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25) 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.
26) It is generally claimed that a movement from autarky to free trade consistent with Ricardian
comparative advantage increases the economic welfare of each of the trade partners. However, it
may be demonstrated that under certain circumstances, not everyone in each country is made
better off. Illustrate such a case.
27) It is generally claimed that state trading, or centrally controlled trading will tend to reach a
lower economic welfare than would be reached by allowing market forces to determine trade
flow directions and terms of trade. Illustrate a counter-example to this proposition.
28) The Ricardian proposition that international trade will benefit any country ("gains from
trade") as long as the world terms of trade do not equal its autarkic relative prices is a
straightforward and powerful concept. Nevertheless, it is impossible to demonstrate empirically.
Why?
29) Given the information in the table above. What is the opportunity cost of Cloth in terms of
Widgets in Foreign?
30) Given the information in the table above. If these two countries trade these two goods in the
context of the Ricardian model of comparative advantage, then what is the lower limit of the
world equilibrium price of widgets?
31) Given the information in the table above. If these two countries trade these two goods with
each other in context of the Ricardian model of comparative advantage, what is the lower limit
for the price of cloth?
32) Given the information in the table above. What is the opportunity cost of cloth in terms of
Widgets in Foreign?
3.4 Misconceptions About Comparative Advantage
1) If a production possibilities frontier is bowed out (concave to the origin), then production
occurs under conditions of
A) constant opportunity costs.
B) increasing opportunity costs.
C) decreasing opportunity costs.
D) infinite opportunity costs.
E) uncertain opportunity costs.
2) If the production possibilities frontier of one trade partner ("Country A") is bowed out
(concave to the origin), then increased specialization in production by that country will
A) increase the economic welfare of both countries.
B) increase the economic welfare of only Country A.
C) decrease the economic welfare of Country A.
D) decrease the economic welfare of Country B.
E) not affect the economic welfare of either country.
3) If two countries have identical production possibility frontiers, then trade between them is
likely to be beneficial if
A) their supply curves are identical.
B) their cost functions are identical.
C) their demand conditions are identical.
D) their incomes are identical.
E) their demand functions differ.
4) If one country's wage level is very high relative to the other's (the relative wage exceeding the
relative productivity ratios), then if they both use the same currency
A) neither country has a comparative advantage.
B) only the low wage country has a comparative advantage.
C) only the high wage country has a comparative advantage.
D) consumers will still find trade worth while from their perspective.
E) it is possible that both will enjoy the conventional gains from trade.
5) If one country's wage level is very high relative to the other's (the relative wage exceeding the
relative productivity ratios) then it is probable that
A) free trade will not improve either both countries welfare.
B) free trade will result in no trade taking place.
C) free trade will result in each country exporting the good in which it enjoys comparative
advantage.
D) free trade will result in each country exporting the good in which it suffers the greatest
comparative disadvantage.
E) free trade will not affect the economic welfare of either country.
6) 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.
7) If the United States' production possibility frontier was flatter to the widget axis, whereas
Germany's was flatter to the butter axis, we know that
A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the U.S. has a comparative advantage in butter.
D) Germany has comparative advantages in both products.
E) the U.S. has a comparative disadvantage in widgets.
8) Suppose the United States' production possibility frontier was flatter to the widget axis,
whereas Germany's was flatter to the butter axis. We now learn that the German mark sharply
depreciates against the U.S. dollar. We now know that
A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Germany has a comparative advantage in widgets.
E) Germany has lost its comparative advantage.
9) Suppose the United states production possibility frontier was flatter to the widget axis,
whereas Germany's was flatter to the butter axis. We now learn that the German wage doubles,
but U.S. wages do not change at all. We now know that
A) the United States has no comparative advantage.
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Not enough information is given.
E) Germany gains a comparative advantage in widgets.
10) Which of the following statements is TRUE?
A) Free trade is beneficial only if your country is strong enough to stand up to foreign
competition.
B) Free trade is beneficial only if your competitor does not pay unreasonably low wages.
C) Free trade is beneficial only if both countries have access to the same technology.
D) Free trade is never beneficial for developing countries.
E) Free trade can be beneficial to economic welfare of all countries involved.
11) Mahatma Gandhi exhorted his followers in India to promote economic welfare by decreasing
imports. This approach
A) makes no sense.
B) makes no economic sense.
C) is consistent with the the Ricardian model of comparative advantage.
D) is not consistent with the Ricardian model of comparative advantage.
E) guarantees benefits for Indian workers.
12) The Country of Rhozundia is blessed with rich copper deposits. The cost of copper produced
(relative to the cost of widgets produced) is therefore very low. From this information we know
that
A) Rhozundia has a comparative advantage in copper.
B) Rhozundia should import copper and export widgets.
C) Rhozundia should export both widgets and copper.
D) Rhozundia should invest in more in widget production.
E) Rhozundia may or may not have a comparative advantage in copper.
13) We know that in antiquity, China exported silk because no one in any other country knew
how to produce this product. From this information we know that
A) China had a comparative advantage in silk.
B) China had an absolute advantage, but not a comparative advantage in silk.
C) no comparative advantage could exist because the technology was not diffused.
D) China exported silk for political reasons even though it had no comparative advantage.
E) China was unable to profit by exporting silk because it was unknown in the rest of the world.
14) The pauper labor theory, and the exploitation argument
A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative
advantage.
B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance.
C) are not relevant because the Ricardian model is based on the labor theory of value.
D) are not relevant because the Ricardian model allows for different technologies in different
countries.
E) invalidate the Ricardian model.
15) If labor productivities were exactly proportional to wage levels internationally, this would
A) not negate the logical basis for trade in the Ricardian model.
B) render the Ricardian model theoretically correct but practically useless.
C) negate the logical basis for trade in the Ricardian model.
D) negate the applicability of the Ricardian model if the number of products were greater than
the number of trading partners.
E) demonstrate the validity of the Ricardian model.
16) Many countries in sub-Saharan Africa have very low labor productivities in many sectors,
for example in manufacturing and agriculture. They often despair of even trying to attempt to
build their industries unless it is done in an autarkic context, behind protectionist walls because
they do not believe they can compete with more productive industries abroad. Discuss this issue
in the context of the Ricardian model of comparative advantage.
17) In 1975, wage levels in South Korea were roughly 5% of those in the United States. It is
obvious that if the United States had allowed Korean goods to be freely imported into the United
States at that time, this would have caused devastation to the standard of living in the United
States, because no producer in this country could possibly compete with such low wages.
Discuss this assertion in the context of the Ricardian model of comparative advantage.
18) The evidence cited in the chapter using the examples of the East Asia New Industrializing
Countries suggests that as international productivities converge, so do international wage levels.
Why do you suppose this happened for the East Asian NICs? In light of your answer, what do
you think is likely to happen to the relative wages (relative to those in the United States) of
China in the coming decade? Explain your reasoning.
3.5 Comparative Advantage with Many Goods
1) The two-country, multi-product model differs from the two-country, two-product model in
that, in the former
A) the relative wage ratio will determine the pattern of trade ( which good is exported by which
country.
B) which country will export which product is determined entirely by labor productivity data.
C) full specialization is likely to hold in equilibrium.
D) none of the goods are potentially nontraded.
E) domestic relative prices are not relevant.
2) How does the two-good, two-country version of the Ricardian model differ from the two-
country, many-good model in terms of the determination which goods are produced and exported
by each country?
3.6 Adding Transport Costs and Nontraded Goods
1) Assume that transportation costs are especially high for Widgets in the two-country, two-
product Ricardian model, and Country A enjoys a comparative advantage in Widgets, then
A) country B must also enjoy a comparative advantage in Widgets.
B) country B may end up exporting Widgets.
C) country A may switch to having a comparative advantage in the other good.
D) country A will still export Widgets.
E) Trade may be impossible between the two countries.
2) Which of the following is most likely to be an untraded good in a Ricardian two-country,
multi-good model?
A) steel
B) textiles
C) haircuts
D) petroleum
E) telemarketer services
3.7 Empirical Evidence on the Ricardian Model
1) Which of the following has been confirmed by empirical tests of the Ricardian model?
A) All predictions of the model for a multi-product, multi-country world are highly unrealistic.
B) The existence of nontraded goods results in a high degree of specialization among countries.
C) International trade has no impact on income distribution.
D) The unimportance of economies of scale as a cause of trade.
E) Companies tend to export goods in which they have a relatively high level of productivity.
2) When compared with China, the growth of clothing exports originating in Bangladesh clearly
illustrates the difference between absolute and comparative advantage. Discuss and explain.
3) When compared with China, the growth of clothing exports originating in Bangladesh clearly
illustrates the Ricardian model of comparative advantage. Discuss and explain.
4) When compared with China, the growth of clothing exports originating in Bangladesh is the
result of
A) the comparative advantage that Bangladesh has in the production of clothing for export.
B) the absolute advantage that China has in the production of clothing for export.
C) the absolute advantage that Bangladesh has in the production of clothing for export.
D) the comparative and absolute advantage that China has in the production of clothing for
export.
E) the comparative and absolute advantage that Bangladesh has in the production of clothing for
export.
5) The growth of clothing exports originating in Bangladesh is the result of the
A) high productivity of workers in Bangladesh.
B) low wages in Bangladesh.
C) low productivity of workers in other countries.
D) low productivity of workers in Bangladesh in industries other than those that produce clothing
for export.
E) high wages in other countries.
