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Comparative Advantage in International Trade

Chapter 9 discusses international trade, emphasizing the concepts of comparative advantage and specialization. It highlights how trade can benefit nations, the effects of tariffs and quotas, and the implications of free trade on consumer surplus and domestic markets. Additionally, it addresses the challenges faced by domestic producers in a global market and the impact of trade restrictions.

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8 views5 pages

Comparative Advantage in International Trade

Chapter 9 discusses international trade, emphasizing the concepts of comparative advantage and specialization. It highlights how trade can benefit nations, the effects of tariffs and quotas, and the implications of free trade on consumer surplus and domestic markets. Additionally, it addresses the challenges faced by domestic producers in a global market and the impact of trade restrictions.

Uploaded by

kngannguyen0704
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Chapter 9

Application: International Trade


1. Nations would gain from trade if a(n) __________ exists.
a. absolute advantage
b. specialization
c. comparative advantage
d. infant industry
ANSWER: c

2. If Canada has a comparative advantage over Denmark in the production of wood, this implies that
a. it requires fewer resources in Canada than in Denmark to produce wood.
b. the opportunity cost of producing wood in Canada is lower than in Denmark.
c. Denmark does not benefit by trading with Canada.
d. Canada should buy wood from Denmark.
ANSWER: b

3. If two countries specialize


a. the other countries trading with them cannot specialize.
b. everyone in both countries benefits.
c. the total of goods produced increases.
d. all goods will be produced in both countries.
ANSWER: c

4. As a result of free trade in a commodity, the


a. price of the commodity must be the same in all countries.
b. total quantity imported will exceed the total quantity exported.
c. price of the commodity will be higher in the producing country.
d. price of the commodity will be lower in the producing country.
ANSWER: a

5. If at the world equilibrium price the U.S. quantity demanded is greater than the U.S. quantity
supplied, then the
a. United States will import the good.
b. United States will export the good.
c. world price will fall.
d. world price will rise.
ANSWER: a

6. Consider this diagram of the market for pocket calculators in Venezuela. In the absence of trade,
the price and quantity of calculators sold are
a. $3.00 and 10 calculators.
b. $3.00 and 60 calculators.
c. $8.00 and 60 calculators.
d. $8.00 and 80 calculators.
ANSWER: c

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7. Consider this diagram of the market for pocket calculators in Venezuela. With free trade, Venezuela
produces __________, consumes __________, and imports __________.
a. 10 calculators; 80 calculators; 70 calculators.
b. 10 calculators; 110 calculators; 100 calculators.
c. 40 calculators; 40 calculators; 20 calculators.
d. 80 calculators; 110 calculators; 30 calculators.
ANSWER: b

8. Consider this diagram of the market for pocket calculators in Venezuela. With free trade, consumer
surplus
a. increases by 300.
b. increases by 425.
c. decreases by 125.
d. None of the above are correct.
ANSWER: b

9. Consider this diagram of the market for pocket calculators in Venezuela. A tariff would completely
eliminate imports of calculators if it equaled
a. $2.00.
b. $3.00.
c. $4.00.
d. $5.00.
ANSWER: d

[Link] this diagram of the market for pocket calculators in Venezuela. With a per-unit tariff of
$3.00, the Venezuelan government collects tariff revenues of
a. $80.00.
b. $100.00.
c. $120.00.
d. $140.00.
ANSWER: c

11. If the opportunity cost of a television set equals 20 cameras in China, but 10 cameras in Japan, then
we know
a. China has a comparative advantage in producing cameras.
b. Japan has a comparative advantage in producing TV sets.
c. market exchange of 1 TV set for 15 cameras would produce not only mutually beneficial trade,
but would also split the gains from trade equally between the two countries.
d. All of the above are correct.
ANSWER: d

[Link] customers are free to buy at the lowest prices, they will
a. purchase goods from the country that has a comparative advantage in producing it.
b. purchase only goods produced in their own country.
c. purchase only goods produced in their own local area.
d. prefer to purchase only well-made, foreign-produced goods.
ANSWER: a

[Link] international trade


a. producers and consumers in both countries must gain; otherwise, there would be no trade.
b. producers in both countries must gain.
c. consumers in both countries must gain.
d. consumer surplus in the country that imports the good rises.
ANSWER: d

[Link] United States is the world’s leading grain producing nation. Exporting U.S. grain causes the
a. domestic consumption of grain to rise because of the added foreign demand.
b. price of grain in the domestic market to fall because foreigners are now taking some of the
domestic demand.
c. price of grain to domestic consumers to rise because of the added foreign demand.
d. U.S. standard of living to improve but reduces the standard of living of foreigners.
ANSWER: c

[Link] the United States imports shoes in a free-trade situation, we can infer that
a. the domestic production of shoes in a no-trade situation is lower than if there is free trade.
b. domestic consumption of shoes is higher in a no-trade situation than if there is free trade.
c. the domestic price of shoes in a no-trade situation is higher than the free-trade world price.
d. the domestic price of shoes in a no-trade situation is lower than the free-trade world price.
ANSWER: c

[Link] producers gain from the opportunity to export goods to foreign countries because
a. the free-trade price of the good is higher than the domestic price in the absence of trade.
b. producers are able to reach a wider market.
c. although the free-trade price is lower than in the absence of trade, producers are able to sell a
greater quantity.
d. production rises, although there is no change in the price of the good compared to the no-trade
situation.
ANSWER: a

17. Consider this diagram of the market for tea in China. If the world price is $20, consumer surplus is
a. $60.
b. $600.

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c. $900.
d. $1800.
ANSWER: c

[Link] this diagram of the market for tea in China. If the government imposes a quota of 10 units
of tea per day, the consumer surplus will
a. $50.
b. $625.
c. $900.
d. $1250.
ANSWER b

[Link] this diagram of the market for tea in China. If the government imposes a quota of 10 units
of tea per day, the import license holders receive
a. $50.
b. $100.
c. $625.
d. $225.
ANSWER: b

[Link] this diagram of the market for tea in China. If the government imposes a quota of 10 units
of tea per day, the deadweight loss will be
a. $50.
b. $100.
c. $225.
d. $275.
ANSWER: a

21. One big difference between tariffs and quotas is that tariffs
a. raise the price of a good while quotas lower it.
b. generate tax revenues while quotas do not.
c. stimulate international trade while quotas inhibit it.
d. hurt domestic producers while quotas help them.
ANSWER: b

[Link] the United States decides to impose a $1,000 tax on every Japanese minivan sold in the
United States. This is an example of
a. a tariff.
b. a subsidy.
c. comparative disadvantage.
d. a quota.
ANSWER: a

[Link] U.S. military aircraft industry sought protection from foreign competition by using the
__________ argument to persuade Congress to impose trade restrictions.
a. infant industries
b. national security
c. unfair competition
d. protection-as-bargaining-chip
ANSWER: b

24.A less-developed country would probably use __________ to argue for trade restrictions.
a. national security
b. infant industry
c. increased efficiency
d. unfair competition
ANSWER: b

[Link] U.S. producers complain about limited access to the Japanese market. They say that they
cannot export to Japan because Japanese import restrictions are so severe. Who gains? Who
loses?
a. Everyone loses.
b. Japanese producers gain, U.S. producers and Japanese consumers lose.
c. Japanese producers and consumers gain, U.S. producers and consumers lose.
d. Japanese consumers and U.S. consumers gain, Japanese producers lose.
ANSWER: b

[Link] workers in the U.S. complain that they cannot compete with low-cost, foreign textile
producers. While some U.S. textile workers may lose their jobs, an advantage is
a. the United States gets cheaper textiles.
b. U.S. imports will become more expensive so U.S. domestic producers gain.
c. workers in other countries will buy more U.S. clothing.
d. the United States can retaliate with punishing trade policies.
ANSWER: a

Common questions

Powered by AI

If the U.S. imports shoes under free trade, it indicates that the domestic price of shoes would be higher without trade, leading to decreased domestic production and increased domestic consumption due to lower prices, highlighting how free trade can lead to more affordable goods and increased consumer options .

Tariffs generate tax revenues for governments by increasing the price of imported goods, whereas quotas limit the quantity of goods imported and do not provide revenue but rather advantage domestic producers. This difference can stimulate international trade in the case of tariffs while inhibiting it through quotas .

Mutual gain manifests when China and Japan trade based on comparative advantage, with China having an advantage in camera production and Japan in TV production. By exchanging 1 TV set for 15 cameras, both countries split the gains from trade, benefiting from specialization and efficient resource utilization .

U.S. textile workers might see foreign competition as a threat due to job loss potential from cheaper foreign textiles. However, consumers benefit from these imports due to access to more affordable goods, thus increasing their overall purchasing power and standard of living .

The U.S. military aircraft industry might justify protectionist measures using the national security argument, which is concerned about maintaining domestic production capabilities vital for defense. In contrast, less-developed countries often use the 'infant industry' argument, asserting the need to protect nascent industries until they become competitive internationally .

Comparative advantage affects the trade relationship such that if Canada has a lower opportunity cost for producing wood compared to Denmark, Canada would specialize in producing wood and trade with Denmark, benefitting both countries by gaining access to goods at lower opportunity costs than if they had produced them independently .

Export-led growth benefits the U.S. by improving domestic living standards through increased foreign demand, which raises domestic grain prices. However, it may also limit domestic consumption due to higher prices, highlighting a trade-off between producer gains and consumer costs in the domestic economy .

Nations engage in international trade primarily due to the principle of 'comparative advantage,' whereby countries can benefit by specializing in the production of goods for which they have a lower opportunity cost compared to other nations .

Imposing a quota on tea imports reduces consumer surplus and creates deadweight loss, as consumers pay higher prices and have less access to goods than in a free market. The quota grants import license holders economic rents and reduces overall welfare by limiting the efficiency gains from trade .

Consumer surplus indicates the gains consumers receive from being able to purchase products at lower prices due to free trade. In Venezuela, with free trade, consumer surplus increases significantly, illustrating how free trade allows consumers to benefit from lower prices and greater product availability, even if it means importing more goods than are produced locally .

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