Test Bank for Introduction to International Economics, 3rd Edition

Salvatore’s Introduction to International Economics, Third Edition Test Bank c02; Chapter 2: Comparative Advantage Multiple Choice 1. A) B) C) D) The analysis of economic forces that justify the existence of trade and its degree between two nations is referred to as: basis for trade losses from trade gains from trade pattern of trade Answer: A Section: 2.1 2. A) B) C) D) The increase in consumption in each nation resulting from specialization in production and trading is referred to as: basis for trade losses from trade gains from trade pattern of trade Answer: C Section: 2.1 3. A) B) C) D) Commodities exported and imported by each nation constitute the: basis for trade losses from trade gains from trade pattern of trade Answer: D Section: 2.1 4. A) The school of thought during the seventeenth and eighteenth centuries proposing that the way for a nation to become richer was to restrict imports and stimulate exports was: Mercantilist Copyright © 2013 John Wiley & Sons, Inc. 2-1 Salvatore’s Introduction to International Economics, Third Edition B) C) D) Test Bank Classical School Laissez Faire Opportunity cost Answer: A Section: 2.2 5. A) B) C) D) _____________ explains how mutually beneficial trade can take place even when one nation is less efficient than another nation in the production of all commodities. Mercantilism The law of comparative advantage The labor theory of value The law of absolute advantage Answer: B Section: 2.4 6. If wage in country A is $6/hour and in country B is £2/hour, and the exchange rate between a $ and a £ is 1£=2$, then given the information in the table, what is the dollar price of a bushel of apple in Country B? Country A Country B Apple (bushels/hr) 8 1 Orange (bushels/hr) 2 3 A) $0.75 B) $1.33 C) $3.00 D) $4.00 Answer: D Section: 2.7 7. If wage in country A is $6/hour and in country B is £2/hour, and the exchange rate between a $ and a £ is 1£=2$, then given the information in the table, which of the following is true? Country A Country B Apple (bushels/hr) 8 1 Orange (bushels/hr) 2 3 A) Country A has comparative advantage in apples B) Country A has comparative advantage in oranges C) Country B has comparative advantage in apples D) Country A and B both have comparative advantage in oranges Copyright © 2013 John Wiley & Sons, Inc. 2-2 Salvatore’s Introduction to International Economics, Third Edition Test Bank Answer: A Section: 2.7 8. A) B) C) D) ______________ states that the cost or price of a commodity is determined by, or can be inferred exclusively from, its labor content. Mercantilism The law of comparative advantage The labor theory of value The opportunity cost theory Answer: C Section: 2.7 9. A) B) C) D) ______________ states that the true cost of a commodity is the amount of a second commodity that must be given up to release just enough resources to produce one more unit of the first commodity: Mercantilism The law of comparative advantage The labor theory of value The opportunity cost theory Answer: D Section: 2.7 10. A) B) C) D) The ability of one nation to produce a commodity using fewer resources than another nation is: absolute advantage comparative advantage mercantilism specialization Answer: A Section: 2.3 11. When the amount of a commodity that must be given up to produce each additional unit of another commodity, regardless of the amount of the commodity foregone, is the same at every level of production, which of the following exists? Copyright © 2013 John Wiley & Sons, Inc. 2-3 Salvatore’s Introduction to International Economics, Third Edition A) B) C) D) Test Bank absolute advantage comparative advantage constant opportunity costs increasing opportunity costs. Answer: C Section: 2.8 12. The ratio of one commodity price to the price of another commodity is called (the): A) absolute advantage B) relative commodity price C) constant opportunity costs D) increasing opportunity costs. Answer: B Section: 2.8 13. A) B) C) D) The mercantilists would have objected to: the use of tariffs or quotas to restrict imports international trade based on open markets export promotion policies initiated by the government trade policies designed to accumulate gold Answer: B Section: 2.2 14. A) B) C) D) ______________ is the utilization of all of a trading nation’s resources in the production of only one commodity. Laissez-faire policy Complete specialization Incomplete specialization Mercantilism Answer: B Section: 2.10 15. A) A laissez-faire policy is one in which: The government regulates all aspects of economic activity Copyright © 2013 John Wiley & Sons, Inc. 2-4 Salvatore’s Introduction to International Economics, Third Edition B) C) D) Test Bank The government interferes with economic activity to a moderate level The government keeps regulation of economic activity to a minimum The governments interference in economic activity is completely non-existent Answer: C Section: 2.3 16. A) B) C) D) Which of these economists considered absolute advantage in production to be the basis for trade between nations? Adam Smith Alfred Marshall David Ricardo David Hume Answer: A Section: 2.3 17. A) B) C) D) Which of these economists considered comparative advantage in production to be the basis for trade between nations? Adam Smith Alfred Marshall David Ricardo David Hume Answer: C Section: 2.4 18. A) B) C) D) According to the mercantilists: Only one nation can gain from trade, and it is at the expense of other nations. All nations can gain mutually from trade without any reduction in welfare to any nation. No nations gain from trade, as it is necessary for each country to sacrifice more than they gain. Trade has nothing to do with a nation’s wealth or well-being. Answer: A Section: 2.2 19. Adam Smith advocated a policy in which: Copyright © 2013 John Wiley & Sons, Inc. 2-5 Salvatore’s Introduction to International Economics, Third Edition A) B) C) D) Test Bank The government regulates all aspects of economic activity The government interferes with economic activity to a moderate level The government keeps regulation of economic activity to a minimum The governments interference in economic activity is completely non-existent Answer: C Section: 2.3 20. A) B) C) D) The Wealth of Nations was published in 1776 by: David Ricardo Adam Smith The Mercantilists Alfred Marshall Answer: B Section: 2.2 21. A) B) C) D) Essays and pamphlets on international trade, maintaining that the only way for a nation to become rich and powerful was to export more than it imported, were written during the seventeenth and eighteenth centuries by: David Ricardo Adam Smith the Mercantilists Alfred Marshall Answer: C Section: 2.2 22. A) B) C) D) According to mercantilism, the flow of _____________ would settle the export surplus that results from trade. Gold and diamonds Diamonds and rubies Silver and copper Gold and silver Answer: D Section: 2.2 Copyright © 2013 John Wiley & Sons, Inc. 2-6 Salvatore’s Introduction to International Economics, Third Edition 23. A) B) C) D) Test Bank The mercantilists measure the wealth of a nation by its stock of: Gold and rubies Gold and silver Human and man-made capital Natural resources available for producing goods and services Answer: B Section: 2.2 24. A) B) C) D) Mercantilists advocated a policy in which: The government regulates all aspects of economic activity The government interferes with economic activity to a moderate level The government keeps regulation of economic activity to a minimum The governments interference in economic activity is completely non-existent Answer: A Section: 2.2 25. A) B) C) D) An important exception to the Laissez-faire policy mentioned by the author is in: the agricultural industries the steel industry national defense related industries None of the above Answer: C Section: 2.3 26. A) B) C) D) With respect to international trade, a zero-sum game is one in which: Only one nation can gain from trade, and it is at the expense of other nations All nations can gain from trade mutually without any reduction in welfare to any nation No nations gain from trade, as it is necessary for each country to sacrifice more than they gain. Only the two nations engaged in trade will benefit and the other nations will lose. Answer: A Section: 2.2 Copyright © 2013 John Wiley & Sons, Inc. 2-7 Salvatore’s Introduction to International Economics, Third Edition 27. A) B) C) D) Test Bank What is the only Western nation that has ever been completely free of mercantilist ideas for a given period in modern times? United States France Germany England Answer: D Section: 2.2 28. A) B) C) D) The concept of absolute advantage provides that the resources of trading partners are utilized most efficiently, and that the output of both commodities will: fall rise stay the same increase initially, then decrease Answer: B Section: 2.3 29. A) B) C) D) Japan is more efficient in the production of rice, and the United States is more efficient in the production of oranges. In the production of rice, Japan is said to have a(n): comparative advantage absolute disadvantage absolute advantage comparative disadvantage Answer: C Section: 2.3 30. A) B) C) D) Japan is more efficient in the production of rice, and the United States is more efficient in the production of oranges. In the production of rice, the United States is said to have a(n): comparative advantage absolute disadvantage absolute advantage comparative disadvantage Answer: B Section: 2.3 Copyright © 2013 John Wiley & Sons, Inc. 2-8 Salvatore’s Introduction to International Economics, Third Edition 31. A) B) C) D) Test Bank Japan is more efficient in the production of rice, and the United States is more efficient in the production of oranges. In the production of oranges, Japan is said to have a(n): comparative advantage absolute disadvantage absolute advantage comparative disadvantage Answer: B Section: 2.3 32. A) B) C) D) Japan is more efficient in the production of rice, and the United States is more efficient in the production of oranges. In the production of oranges, the United States is said to have a(n): comparative advantage absolute disadvantage absolute advantage comparative disadvantage Answer: C Section: 2.3 33. A) B) C) D) According to the following table, if the US trades 9 bushels of wheat to the UK for 9 yards of cloth, the US gains from trade will equal: U.S. U.K. Wheat (bushels/hr) 9 3 Cloth (yards/hr) 5 4 4 bushels of wheat 3 yards of cloth 4 yards of cloth 5 bushels of wheat Answer: C Section: 2.3 34. According to the following table, if the US trades 9 bushels of wheat to the UK for 8 yards of cloth, the UK gains from trade equal: U.S. U.K. Wheat (bushels/hr) 9 3 Copyright © 2013 John Wiley & Sons, Inc. 2-9 Salvatore’s Introduction to International Economics, Third Edition Cloth (yards/hr) A) B) C) D) 5 Test Bank 4 4 bushels of wheat 3 yards of cloth 4 yards of cloth 3 bushels of wheat Answer: D Section: 2.3 35. A) B) C) D) According to the following table, the UK can gain from trade with the US by giving up how much cloth for 9 bushels of wheat? U.S. U.K. Wheat (bushels/hr) 9 3 Cloth (yards/hr) 5 4 Anything less than 12 yards of cloth Anything greater than 9 yards of cloth Only less than 5 yards of cloth Only greater than 10 yards of cloth Answer: A Section: 2.5 36. A) B) C) D) According to the following table, the US can gain from trade with the UK by getting how much cloth for 9 bushels of wheat? U.S. U.K. Wheat (bushels/hr) 9 3 Cloth (yards/hr) 5 4 Only less than 12 yards of cloth Only greater than 9 yards of cloth Anything less than 5 yards of cloth Anything greater than 5 yards of cloth Answer: D Section: 2.5 37. According to the table below, the opportunity cost of one unit of rice for the US is equal to: Production Possibility Schedule for Rice and Pudding in the United States and the United Kingdom United States United Kingdom Rice Pudding Rice Pudding Copyright © 2013 John Wiley & Sons, Inc. 2-10 Salvatore’s Introduction to International Economics, Third Edition A) B) C) D) 140 120 100 80 60 40 20 0 1/2 units of pudding 5 units of pudding 10 units of pudding 2 units of pudding 0 10 20 30 40 50 60 70 Test Bank 35 30 25 20 15 10 5 0 0 10 20 30 40 50 60 70 Answer: A Section: 2.8 38. According to the table below, the opportunity cost of one unit of rice for the UK is equal to: Production Possibility Schedule for Rice and Pudding in the United States and the United Kingdom United States United Kingdom Rice Pudding Rice Pudding 140 0 35 0 120 10 30 10 100 20 25 20 80 30 20 30 60 40 15 40 40 50 10 50 20 60 5 60 0 70 0 70 A) 1/2 units of pudding B) 5 units of pudding C) 10 units of pudding D) 2 units of pudding Answer: D Section: 2.8 39. A) According to the following table, the US has a comparative advantage in: U.S. U.K. Wheat (bushels/hr) 9 3 Cloth (yards/hr) 6 4 Wheat Copyright © 2013 John Wiley & Sons, Inc. 2-11 Salvatore’s Introduction to International Economics, Third Edition B) C) D) Test Bank Cloth Both Neither Answer: A Section: 2.4 40. A) B) C) D) According to the following table, the UK has a comparative advantage in: U.S. U.K. Wheat (bushels/hr) 9 3 Cloth (yards/hr) 6 4 Wheat Cloth Both Neither Answer: B Section: 2.4 41. In the table below both countries produce at the bold levels of output without trade. Assume the US and UK initiate trade and begin to completely specialize in the commodity in which they have a comparative advantage. What would the gains from trade be if the US trades 50 units of rice to the UK for 50 units of pudding? Production Possibility Schedule for Rice and Pudding in the United States and the United Kingdom United States United Kingdom Rice Pudding Rice Pudding 140 0 35 0 120 10 30 20 100 20 25 40 80 30 20 60 60 40 15 80 40 50 10 100 20 60 5 120 0 70 0 140 A) US: 10 units of pudding, 20 units of rice B) US: 20 units of pudding, 10 units of rice C) UK: 10 units of pudding, 20 units of rice D) UK: 20 units of pudding, 10 units of rice Answer: B Section: 2.10 Copyright © 2013 John Wiley & Sons, Inc. 2-12 Salvatore’s Introduction to International Economics, Third Edition Test Bank 42. Among the following 4, which one do you think is the most powerful trade theories? A) Theory of Absolute Advantage B) Theory of Comparative Advantage C) Mercantilism D) Neo-mercantilism Answer: B Section: 2.3 43. In the table below both countries produce at the bold levels of output without trade. Assume the US and UK initiate trade and begin to completely specialize in the commodity in which they have a comparative advantage. Identify the gains from trade if the US trades 50 units of rice to the UK for 50 units of pudding. Production Possibility Schedule for Rice and Pudding in the United States and the United Kingdom United States United Kingdom Rice Pudding Rice Pudding 140 0 35 0 120 10 30 20 100 20 25 40 80 30 20 60 60 40 15 80 40 50 10 100 20 60 5 120 0 70 0 140 A) US: 10 units of pudding, 20 units of rice B) US: 30 units of pudding, 30 units of rice C) UK: 10 units of pudding, 20 units of rice D) UK: 30 units of pudding, 30 units of rice Answer: D Section: 2.10 True/False 44. From 1815 to1914, the United States was the only Western nation that was completely free of mercantilist ideas. Copyright © 2013 John Wiley & Sons, Inc. 2-13 Salvatore’s Introduction to International Economics, Third Edition Test Bank Answer: False Section: 2.2 45. Merchants, bankers, and government officials from Spain, France, and Portugal outline the principles and ideas of mercantilism in the publication The Wealth of Nations. Answer: False Section: 2.2 46. The theory of absolute advantage was how Adam Smith explained basis for trade between nations. Answer: True Section: 2.1 47. The theory of absolute advantage was how David Ricardo explained basis for trade between nations. Answer: False Section: 2.1 48. According to opportunity cost theory, the cost or price of a commodity is determined by, or can be inferred exclusively from, its labor content. Answer: False Section: 2.7 49. The production possibilities frontier shows the various combinations of two commodities that a nation can produce by utilizing anywhere from none of its resources to all of them. Answer: False Section: 2.8 Copyright © 2013 John Wiley & Sons, Inc. 2-14 Salvatore’s Introduction to International Economics, Third Edition 50. Test Bank Even if Country A has an absolute advantage in the production of all commodities over country B, David Ricardo claimed that the basis for mutually beneficial trade could still exist. Answer: True Section: 2.4 51. According to Adam Smith, in order for two countries to voluntarily trade, both nations must gain. Answer: True Section: 2.3 52. Adam Smith strongly advocated a policy of laissez-faire. Answer: True Section: 2.3 53. According to the law of comparative advantage, the less efficient of the two trading countries should specialize in and export the commodity in which it manages to have an absolute advantage. Answer: False Section: 2.4 54. In the presence of trade, a nation’s consumption frontier is the same as the production possibilities frontier. Answer: False Section: 2.10 Essay Copyright © 2013 John Wiley & Sons, Inc. 2-15 Salvatore’s Introduction to International Economics, Third Edition 55. Test Bank Describe the major points of the mercantilists’ view of trade and how they differ from today’s views. Answer: Mercantilists believed that the only way for a nation to accumulate wealth was to export more than that nation imports. The positive net exports would then be ‘settled’ with precious metals, gold and silver in particular. So, the greater gold and silver that a country accumulates, the wealthier that country becomes. However, this environment can best be related to a zero-sum game, and as such a country may only generate wealth at the expense of other nations. In order to sway the value of net exports toward itself, a country would thus want to heavily restrict imports. These views differ dramatically from today’s views of trade. Today the wealth of a nation is not determined by precious metals, but by the stock of human, man-made, and natural resources available for the production of goods and services. The greater the stock of these resources the more readily human wants are satisfied, and the higher the standard of living. But, even though what we value today and consider wealth to be comprised of differs from the mercantilists, mercantilism still exists to some degree. Many countries still restrict imports for the protection of various industries, or even the country’s economy itself. Section: 2.2 56. Could a country which has no absolute advantage in anything still trade and benefit from trade? Answer: Yes, trade will be beneficial to this country as long as it can find a comparative advantage in a product. In order to have comparative advantage, a country does not require absolute advantage in that product. As long as the opportunity cost of production is smaller compared to another country, we will be able to show that it has comparative advantage in that product. 57. Draw two diagrams and show that in the case of constant returns to scale as long as the production possibility frontiers of two countries have different slopes, the two countries will be able to find comparative advantage in two different product and both can benefit from trade. Answer: As you see in the diagrams bellow both country can actually benefit from trade and reach a higher community indifference curve. Country A should completely specialize in the production of X and should use the trade triangle to shift to the higher indifference curve. Similarly, country B should completely specialize in the production of Y and then use the trade triangle to export Y and import X and end up at a higher indifference curve. Thus both countries will benefit from trade. Copyright © 2013 John Wiley & Sons, Inc. 2-16 Salvatore’s Introduction to International Economics, Third Edition Test Bank Y export Y Trade Triangle import Trade Triangle X X export Country A Copyright © 2013 John Wiley & Sons, Inc. import Country B 2-17