Macroeconomics, 5e (Hubbard)
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Chapter 7 Comparative Advantage and the Gains from International Trade
7.1 The United States in the International Economy
1) When the U.S. government places a tariff on a product, such as the tariff on tires imported from China, the quantity of the product imported will generally ________ and the price paid by consumers for the product will generally ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: C
Diff: 1 Page Ref: 271/203
Topic: Trade Restrictions
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
Special Feature: Chapter Opener: Saving Jobs in the U.S. Tire Industry?
2) Trade restrictions tend to preserve ________ in the protected industries and lead to ________ in other industries.
A) almost all jobs; economic growth
B) well over half of the jobs; price decreases
C) relatively few jobs; job losses
D) no jobs; increased productivity
Answer: C
Diff: 1 Page Ref: 271/203
Topic: Trade Restrictions
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
Special Feature: Economics in Your Life: Have You Heard of the Tariff on Chinese Tires?
Copyright © 2015 Pearson Education, Inc.
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3) Protection in the form of tariffs create winners and losers. Winners include ________ and losers include ________.
A) U.S. consumers and taxpayers; foreign firms that rely on U.S. exports
B) firms sheltered from foreign competition; U.S. consumers and taxpayers
C) U.S. firms that rely on exports to foreign countries; foreign manufacturers
D) the U.S. government; firms sheltered from foreign competition
Answer: B
Diff: 1 Page Ref: 271/203
Topic: Trade Restrictions
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
Special Feature: Chapter Opener: Saving Jobs in the U.S. Tire Industry?
2
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4) Over the past several decades there has been a rapid growth in international trade. This growth has been due to all except one of the following factors. Which factor has not contributed to the growth of international trade?
A) the spread of reliable communications
B) a change in the tariffs charged on many goods
C) a reduction in shipping costs
D) favorable changes in government policies
Answer: B
Diff: 1 Page Ref: 272/204
Topic: Trade
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
5) A tax imposed by a government on imports of a good into a country is called
A) an import levy.
B) an import fine.
C) a tariff.
D) an import quota.
Answer: C
Diff: 1 Page Ref: 272/204
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
6) Imports are goods and services bought domestically
A) and produced domestically.
B) but produced in other countries.
C) and resold at a profit.
D) and not subject to tariffs.
Answer: B
Diff: 1 Page Ref: 272/204
Topic: Imports
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
7) Domestically produced goods and services sold to other countries are referred to as
A) exports.
B) imports.
C) transfer payments.
D) capital outflow.
Answer: A
Diff: 1 Page Ref: 272/204
Topic: Exports
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
3 Copyright © 2015 Pearson Education, Inc.
8) When Sophie, a French citizen, purchases a Dell computer in Paris that was produced in Texas, the purchase is
A) both a U.S. and an French import.
B) a U.S. import and an French export.
C) a U.S. export and an French import.
D) neither an export nor an import for either country.
Answer: C
Diff: 1 Page Ref: 272/204
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
9) When Tesla, a U.S. company, purchases Italian-made Pirelli tires for its automobiles, the purchase is
A) both a U.S. and an Italian import.
B) a U.S. import and an Italian export.
C) a U.S. export and an Italian import.
D) neither an export nor an import for either country.
Answer: B
Diff: 1 Page Ref: 272/204
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
10) Which of the following statements about the importance of trade to the U.S. economy is false?
A) Since 1950, both exports and imports have steadily increased as a fraction of U.S. gross domestic product.
B) Overall, about 20 percent of U.S. manufacturing jobs depend directly or indirectly on exports.
C) The United States is the second largest exporter in the world.
D) The U.S. economy is highly dependent on international trade for growth in its gross domestic product.
Answer: D
Diff: 1 Page Ref: 273-275/205-207
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
11) Which of the following countries is not one of the top three exporting countries in the world?
A) China
B) Germany
C) South Korea
D) the United States
Answer: C
Diff: 1 Page Ref: 274/206
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
4 Copyright © 2015 Pearson Education, Inc.
12) Today, ________ of Goodyear's tire sales are in the North America.
A) only 11 percent
B) less than 40 percent
C) 65 percent
D) more than 80 percent
Answer: B
Diff: 1 Page Ref: 276-277/208-209
Topic: Exports
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
Special Feature: Making the Connection: Goodyear and the Tire Tariff
13) At the beginning of 2013, with the tariff on Chinese tires having expired, Goodyear's profits ________ compared to the previous year, and Chinese tire imports ________.
A) rose; increased
B) rose; decreased
C) fell; increased
D) fell; decreased
Answer: A
Diff: 1 Page Ref: 273-274/205-206
Topic: Exports
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
Special Feature: Making the Connection: Goodyear and the Tire Tariff
14) Which of the following statements is false?
A) Japan is less dependent on foreign trade than is the United States.
B) Imports and exports account for over one-half of the GDP of the Netherlands.
C) The United States is the leading exporting country, accounting for almost 10 percent of total world exports.
D) Because the cost of labor used on farms is so high, the United States exports very little of its wheat, rice and corn crops.
Answer: D
Diff: 1 Page Ref: 273-275/205-207
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
15) As a percentage of GDP, imports are greater than exports for which of the following countries?
A) Germany
B) Japan
C) the Netherlands
D) the United States
Answer: D
Diff: 1 Page Ref: 275/207
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
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16) Twenty-seven countries in Europe have formed the European Union (EU). After the EU was formed it
A) eliminated all tariffs among its member countries.
B) completed a trade treaty (NAFTA) that reduced tariff rates between the EU and North American countries.
C) greatly decreased imports and exports among its member countries.
D) barred imports of 747 jumbo jets by its member countries; all EU countries must now buy jets from Airbus, a European company.
Answer: A
Diff: 1 Page Ref: 272/204
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
17) The 1994 agreement that eliminated most tariffs among the United States, Canada, and Mexico is known as
A) the Pacific Trade Association.
B) Trade Without Borders.
C) NAFTA.
D) the Western Trade Union.
Answer: C
Diff: 1 Page Ref: 272/204
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
18) In the 1930s the United States charged an average tariff rate
A) that was less than its average tariff rate in 2007.
B) that cut its exports to other countries by 50 percent.
C) that was less than 2 percent.
D) that exceeded 50 percent.
Answer: D
Diff: 1 Page Ref: 272/204
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
6 Copyright © 2015 Pearson Education, Inc.
19) Which of the following statements is false?
A) Exports benefit trading countries because exports create jobs. Imports do not benefit trading countries because they result in a loss of jobs.
B) Each year the United States exports about 50 percent of its wheat crop and 20 percent of its corn crop.
C) Most of the leading exporting countries are large, high-income countries.
D) Not all sectors of the U.S. economy are affected equally by international trade.
Answer: A
Diff: 1 Page Ref: 272-273/204-205
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
20) Although the United States is the second largest exporting country, international trade is less important to the U.S. than it is to most other countries
Answer: TRUE
Diff: 1 Page Ref: 275/207
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
21) Imports are goods and services bought domestically but produced in other countries.
Answer: TRUE
Diff: 1 Page Ref: 272/204
Topic: Imports
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
22) A tariff is a tax imposed by a government on imports.
Answer: TRUE
Diff: 1 Page Ref: 272/204
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
23) Today, the United States charges an average tariff rate of less than 1.5 percent.
Answer: TRUE
Diff: 1 Page Ref: 272/204
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
7 Copyright © 2015 Pearson Education, Inc.
24) Is the value of U.S. exports is typically larger or smaller than the value of U.S. imports.
Answer: As a percentage of GDP, U.S. imports have been larger than U.S. exports since the mid-19702.
Diff: 1 Page Ref: 273/205
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
25) What are three primary reasons for the growth of international trade over the past 50 years?
Answer: The increase in trade is the result of the falling costs of shipping products around the world, the spread of inexpensive and reliable communications, and changes in government policies.
Diff: 1 Page Ref: 272-273/204-205
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
26) Explain why international trade is less important to the United States than it is to many other countries.
Answer: In the United States, international trade (imports and exports) makes up a lower percentage of GDP than in many other countries. As a percentage of GDP, U.S. imports and exports each make up less than 20 percent of U.S. GDP, whereas in some countries, such as Belgium and the Netherlands, imports and exports make up over half of GDP, and in larger European nations such as France, Italy, Germany, and the United Kingdom, imports and exports make up between 25 and 50 percent of GDP.
Diff: 2 Page Ref: 272-273/204-205
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
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7.2 Comparative Advantage in International Trade
1) ________ is the ability to produce more of a good or service than competitors when using the same amount of resources.
A) Absolute advantage
B) Comparative advantage
C) Trade superiority
D) Trade autarky
Answer: A
Diff: 1 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
2) Trade that is within a country or between countries is based on the principle of
A) absolute advantage.
B) scarcity.
C) competition.
D) comparative advantage.
Answer: D
Diff: 1 Page Ref: 275/207
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
Table 7-1
Berries Fish
Rob 20 80
Bill 30 60
Rob Crusoe and Bill Friday spent their week-long vacation on a desert island where they had to find and make their own food. Rob and Bill spent one day each fishing and picking berries. The table lists the pounds of output Rob and Bill produced.
3) Refer to Table 7-1. Use the table above to select the statement that accurately interprets the data in the table.
A) Rob has an absolute advantage in picking berries and Bill has an absolute advantage in catching fish.
B) Bill has an absolute advantage in picking berries and Rob has an absolute advantage in catching fish.
C) Bill has an absolute advantage in picking berries and catching fish.
D) Rob has an absolute advantage in picking berries and catching fish.
Answer: B
Diff: 2 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
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4) Refer to Table 7-1. Use the table above to select the statement that accurately interprets the data in the table.
A) Bill has a greater opportunity cost than Rob for picking berries.
B) Bill's opportunity cost for catching fish is less than Rob's.
C) Rob has a greater opportunity cost than Bill for picking berries.
D) Bill's opportunity cost for picking berries and catching fish are both greater than Rob's.
Answer: C
Diff: 3 Page Ref: 276/208
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
5) Refer to Table 7-1. Use the table above to select the statement that accurately interprets the data in the table.
A) Bill has a comparative advantage in catching fish.
B) Rob has a comparative advantage in picking berries.
C) Rob has a comparative advantage in catching fish and picking berries.
D) Bill has a comparative advantage in picking berries.
Answer: D
Diff: 3 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
6) Refer to Table 7-1. Use the table above to select the statement that accurately interprets the data in the table.
A) Rob has a comparative advantage in catching fish.
B) Bill has an absolute advantage in catching fish.
C) Bill has a comparative advantage in catching fish.
D) Rob has a comparative advantage in picking berries and catching fish.
Answer: A
Diff: 3 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
10 Copyright © 2015 Pearson Education, Inc.
Empanadas Tacos
Madison and Austin own Cafe Ole'. Table 7-2 lists the number of empanadas and tacos Madison and Austin can each make in one hour.
7) Refer to Table 7-2. Select the statement that accurately interprets the data in the table.
A) Madison has an absolute advantage in making tacos and Austin has an absolute advantage in making empanadas.
B) Madison has an absolute advantage in making empanadas and Austin has an absolute advantage in making tacos.
C) Madison has an absolute advantage in making empanadas and tacos.
D) Austin has an absolute advantage in making empanadas and tacos.
Answer: C
Diff: 2 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
8) Refer to Table 7-2. Select the statement that accurately interprets the data in the table.
A) Madison has a greater opportunity cost than Austin for making tacos.
B) Madison's opportunity cost for making tacos is less than Austin's.
C) Austin has a greater opportunity cost than Madison for making empanadas.
D) Austin's opportunity cost for making tacos and making empanadas are both greater than Madison's.
Answer: B
Diff: 3 Page Ref: 276/208
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
9) Refer to Table 7-2. Select the statement that accurately interprets the data in the table.
A) Madison has a comparative advantage in making empanadas.
B) Austin has a comparative advantage in making tacos.
C) Madison has a comparative advantage in making empanadas and making tacos.
D) Madison has a comparative advantage in making tacos.
Answer: D
Diff: 3 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
11 Copyright © 2015 Pearson Education, Inc.
Table 7-2
Madison
Austin
30 50
24 32
10) Refer to Table 7-2. Select the statement that accurately interprets the data in the table.
A) Madison has a comparative advantage in making empanadas.
B) Austin has an absolute advantage in making tacos.
C) Austin has a comparative advantage in making empanadas.
D) Austin has a comparative advantage in making empanadas and making tacos.
Answer: C
Diff: 3 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
Table 7-3
Saddles
Spurs (pairs)
Mateo 75 225
Celeste 100 225
Mateo and Celeste produce custom saddles and spurs. Table 7-3 lists the number of saddles and pairs of spurs Mateo and Celeste can each produce in one month.
11) Refer to Table 7-3. Select the statement that accurately interprets the data in the table.
A) Mateo has an absolute advantage in making saddles and Celeste has an absolute advantage in making spurs.
B) Mateo has an absolute advantage in making spurs and Celeste has an absolute advantage in making saddles.
C) Mateo has an absolute advantage in making spurs.
D) Celeste has an absolute advantage in making saddles.
Answer: D
Diff: 2 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
12) Refer to Table 7-3. Select the statement that accurately interprets the data in the table.
A) Mateo has an absolute advantage in making saddles and spurs.
B) Celeste has an absolute advantage in making saddles and spurs.
C) Neither Mateo nor Celeste has an absolute advantage in making saddles.
D) Neither Mateo nor Celeste has an absolute advantage in making spurs.
Answer: D
Diff: 2 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
12
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13) Refer to Table 7-3. Select the statement that accurately interprets the data in the table.
A) Mateo has a greater opportunity cost than Celeste for making saddles.
B) Mateo's opportunity cost for making saddles is less than Celeste's.
C) Celeste has a greater opportunity cost than Mateo for making saddles.
D) Mateo's opportunity cost for making saddles and making spurs are both greater than Celeste's
Answer: A
Diff: 3 Page Ref: 276/208
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
14) Refer to Table 7-3. Select the statement that accurately interprets the data in the table.
A) Celeste has a comparative advantage in making spurs.
B) Mateo has a comparative advantage in making spurs.
C) Celeste has a comparative advantage in making saddles and making spurs.
D) Neither Mateo nor Celeste has a comparative advantage in making spurs.
Answer: B
Diff: 3 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
15) Refer to Table 7-3. Select the statement that accurately interprets the data in the table.
A) Celeste has a comparative advantage in making saddles.
B) Mateo has an absolute advantage in making spurs.
C) Mateo has a comparative advantage in making saddles.
D) Mateo has a comparative advantage in making saddles and making spurs.
Answer: A
Diff: 3 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
16) An economic principle that explains why people pursue different occupations is
A) absolute advantage.
B) international trade.
C) comparative advantage.
D) NAFTA.
Answer: C
Diff: 1 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
13
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17) Assume that Honduras has a comparative advantage in producing bananas and exports bananas to Brazil. We can conclude that
A) Honduras also has an absolute advantage in producing bananas relative to Brazil.
B) Honduras has a lower opportunity cost of producing bananas relative to Brazil.
C) Brazil has an absolute disadvantage in producing bananas relative to Honduras.
D) Labor costs are higher for banana producers in Brazil than in Honduras.
Answer: B
Diff: 2 Page Ref: 275/207
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
18) Assume that Australia has a comparative advantage in producing surfboards and New Zealand imports surfboards from Australia. We can conclude that
A) Australia also has an absolute advantage in producing surfboards relative to New Zealand.
B) Australia has a lower opportunity cost of producing surfboards relative to New Zealand.
C) New Zealand has an absolute disadvantage in producing surfboards relative to Australia.
D) Labor costs are higher for surfboard producers in New Zealand than in Australia.
Answer: B
Diff: 2 Page Ref: 275/207
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
19) Whenever a buyer and a seller agree to trade, both must believe they will be made better off
A) unless the buyer resides in a different country than the seller resides in. International trade may make the buyer or seller worse off.
B) unless one party is richer than the other.
C) only if the buyer and seller live in countries with market economies.
D) whether the buyer and seller live in the same city or different countries.
Answer: D
Diff: 1 Page Ref: 276/208
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
Copyright © 2015 Pearson Education, Inc.
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20) If Norwegian workers are more productive than Albanian workers, then trade between Norway and Albania
A) cannot take place because Norwegian goods and services will be less expensive than Albanian goods and services.
B) will take place so long as each country has a comparative advantage in a good or service that buyers in the other country want.
C) cannot take place until Albanian workers become more productive.
D) can take place only if Albania has an absolute advantage in producing a good or service Norwegian buyers want.
Answer: B
Diff: 1 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
21) If the ________ cost of production for two goods is different between two countries then mutually beneficial trade is possible.
A) marginal
B) explicit
C) opportunity
D) implicit
Answer: C
Diff: 1 Page Ref: 275/207
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
22) If Brazil has a comparative advantage relative to Cuba in the production of sugar cane, then
A) the average cost of production for sugar cane is lower in Brazil than in Cuba.
B) the implicit costs of production for sugar cane are lower in Brazil than in Cuba.
C) the opportunity cost of production for sugar cane is lower in Brazil than in Cuba.
D) the explicit cost of production for sugar cane is lower in Brazil than in Cuba.
Answer: C
Diff: 1 Page Ref: 275/207
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
15
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23) If Sweden exports cell phones to Denmark and Denmark exports butter to Sweden, which of the following would explain this pattern of trade?
A) Sweden has a lower opportunity cost of producing cell phones than Denmark and Denmark has a comparative advantage in producing butter.
B) The opportunity cost of producing butter in Denmark is higher than the opportunity cost of producing butter in Sweden.
C) Sweden must have an absolute advantage in producing cell phones and Denmark must have an absolute advantage in producing butter.
D) Sweden has a higher opportunity cost of producing cell phones than Denmark, and Denmark has a higher opportunity cost of producing butter.
Answer: A
Diff: 2 Page Ref: 275/207
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
24) The ability of a firm or country to produce a good or service at a lower opportunity cost than other producers is called comparative advantage.
Answer: TRUE
Diff: 2 Page Ref: 275/207
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
25) If Finland has an absolute advantage in the production of two goods compared to Latvia, Finland can still benefit from trade with Latvia.
Answer: TRUE
Diff: 1 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
26) If a country has a comparative advantage in producing a product, it must also have an absolute advantage in producing that product.
Answer: FALSE
Diff: 1 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
16
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27) If a country has an absolute advantage in producing a product, it may not have a comparative advantage in producing that product.
Answer: TRUE
Diff: 1 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
28) What does it mean for a country to have a comparative advantage in producing a product?
Answer: A country has a comparative advantage in producing a product when it has the ability to produce that product at a lower opportunity cost than competitors.
Diff: 2 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
29) Explain whether it is possible for a country to have a comparative advantage in the production of a product without having an absolute advantage in the production of that product.
Answer: A country can have a comparative advantage without having an absolute advantage in the production of a product, because having a comparative advantage means that the country can produce the product at a lower opportunity cost than another country, and having an absolute advantage means a country can produce more of the product than another country while using the same amount of resources. Having an absolute advantage is not required to have a comparative advantage.
Diff: 2 Page Ref: 276/208
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
17 Copyright © 2015 Pearson Education, Inc.
Table 7-4
Output Per Hour of Work Light Bulbs Flash Drives
Mexico 20 5
Canada 8 32
Table 7-4 shows the output per hour of work for light bulbs and flash drives in Mexico and in Canada.
30) Refer to Table 7-4. Fill in the following table with the opportunity costs of producing light bulbs and flash drives for Mexico and Canada.
Light Bulbs Flash Drives
Mexico Canada
Answer: Light Bulbs Flash Drives
Mexico 0.25 4
Canada 4 0.25
Diff: 1 Page Ref: 275/207
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
31) Refer to Table 7-4.
a. Which country has an absolute advantage in the production of light bulbs and flash drives?
b. Which country has a comparative advantage in the production of light bulbs?
c. Which country has a comparative advantage in the production of flash drives?
Answer: a. Neither country has an absolute advantage in the production of both products.
b. Mexico has a comparative advantage in the production of light bulbs.
c. Canada has a comparative advantage in the production of flash drives.
Diff: 1 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
18
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2015 Pearson
Table 7-5 shows the output per week for pens and pencils by Tran and Farah.
32) Refer to Table 7-5. Fill in the following table with the opportunity costs of producing bows and arrows for Tran and Farah. Pens Pencils
Answer: Pens Pencils Tran 4 0.25 Farah 3 0.33
Diff: 2 Page Ref: 276/208
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
33) Refer to Table 7-5.
a. Which person has an absolute advantage in the production of pens? pencils?
b. Which person has a comparative advantage in the production of pens?
c. Which person has a comparative advantage in the production of pencils?
Answer: a. Farah has an absolute advantage in the production of pens and Tran has an absolute advantage in the production of pencils.
b. Farah has a comparative advantage in the production of pens.
c. Tran has a comparative advantage in the production of pencils.
Diff: 2 Page Ref: 276/208
Topic: Absolute Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
19 Copyright © 2015 Pearson Education, Inc.
Pens Pencils Tran 40 160 Farah 50 150
Table 7-5
Tran Farah
7.3 How Countries Gain from International Trade
1) Autarky is a situation in which a country
A) only exports products.
B) only imports products.
C) does not trade with other countries.
D) has no absolute advantage in any production.
Answer: C
Diff: 1 Page Ref: 277/209
Topic: Autarky
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
2) The terms of trade refers to
A) the rules and regulations that countries must adhere to when trading.
B) the ratio at which a country can trade its exports for imports from other countries.
C) the role of the government in overseeing international trade.
D) a legal document that specifies the trade quantities agreed to by two countries.
Answer: B
Diff: 1 Page Ref: 277/209
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
3) Countries gain from specializing in producing goods in which they have ________ and trading for goods in which other countries have ________.
A) a comparative advantage; an absolute advantage
B) an absolute advantage; an absolute advantage
C) a comparative advantage; a comparative advantage
D) an absolute advantage; a comparative advantage
Answer: C
Diff: 1 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
4) The first discussion of comparative advantage appears in a book written by
A) Adam Smith.
B) Paul Samuelson.
C) David Portugal.
D) David Ricardo.
Answer: D
Diff: 1 Page Ref: 278-279/210-211
Topic: Comparative Advantage
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
Special Feature: Solved Problem: The Gains from Trade
20 Copyright © 2015 Pearson Education, Inc.
Estonia and Morocco can produce both swords and belts. Table 7-6 shows the production and consumption quantities without trade, and the production numbers with trade.
5) Refer to Table 7-6. Which country has an absolute advantage in producing swords?
A) Estonia
B) Morocco
C) both countries
D) neither country
Answer: A
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
6) Refer to Table 7-6. Which country has an absolute advantage in producing belts?
A) Estonia
B) Morocco
C) both countries
D) neither country
Answer: A
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
7) Refer to Table 7-6. Which country has a comparative advantage in producing swords?
A) Estonia
B) Morocco
C) both countries
D) neither country
Answer: A
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
21 Copyright © 2015 Pearson Education, Inc.
Production
Without
Trade Swords Belts Swords Belts Estonia 100 50 200 0 Morocco 50 40 0 120
Table 7-6
and Consumption Production
Trade With
8) Refer to Table 7-6. Which country has a comparative advantage in producing belts?
A) Estonia
B) Morocco
C) both countries
D) neither country
Answer: B
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
9) Refer to Table 7-6. Prior to trade, what was the opportunity cost to produce 1 belt in Estonia?
A) 1/2 of a sword
B) 4/5 of a sword
C) 1.25 swords
D) 2 swords
Answer: D
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
10) Refer to Table 7-6. Prior to trade, what was the opportunity cost to produce 1 belt in Morocco?
A) 1/2 of a sword
B) 4/5 of a sword
C) 1.25 swords
D) 2 swords
Answer: C
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
11) Refer to Table 7-6. Prior to trade, what was the opportunity cost to produce 1 sword in Estonia?
A) 1/2 of a belt
B) 4/5 of a belt
C) 1.25 belts
D) 2 belts
Answer: A
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
22
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Copyright © 2015 Pearson Education,
12) Refer to Table 7-6. Prior to trade, what was the opportunity cost to produce 1 sword in Morocco?
A) 1/2 of a belt
B) 4/5 of a belt
C) 1.25 belts
D) 2 belts
Answer: B
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
13) Refer to Table 7-6. With trade, what is the total gain in belt production?
A) 30
B) 80
C) 120
D) 210
Answer: A
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
14) Refer to Table 7-6. With trade, what is the total gain in sword production?
A) 50
B) 100
C) 200
D) 350
Answer: A
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
15) Refer to Table 7-6. All of the following are terms of trade that could possibly benefit both countries except
A) 1 belt : 1.33 swords
B) 1 belt : 1.5 swords
C) 1 belt : 1.75 swords
D) 1 belt : 2.25 swords
Answer: D
Diff: 3 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
23 Copyright © 2015 Pearson Education, Inc.
16) Refer to Table 7-6. All of the following are terms of trade that could possibly benefit both countries except
A) 2/3 of a belt : 1 sword
B) 3/5 of a belt : 1 sword
C) 7/10 of a belt : 1 sword
D) 1/4 of a belt : 1 sword
Answer: D
Diff: 3 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
17) Refer to Table 7-6. If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many belts will Estonia consume?
A) 50 B) 70
C) 90
D) 120
Answer: B
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
18) Refer to Table 7-6. If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many belts will Morocco consume?
A) 40 B) 50
C) 70
D) 120
Answer: B
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
24
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Education, Inc.
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2015 Pearson
19) Refer to Table 7-6. If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many swords will Estonia consume?
A) 95
B) 100
C) 105
D) 200 Answer: C
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
20) Refer to Table 7-6. If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many swords will Morocco consume?
A) 50
B) 95
C) 105
D) 200 Answer: B
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
21) Refer to Table 7-6. If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many belts will Estonia gain compared to the "without trade" numbers?
A) 10
B) 20
C) 50
D) 70 Answer: B
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
25 Copyright © 2015 Pearson Education, Inc.
22) Refer to Table 7-6. If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many belts will Morocco gain compared to the "without trade" numbers?
A) 10
B) 20
C) 70
D) 80 Answer: A
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
23) Refer to Table 7-6. If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many swords will Estonia gain compared to the "without trade" numbers?
A) 5
B) 45
C) 100
D) 105 Answer: A
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
24) Refer to Table 7-6. If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many swords will Morocco gain compared to the "without trade" numbers?
A) 5
B) 45
C) 105
D) 150 Answer: B
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
26
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Copyright © 2015 Pearson Education,
25) The first example of comparative advantage appeared in a book that was published in 1817. This example showed that mutually beneficial trade between two countries (England and Portugal) was possible. The example assumed that two goods (wine and cloth) could be produced by both countries. Which of the following describes the conclusion of this example?
A) Portugal had a comparative advantage in wine and England had a comparative advantage in cloth.
B) Portugal had a comparative advantage in both wine and cloth, but its advantage in cloth was greater.
C) England had a comparative advantage in both wine and cloth, but its advantage in cloth was greater.
D) England had an absolute advantage in both wine and cloth, but a comparative advantage in wine.
Answer: A
Diff: 1 Page Ref: 278-279/210-211
Topic: Comparative Advantage
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
Special Feature: Solved Problem: The Gains from Trade
26) Examples of comparative advantage show how trade between two countries can make each better off. Compared to their pre-trade positions, trade makes both countries better off because in each country
A) total employment is greater.
B) total consumption of goods is greater.
C) wages are higher.
D) total welfare is greater.
Answer: B
Diff: 1 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
27) In the real world we don't observe countries completely specializing in the production of goods for which they have a comparative advantage. All of the following are reasons for this except
A) not all goods and services are traded internationally.
B) some countries have more resources than other countries.
C) tastes for many traded goods are different in many countries because of globalization.
D) production of most goods involves increasing opportunity costs.
Answer: B
Diff: 2 Page Ref: 280/212
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
27
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28) Automobiles and many other products are differentiated. As a result
A) different countries may each have a comparative advantage in producing different types of automobiles.
B) consumers of automobiles have difficulty deciding what type of imported automobile to buy.
C) the quality of imported automobiles is less than it could be.
D) we see countries specializing completely in the production of automobiles.
Answer: A
Diff: 2 Page Ref: 280/212
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
29) A consequence of increasing marginal costs of producing laptop computers in the United States is
A) the United States will import laptop computers from countries that don't experience increasing marginal costs.
B) the United States will stop short of complete specialization in the production of laptop computers.
C) the United States will not export laptop computers.
D) the United States will likely impose trade restrictions on imported laptop computers.
Answer: B
Diff: 2 Page Ref: 280/212
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
30) Textbook examples of trade between two nations are simplified in order to show how two nations both benefit from trade. These examples are misleading because
A) in the real world, rich countries can take advantage of poor countries.
B) they do not account for the reduction in wages that occurs in both countries as a result of trade.
C) some individuals in both countries may be made worse off because of trade.
D) trade restrictions are likely to be imposed as trade grows over time.
Answer: C
Diff: 2 Page Ref: 280/212
Topic: Trade
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
Special Feature: Don't Let This Happen to You: Remember That Trade Creates Both Winners and Losers
28
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31) Which of the following statements is false?
A) Not all individuals in both countries are made better off as a result of international trade.
B) Within each country, some individuals are made better off as a result of international trade, but one of the countries will be worse off overall.
C) Although some individuals may not be made better off as a result of international trade, both countries may be made better off overall.
D) Each country as a whole is made better off as a result of international trade, but individuals within each country may be made worse off.
Answer: B
Diff: 2 Page Ref: 281/213
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
32) All of the following are sources of comparative advantage except
A) climate and natural resources.
B) relative abundance of labor and capital.
C) a strong foreign currency exchange rate.
D) technology.
Answer: C
Diff: 1 Page Ref: 281/213
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
33) The United States has developed a comparative advantage in digital computers, airliners and many prescription drugs. The source of its comparative advantage in these products is
A) a favorable climate.
B) technology.
C) abundant supplies of natural resources.
D) a strong central government.
Answer: B
Diff: 1 Page Ref: 281/213
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
29 Copyright © 2015 Pearson Education, Inc.
34) Pakistan has developed a comparative advantage in the production of clothing. The source of its comparative advantage in these products is
A) a favorable climate.
B) technology.
C) abundant supplies of natural resources.
D) a large supply of unskilled workers.
Answer: D
Diff: 1 Page Ref: 281/213
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
35) Once an industry becomes established in a certain area firms that locate in that area gain advantages over firms located elsewhere, leading to lower costs of production. Economists refer to the lower costs that result from increases in the size of an industry in a certain area as
A) external economies.
B) positive externalities.
C) strategic advantages.
D) technological change.
Answer: A
Diff: 2 Page Ref: 282/214
Topic: Comparative Advantage
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
Special Feature: Making the Connection: Leaving New York City Is Risky for Financial Firms
36) China has developed a comparative advantage in the production of children's toys. The source of this comparative advantage is
A) superior process technology.
B) a large supply of unskilled workers and relatively little capital.
C) investment in capital used to produce toys.
D) a large supply of natural resources.
Answer: B
Diff: 2 Page Ref: 281/213
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
30
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Education, Inc.
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2015 Pearson
37) Costa Rica is a leading exporter of bananas. What explains the comparative advantage of this country in banana production?
A) climate and soil conditions in Costa Rica which are well-suited for banana production
B) investment by multinational firms such as Chiquita Brands International and the Dole Food Company
C) a large supply of unskilled labor
D) positive externalities
Answer: A
Diff: 1 Page Ref: 281/213
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
38) In the past two decades the United States lost its comparative advantage in automobiles to Japan. What factor was most responsible for the development of Japan's comparative advantage in automobiles?
A) Japanese firms excelled in process technology.
B) Japan has abundant supplies of labor.
C) Japanese firms benefited from external economies.
D) Japan has abundant supplies of natural resources needed to produce automobiles.
Answer: A
Diff: 2 Page Ref: 283/215
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
39) One reason a country does not specialize completely in production is that production of most goods involves increasing opportunity costs.
Answer: TRUE
Diff: 1 Page Ref: 280/212
Topic: Opportunity Cost
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
40) One of the main sources of comparative advantage is natural resources.
Answer: TRUE
Diff: 1 Page Ref: 281/213
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
41) Autarky is a situation where one country does not trade with other countries.
Answer: TRUE
Diff: 1 Page Ref: 281/213
Topic: Autarky
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
31
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Copyright
42) The ratio at which a country can trade its exports for imports from other countries is called comparative advantage.
Answer: FALSE
Diff: 1 Page Ref: 281/213
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
43) What are terms of trade?
Answer: Terms of trade refers to the ratio at which a country can trade its exports for imports from other countries.
Diff: 3 Page Ref: 277/209
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
44) How does the U.S. federal government assist workers who have lost their jobs due to international trade?
Answer: The federal government uses the Trade Adjustment Assistance program to provide funds for workers who have lost their jobs due to international trade. Qualified unemployed workers can use these funds to pay for retraining, for searching for new jobs, or for relocating to areas where new jobs are available.
Diff: 3 Page Ref: 280/212
Topic: Trade
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
Special Feature: Don't Let This Happen to You: Remember That Trade Creates Both Winners and Losers
45) Examples of comparative advantage often begin with two countries that each produce the same two goods. Each country is then shown to have a comparative advantage in producing the good it can produce at a lower opportunity cost, and specializes in the production of the good for which it has a comparative advantage. How do these examples prove that both nations are made better off as a result of trade than they would be without trade?
Answer: To show that both countries are better off it is necessary to demonstrate that total consumption, not just production, of both goods is greater after trade. If a country specializes completely in producing one good apples, for example it has given up the opportunity to produce another good that consumers value; let's say this other good is plums. Apple lovers now have more of the good they like, but the country as a whole cannot be better off unless the change in production benefits plum lovers too. This can be done by trading some of the additional apples that are produced for some of the plums the other country has produced. Trade may benefit apple lovers more than plum lovers (or vice versa) but if, after trade, more of both goods can be consumed then trade has unambiguously made all consumers better off than they were previously.
Diff: 2 Page Ref: 277/209
Topic: Comparative Advantage
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytic thinking
32
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Copyright
46) Suppose in Vietnam a worker can produce either 16 units of cloth or 2 bicycles while in China a worker can produce either 20 units of cloth or 5 bicycles.
a. Which country has an absolute advantage in cloth production? In bicycle production?
b. What is the opportunity cost of 1 unit of cloth in Vietnam? In China?
c. What is the opportunity cost of 1 bicycle in Vietnam? In China?
d. Which country has a comparative advantage in cloth production? In bicycle production?
e. Suppose each country has 1,000 workers. Currently, each country devotes 40 percent of its labor force to cloth production and 60 percent to bicycle production. What is the output of cloth and bicycles for each country and what is the total output of cloth and bicycles between the two countries?
f. Suppose each country specializes in the production of the good in which it has a comparative advantage. What is the total output of cloth and bicycles in the two countries?
g. Provide a numerical example to show how Vietnam and China can both gain from trade. Assume that the terms of trade are established at 6 units of cloth for 1 bicycle.
Copyright © 2015 Pearson Education, Inc.
33
Answer:
a. China has an absolute advantage in the production of both goods.
b. In Vietnam, the opportunity cost of 1 unit of cloth = 1/8 bicycle. In China, the opportunity cost of 1 unit of cloth = 1/4 bicycle.
c. In Vietnam, the opportunity cost of 1 bicycle = 8 units of cloth. In China, the opportunity cost of 1 bicycle = 4 units of cloth.
d. Vietnam has a comparative advantage in cloth production and China in bicycle production.
e.
f. If each country specializes, output is:
Diff: 3 Page Ref: 278-279/210-211
Topic: Comparative Advantage
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
Special Feature: Solved Problem: The Gains from Trade
34
Copyright © 2015 Pearson Education, Inc.
Cloth Bicycles Vietnam 400 × 16 = 6,400 600 × 2 = 1,200 China 400 × 20 = 8,000 600 × 5 = 3,000 Total 14,400 4,200
Cloth Bicycles Vietnam 1,000 × 16 = 16,000 China 1,000 × 5 = 5,000 Total 16,000 5,000
Vietnam Output 16,000 units of cloth Exports 9,000 units of cloth Consumes 7,000 units of cloth Imports 1,500 bicycles China Output 5,000 bicycles Exports 1,500 bicycles Consumes 3,500 bicycles Imports 9,000 units of cloth
g.
7.4 Government Policies That Restrict International Trade
1) Free trade refers to trade between countries
A) that is without shipping costs.
B) that is licensed by both governments.
C) that is without restrictions.
D) of products which are free to low-income consumers.
Answer: C
Diff: 1 Page Ref: 283/215
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
2) Refer to Figure 7-1. Under autarky, the equilibrium price is
A) $0.
B) $24.
C) $30.
D) $54.
Answer: C
Diff: 1 Page Ref: 284/216
Topic: Autarky
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
35 Copyright © 2015 Pearson Education, Inc.
Figure 7-1
Figure 7-1 shows the U.S. demand and supply for leather footwear.
3) Refer to Figure 7-1. Under autarky, the consumer surplus is area
A) R.
B) S.
C) R + S + V.
D) S + V.
Answer: A
Diff: 2 Page Ref: 284/216
Topic: Autarky
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
4) Refer to Figure 7-1. Under autarky, the producer surplus is area
A) S + V.
B) T + W+ X.
C) V.
D) S + T + V + W + X.
Answer: A
Diff: 2 Page Ref: 284/216
Topic: Autarky
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
5) Refer to Figure 7-1. Suppose the government allows imports of leather footwear into the United States. What will the market price be?
A) >$24
B) $24
C) $30
D) $54
Answer: B
Diff: 2 Page Ref: 284/216
Topic: Trade
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
6) Refer to Figure 7-1. Suppose the government allows imports of leather footwear into the United States. What will be the quantity demanded?
A) Q0
B) Q1
C) Q2
D) Q2 - Q0
Answer: C
Diff: 2 Page Ref: 284/216
Topic: Trade
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
36
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7) Refer to Figure 7-1. Suppose the government allows imports of leather footwear into the United States. What will be the domestic quantity supplied?
A) Q0
B) Q1
C) Q2
D) Q2 - Q0
Answer: A
Diff: 2 Page Ref: 284/216
Topic: Trade
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
8) Refer to Figure 7-1. Suppose the government allows imports of leather footwear into the United States. What will be the quantity of imports?
A) Q0
B) Q1
C) Q2
D) Q2 - Q0
Answer: D
Diff: 2 Page Ref: 284/216
Topic: Trade
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
9) Refer to Figure 7-1. Suppose the government allows imports of leather footwear into the United States. The market price falls to $24. What area represents consumer surplus?
A) R + S
B) R + S + T + U
C) V + W + X + Y
D) R + S + V
Answer: B
Diff: 2 Page Ref: 284/216
Topic: Trade
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
37 Copyright © 2015 Pearson Education, Inc.
10) Refer to Figure 7-1. Suppose the government allows imports of leather footwear into the United States. The market price falls to $24. What area represents domestic producer surplus?
A) T + U
B) V
C) V + W + X + Y
D) W + X + Y
Answer: B
Diff: 2 Page Ref: 284/216
Topic: Trade
*: Recurring
Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade
AACSB: Analytic thinking
11) Which of the following is an example of a trade restriction?
A) Japan places a tax on all Korean automobiles.
B) Domestic wine is more expensive than wine imported from Chile.
C) The United States, Canada, and Mexico sign the NAFTA agreement.
D) Consumers prefer German beer to domestic beer.
Answer: A
Diff: 1 Page Ref: 285-286/217-218
Topic: Trade Restrictions
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
12) International trade
A) harms consumers but helps exporting firms.
B) helps consumers but harms exporting firms and their workers.
C) helps consumers but hurts firms that are less efficient than their foreign competitors.
D) helps consumers and firms that compete with their foreign competitors.
Answer: C
Diff: 1 Page Ref: 283/215
Topic: Trade
*: Recurring
Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
AACSB: Analytic thinking
13) A quota is
A) a limit placed on the quantity of goods that can be imported into a country.
B) a tax imposed by a government on goods imported into a country.
C) a subsidy granted to importers of a vital input.
D) a health and safety restriction imposed on an imported product.
Answer: A
Diff: 1 Page Ref: 286/218
Topic: Quotas
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
38 Copyright © 2015 Pearson Education, Inc.
14) A tax imposed by a government on imports of a good into a country is called a
A) tariff.
B) quota.
C) value added tax.
D) sales tax.
Answer: A
Diff: 1 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
15) Which of the following is the best example of a quota?
A) a subsidy from the U.S. government to domestic manufacturers of residential air conditioners to enable them to compete more effectively with foreign producers
B) a limit on the quantity of residential air conditioners that can be imported from a foreign country
C) a $150 fee imposed on all imported residential air conditioners
D) a tax placed on all residential air conditioners sold in the domestic market to help offset the impact of emissions on the environment
Answer: B
Diff: 1 Page Ref: 286/218
Topic: Quotas
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
16) Which of the following is the best example of a tariff?
A) a subsidy from the U.S. government to domestic manufacturers of residential air conditioners to enable them to compete more effectively with foreign producers
B) a limit on the quantity of residential air conditioners that can be imported from a foreign country
C) a $150 fee imposed on all imported residential air conditioners
D) a tax placed on all residential air conditioners sold in the domestic market to help offset the impact of emissions on the environment
Answer: C
Diff: 1 Page Ref: 286/218
Topic: Quotas
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
39 Copyright © 2015 Pearson Education, Inc.
17) A tariff
A) makes domestic consumers better off.
B) makes both domestic producers and consumers better off.
C) makes everyone worse off.
D) makes domestic producers better off.
Answer: D
Diff: 1 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
18) A quota
A) makes domestic consumers worse off.
B) makes both domestic producers and consumers better off.
C) makes everyone worse off.
D) makes domestic producers worse off.
Answer: A
Diff: 1 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
40 Copyright © 2015 Pearson Education, Inc.
Suppose the U.S. government imposes a $0.75 per pound tariff on coffee imports. Figure 7-2 shows the impact of this tariff.
19) Refer to Figure 7-2. The tariff revenue collected by the government equals
A) $10 million.
B) $15 million.
C) $19.875 million.
D) $35 million.
Answer: B
Diff: 3 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
20) Refer to Figure 7-2. Without the tariff in place, the United States consumes
A) 12 million pounds of coffee.
B) 26 million pounds of coffee.
C) 33 million pounds of coffee.
D) 45 million pounds of coffee.
Answer: D
Diff: 2 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
41 Copyright © 2015 Pearson Education, Inc.
7-2
Figure
21) Refer to Figure 7-2. Without the tariff in place, the United States produces
A) 12 million pounds of coffee.
B) 26 million pounds of coffee.
C) 33 million pounds of coffee.
D) 45 million pounds of coffee.
Answer: A
Diff: 2 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
22) Refer to Figure 7-2. With the tariff in place, the United States consumes
A) 18 million pounds of coffee.
B) 20 million pounds of coffee.
C) 26 million pounds of coffee.
D) 38 million pounds of coffee.
Answer: D
Diff: 2 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
23) Refer to Figure 7-2. With the tariff in place, the United States produces
A) 18 million pounds of coffee.
B) 20 million pounds of coffee.
C) 26 million pounds of coffee.
D) 38 million pounds of coffee.
Answer: A
Diff: 2 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
24) Refer to Figure 7-2. With the tariff in place, the United States
A) imports 20 million pounds of coffee.
B) imports 12 million pounds of coffee.
C) imports 18 million pounds of coffee.
D) exports 38 million pounds of coffee.
Answer: A
Diff: 2 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
42
© 2015 Pearson Education, Inc.
Copyright
25) Refer to Figure 7-2. As a result of the tariff, domestic producers increase their quantity supplied by
A) 6 million pounds of coffee.
B) 18 million pounds of coffee.
C) 26 million pounds or coffee.
D) 38 million pounds of coffee.
Answer: A
Diff: 2 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
26) Refer to Figure 7-2. The increase in domestic producer surplus as a result of the tariff is equal to
A) $11.25 million.
B) $18 million.
C) $32.5 million.
D) $45 million.
Answer: A
Diff: 3 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
27) Refer to Figure 7-2. The tariff causes domestic consumption of coffee
A) to fall by 27 million pounds.
B) to fall by 7 million pounds.
C) to rise by 6 million pounds.
D) to rise by 20 million pounds.
Answer: B
Diff: 2 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
28) Refer to Figure 7-2. The loss in domestic consumer surplus as a result of the tariff is equal to
A) $5 million.
B) $19.875 million.
C) $24.875 million.
D) $31.125 million.
Answer: D
Diff: 3 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
43
© 2015 Pearson Education, Inc.
Copyright
29) Refer to Figure 7-2. If the tariff was replaced by a quota which limited coffee imports to 20 million pounds, the amount of revenue received by coffee importers would equal
A) $5 million.
B) $15 million.
C) $50 million.
D) $78 million.
Answer: C
Diff: 3 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
30) A voluntary export restraint is an agreement negotiated by two countries that places ________ that can be imported by one country from another country.
A) a tax on goods
B) a minimum quantity of a good
C) quality standards on goods
D) a numerical limit on the quantity of a good
Answer: D
Diff: 1 Page Ref: 286/218
Topic: Trade Restrictions
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
31) In the 1980s, Japan agreed to limit the quantity of automobiles it would export to the United States. Why did the Japanese government agree to this trade restriction?
A) Japanese automobile producers lobbied for the restrictions in order to increase the price of their exports to the United States.
B) The Japanese government wanted to limit sales to the United States in order to make more automobiles available for Japanese consumers.
C) The Japanese government feared that the alternative would be a tariff or quota on imports of Japanese automobiles imposed by the U.S. government.
D) The Japanese government wanted more automobiles to be available for export to countries other than the United States.
Answer: C
Diff: 1 Page Ref: 286/218
Topic: Trade Restrictions
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
44 Copyright © 2015 Pearson Education, Inc.
32) Which of the following is the best example of a tariff?
A) a limit imposed on the number of sports utility vehicles that the United States can import from Japan
B) a subsidy granted by the U.S. government to domestic garment manufacturers so they can compete more effectively with foreign garment manufacturers
C) a tax placed on all sports utility vehicles sold in the domestic market
D) a $5,000 per-car fee imposed on all sports utility vehicles imported into the United States
Answer: D
Diff: 1 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
33) Which of the following is the best example of a voluntary export restraint?
A) a limit set by the Japanese government on the number of sports utility vehicles that the United States can import from Japan
B) a subsidy granted by the U.S. government to domestic garment manufacturers so they can compete more effectively with foreign garment manufacturers
C) a tax placed on all sports utility vehicles sold in the domestic market
D) a $5,000 per-car fee imposed on all sports utility vehicles imported into the United States
Answer: A
Diff: 1 Page Ref: 285/217
Topic: Tariffs
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
34) In order to avoid the imposition of other types of trade barriers, foreign producers will sometimes agree to limit their exports to a country. What are these types of agreements called?
A) involuntary export restraints
B) voluntary export restraints
C) implicit quotas
D) sanctions
Answer: B
Diff: 1 Page Ref: 286/218
Topic: Non-Tariff Barriers
*: Recurring
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
AACSB: Analytic thinking
45 Copyright © 2015 Pearson Education, Inc.
