Microeconomics, 4e (Hubbard/O’Brien)
Chapter 9 Comparative Advantage and the Gains from International Trade
9.1 The United States in the International Economy
1) U.S. firms that sell products in foreign markets protested the “Buy American” provision in the
2009 stimulus bill, arguing that if the United States restricted imports from foreign firms,
A) foreign countries would likely retaliate by limiting U.S. exports.
B) foreign firms would stop selling all products in the United States.
C) U.S. firms would never be able to meet the increased demand for U.S.-produced goods.
D) eventually the government would demand price cuts from U.S. manufacturers.
2) Workers in industries protected by tariffs and quotas are likely to support these trade
restrictions because
A) they do not want to offend their employers who want them.
B) politicians lobby to convince workers the restrictions will make them better off.
C) they believe the restrictions will protect their jobs.
D) they don’t understand that the restrictions will threaten their jobs.
3) The intention of the “Buy American” provision in the 2009 stimulus bill was to
A) increase jobs in the United States.
B) prevent foreign firms from dumping product in the United States.
C) insure that products used to build roads and bridges meet U.S. quality and safety standards.
D) save the government money by restricting the sale of more expensive foreign-made products.
4) In the 1930s, the United States charged an average tariff rate ________. Today, the rate is
________.
A) of 100 percent; 20 percent
B) above 50 percent; less than 2 percent
C) of less than 10 percent; over 40 percent
D) of 17 percent; 33 percent
5) A tariff is a tax imposed by a government on
A) exports.
B) services.
C) imports.
D) luxury items.
6) Goods and services bought domestically but produced in other countries are referred to as
A) exports.
B) imports.
C) transfer payments.
D) foreign consumption.
7) Exports are domestically produced goods and services
A) sold to other countries.
B) sold to the government.
C) sold at home.
D) which are used to produce other goods and services.
8) When Roxanne, a U.S. citizen, purchases a designer dress from Barneys of New York that
was made in Milan, the purchase is
A) both a U.S. and an Italian import.
B) a U.S. import and an Italian export.
C) a U.S. export and an Italian import.
D) neither an export nor an import for either country.
9) Which of the following statements about the importance of trade to the U.S. economy is true?
A) Since 1950, both exports and imports have steadily decreased as a fraction of U.S. gross
domestic product.
B) Overall, about 80 percent of U.S. manufacturing jobs depend directly or indirectly on exports.
C) The United States is the largest exporter in the world.
D) The U.S. economy is highly dependent on international trade for growth in its gross domestic
product.
10) In 2010, ________ of Caterpillar’s sales were outside the United States.
A) only 12 percent
B) more than two-thirds
C) less than half
D) 95 percent
11) Caterpillar’s sales were severely affected by the decline in the U.S. housing market that
began in 2006. Sales in the United States declined by ________ between 2006 and 2008, and
export sales ________ during the same time period.
A) more than half; increased by enough to make 2008 a record sales year
B) almost 90 percent; remained virtually unchanged
C) almost 90 percent; declined by half
D) more than half; declined by a similar percentage
12) Which of the following statements is true?
A) Japan is more dependent on foreign trade than is the United States.
B) Imports and exports account for over one-half of the GDP of Belgium.
C) France is the leading exporting country, accounting for 10 percent of total world exports.
D) Because the cost of labor used on farms is so high, the United States exports very little of its
wheat, rice and corn crops.
13) Twenty-seven countries in Europe have eliminated all tariffs with each other. This group of
countries is known as the
A) European Union.
B) United Federation of Europe.
C) Gruppo Euro.
D) European Free Trade Association.
14) NAFTA refers to a 1994 agreement that eliminated most tariffs among which countries?
A) Canada, the United Kingdom and Mexico
B) the United States, the United Kingdom and Mexico
C) the United States, Canada and Mexico
D) the United States, Mexico and Cuba
15) Today, the United States charged an average tariff rate
A) that is more than its average tariff rate in 1930.
B) which is greater than any other high-income country.
C) of less than 2 percent.
D) that exceeds 50 percent.
16) Which of the following statements is true?
A) Exports benefit trading countries because exports create jobs. Imports do not benefit trading
countries because they result in a loss of jobs.
B) Each year China exports about 50 percent of its wheat crop and 40 percent of its rice crop.
C) Most of the leading exporting countries are large, high-income countries.
D) All sectors of the U.S. economy are affected equally by international trade.
17) In the United States, imports and exports make up more than half of GDP.
18) Caterpillar’s sales are now greater outside the United States than inside the United States.
19) How have U.S. imports and exports, as a fraction of GDP, changed from 1950 to the present?
9.2 Comparative Advantage in International Trade
1) Absolute advantage is
A) the ability to produce more of a good or service than competitors when using the same
amount of resources.
B) the ability to produce higher quality goods compared to one’s competitors.
C) the ability to produce a good or service at a higher opportunity cost than one’s competitors.
D) the ability to produce more of a good or service than competitors that have more resources.
2) ________ is the ability of an individual, a firm, or a country to produce a good or service at a
lower opportunity cost than competitors.
A) Absolute advantage
B) Specialization
C) Autarky
D) Comparative advantage
Table 9-1
Bathing
Grooming
Linda
60
20
Sandy
50
25
Linda and Sandy own The Preppy Puppy, a dog grooming business. Table 9-1 lists the number of
dogs Linda and Sandy can each bathe and groom in one week.
3) Refer to Table 9-1. Select the statement that accurately interprets the data in the table.
A) Linda has an absolute advantage in dog bathing and Sandy has an absolute advantage in dog
grooming.
B) Sandy has an absolute advantage in dog bathing and Linda has an absolute advantage in dog
grooming.
C) Sandy has an absolute advantage in dog bathing and dog grooming.
D) Linda has an absolute advantage in dog bathing and dog grooming.
4) Refer to Table 9-1. Select the statement that accurately interprets the data in the table.
A) Sandy has a greater opportunity cost than Linda for dog grooming.
B) Sandy’s opportunity cost for dog grooming is less than Linda’s.
C) Linda has a greater opportunity cost than Sandy for dog bathing.
D) Sandy’s opportunity cost for dog grooming and dog bathing are both greater than Linda’s.
5) Refer to Table 9-1. Select the statement that accurately interprets the data in the table.
A) Sandy has a comparative advantage in dog grooming.
B) Linda has a comparative advantage in dog grooming.
C) Linda has a comparative advantage in dog grooming and dog bathing.
D) Sandy has a comparative advantage in dog bathing.
6) Refer to Table 9-1. Select the statement that accurately interprets the data in the table.
A) Linda has a comparative advantage in dog bathing.
B) Sandy has an absolute advantage in dog bathing.
C) Sandy has a comparative advantage in dog bathing.
D) Linda has a comparative advantage in dog grooming and dog bathing.
7) An economic principle that explains why countries produce different goods and services is
A) absolute advantage.
B) trade as a percentage of GDP.
C) comparative advantage.
D) NAFTA.
8) Assume that China has a comparative advantage in producing corn and exports corn to Japan.
We can conclude that
A) China also has an absolute advantage in producing corn relative to Japan.
B) China has a lower opportunity cost of producing corn relative to Japan.
C) Japan has an absolute disadvantage in producing corn relative to China.
D) Labor costs are higher for corn producers in Japan than in China.
9) Whenever a buyer and a seller agree to trade,
A) the agreement is made based on absolute advantage.
B) they must have identical opportunity costs in producing their respective products.
C) one party will always be worse off.
D) both must believe they will be made better off.
10) If Japanese workers are more productive than French workers then trade between Japan and
France
A) can take place only if France has an absolute advantage in producing a good or service
Japanese buyers want.
B) cannot take place because Japanese goods and services will be less expensive than French
goods and services.
C) cannot take place until French workers become more productive.
D) will take place so long as each country has a comparative advantage in a good or service that
buyers in the other country want.
11) If the opportunity cost of production for two goods is different between two countries, then
A) trade cannot benefit either country.
B) only one country can be made better off by trade.
C) mutually beneficial trade is possible.
D) trade will only benefit both countries if one can lower its opportunity costs.
12) If Canada has a comparative advantage relative to Mexico in the production of timber, then
A) the explicit cost of production for timber is lower in Canada than in Mexico.
B) the opportunity cost of production for timber is lower in Canada than in Mexico.
C) the implicit costs of production for timber are lower in Canada than in Mexico.
D) the average cost of production for timber is lower in Canada than in Mexico.
13) If Canada imports fishing poles from Mexico and Mexico imports bacon from Canada,
which of the following would explain this pattern of trade?
A) Mexico has a lower opportunity cost of producing bacon than Mexico and Mexico has a
comparative advantage in producing fishing poles.
B) The opportunity cost of producing fishing poles in Canada is higher than the opportunity cost
of producing bacon in Mexico.
C) Mexico must have an absolute advantage in producing fishing poles and Canada must have an
absolute advantage in bacon.
D) Mexico has a higher opportunity cost of producing fishing poles than Canada, and Canada has
a higher opportunity cost of producing bacon.
14) The ability of a firm or country to produce a good or service at a lower opportunity cost than
other producers is called absolute advantage.
15) If Estonia has an absolute advantage in the production of two goods compared to Norway,
Estonia can not benefit from trade with Norway.
Table 9-2
Output Per Hour of Work
Handbags
Jackets
Cambodia
15
3
Thailand
24
6
Table 9-2 shows the output per hour of work for handbags and jackets in Cambodia and in
Thailand.
16) Refer to Table 9-2. Fill in the following table with the opportunity costs of producing
handbags and jackets for Cambodia and Thailand.
Handbags
Jackets
Cambodia
Thailand
Answer:
Handbags
Jackets
Cambodia
0.20
5
Thailand
0.25
4
17) Refer to Table 9-2.
a.Which country has an absolute advantage in the production of handbags and jackets?
b. Which country has a comparative advantage in the production of handbags?
c. Which country has a comparative advantage in the production of jackets?
9.3 How Countries Gain from International Trade
1) A situation in which a country does not trade with other countries is called
A) autarky.
B) self-actualization.
C) autonomy.
D) independence.
2) The ratio at which a country can trade its exports for imports from other countries is called
A) a trade barrier.
B) the terms of trade.
C) autarky.
D) a free trade agreement.
3) Countries that engage in trade will tend to specialize in the production of goods and services
in which they have ________ and will ________ these goods and services.
A) a comparative advantage; import
B) an absolute advantage; export
C) a comparative advantage; export
D) an absolute advantage; import
4) Examples of ________ show how trade between two countries can make each better off.
A) absolute advantage
B) comparative advantage
C) autarky
D) trade barriers
5) The first example used to explain comparative advantage used two countries (England and
Portugal) and two goods (wine and cloth) to show that
A) each country would be better off from trade if it had an absolute advantage in producing one
of the goods.
B) each country would have a comparative advantage in the production of the good for which it
had an absolute advantage.
C) mutually beneficial trade was possible between two countries even if one had an absolute
advantage in the production of both goods.
D) mutually beneficial trade was possible between two countries even if one had a comparative
advantage in the production of both goods.
6) In the real world we don’t observe countries completely specializing in the production of
goods for which they have a comparative advantage. One reasons for this is
A) comparative advantage works better in theory than in practice.
B) some countries have more resources than other countries.
C) tastes for many traded goods are similar in many countries because of globalization.
D) production of most goods involves increasing opportunity costs.
7) Tastes for products such as beer differ. As a result
A) we see countries specializing completely in the production of beer.
B) consumers of beer have difficulty deciding what type of imported beer to buy.
C) the quality of imported beer is less than it could be.
D) different countries may each have a comparative advantage in producing different types of
beer.
8) A consequence of increasing marginal costs of producing digital music players in Japan is
A) Japan will not export digital music players.
B) Japan will stop short of complete specialization in the production of digital music players.
C) Japan will import digital music players from countries that don’t experience increasing
marginal costs.
D) Japan will likely impose trade restrictions on imported digital music players.
9) Which of the following statements is true?
A) All individuals in both countries are made better off as a result of international trade.
B) Within each country, some individuals are made better off as a result of international trade,
but one of the countries will be worse off overall.
C) Although some individuals are made better off as a result of international trade, both countries
may be made worse off overall.
D) Each country as a whole is made better off as a result of international trade, but individuals
within each country may be made worse off.
10) A Federal Reserve publication proclaimed that “Trade is a win-win situation for all countries
that participate.” This statement is
A) false since it ignores the workers who lose their jobs as result of international trade.
B) false since not all countries participate in international trade.
C) true because it refers to countries; individuals may be losers as a result of international trade.
D) true because all consumers and workers benefit from international trade.
11) Which of the following is not a source of comparative advantage?
A) relative abundance of labor and capital
B) technology
C) climate and natural resources
D) a strong foreign currency exchange rate
12) Japan has developed a comparative advantage in designing and producing automobiles. The
source of its comparative advantage in these products is
A) abundant supplies of natural resources.
B) a favorable climate.
C) a strong central government.
D) technology.
13) China has developed a comparative advantage in the production of clothing. The source of
this comparative advantage is
A) a large supply of natural resources.
B) a large supply of unskilled workers and relatively little capital.
C) investment in capital used to produce clothing.
D) superior process technology.
14) ________ refers to reductions in a firm’s costs that result from an increase in the size of an
industry.
A) Internal economies
B) External economies
C) Autarkial dominance
D) Streamlining
15) Once a country has lost its comparative advantage in producing a good, its income will be
________ and its economy will be ________ if it switches from producing the good to importing
it.
A) higher; less efficient
B) higher; more efficient
C) lower; less efficient
D) lower; more efficient
16) Wall Street, in the borough of Manhattan in New York City, is the heart of the U.S. financial
system, where banks, brokerage houses, other financial firms, and the New York Stock
Exchange are all located. What is the reason for New York City’s comparative advantage in the
financial market?
A) the development of superior information technology
B) an abundant supply of skilled labor
C) New York City has one of the largest sea ports in the world.
D) external economies
17) The United States is a leading exporter of wheat. What explains the comparative advantage
of the United States in wheat production?
A) positive externalities
B) investment by multinational firms such as Archer-Daniels-Midland and the Tyson Foods Inc.
C) climate and soil conditions in the United States which are well-suited for wheat production
D) a large supply of unskilled labor
18) In the 1970s and 1980s, the United States lost its comparative advantage in consumer
electronics goods to Japan. What factor was most responsible for the development of Japan’s
comparative advantage in consumer electronics goods?
A) Japanese firms benefited from external economies.
B) Japan has abundant supplies of labor.
C) Japanese firms excelled in process technology.
D) Japan has abundant supplies of natural resources needed to produce electronics goods.
19) One reason a country does not specialize completely in production is that not all goods and
services are traded internationally.
20) One of the main sources of comparative advantage is internal economies.
21) What is autarky?