Ch3 – Interdependence And The Gains From Test Bank + Answers - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 3 – Interdependence and the gains from trade
TRUE/FALSE
1. People’s motivation to trade comes from the goods or services they expect to get in return.
DIF: Easy TOP: Introduction
2. Two individuals or two nations can benefit from trade even if one country has an absolute advantage over the other in producing all goods.
DIF: EASY TOP: A parable for the modern economy
3. If trade is not possible, then each person’s production possibility frontier is the same as each person’s consumption possibility frontier.
DIF: Moderate TOP: Production possibilities
4. A constant trade-off in the production of two goods implies that the production possibility frontier will be a curve rather than a straight line.
DIF: Easy TOP: Production possibilities
5. One reason trade benefits both parties is that it allows each to specialise in what they do better.
DIF: Easy TOP: Specialisation and trade
6. Trade allows a country to pivot outwards its production possibilities frontier.
DIF: Moderate TOP: Specialisation and trade
7. It takes Barbara four hours to make a pie and four hours to make a shirt. It takes Gary two hours to make a pie and five hours to make a shirt. Barbara should specialise in making shirts and Gary should specialise in making pies. Then they should trade.
DIF: Moderate TOP: Specialisation and trade
8. Suppose it takes Jean four hours to catch 10 fish and one hour to collect one kilogram of mushrooms. It takes Lee four hours to catch 10 fish and 30 minutes to collect 1 kg of mushrooms. Lee should specialise in catching fish and Jean should specialise in collecting mushrooms.
DIF: Moderate TOP: Specialisation and trade
9. Suppose Aaron can build a table in three days and clean a house in one hour, while Jack can clean a house in three hours but it only takes him one day to build a table. Jack has an absolute advantage over Aaron.
DIF: Moderate TOP: Specialisation and trade
10. For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity cost of the other good.
DIF: Moderate TOP: The principle of comparative advantage
11. If one country can produce all goods more cheaply than another, there is no reason to trade.
DIF: Moderate TOP: The principle of comparative advantage
12. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.
DIF: Easy TOP: The principle of comparative advantage
13. Trade is not based on absolute advantage; rather it is based on comparative advantage.
DIF: Easy TOP: The principle of comparative advantage
14. Rusty can edit two pages in one minute, and can type 80 words in one minute. Emily can edit one page in one minute and can type 100 words in one minute. Rusty has both an absolute and a comparative advantage in editing and Emily has both an absolute and a comparative advantage in typing.
DIF: Moderate TOP: Opportunity cost and comparative advantage
15. Shaquille can score 32 points or produce 12 rebounds in one game. Karl can score three points or produce one rebound in one game. Shaquille has both an absolute and a comparative advantage in both scoring and rebounding.
DIF: Moderate TOP: The principle of comparative advantage
16. Lee can pick 30 apples in one hour. He can pick 60 kiwifruit in half an hour. The opportunity cost to Lee of picking one apple is four kiwifruit.
DIF: Easy TOP: Opportunity cost and comparative advantage
17. The principle of absolute advantage explains the gains from trade and why economic interdependence occurs.
DIF: Easy TOP: The principle of comparative advantage
18. Differences in opportunity cost and comparative advantage allow for gains from trade.
DIF: Easy TOP: Comparative advantage and trade
19. Comparative advantage will always occur when two parties have different opportunity costs in production.
DIF: Easy TOP: Opportunity cost and comparative advantage
20. As long as two people have different opportunity costs, each can gain from trade by being able to obtain a good at a price lower than his or her opportunity cost.
DIF: Moderate TOP: Comparative advantage and trade
21. A person is able to obtain goods at prices that are less than that person’s opportunity cost because each person concentrates on the activity for which he or she has the lower opportunity cost.
DIF: Moderate TOP: Applications of comparative advantage
22. If a country imports goods from overseas, it will always suffer a reduction in welfare.
DIF: Easy TOP: Should a country trade with other countries?
23. Goods produced abroad and sold domestically are called exports and goods produced domestically and sold abroad are called imports.
DIF: Easy TOP: Should a country trade with other countries?
24. A Korean worker can produce 10 cars per month or grow 1500 kg of wheat per month and an American worker can produce four cars or 1700 kg of rice per month. Korea and the US can both gain if Korea makes more cars and exports them to the US in exchange for imports of increased output of Australian rice.
DIF: Moderate TOP: Should a country trade with other countries?
25. If it takes Australian workers fewer hours to produce every good than it takes Malaysian workers, Australia cannot gain from trade with Malaysia.
DIF: Easy TOP: Should a country trade with other countries?
26. Adam Smith discusses that countries should be self-sufficient in his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.
DIF: Easy TOP: FYI: The legacy of Adam Smith and David Ricardo
27. David Ricardo developed the theory of imports and exports, as we know them today.
DIF: Moderate TOP: FYI: The legacy of Adam Smith and David Ricardo
28. The principle of comparative advantage was developed in Adam Smith’s 1817 book Principles of Political Economy and Taxation.
DIF: Easy TOP: FYI: The legacy of Adam Smith and David Ricardo
29. The conclusions of Adam Smith and David Ricardo on the gains from trade are no longer valid due to the increase of barriers to trade.
DIF: Easy TOP: FYI: The legacy of Adam Smith and David Ricardo
30. The central argument for free trade has changed a lot in the past two centuries.
DIF: Easy TOP: FYI: The legacy of Adam Smith and David Ricardo
31. International trade may make some individuals in a nation better off, while other individuals are made worse off.
DIF: Moderate TOP: Should a country trade with other countries?
MULTIPLE CHOICE
1. The reason most people provide you with goods and services is because:
A. | their beliefs make them feel charitable to you |
B. | they want to be your friend |
C. | they will receive something they want in return |
D. | they are not as good at bargaining as you are |
DIF: Easy TOP: Introduction
2. A butcher can produce only sausages, and a farmer can produce only potato chips. The butcher and the farmer like both foods. They:
A. | cannot gain from trade under any circumstances |
B. | could gain from trade under certain circumstances, but not always |
C. | could gain from trade because each would enjoy a greater variety of food |
D. | could gain from trade only if they were indifferent between sausages and potato chips |
DIF: Easy TOP: Introduction
3. A country’s consumption possibilities frontier can be moved outside its production possibilities frontier:
A. | by producing a greater variety of goods and services |
B. | by allocating resources differently |
C. | through trade |
D. | by lowering unemployment in the country |
DIF: Moderate TOP: Specialisation and trade
4. In order to have a linear production possibilities frontier (one that is not bowed out), it must be that:
A. | there are no trade-offs |
B. | the trade-off between two goods is constant |
C. | the trade-off between two goods is increasing |
D. | the trade-off between two goods is decreasing |
DIF: Easy TOP: Production possibilities
Table 3-1
Labour hours needed to make 1 kg of: | Kgs produced in 20 hours: | |||
Meat | Potatoes | Meat | Potatoes | |
Potato farmer | 10 | 5 | 2 | 4 |
Cattle farmer | 4 | 1 | 5 | 20 |
5. Refer to Table 3-1. For the potato farmer, the opportunity cost of 1 kg of meat is:
A. | eight hours of labour |
B. | four hours of labour |
C. | 2 kg of potatoes |
D. | 1/2 kg of potatoes |
DIF: Moderate TOP: Opportunity cost and comparative advantage
6. Refer to Table 3-1. For the cattle farmer, the opportunity cost of 1 kg of meat is:
A. | five hours of labour |
B. | one hour of labour |
C. | 1/4 kg of potatoes |
D. | 4 kg of potatoes |
DIF: Moderate TOP: Opportunity cost and comparative advantage
7. Refer to Table 3-1. For the potato farmer, the opportunity cost of 1 kg of potatoes is:
A. | eight hours of labour |
B. | 1/2 kg of meat |
C. | 2 kg of meat |
D. | four hours of labour |
DIF: Moderate TOP: Opportunity cost and comparative advantage
8. Refer to Table 3-1. For the cattle farmer, the opportunity cost of one kg of potatoes is:
A. | four hours of labour |
B. | two hours of labour |
C. | 1/4 kg of meat |
D. | 4 kg of meat |
DIF: Moderate TOP: Opportunity cost and comparative advantage
9. According to Table 3-1:
A. | the cattle farmer has a comparative advantage in potatoes, and the potato farmer has a comparative advantage in meat |
B. | the cattle farmer has a comparative advantage in both goods, and the potato farmer has a comparative advantage in neither goods |
C. | the cattle farmer has a comparative advantage in meat, and the potato farmer has a comparative advantage in potatoes |
D. | the cattle farmer has a comparative advantage in neither goods, and the potato farmer has a comparative advantage in both goods |
DIF: Moderate TOP: Absolute advantage and comparative advantage
10. Mark can cook dinner in 30 minutes and wash the laundry in 20 minutes while his housemate John can cook dinner in 15 minutes and wash the laundry in 30 minutes. How should they allocate their work?
A. | Mark should cook dinner based on his comparative advantage |
B. | John should cook dinner based on his absolute advantage |
C. | John should cook dinner based on his comparative advantage |
D. | Mark should do the laundry based on his absolute advantage |
DIF: Moderate TOP: Comparative advantage and trade
11. Refer to Graph 3-1. For Robinson Crusoe, the opportunity cost of 1 kg of fish is:
A. | 2 kg of coconuts |
B. | 1/2 kg of coconuts |
C. | 4 kg of coconuts |
D. | 1/4 kg of coconuts |
Graph 3-1
These figures illustrate the production possibilities frontiers for Robinson Crusoe and Friday with 12 hours of labour.
DIF: Moderate TOP: Opportunity cost and comparative advantage
12. Refer to Graph 3-1. For Friday, the opportunity cost of 1 kg of fish is:
A. | 1 kg of coconuts |
B. | 3/2 kg of coconuts |
C. | 1/3 kg of coconuts |
D. | 2 kg of fish |
DIF: Moderate TOP: Opportunity cost and comparative advantage
13. Refer to Graph 3-1. For Robinson Crusoe, the opportunity cost of 1 kg of coconuts is:
A. | 2 kg of fish |
B. | 1/2 kg of fish |
C. | 4 kg of fish |
D. | 1/4 kg of fish |
DIF: Moderate TOP: Opportunity cost and comparative advantage
14. Refer to Graph 3-1. For Friday, the opportunity cost of 1 kg of coconuts is:
A. | 2/3 kg of fish |
B. | 3 kg of fish |
C. | 1 kg of fish |
D. | 2 kg of fish |
DIF: Moderate TOP: Opportunity cost and comparative advantage
15. According to Graph 3-1:
A. | Robinson Crusoe has a comparative advantage in fish, and Friday has a comparative advantage in coconuts |
B. | Robinson Crusoe has a comparative advantage in coconuts, and Friday has a comparative advantage in fish |
C. | Robinson Crusoe has a comparative advantage in fish, and Friday has a comparative advantage in fish |
D. | Robinson Crusoe has a comparative advantage in fish, and Friday has a comparative advantage in neither goods |
DIF: Difficult TOP: Opportunity cost and comparative advantage
16. According to Graph 3-1:
A. | Robinson Crusoe has an absolute advantage in coconuts, and Friday has a comparative advantage in fish |
B. | Robinson Crusoe has an absolute advantage in both goods, and Friday has a comparative advantage in coconuts |
C. | Robinson Crusoe has an absolute advantage in fish, and Friday has a comparative advantage in coconuts |
D. | Robinson Crusoe has an absolute advantage in neither goods, and Friday has a comparative advantage in fish |
DIF: Difficult TOP: Absolute advantage
Table 3-2
Labour hours needed to produce one unit of: | Amount produced in 60 hours: | |||
Butter (kg) | Butter (kg | Rice (kg) | Rice (kg) | |
Lee | 6 | 10 | 15 | 4 |
John | 3 | 20 | 15 | 4 |
17. Refer to Table 3-2. The opportunity cost of 1 kg of butter for Lee is:
A. | 3/2 kg of rice |
B. | 4/3 kg of rice |
C. | 3/4 kg of rice |
D. | 2/3 kg of rice |
DIF: Moderate TOP: Opportunity cost and comparative advantage
18. Refer to Table 3-2. The opportunity cost of 1 kg of butter for John is:
A. | 3/2 kg of rice |
B. | 4/3 kg of rice |
C. | 3/4 kg of rice |
D. | 2/3 kg of rice |
DIF: Moderate TOP: Opportunity cost and comparative advantage
19. Refer to Table 3-2. For Lee the opportunity cost of 1 kg of rice is:
A. | 4/3 kg of butter |
B. | 3/4 kg of butter |
C. | 2/3 kg of butter |
D. | 3/2 kg of butter |
DIF: Moderate TOP: Opportunity cost and comparative advantage
20. Refer to Table 3-2. For John the opportunity cost of one kg of rice:
A. | 3/4 kg of butter |
B. | 3/2 kg of butter |
C. | 4/3 kg of butter |
D. | 2/3 kg of butter |
DIF: Moderate TOP: Opportunity cost and comparative advantage
21. According to Table 3-2:
A. | Lee has a comparative advantage in rice, and John has an absolute advantage in butter |
B. | Lee has a comparative advantage in butter, and John has an absolute advantage in rice |
C. | Lee has a comparative advantage in rice, and John has an absolute advantage in neither good |
D. | Lee has a comparative advantage in butter, and John has an absolute advantage in neither good |
DIF: Difficult TOP: Absolute advantage and comparative advantage
22. According to Table 3-2:
A. | Lee has an absolute advantage in neither goods, and John has a comparative advantage in butter |
B. | Lee has an absolute advantage in rice, and John has a comparative advantage in butter |
C. | Lee has an absolute advantage in rice, and John has a comparative advantage in neither good |
D. | Lee has an absolute advantage in neither goods, and John has a comparative advantage in rice |
DIF: Difficult TOP: Absolute advantage and comparative advantage
23. According to Table 3-2:
A. | Lee has an absolute advantage in neither goods, and John has an absolute advantage in both goods |
B. | Lee has an absolute advantage in neither goods, and John has an absolute advantage in butter |
C. | Lee has an absolute advantage in rice, and John has an absolute advantage in butter |
D. | Lee has an absolute advantage in rice, and John has an absolute advantage in both goods |
DIF: Difficult TOP: Absolute advantage and comparative advantage
24. According to Table 3-2:
A. | Lee and John both could benefit by Lee specialising in butter, and John specialising in rice |
B. | Lee and John both could benefit by Lee specialising in butter, and John specialising in butter |
C. | Lee and John both could benefit by Lee specialising in rice, and John specialising in butter |
D. | Lee and John both could benefit by Lee specialising in rice, and John specialising in rice |
DIF: Difficult TOP: Absolute advantage and comparative advantage
25. According to Table 3-2:
A. | Lee has a comparative advantage in butter, and John has a comparative advantage in rice |
B. | Lee has a comparative advantage in butter, and John has a comparative advantage in butter |
C. | Lee has a comparative advantage in rice, and John has a comparative advantage in butter |
D. | Lee has a comparative advantage in rice, and John has a comparative advantage in rice |
DIF: Difficult TOP: Absolute advantage and comparative advantage
26. Comparative advantage is based on:
A. | capital costs |
B. | labour costs |
C. | dollar price |
D. | opportunity costs |
DIF: Easy TOP: Opportunity cost and comparative advantage
27. Trade is based on:
A. | absolute advantage |
B. | comparative advantage |
C. | trade subsidies |
D. | free trade agreements |
DIF: Easy TOP: Specialisation and trade
28. Absolute advantage is found by:
A. | comparing opportunity costs |
B. | calculating the dollar cost of production |
C. | comparing the productivity of one nation to that of another |
D. | first determining which country has a comparative advantage |
DIF: Easy TOP: Absolute advantage
29. Trade can benefit society as a whole because it allows:
A. | people to specialise in activities in which they have a comparative advantage |
B. | for a more efficient use of resources |
C. | for goods to be obtained at a lower opportunity cost |
D. | all of the above are correct |
DIF: Easy TOP: Specialisation and trade
Table 3-3
Hours needed to make one unit of: | Amount produced in 2400 hours: | |||
Cars | Aeroplanes | Cars | Aeroplanes | |
US | 40 | 160 | 60 | 15 |
Europe | 50 | 150 | 48 | 16 |
30. Refer to Table 3-3. The opportunity cost of one car for Europe is:
A. | four aeroplanes |
B. | three aeroplanes |
C. | 1/3 aeroplane |
D. | 1/4 aeroplane |
DIF: Moderate TOP: Opportunity cost and comparative advantage
31. Refer to Table 3-3. The opportunity cost of one aeroplane for Europe is:
A. | four cars |
B. | three cars |
C. | 1/3 car |
D. | 1/4 car |
DIF: Moderate TOP: Opportunity cost and comparative advantage
32. Refer to Table 3-3. The opportunity cost of one car for the US is:
A. | four aeroplanes |
B. | three aeroplanes |
C. | 1/3 aeroplane |
D. | 1/4 aeroplane |
DIF: Moderate TOP: Opportunity cost and comparative advantage
33. Refer to Table 3-3. The opportunity cost of one aeroplane for the US is:
A. | four cars |
B. | three cars |
C. | 1/3 car |
D. | 1/4 car |
DIF: Moderate TOP: Opportunity cost and comparative advantage
34. According to Table 3-3, the US and Europe could benefit by specialising in _____ respectively.
A. | aeroplanes and aeroplanes |
B. | cars and aeroplanes |
C. | aeroplanes and cars |
D. | neither goods and cars |
DIF: Difficult TOP: Specialisation and trade
35. Refer to Table 3-3. If the US and Europe trade according to the principle of comparative advantage, the US will export what product to Europe?
A. | cars |
B. | both aeroplanes and cars |
C. | aeroplanes |
D. | the US should buy both products from Europe |
DIF: Difficult TOP: Specialisation and trade
36. Refer to Table 3-3. If the US and Europe trade according to the principle of comparative advantage, Europe will export what product to the US?
A. | cars |
B. | both aeroplanes and cars |
C. | aeroplanes |
D. | Europe should buy both products from the US |
DIF: Difficult TOP: Specialisation and trade
37. Refer to Table 3-3. If the US and Europe trade according to the principle of comparative advantage:
A. | the US will export cars and Europe will export aeroplanes |
B. | the US will export aeroplanes and Europe will export cars |
C. | the US will export cars and Europe will export cars |
D. | the US will export aeroplanes and Europe will export aeroplanes |
DIF: Difficult TOP: Specialisation and trade
38. Refer to Table 3-3. If Europe and the US trade according to the principle of comparative advantage:
A. | all individuals in both countries will gain |
B. | car producers in Europe and aeroplane producers in the US will gain |
C. | some individuals within each society will be made worse off |
D. | one country will be better off and the other country will be worse off |
DIF: Difficult TOP: Specialisation and trade
39. Refer to Table 3-3. If Europe and the US trade according to the principle of comparative advantage:
A. | all individuals in both countries will gain |
B. | both countries can have more aeroplanes and cars |
C. | Europe will specialise in cars and the US will specialise in aeroplanes |
D. | both countries will consume on their own production possibilities frontier |
DIF: Difficult TOP: Specialisation and trade
Use the accompanying table to answer the following questions.
Table 3-4
Labour hours needed to make one unit of: | Amount Produced in 40 hours: | |||
Cheese | Bread | Cheese | Bread | |
England | 3 | 2 | 13.3 | 20 |
Spain | 1 | 5 | 40 | 8 |
40. Refer to Table 3-4. The opportunity cost of one unit of cheese in England is:
A. | four units of bread |
B. | two units of bread |
C. | 1/2 unit of bread |
D. | 1.5 units of bread |
DIF: Moderate TOP: Opportunity cost and comparative advantage
41. Refer to Table 3-4. The opportunity cost of one unit of bread in England is:
A. | 2/3 unit of cheese |
B. | two units of cheese |
C. | one unit of cheese |
D. | 1/2 unit of cheese |
DIF: Moderate TOP: Opportunity cost and comparative advantage
42. Refer to Table 3-4. The opportunity cost of one unit of cheese in Spain is:
A. | one unit of bread |
B. | five units of bread |
C. | 1/5 unit of bread |
D. | 1/3 unit of bread |
DIF: Moderate TOP: Opportunity cost and comparative advantage
43. Refer to Table 3-4. The opportunity cost of one unit of bread in Spain is:
A. | one unit of cheese |
B. | five units of cheese |
C. | 1/5 unit of cheese |
D. | 1/3 unit of cheese |
DIF: Moderate TOP: Opportunity cost and comparative advantage
44. According to Table 3-4:
A. | England has a comparative advantage in bread, and Spain has a comparative advantage in cheese |
B. | England has a comparative advantage in cheese, and Spain has a comparative advantage in bread |
C. | England has a comparative advantage in both goods, and Spain has a comparative advantage in neither goods |
D. | England has a comparative advantage in neither goods, and Spain has a comparative advantage in both goods |
DIF: Difficult TOP: Opportunity cost and comparative advantage
45. According to Table 3-4:
A. | England has an absolute advantage in bread, and Spain has an absolute advantage in cheese |
B. | England has an absolute advantage in cheese, and Spain has an absolute advantage in bread |
C. | England has an absolute advantage in both goods, and Spain has an absolute advantage in neither goods |
D. | Neither England nor Spain has an absolute advantage |
DIF: Difficult TOP: Absolute advantage
46. According to Table 3-4, England and Spain could benefit by specialising in _____ respectively:
A. | bread and cheese |
B. | cheese and bread |
C. | both goods and neither goods |
D. | neither goods and both goods |
DIF: Difficult TOP: Absolute advantage
47. Refer to Table 3-4. If England and Spain trade according to the principle of comparative advantage, England will export which product to Spain:
A. | bread |
B. | cheese |
C. | both cheese and bread |
D. | England cannot benefit from trade with Spain |
DIF: Difficult TOP: Absolute advantage
48. Refer to Table 3-4. If England and Spain trade according to the principle of comparative advantage, Spain will export which product to England?
A. | bread |
B. | both bread and cheese |
C. | cheese |
D. | Spain cannot benefit from trade with England |
DIF: Difficult TOP: Specialisation and trade
49. Refer to Table 3-4. If England reduced the labour hours needed for it to produce cheese by 2.5 hours, it would:
A. | have a comparative advantage over Spain in the production of cheese |
B. | have an absolute advantage over Spain in the production of both goods |
C. | have a comparative advantage over Spain in the production of both goods |
D. | have an absolute advantage over Spain in the production of cheese but not in the production of bread |
DIF: Moderate TOP: Specialisation and trade
50. Refer to Table 3-4. If England imports cheese from Spain, who will benefit and who will lose?
A. | the producers of bread will lose and the consumers of cheese will benefit |
B. | the producers of cheese will lose and the consumers of bread will benefit |
C. | the producers of bread will lose and the consumers of bread will benefit |
D. | the producers of cheese will lose and the consumers of cheese will benefit |
DIF: Difficult TOP: Specialisation and trade
51. According to Table 3-4, if England and Spain do not trade:
A. | they will both be better off |
B. | they will miss out on the opportunity to expand their production possibilities frontier |
C. | they will consume inside their production possibilities frontier |
D. | they will have absolute advantage over each other in the production of both goods |
DIF: Moderate TOP: Specialisation and trade
52. According to Table 3-4, if the English government decided to impose a tariff on cheese imports, this would:
A. | make bread and cheese cheaper for English consumers |
B. | make bread and cheese more expensive for English consumers |
C. | make bread more expensive for English consumers |
D. | make cheese more expensive for English consumers |
DIF: Difficult TOP: Specialisation and trade
53. Refer to Table 3-4. The fact of England imposing a tariff on cheese imports would be:
A. | protecting the English cheese industry from international competition |
B. | encouraging England to specialise in and export cheese |
C. | allowing a greater production of dairy products in England |
D. | a policy intended to harm the Spanish cheese industry |
DIF: Difficult TOP: Specialisation and trade
54. One reason for which the English government might impose a tariff on Spanish cheese imports is:
A. | national pride |
B. | a general rivalry between Spain and England |
C. | the possibility of disease in Spanish cheese |
D. | pressure from English cheese lobby groups |
DIF: Difficult TOP: Specialisation and trade
55. Trade will:
A. | make everyone better off |
B. | make some people produce better goods |
C. | make some countries pay more for all goods |
D. | make some people better off and some people worse off |
DIF: Moderate TOP: Specialisation and trade
56. If two countries have identical opportunity costs, then:
A. | one country must be more productive in producing all goods than the other |
B. | the benefits resulting from trade are increased |
C. | there are no gains from specialisation and trade |
D. | each country should specialise in the production of a particular commodity |
DIF: Difficult TOP: Specialisation and trade
57. Which of the following is correct?
A. | trade allows for specialisation |
B. | trade is good for some nations only |
C. | trade is based on absolute advantage |
D. | trade allows countries to consume inside their production possibilities curve |
DIF: Easy TOP: Specialisation and trade
58. If capital in China is less productive than capital in Australia in agricultural production:
A. | neither nation can benefit from trade |
B. | only China can benefit from trade in agricultural goods |
C. | only Australia can benefit from trade in agricultural goods |
D. | both nations can benefit from increased trade in agricultural goods |
DIF: Easy TOP: Specialisation and trade
59. Imports arise because:
A. | the importing country can produce the good more cheaply than the exporting country |
B. | the exporting country can produce the good at a higher cost than the importing country |
C. | the importing country can produce the good at an equal cost to the exporting country |
D. | the exporting country can produce the good more cheaply than the importing country |
DIF: Easy TOP: Specialisation and trade
60. Exports arise because:
A. | the importing country has a comparative advantage in consuming a good |
B. | the exporting country has a comparative advantage in producing a good |
C. | the exporting country has a comparative advantage in consuming a good |
D. | the importing country has a comparative advantage in producing a good |
DIF: Easy TOP: Specialisation and trade
61. Spain can produce everything more cheaply than France. What should they do?
A. | still trade with each other because it is comparative, not absolute, advantage that is important |
B. | not trade with each other because it is not profitable for either of them |
C. | France should buy all goods from Spain in order to make the most of their cheaper prices |
D. | Spain should sell everything to France because other countries might have a comparative advantage |
DIF: Easy TOP: Should a country trade with other countries?
62. Trade is likely to:
A. | lead to self-sustaining countries |
B. | reduce the quantity of goods available in the economy |
C. | allow each country to do what they are better at, than other countries |
D. | lead to goods being produced at a lower quality |
DIF: Easy TOP: Specialisation and trade
63. The principle of comparative advantage was developed by:
A. | Harry Truman |
B. | David Ricardo |
C. | John Maynard Keynes |
D. | Adam Smith |
DIF: Easy TOP: FYI: The legacy of Adam Smith and David Ricardo
64. David Ricardo:
A. | wrote books opposing the ideas of Adam Smith |
B. | argued in favour of Britain following a free-trade policy |
C. | was the founder of modern economics |
D. | wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776 |
DIF: Easy TOP: FYI: The legacy of Adam Smith and David Ricardo
65. David Ricardo was the author of:
A. | An Inquiry into the Nature and Causes of the Wealth of Nations |
B. | Principles of Political Economy and Taxation |
C. | The General Theory of Prices and Employment |
D. | Why Nations Trade |
DIF: Easy TOP: FYI: The legacy of Adam Smith and David Ricardo
SHORT ANSWER
1. Suppose that there are two goods in the world: bread and cheese. Without trade, David can bake 50 loaves of bread in a week. Alternatively, he can make five kg of cheese in a week. Laura can make 20 kg of cheese in one week, or she can bake 10 loaves of bread in one week. Draw the production possibilities frontiers for David and for Laura, assuming that the frontiers are linear.
PTS: 1 DIF: Moderate TOP: Production possibilities
2. Julia can produce 15 apple pies or one dozen croissants in one day. Jacque can produce two apple pies or 10 dozen croissants in one day.
a. Draw the production possibilities frontiers for Julia and Jacque.
b. What pattern of specialisation and trade will benefit both Julia and Jacque?
DIF: Moderate TOP: Specialisation and trade
3. George and Martha face the production possibilities frontiers shown for brownies and cupcakes.
a. If George and Martha choose not to trade and divide their time equally between the production of brownies and cupcakes, how many of each would they be able to consume? (Show this point on your graphs.)
b. Now assume that George and Martha each decide to specialise in the good in which they have a comparative advantage and then trade. Who would trade brownies and who would trade cupcakes?
c. If George and Martha decided to trade 60 brownies for 60 cupcakes, how many cupcakes and brownies would each have to consume?
d. How do we know each is better off with trade than acting alone?
DIF: Moderate TOP: Specialisation and trade
4. The only two countries in the world, Alpha and Omega, face the production possibilities frontiers shown.
a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A.
b. If these countries choose not to trade, what will be the total world production of popcorn and peanuts?
c. Now suppose that each country decides to specialise in the good in which each has a comparative advantage. What is the total world production of each product now?
d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country will receive from trade. Label these points B.
DIF: Moderate TOP: Specialisation and trade
5. Why do countries outsource their jobs to other countries? Give an example to help explain why this might occur.
DIF: Moderate TOP: In the news: Who has the comparative advantage in slaying ogres?
6. Explain the difference between absolute advantage and comparative advantage.
DIF: Easy TOP: Opportunity cost and comparative advantage
7. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?
DIF: Easy TOP: Opportunity cost and comparative advantage
8. The table below describes the production possibilities for Lee and Amy in a four-hour shift.
Coffee | Croissants | |
Lee | 20 | 15 |
Amy | 8 | 16 |
a. What is the opportunity cost of one coffee for each person? What is the opportunity cost of one croissant?
b. Who has a comparative advantage in coffees? Who has a comparative advantage in croissants?
c. Who has an absolute advantage in coffees? Who has an absolute advantage in croissants?
d. Who should produce coffees? Who should produce croissants?
DIF: Moderate TOP: Opportunity cost and comparative advantage
9. Jess makes coconut brownies that all her friends rave about but is also a highly paid marketing executive. Should she open a healthy bakery, like her friends suggest?
DIF: Difficult TOP: Opportunity cost and comparative advantage
10. Describe two ways in which trade benefits a country.
DIF: Moderate TOP: Specialisation and trade
11. Martha can prepare a meal in one hour, and her opportunity cost of one hour is $50. Stewart can prepare the same kind of meal in two hours and his opportunity cost of one hour is $20. Will both Martha and Stewart be better off if she pays him $45 per meal to prepare her meals? Explain.
DIF: Moderate TOP: Specialisation and trade
12. John can milk 20 cows or feed 40 calves in one hour. Jared can milk 10 cows or feed 50 calves in one hour.
a. Who has the absolute advantage in milking cows? Who has the absolute advantage in feeding calves?
b. Who has the comparative advantage in milking cows? Who has the comparative advantage in feeding calves?
c. If John and Jared, who have been dividing their time equally between milking and feeding, each specialise in the activity in which they have a comparative advantage, how many additional cows can be milked and calves fed per hour?
DIF: Difficult TOP: Absolute advantage
13. In one day, Daniel can catch 10 frogs or 5 birds that are eating the crops on his farm. Miles can catch 20 frogs or 2 birds.
a. What is Daniel’s opportunity cost of catching a bird? What is Miles’ opportunity cost of catching a bird?
b. Who has comparative advantage in catching frogs? Birds?
c. The two farmers decide that Daniel will catch 2 birds for Miles if Miles catches 40 frogs in return. Who is gaining from this specialisation and trade?
d. If Miles hones his bird catching skills and can now catch 5 birds in an hour, have the farmers’ advantages changed?
DIF: Difficult TOP: Absolute advantage
14. a. Neverland imports 60 per cent of its beef. What does this say about Neverland’s ability to produce beef compared to other countries?
b. Imports of beef into Neverland have been falling over the last 10 years, and forecasts suggest that within another five years Neverland will become an exporter of beef. What does this say about Neverland’s changing comparative advantage/disadvantage in producing beef?
DIF: Moderate TOP: Comparative advantage and trade
15. Jack and Catherine have a cooperative project that must be completed for a business class. The project involves doing a series of calculations and writing a report. It would take Jack 10 hours to do the required calculation and 10 hours to write the report. It would take Catherine 12 hours to do the calculations and 20 hours to write the report.
a. How much time would it take the two to complete the project if they divide the calculations equally and the writing equally?
b. How much time would it take the two to complete the project if they use comparative advantage and specialise in calculating or writing?
c. If Catherine and Jack have the same opportunity cost of $5 per hour, is there a better solution than for each to specialise in calculating or writing?
DIF: Difficult TOP: Absolute advantage
16. What factors might economists take into account when advising the Australian government on international trade?
DIF: Moderate TOP: Should a country trade with other countries?
17. Is the statement ‘international trade can make everyone better off’ true? Why or why not?
DIF: Moderate TOP: Specialisation and trade