Survey of Economics, 6e (O’Sullivan/Sheffrin/Perez)
Chapter 18 International Trade and Finance
18.1 Comparative Advantage and Exchange
1) Markets exist
A) so people can buy and sell things.
B) because people are self-sufficient.
C) because each person specializes in the production of many products.
D) as an arrangement where buyers do not interact with sellers.
2) To explore the rationale for specialization, economists use the
A) marginal principle.
B) principle of opportunity cost.
C) real-nominal principle.
D) principle of marginal exchange.
Kites /hour
Snowboards
/hour
Jesse
8
1
April
12
3
Table 18.1
3) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.1
shows how much of each good Jesse and April can paint in one hour. Jesse’s opportunity cost of
painting one kite is painting
A) 1/12 of a snowboard.
B) 1/8 of a snowboard.
C) 1/3 of a snowboard.
D) 3 snowboards.
4) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.1
shows how much of each good Jesse and April can paint in one hour. Jesse’s opportunity cost of
painting one snowboard is painting
A) 1/8 of a kite.
B) 1.5 kites.
C) 8 kites.
D) 12 kites.
5) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.1
shows how much of each good Jesse and April can paint in one hour. April’s opportunity cost of
painting one kite is painting
A) 1/12 of a snowboard.
B) 1/4 of a snowboard.
C) 3 snowboards.
D) 4 snowboards.
6) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.1
shows how much of each good Jesse and April can paint in one hour. April’s opportunity cost of
painting one snowboard is painting
A) 1.5 kites.
B) 3 kites.
C) 4 kites.
D) 12 kites.
7) Based on the data in Table 18.1
A) Jesse should specialize in painting kites and trade for snowboards.
B) Jesse should specialize in painting snowboards and trade for kites.
C) April should specialize in both goods.
D) Jesse should specialize in both goods.
8) Based on the data in Table 18.1
A) April should specialize in painting kites and trade for snowboards.
B) April should specialize in painting snowboards and trade for kites.
C) Jesse should specialize in both goods.
D) April should specialize in both goods.
9) Based on the data in Table 18.1, if Jesse and April choose to specialize and trade, then
A) April will specialize in painting kites and trade kites for snowboards.
B) April will specialize in painting snowboards and trade snowboards for kites.
C) Jesse will specialize in painting snowboards and trade snowboards for kites.
D) None of the above; specialization and trade are not beneficial for Jesse and April.
10) The ability of one person or nation to produce a good at a lower absolute cost than another is
called a(n)
A) market advantage.
B) comparative advantage.
C) absolute advantage.
D) specialization advantage.
11) The ability of one person or nation to produce a good at a lower opportunity cost than
another is called a(n)
A) market advantage.
B) comparative advantage.
C) absolute advantage.
D) specialization advantage.
12) An individual or country that has a comparative advantage in the production of one good
A) must have an absolute advantage in the good’s production.
B) must not have an absolute advantage in the good’s production.
C) may or may not have an absolute advantage in the good’s production.
D) must not have an absolute advantage in the production of the other good.
Kites /hour
Snowboards
/hour
Jesse
8
1
April
12
3
Table 18.2
13) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.2
shows how much of each good Jesse and April can paint in one hour. Which of the following is
true?
A) April has an absolute advantage in painting kites but not snowboards.
B) April has an absolute advantage in painting snowboards but not kites.
C) April has an absolute advantage in painting both goods.
D) April does not have an absolute advantage in painting either good.
14) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.2
shows how much of each good Jesse and April can paint in one hour. Which of the following is
true?
A) April has a comparative advantage in painting kites but not snowboards.
B) April has a comparative advantage in painting snowboards but not kites.
C) April has a comparative advantage in painting both goods.
D) April does not have a comparative advantage in painting either good.
15) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.2
shows how much of each good Jesse and April can paint in one hour. Which of the following is
true?
A) April has both an absolute and comparative advantage in painting kites.
B) April has both an absolute and comparative advantage in painting snowboards.
C) April has neither an absolute nor comparative advantage in painting kites.
D) April has neither an absolute nor a comparative advantage in painting snowboards.
16) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.2
shows how much of each good Jesse and April can paint in one hour. Which of the following is
true?
A) Jesse has an absolute advantage in painting kites but not snowboards.
B) Jesse has an absolute advantage in painting snowboards but not kites.
C) Jesse has an absolute advantage in painting both goods.
D) Jesse has an absolute advantage in painting neither good.
Hair Pins
/hour
Bandanas
/hour
Nigel
4
10
Mia
9
3
Table 18.3
17) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel’s and
Mia’s hourly productivity are shown in Table 18.3. Nigel’s opportunity cost of producing one
bandana is
A) 1/4 of a hair pin.
B) 2/5 of a hair pin.
C) 2.5 hair pins.
D) 4 hair pins.
18) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel’s and
Mia’s hourly productivity are shown in Table 18.3. Nigel’s opportunity cost of producing one
hair pin is
A) 1/3 of a bandana.
B) 2.5 bandanas.
C) 3 bandanas.
D) 10 bandanas.
19) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel’s and
Mia’s hourly productivity are shown in Table 18.3. Mia’s opportunity cost of producing one
bandana is
A) 1/3 of a hair pin.
B) 2.5 hair pins.
C) 3 hair pins.
D) 9 hair pins.
20) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel’s and
Mia’s hourly productivity are shown in Table 18.3. Mia’s opportunity cost of producing one hair
pin is
A) 1/3 of a bandana.
B) 2.5 bandanas.
C) 3 bandanas.
D) 10 bandanas.
21) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel’s and
Mia’s hourly productivity are shown in Table 18.3. Which of the following is true?
A) Nigel has an absolute advantage in producing hair pins but not bandanas.
B) Nigel has an absolute advantage in producing bandanas but not hair pins.
C) Nigel has an absolute advantage in producing both goods.
D) Nigel does not have an absolute advantage in producing either good.
22) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel’s and
Mia’s hourly productivity are shown in Table 18.3. Which of the following is true?
A) Nigel has a comparative advantage in producing hair pins but not bandanas.
B) Nigel has a comparative advantage in producing bandanas but not hair pins.
C) Nigel has a comparative advantage in producing both goods.
D) Nigel does not have a comparative advantage in producing either good.
23) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel’s and
Mia’s hourly productivity are shown in Table 18.3. Which of the following is true?
A) Nigel has both an absolute and comparative advantage in hair pin production.
B) Nigel has both an absolute and comparative advantage in bandana production.
C) Nigel has neither an absolute nor comparative advantage in hair pin production.
D) Nigel has neither an absolute nor a comparative advantage in bandana production.
24) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel’s and
Mia’s hourly productivity are shown in Table 18.3. Which of the following is true?
A) Mia has an absolute advantage in producing hair pins but not bandanas.
B) Mia has an absolute advantage in producing bandanas but not hair pins.
C) Mia has an absolute advantage in producing both goods.
D) Mia does not have an absolute advantage in producing either good.
25) Jimbo has a comparative advantage over Ned in producing a good if
A) Jimbo can produce more of the good than Ned can in a given time period.
B) Jimbo has a lower opportunity cost of producing the good than does Ned.
C) Jimbo has to trade off more than Ned does to produce the good.
D) Jimbo has a higher opportunity cost of producing the good than does Ned.
Wind Chimes
Sun Dials
Deena
9
12
Artie
6
8
Table 18.4
26) Consider two individuals, Artie and Deena, who produce wind chimes and sun dials. Artie’s
and Deena’s weekly productivity are shown in Table 18.4. Which of the following is true?
A) Artie has a comparative advantage in producing wind chimes but not sun dials.
B) Artie has a comparative advantage in producing sun dials but not wind chimes.
C) Artie has a comparative advantage in producing both goods.
D) Artie does not have a comparative advantage in producing either good.
27) Consider two individuals, Artie and Deena, who produce wind chimes and sun dials. Artie’s
and Deena’s weekly productivity are shown in Table 18.4. Which of the following is true?
A) Deena has an absolute advantage in producing both goods, and a comparative advantage in
producing wind chimes.
B) Deena has an absolute advantage in producing both goods, and a comparative advantage in
producing sun dials.
C) Deena has an absolute and a comparative advantage in producing both goods.
D) Deena has an absolute advantage in producing both goods, but no one has a comparative
advantage in producing either good.
28) Trade results from
A) comparative advantage.
B) absolute advantage.
C) self-sufficiency.
D) diminishing returns.
29) An import is a product
A) produced in and purchased by residents of the home country.
B) produced in and sold to the residents of a foreign country.
C) produced in the home country and sold in another country.
D) produced in a foreign country and purchased by the residents of the home country.
30) An export is a product
A) produced in and purchased by residents of the home country.
B) produced in and sold to the residents of a foreign country.
C) produced in the home country and sold in another country.
D) produced in a foreign country and purchased by the residents of the home country.
31) A rich nation will trade with a poor nation because the
A) rich nation has the absolute advantage in producing all products.
B) poor nation has the absolute advantage in producing all products.
C) poor nation has the comparative advantage in producing a product.
D) rich nation has the comparative advantage in producing all products.
32) For country A, an export is a good produced in
A) country B and purchased by residents of country B.
B) country B and purchased by residents of country A.
C) country A and purchased by residents of country B.
D) country A and purchased by residents of country A.
33) For country A, an import is a good produced in
A) country B and purchased by residents of country B.
B) country B and purchased by residents of country A.
C) country A and purchased by residents of country B.
D) country A and purchased by residents of country A.
34) Outsourcing allows a company to take advantage of the ________ of other countries, and in
doing so it can produce its products at a lower cost.
A) comparative advantages
B) diminishing returns
C) trade imbalances
D) market failures
35) The cost savings from outsourcing often lead to ________ for consumers and ________ for
the outsourcing company.
A) lower prices; less output
B) lower prices; more output
C) higher prices; less output
D) higher prices; more output
36) Jobs lost to outsourcing can be partially offset by jobs gained from
A) higher production costs.
B) higher opportunity costs.
C) greater trade imbalances.
D) increased output from another industry.
37) When a U.S. company shifts some of its production to Mexico, it is engaging in
A) outsourcing.
B) insourcing.
C) self-sufficiency.
D) involuntary exchange.
38) A U.S. company is attempting to cut costs by shifting some of its services to Thailand. This
process of shifting production of products or services overseas to cut costs often results in
A) greater potential for market failure for those products and services.
B) greater economic uncertainty in the market for those products and services.
C) lower consumer prices on those products or services.
D) lower production quantities of those products or services.
39) When a U.S. company shifts its call-center operations overseas to reduce costs, it is applying
the economic concept of
A) thinking at the margin.
B) comparative advantage.
C) diminishing returns.
D) using assumptions to simplify.
Recall the Application about productivity in the nation of Latvia in the 1990s to answer the
following question(s).
40) Recall the application. In the 1990s EU countries had ________ in the production of all
products compared to Latvia.
A) an absolute advantage and a comparative advantage
B) an absolute advantage but not a comparative advantage
C) a comparative advantage but not an absolute advantage
D) neither an absolute advantage nor a comparative advantage
41) Recall the application. Workers in the EU were more productive than workers in Latvia in
the 1990s, yet EU nations still purchased products from Latvia. This is because Latvia ________
in the production of the products it sold to EU nations.
A) had an absolute advantage
B) had a comparative advantage
C) used fewer resources
D) had a higher opportunity cost
42) Recall the application. Workers in the EU were more productive than workers in Latvia in
the 1990s, yet despite this, EU nations chose to trade with Latvia. Engaging in trade with Latvia
allowed ________ to become more productive.
A) workers in the EU but not workers in Latvia
B) workers in Latvia but not workers in the EU
C) neither workers in the EU nor in Latvia
D) workers in both the EU and in Latvia
43) If Libby can produce 20 gallons of beer or 5 gallons of wine per hour, her opportunity cost of
one gallon of beer is 4 gallons of wine.
44) A comparative advantage is the ability of one person or nation to produce a good at an
opportunity cost that is lower than that of another person or nation.
45) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30
milk shakes or 16 banana splits in an hour, then Eddie has a comparative advantage in producing
milk shakes.
46) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30
milk shakes or 16 banana splits in an hour, then Eddie has a comparative advantage in producing
banana splits.
47) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30
milk shakes or 16 banana splits in an hour, then Tina has a comparative advantage in producing
milk shakes.
48) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30
milk shakes or 16 banana splits in an hour, then Tina has a comparative advantage in producing
banana splits.
49) If a person has an absolute advantage in some activity, she must have a comparative
advantage in that activity as well.
50) If a person has a comparative advantage in some activity, she must have an absolute
advantage in that activity as well.
51) Absolute advantage occurs when one producer has greater productivity compared to another
producing the same product.
52) The principles of comparative advantage and specialization only apply to trade between
different nations.
53) Imports are products produced in the home country and sold in another country.
54) Exports are products produced in the home country and sold in another country.
55) Trade will be beneficial for a nation with a comparative advantage in producing a certain
product.
56) Trade is only beneficial if a nation has an absolute advantage in producing all products.
57) What does it mean for a person or nation to have a comparative advantage in producing a
product?
58) Explain what is meant by the economic principle of voluntary exchange.
59) Consider two individuals, Ozzy and Sharon, who produce toy boats and yoyos. Ozzy’s and
Sharon’s hourly productivity are as follows:
Yoyos /hour
Toy boats /hour
Ozzy
12
4
Sharon
10
5
Who has the absolute advantage or comparative advantage in the production of yoyos or boats?
60) What does it mean for a nation to have an absolute advantage in producing a product?
61) Consider two individuals, Celia and Sondra, who produce bracelets and pendants. Celia’s and
Sondra’s hourly productivity are as follows:
Bracelets
/hour
Pendants
/hour
Celia
4
1
Sondra
10
2
Who has the absolute advantage or comparative advantage in the production of bracelets or
pendants?
62) In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith listed three
reasons for productivity to increase with specialization. What are these three reasons?
63) Define the term “import.”
64) Define the term “export.”
65) Imagine two countries, Zorba and Anduluvia. Zorba is producing everything at a lower
resource cost than Anduluvia. If the two countries trade what is the reason?