1) Trade between two countries can benefit both countries if

A) each country exports that good in which it has a comparative advantage. B) each country
enjoys superior terms of trade.
C) each country has a more elastic demand for the imported goods.
D) each country has a more elastic supply for the exported goods.
E) each country produces a wide range of goods for export.

2) A country engaging in trade according to the principles of comparative advantage gains from
trade because it
A) is producing exports indirectly more efficiently than it could alternatively.
B) is producing imports indirectly more efficiently than it could domestically.
C) is producing exports using fewer labor units.
D) is producing imports indirectly using fewer labor units.
E) is producing exports while outsourcing services.

3) The earliest statement of the principle of comparative advantage is associated with

A) David Hume.
B) David Ricardo.
C) Adam Smith.
D) Eli Heckscher.
E) Bertil Ohlin.

4) The Ricardian model attributes the gains from trade associated with the principle of
comparative advantage result to
A) differences in technology.
B) differences in preferences.
C) differences in labor productivity.
D) differences in resources.
E) gravity relationships among countries.

5) The Ricardian model demonstrates that

A) trade between two countries will benefit both countries.
B) trade between two countries may benefit both regardless of which good each exports.
C) trade between two countries may benefit both if each exports the product in which it has a
comparative advantage.
D) trade between two countries may benefit one but harm the other.
E) trade between two countries always benefits the country with a larger labor force.

6) In the Ricardian model, comparative advantage is likely to be due to

A) scale economies.
B) home product taste bias.
C) greater capital availability per worker.
D) labor productivity differences.
E) political pressure.
7) In a two-country, two-product world, the statement "Germany enjoys a comparative advantage
over France in autos relative to ships" is equivalent to
A) France having a comparative advantage over Germany in ships.
B) France having a comparative disadvantage compared to Germany in autos and ships.
C) Germany having a comparative advantage over France in autos and ships. D) France having
no comparative advantage over Germany.
E) France should produce autos.

A One-Factor Economy
1) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.

2) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.

3) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.
Answer: (a) Argentina has an absolute advantage in the production of both wheat and beef
because labor productivity in Argentina exceeds labor productivity in the U.S. for both products.
(b) In the U.S., the opportunity cost of wheat is 200/100 or 2.0 units of beef. In Argentina, the
opportunity cost of wheat is 400/200 or 2.0 units of beef.

(c) In the U.S., the opportunity cost of beef is 100/200 or 0.5 units of wheat. In Argentina, the
opportunity cost of beef is 400/200 or 0.5 units of wheat.
(d) Neither country has a comparative advantage and there is, therefore, no opportunity for
beneficial trade.

Trade in a One-Factor World

1) In order to know whether a country has a comparative advantage in the production of one
particular product we need information on at least ________ unit labor requirements.
A) one
B) two
C) three
D) four
E) five

2) Given the information in the table

A) neither country has a comparative advantage in cloth.

B) Home has a comparative advantage in cloth.
C) Foreign has a comparative advantage in cloth.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.

3) Given the information in the table above, if it is ascertained that Foreign uses prison-slave
labor to produce its exports, then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
D) 1.5.
E) 3.0.

4) Given the information in the table above, if the Home economy suffered a meltdown, and the
Unit Labor Requirements doubled to 20 for cloth and 40 for widgets then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.

5) Given the information in the table above, if wages were to double in Home, then Home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.

6) Given the information in the table above

A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in widgets.
C) Foreign has a comparative advantage in widgets.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.

7) Given the information in the table above, Home's opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.

8) Given the information in the table above, Home's opportunity cost of widgets is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.

9) Given the information in the table above, Foreign's opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.

10) Given the information in the table above, Foreign's opportunity cost of widgets is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
11) Given the information in the table above, if the world equilibrium price of widgets were 4
cloth, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage. D)
neither country will want to export the good in which it enjoys comparative advantage. E) both
countries will want to specialize in cloth.

12) Given the information in the table above, if the world equilibrium price of widgets were 40
cloths, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.

13) In a two-product, two-country world, international trade can lead to increases in

A) consumer welfare only if output of both products is increased.
B) output of both products and consumer welfare in both countries.
C) total production of both products but not consumer welfare in both countries.
D) consumer welfare in both countries but not total production of both products. E) prices of
both goods in both countries.

14) A nation engaging in trade according to the Ricardian model will find its consumption
bundle
A) inside its production possibilities frontier.
B) on its production possibilities frontier.
C) outside its production possibilities frontier.
D) inside its trade-partner's production possibilities frontier.
E) on its trade-partner's production possibilities frontier.

15) According to Ricardo, a country will have a comparative advantage in the product in which
its
A) labor productivity is relatively low.
B) labor productivity is relatively high.
C) labor mobility is relatively low.
D) labor mobility is relatively high.
E) labor is outsourced to neighboring countries.

16) Assume that labor is the only factor of production and that wages in the United States equal
$20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the
United States as compared to Japan if
A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.
B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour.

C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour.

D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour.

E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour.

17) An examination of the Ricardian model of comparative advantage yields the clear result that
trade is (potentially) beneficial for each of the two trading partners since it allows for an
expanded consumption choice for each. However, for the world as a whole the expansion of
production of one product must involve a decrease in the availability of the other, so that it is not
clear that trade is better for the world as a whole as compared to an initial situation of non-trade
(but efficient production in each country). Are there in fact gains from trade for the world as a
whole? Explain.