Edition

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TEST BANKVan PhamSalem State UniversityInternational Economics: Theory and PolicyEleventh EditionPaul R. KrugmanPrinceton UniversityMaurice ObstfeldUniversity of California, BerkeleyMarc MelitzHarvard University

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1International Economics: Theory and Policy, 11e(Krugman et al.)Chapter 1Introduction1.1What Is International Economics About?1) Historians of economic thought often describe ________ written by ________ and publishedin ________ as the first real exposition of an economic model.A) "Of the Balance of Trade," David Hume, 1776B) "Wealth of Nations," David Hume, 1758C) "Wealth of Nations," Adam Smith, 1758D) "Wealth of Nations," Adam Smith, 1776E) "Of the Balance of Trade," David Hume, 1758Answer: EPage Ref: 1Difficulty: Easy2) From 1950 to 2015A) 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: CPage Ref: 1Difficulty: Easy3) The United States is less dependent on trade than most other countries becauseA) 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: APage Ref: 2Difficulty: Easy4) Theories of international economics from the 18th and 19th centuries areA) 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: CPage Ref: 2Difficulty: Easy

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25) An important insight of international trade theory is that when two countries engage involuntary tradeA) 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: BPage Ref: 4Difficulty: Easy6) If there are large disparities in wage levels between countries, thenA) 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: DPage Ref: 4Difficulty: Easy7) The benefits of international trade are derived from trade inA) tangible goods only.B) intangible goods only.C) goods but not services.D) services but not goods.E) anything of value.Answer: EPage Ref: 4Difficulty: Easy8) Which of the following does NOT belong?A) NAFTAB) Uruguay RoundC) World Trade OrganizationD) non-tariff barriersE) major free trade agreements of the 1990sAnswer: DPage Ref: 6Difficulty: Easy

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39) International economics ________ use the same fundamental methods of analysis as otherbranches of economics, because ________.A) does not, the level of complexity of international issues is uniqueB) does not, the interactions associated with international economic relations is highlymathematicalC) does not, international economics takes a different perspective on economic issuesD) does not, international economic policy requires cooperation with other countriesE) does, the motives and behavior of individuals are the same in international trade as they are indomestic transactionsAnswer: EPage Ref: 3Difficulty: Easy10) Because the Constitution forbids restraints on interstate tradeA) 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 financialintermediary 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: EPage Ref: 4Difficulty: Easy11) Which of the following is NOT a major concern of international economic theory?A) protectionismB) the balance of paymentsC) exchange rate determinationD) bilateral trade relations with ChinaE) the international capital marketAnswer: DPage Ref: 4Difficulty: Easy12) "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: BPage Ref: 4Difficulty: Easy

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413) Who sells what to whomA) 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 madein the private competitive market.D) is determined by political rather than economic factors.E) is less important than international economic theory.Answer: APage Ref: 5Difficulty: Easy14) The insight that patterns of trade are primarily determined by international differences inlabor productivity was first proposed byA) Adam Smith.B) David Hume.C) David Ricardo.D) Eli Heckscher.E) Lerner and Samuelson.Answer: APage Ref: 5Difficulty: Easy15) After World War II, the United States has pursued a broad policy ofA) 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: BPage Ref: 6Difficulty: Easy16) The balance of payments has become a central issue for the United States becauseA) 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: CPage Ref: 7Difficulty: Easy

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517) The study of exchange rate determination is a relatively new part of international economics,sinceA) 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 becameavailable.C) economic theory developed by David Hume demonstrated that real exchange rates remainfixed over time.D) dynamic overshooting asset pricing models are a recent theoretical development.E) the exchange rate never fluctuates.Answer: APage Ref: 7Difficulty: Easy18) A fundamental problem in international economics is how to produceA) 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 policiesD) a counter-cyclical monetary policy so that all countries will not be adversely affected by afinancial crisis in one country.E) a worldwide form of currency.Answer: BPage Ref: 7Difficulty: Easy19) For almost 70 years international trade policies have been governedA) 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: DPage Ref: 7Difficulty: Easy20) The international capital market isA) 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 topay 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: BPage Ref: 8Difficulty: Easy

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621) International capital markets experience a kind of risk not faced in domestic capital markets,namelyA) "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: DPage Ref: 7Difficulty: Moderate22) Since 1994, trade rules have been enforced byA) the WTO.B) the G10.C) the GATT.D) The U.S. Congress.E) the European Union.Answer: APage Ref: 7Difficulty: Easy23) In 1998 an economic and financial crisis in South Korea caused it to experienceA) 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: APage Ref: 6Difficulty: Easy24) International economists cannot discuss the effects of international trade or recommendchanges in government policies toward trade with any confidence unless they knowA) 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: DPage Ref: 5-6Difficulty: Easy

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725) Trade theorists have proven that the gains from international tradeA) 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: EPage Ref: 5-6Difficulty: Easy26) The international financial crisis of 2007 was the result ofA) 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: EPage Ref: 8Difficulty: Easy27) In September 2010, the finance minister of ________ declared that the world was "in themidst of an international currency war" because of rapid appreciation in the value of thecountry's currency, the ________.A) England; pound sterlingB) Germany; euroC) Japan; yenD) China; renminbiE) Brazil; RealAnswer: EPage Ref: 7Difficulty: Easy28) Cost-benefit analysis of international tradeA) 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: CPage Ref: 6Difficulty: Moderate

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829) An improvement in a country's balance of payments means a decrease in its balance ofpayments deficit, or an increase in its surplus. In fact we know that a surplus in a balance ofpaymentsA) is always beneficial.B) is usually beneficial.C) is never harmful.D) is sometimes harmful.E) is always harmful.Answer: DPage Ref: 6Difficulty: Moderate30) The GATT isA) 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: APage Ref: 7Difficulty: Easy31) It is argued that global trade tends to be more important to countries with smaller economiesthan the U.S. Is this empirically verified?Answer: Yes. Figure 1-2 shows exports and imports as a percentage of national income in theU.S. and five other countries and notes that "International trade is even more important to mostother countries than it is to the U.S."Page Ref: 3Difficulty: Moderate32) It is argued that if a rich high wage country such as the United States were to expand tradewith a relatively poor and low wage country such as Mexico, then U.S. industry would migratesouth, and U.S. wages would fall to the level of Mexico's. What do you think about thisargument?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: 4Difficulty: Moderate33) How are the patterns of international trade, that is the pattern of what different countriesexport and import, explained?Answer: Climate explains why Brazil exports coffee. Natural resources explains why SaudiArabia exports oil. More generally, differences in labor productivity and in the availability ofland, labor, and capital within different countries explain patterns of trade. More recent researchsuggests that there is a significant random component involved, as well.Page Ref: 5Difficulty: Moderate

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934) International trade theory implies that international trade is beneficial to all trading countries.However, casual observation leads to the conclusion that official obstruction of internationaltrade 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: 4Difficulty: Moderate1.2International Economics: Trade and Money1) International economics can be divided into two broad sub-fieldsA) macro and micro.B) developed and less developed.C) monetary and barter.D) international trade and international money.E) static and dynamic.Answer: DPage Ref: 9Difficulty: Easy2) International monetary analysis focuses onA) 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: EPage Ref: 9Difficulty: Easy3) The distinction between international trade and international money is NOT entirely clearbecauseA) 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: EPage Ref: 9Difficulty: Easy

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1International Economics: Theory and Policy, 11e(Krugman et al.)Chapter 2World Trade: An Overview2.1Who Trades with Whom?1) Approximately what percent of all world production of goods and services is exported to othercountries?A) 10%B) 30%C) 50%D) 100%E) 90%Answer: BPage Ref: 10Difficulty: Easy2) Thegravity modeloffers a logical explanation for the fact thatA) 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: DPage Ref: 11-15Difficulty: Moderate3) Thegravity modelsuggests that over timeA) trade between neighboring countries will increase.B) trade between all countries will increase.C) world trade will eventually be swallowed by ablack 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 twocountries' GDP.Answer: EPage Ref: 12Difficulty: Easy4) Thegravity modelexplains whyA) 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 betweenneighboring countries.E) European countries rely most often on natural resources.Answer: APage Ref: 11-15Difficulty: Moderate

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25) According to thegravity model, a characteristic that tends to affect the probability of tradeexisting between any two countries isA) 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: DPage Ref: 12Difficulty: Easy6) In general, which of the following do NOT tend to increase trade between two countries?A) linguistic and/or cultural affinityB) historical tiesC) larger economiesD) mutual membership in preferential trade agreementsE) the existence of well controlled borders between countriesAnswer: EPage Ref: 14-16Difficulty: Moderate7) 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 governmentpromotion of trade and investment.C) Large economies have relatively larger areas, which raises the probability that a productiveactivity 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: DPage Ref: 13Difficulty: Easy8) We see that the Netherlands, Belgium, and Ireland trade considerably more with the UnitedStates 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: CPage Ref: 13Difficulty: Easy

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39) The two neighbors of the United States do a lot more trade with the United States thanEuropean 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: BPage Ref: 14-15Difficulty: Moderate10) Which of the following does NOT explain the extent of trade between Ireland and the U.S.?A) historical tiesB) cultural Linguistic tiesC) Gravity ModelD) multinational corporationsE) large numbers of Irish-AmericansAnswer: CPage Ref: 13Difficulty: Moderate2.2The Changing Pattern of World Trade1) Since the early 1970s, world's trade as a share of world production hasA) remained constant.B) increased.C) decreased.D) fluctuated widely with no clear trend.E) increased slightly before dropping off.Answer: BPage Ref: 18Difficulty: Easy2) In the current Post-Industrial economy, international trade in services (including banking andfinancial 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: CPage Ref: 20-21-22Difficulty: Easy

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43) In the early 20th century, the United Kingdom exported mainlyA) manufactured goods.B) services.C) primary products including agricultural.D) technology intensive products.E) livestock.Answer: APage Ref: 19Difficulty: Easy4) In the early 20th century, the United Kingdom imported mainlyA) manufactured goods.B) services.C) primary products including agricultural.D) technology intensive products.E) from the United States.Answer: CPage Ref: 19Difficulty: Easy5) In the present, most of the exports from China areA) manufactured goods.B) services.C) primary products including agricultural.D) technology intensive products.E) overpriced by world market standards.Answer: APage Ref: 19Difficulty: Easy6) When comparing the composition of world trade in the early 20th century to the early 21stcentury, we find major compositional changes. These include a relative decline in trade inagricultural and primary-products (including raw materials). How would you explain this interms of broad historical developments during this period?Answer: The typical composition of world production during this period experienced majorchanges. Focusing on today's Industrialized Countries (primarily members of the OECD), theindustrial-employment composition was focused primarily on agriculture. Most value was inland. The predominant single consumption category was food. Since then, the economies shiftedfrom the agricultural to the manufacturing sectors (continuing trends begun over a century earlierin the industrial revolution). Incomes rose, and consumption shifted in favor of (increasinglyaffordable) manufactures. Both income and price elasticities were greater in manufactures thanin 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 worldproduction and consumption.Page Ref: 18-21Difficulty: Moderate

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57) In the past half century, thedeveloping countrieshave experienced major compositional shiftsfrom exports of primary products (including agricultural and raw materials) to exports ofmanufactures. How might you explain this in terms of broad historical developments during thisperiod?Answer: Any discussion of the export experience of thedeveloping countriesmust first clarifythe problem of definitional inclusion. In particular, the exports of the (non-OECD)developingcountries, has become increasingly dominated by the experience of a relatively small number ofcountries in South-East Asia, termed theNew Industrialized Countries (NICs). Since theyexperienced both very rapid increases in their exports, and very rapid increases in themanufactured component of their exports, their experience alone may explain the bulk of theobserved phenomenon. Many would exclude the NICs from thedeveloping countrycategory soas 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 includingChina have replicated the experience of the NICs, and this again muddies the water for oneinterested in focusing on the export experience of the increasingly heterogeneous category,developing countries. Another explanation of the growing dependence on manufactured exportson the part of thedeveloping countriesis the following: Since the consumer ( includingindustrial consumer) markets in OECD countries were rapidly shifting away from primaryproducts, these markets were rapidly disappearing.In addition, the world market for primary products was generally limited by low price andespecially income elasticities; agricultural sectors tended to be highly and rigidly protected inpotential OECD markets; and escalating effective tariff structures levied systematically largelevels of protection against the primary exports of thedeveloping countries; export success hadto be pursued outside of the traditional primary exports of these countries.Page Ref: 18-21Difficulty: Difficult

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62.3Do Old Rules Still Apply?1) The Services sector has been steadily rising in relative importance in GDP of the UnitedStates, 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 slowthe rapid growth in international trade. Discuss.Answer: This argument stands on questionable logical foundations. The past half century hasseen a steady growth in the absolute and relative importance of international trade. This trend hasbeen reversed only by global conflicts, i.e. the two World Wars. This trend has remained steadyand robust despite major compositional shifts (e.g., from primary to manufacturing), and locationshifts (e.g., the sudden rise of NICs as a significant group of exporters). The trend will probablycontinue into the reasonable future, fueled by both super-regional preferential trade regions and agrowing impact of the multilateral forces, represented institutionally by the World TradeOrganization (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 andtransportation—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-distanceteaching, "help-desk" outsourcing, consulting and management services and others. In fact, whena tourist gets a haircut, we see that even haircuts become a "tradable" service.Page Ref: 19-21Difficulty: Difficult

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1International Economics: Theory and Policy, 11e(Krugman et al.)Chapter 3Labor Productivity and Comparative Advantage: The Ricardian Model3.1The Concept of Comparative Advantage1) Trade between two countries can benefit both countries ifA) 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: APage Ref: 26Difficulty: Easy2) A country engaging in trade according to the principles of comparative advantage gains fromtrade because itA) 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: BPage Ref: 24-26Difficulty: Easy3) The earliest statement of the principle of comparative advantage is associated withA) David Hume.B) David Ricardo.C) Adam Smith.D) Eli Heckscher.E) Bertil Ohlin.Answer: BPage Ref: 26Difficulty: Easy4) The Ricardian model attributes the gains from trade associated with the principle ofcomparative advantage result toA) differences in technology.B) differences in preferences.C) differences in labor productivity.D) differences in resources.E) gravity relationships among countries.Answer: CPage Ref: 26Difficulty: Easy

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25) The Ricardian model demonstrates thatA) 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 acomparative 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: CPage Ref: 26Difficulty: Easy6) In the Ricardian model, comparative advantage is likely to be due toA) scale economies.B) home product taste bias.C) greater capital availability per worker.D) labor productivity differences.E) political pressure.Answer: DPage Ref: 26Difficulty: Easy7) In a two-country, two-product world, the statement "Germany enjoys a comparative advantageover France in autos relative to ships" is equivalent toA) 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: APage Ref: 25-26Difficulty: Moderate

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33.2A One-Factor Economy1) 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 beefbecause 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, theopportunity 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, theopportunity 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 comparativeadvantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.33units 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: 26-30Difficulty: Moderate

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42) 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 beefbecause 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, theopportunity 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, theopportunity 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 comparativeadvantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.5units 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: 26-30Difficulty: Moderate3) 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 beefbecause 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, theopportunity 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, theopportunity 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 forbeneficial trade.Page Ref: 26-30Difficulty: Moderate

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53.3Trade in a One-Factor World1) In order to know whether a country has a comparative advantage in the production of oneparticular product we need information on at least ________ unit labor requirements.A) oneB) twoC) threeD) fourE) fiveAnswer: DPage Ref: 29Difficulty: Easy2) Given the information in the table aboveA) 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: BPage Ref: 29Difficulty: Moderate3) Given the information in the table above, if it is ascertained that Foreign uses prison-slavelabor to produce its exports, then home shouldA) export cloth.B) export widgets.C) export both and import nothing.D) export and import nothing.E) export widgets and import cloth.Answer: APage Ref: 29Difficulty: Moderate

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64) Given the information in the table above, if the Home economy suffered a meltdown, and theUnit Labor Requirements doubled to 20 for cloth and 40 for widgets then home shouldA) export cloth.B) export widgets.C) export both and import nothing.D) export and import nothing.E) export widgets and import cloth.Answer: APage Ref: 29Difficulty: Moderate5) Given the information in the table above, if wages were to double in Home, then Home shouldA) export cloth.B) export widgets.C) export both and import nothing.D) export and import nothing.E) export widgets and import cloth.Answer: APage Ref: 29Difficulty: Moderate6) Given the information in the table aboveA) 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: CPage Ref: 29Difficulty: Moderate7) Given the information in the table above, Home's opportunity cost of cloth isA) 0.5.B) 2.0.C) 6.0.D) 1.5.E) 3.0.Answer: APage Ref: 28-29Difficulty: Moderate

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78) Given the information in the table above, Home's opportunity cost of widgets isA) 0.5.B) 2.0.C) 6.0.D) 1.5.E) 3.0.Answer: BPage Ref: 28-29Difficulty: Moderate9) Given the information in the table above, Foreign's opportunity cost of cloth isA) 0.5.B) 2.0.C) 6.0.D) 1.5.E) 3.0.Answer: BPage Ref: 28-29Difficulty: Moderate10) Given the information in the table above, Foreign's opportunity cost of widgets isA) 0.5.B) 2.0.C) 6.0.D) 1.5.E) 3.0.Answer: APage Ref: 28-29Difficulty: Moderate11) Given the information in the table above, if the world equilibrium price of widgets were 4cloth, thenA) 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: APage Ref: 28-33Difficulty: Moderate

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812) Given the information in the table above, if the world equilibrium price of widgets were 40cloths, thenA) 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: APage Ref: 28-33Difficulty: Moderate13) In a two-product, two-country world, international trade can lead to increases inA) 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: BPage Ref: 26-33Difficulty: Moderate14) A nation engaging in trade according to the Ricardian model will find its consumptionbundleA) 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: CPage Ref: 34Difficulty: Moderate15) According to Ricardo, a country will have a comparative advantage in the product in whichitsA) 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: BPage Ref: 26-28Difficulty: Moderate

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916) 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 theUnited States as compared to Japan ifA) 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: APage Ref: 35-37Difficulty: Moderate17) An examination of the Ricardian model of comparative advantage yields the clear result thattrade is (potentially) beneficial for each of the two trading partners since it allows for anexpanded consumption choice for each. However, for the world as a whole the expansion ofproduction of one product must involve a decrease in the availability of the other, so that it is notclear 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 awhole? Explain.Answer: If we were to combine the production possibility frontiers of the two countries to createa 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 fromthe world's perspective. In other words, the new solution cannot possibly involve the productionof more of both goods. However, since we know that each country is better off at the newsolution, it must be true that the original points were not on the trade contract curve between thetwo countries, and it was in fact possible to make some people better off without making othersworse off, so that the new solution does indeed represent a welfare improvement from theworld's perspective.Page Ref: 25-37Difficulty: Difficult18) Given the information in the table above. What is the opportunity cost of Cloth in terms ofWidgets in Foreign?Answer: One half a widget.Page Ref: 26-29Difficulty: Moderate

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1019) Given the information in the table above. What is the opportunity cost of cloth in terms ofWidgets in Foreign?Answer: 2 widgets.Page Ref: 26-29Difficulty: Moderate3.4Misconceptions About Comparative Advantage1) If a production possibilities frontier is a straight line, then production occurs under conditionsofA) increasing opportunity costs.B) constant opportunity costs.C) decreasing opportunity costs.D) infinite opportunity costs.E) uncertain opportunity costs.Answer: BPage Ref: 38Difficulty: Easy2) Which of the following statements is TRUE?A) Free trade is beneficial only if your country is strong enough to stand up to foreigncompetition.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: EPage Ref: 37-40, 45Difficulty: Moderate3) Mahatma Gandhi exhorted his followers in India to promote economic welfare by decreasingimports. This approachA) 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: DPage Ref: 37-40Difficulty: Moderate

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114) 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 knowthatA) 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: EPage Ref: 37-40Difficulty: Moderate5) We know that in antiquity, China exported silk because no one in any other country knew howto produce this product. From this information we know thatA) 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: APage Ref: 37-40Difficulty: Moderate6) The pauper labor and the exploitation argumentsA) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparativeadvantage.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 differentcountries.E) invalidate the Ricardian model.Answer: BPage Ref: 39-40Difficulty: Easy7) If labor productivities were exactly proportional to wage levels internationally, this wouldA) 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 thanthe number of trading partners.E) demonstrate the validity of the Ricardian model.Answer: APage Ref: 38Difficulty: Moderate

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128) Many countries in sub-Saharan Africa have very low labor productivities in many sectors, forexample in manufacturing and agriculture. They often despair of even trying to attempt to buildtheir industries unless it is done in an autarkic context, behind protectionist walls because they donot believe they can compete with more productive industries abroad. Discuss this issue in thecontext of the Ricardian model of comparative advantage.Answer: The Ricardian model of comparative advantage argues that every country must have acomparative 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 growthmodes or linkages.Page Ref: 25-40Difficulty: Difficult9) In 1975, wage levels in South Korea were roughly 5% of those in the United States. It isobvious that if the United States had allowed Korean goods to be freely imported into the UnitedStates at that time, this would have caused devastation to the standard of living in the UnitedStates, 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 itspopulace with a higher standard of living than would be possible without trade. Also, low wagestend to be associated with low productivities.Page Ref: 39Difficulty: Moderate3.5Comparative Advantage with Many Goods1) The two-country, multi-product model differs from the two-country, two-product model inthat, in the formerA) the relative wage ratio will determine the pattern of trade ( which good is exported by whichcountry).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: APage Ref: 40-44Difficulty: Moderate

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132) 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 exportedby each country?Answer: In the two-good-two-country version of the Ricardian model, comparative advantage istotally determined by physical productivity ratios. Changes in wage rates in either country do notchange physically determined comparative advantages, and therefore cannot affect whichproduct will be exported by which country.However, when there are more than two goods in the two-country model, changes in wage ratesin one or the other country can in fact determine which good or goods each of the countries willexport. The physical productivity definition of comparative advantage employed in the two-goodmodel becomes ambiguous. Instead, changes in relative wage rates will alter internationalcompetitiveness along the "chain of comparative advantage."Page Ref: 40-44Difficulty: Moderate3.6Adding Transport Costs and Nontraded Goods1) 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, thenA) 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: EPage Ref: 44-45Difficulty: Moderate2) Which of the following is most likely to be an untraded good in a Ricardian two-country,multi-good model?A) steelB) textilesC) haircutsD) petroleumE) telemarketer servicesAnswer: CPage Ref: 45Difficulty: Easy

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143.7Empirical Evidence on the Ricardian Model1) 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: EPage Ref: 45-46Difficulty: Moderate2) When compared with China, the growth of clothing exports originating in Bangladesh clearlyillustrates 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: 47Difficulty: Moderate3) When compared with China, the growth of clothing exports originating in Bangladesh clearlyillustrates 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: 47Difficulty: Moderate4) When compared with China, the growth of clothing exports originating in Bangladesh is theresult ofA) 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 forexport.E) the comparative and absolute advantage that Bangladesh has in the production of clothing forexport.Answer: APage Ref: 47Difficulty: Easy

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