Questions from the Quiz

Using the following table, answer questions

max. output of:                       Germany         France


Wine (bottles)                        250                 200

Bread (loaves)                      500                 100



France has a comparative advantage in the production of

            a. wine

            b. bread

            c. both wine and bread

            d. neither wine nor bread


If trade opens up between Germany and France, German firms should specialize in producing:

            a. wine

            b. bread

            c. both wine and bread

            d. neither wine nor bread


The opportunity cost of producing one loaf of bread in Germany is:

            a. 2 bottles of wine

            b. 1 bottle of wine

            c. 1/2 bottle of wine

            d. 2/3 bottle of wine


Mutually advantageous trade will occur between Germany and France so long as one loaf of bread trades for:

            a. at least 1/2 wines but not more than 2 wines

            b. at least 1 wine but no more than 2 wines

            c. at least 2 wines but no more than 1/2 wine

            d. at least 2 wines but no more than 1 wine


France gains most from trade if:

            a. 1 bread trades for 1 wine

            b. 1 bread trades for 2 wines

            c. 1 bread trades for 1/2 wine

            d. 1 bread trades for 1/4 wine

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If a nation has on open economy, it means that the nation:

            a. allows private ownership of capital

            b. has flexible exchange rates

            c. has fixed exchange rates

            d. conducts trade with other countries.


Countries typically export goods in which they have:

    a. Comparative disadvantage

    b. Comparative advantage   

    c. Lower transportation costs

    d. Higher transportation costs


If the international terms of trade settle at a level that is between each country's opportunity cost:

            a. there is no basis for gainful trade for either country

            b. both countries gain from trade

            c. only one country gains from trade

            d. one country gains and the other country loses from trade.


The best explanation of the gains from trade that David Ricardo could provide was to describe only the outer limits within which the equilibrium terms of trade would fall. This is because Ricardo's theory did not recognize how market prices are influenced by:

            a. demand conditions

            b. supply conditions

            c. business expectations

            d. profit patterns.



If a transformation curve is bowed out (i.e., concave, not linear) in appearance, production occurs under conditions of:

            a. constant opportunity costs

            b. increasing opportunity costs

            c. decreasing opportunity costs

            d. zero opportunity costs.



As indicated by Carbaugh, a primary reason why nations conduct international trade is because:

            a. some nations prefer to produce one thing while others produce other things

            b. resources are not equally distributed among all trading nations

            c. trade enhances governments’ opportunities to accumulate profits

            d. interest rates are not identical in all trading nations.


Free traders maintain that an open economy is advantageous in that it provides all of the following except:

            a. increased competition for world producers

            b. a wider selection of products for consumers

            c. the utilization of the most efficient production methods

            d. relatively high wage levels for all domestic workers.


Economists often define or measure the degree of a nation’s “openness” as:

            a. the amount of undeveloped land within a nation

            b. the ration of a nation’s exports of good and services to its GDP

            c. the level of a nation’s trade barriers

            d. the extent to which a nation has unprotected coastline


Mercantilists believed that a nation would benefit from achieving:

            a. an even trade balance (exports equal to imports).

            b. a positive or favorable trade balance (exports larger than imports).

            c. as much self-sufficiency as possible (minimal exports and imports).

            d. a trade deficit, funded by loans from other nations.


Exports and imports as a share of national output:

            a. have fallen for most industrial countries over the past 50 years.

            b. have remained relatively constant for most industrial countries over the past 50 years.

            c. has risen for most countries over the past 50 years.

            d. has risen for developing countries but fallen for industrial countries over the past 50 years.

Unlike the mercantilists, Adam Smith maintained that:

            a. trade benefits one nation only at the expense of another nation

            b. government control of trade leads to maximum economic welfare

            c. all nations can gain from free international trade

            d. the world's output of goods must remain constant over time


The trading principle formulated by Adam Smith maintained that:

            a. international prices are determined from the demand side of the market

            b. differences in resource endowments determine comparative advantage

            c. differences in income levels govern world trade patterns

            d. absolute cost differences determine the immediate basis for trade.


Adam Smith's theory was based on the labor theory of value, assuming that:

            a. the value of labor depended on a worker's age

            b. labor was the only productive resource and the price of a good depended only on the amount of labor required to produce it.

            c. labor was more valuable than capital as an input

            d. labor was more valuable than land as an input


Unlike Adam Smith, David Ricardo's trading principle emphasizes the:

            a. demand side of the market

            b. supply side of the market

            c. role of comparative costs

            d. role of absolute costs.


A nation that gains from trade will find its consumption point being located:

            a. inside its transformation curve (or Production Possibilities Curve)

            b. along its transformation curve

            c. outside its transformation curve

            d. none of the above

The introduction of community indifference curves into our trading example focuses attention on the nation's:

            a. income level

            b. resource prices

            c. tastes and preferences

            d. productivity level.

The amount of one good that is just sufficient to compensate the consumer for the loss of some amount of another good is referred to as:

            a. absolute cost

            b. comparative cost

            c. marginal rate of transformation

            d. marginal rate of substitution.


In autarky (no trade), the equilibrium relative price of one product in terms of another product for a country is determined by the:

            a. transformation curve

            b. community indifference curve

            c. community indifference map

            d. transformation curve and community indifference map.


With trade, a country will maximize its satisfaction when it:

            a. moves to the highest possible indifference curve

            b. forces the marginal rate of substitution to its lowest possible value

            c. consumes more of both good than it does in autarky

            d. finds its marginal rate of substitution exceeding its marginal rate of transformation.


Given a two-country and two-product world, the United States would enjoy all the attainable gains from free trade with Canada if it:

            a. trades at the U.S. rate of transformation

            b. trades at the Canadian rate of transformation

            c. specialized completely in the production of both goods

            d. specialized partially in the production of both goods.