118) Suppose that opportunity costs are constant and that Fred can either bake a maximum of six
pies or three cakes in a day. Ethel can either produce a maximum of eight pies or two cakes in a
day. Fred’s opportunity cost to produce one cake is
A) one-half pie.
B) two pies.
C) six pies.
D) four pies.
119) Suppose that opportunity costs are constant and that Fred can either bake a maximum of six
pies or three cakes in a day. Ethel can either produce a maximum of eight pies or two cakes in a
day. Ethel’s opportunity cost to produce one cake is
A) one-half pie.
B) two pies.
C) six pies.
D) four pies.
120) Suppose that opportunity costs are constant and that Fred can either bake a maximum of six
pies or three cakes in a day. Ethel can produce a maximum of eight pies or two cakes in a day.
Ethel has an comparative advantage in the production of
A) cakes.
B) pies.
C) both cakes and pies.
D) neither cakes nor pies.
121) Suppose that opportunity costs are constant and that Fred can either bake a maximum of six
pies or three cakes in a day. Ethel can produce a maximum of eight pies or two cakes in a day.
Fred has an comparative advantage in the production of
A) cakes.
B) pies.
C) both cakes and pies.
D) neither cakes nor pies.
122) According to the Swiss Institute for Management Development, the top country in terms of
productive efficiency is
A) Germany.
B) Japan.
C) Switzerland.
D) the United States.
123) The United States is considered by the Institute for Management Development to be the
most competitive economy because
A) U.S. residents are willing to work harder than anyone else is.
B) of widespread entrepreneurship.
C) of a high saving rate.
D) of selected restrictions on imports from Japan and Europe.
124) All of the following are cited as factors in explaining U.S. competitiveness EXCEPT
A) large investments in scientific research.
B) economic restructuring.
C) widespread entrepreneurship.
D) reducing the federal deficit.
125) All of the following are cited as factors in explaining U.S. competitiveness EXCEPT
A) the open U.S. financial system.
B) economic restructuring.
C) investments in information technology.
D) the decline of entrepreneurship.
126) The concept of “global competitiveness”
A) is not practical because economic well-being is evaluated within each country.
B) means that the economic well-being of each nation must be compared with nations with same
size population.
C) means that the economic well-being of each nation must be compared with nations on the
same continent.
D) means that the export-import ratio of each nation must be compared.
127) People who focus on the “competitiveness” of the United States are
A) focusing on the right thing if the United States is to stay a leading economic power.
B) treating the United States as if it is a business firm.
C) also focusing on the importance of education.
D) correctly recognizing that trade is a zero-sum game.
128) Discuss the relationship between world trade and world Gross Domestic Product (GDP)
since the early 1950s.
129) Why is trade based on comparative advantage?
130) How can comparative advantage yield gains from trade?
131) “Everybody has a comparative advantage in something.” Do you agree or disagree? Why?
132) “International trade bestows benefits on countries through the international transmission of
ideas.” Do you agree or disagree? Explain.
32.2 Arguments against Free Trade
1) In the long run, imports will most likely be paid for with
A) exports.
B) the sale of real and financial assets.
C) the extension of credit.
D) higher domestic unemployment.
2) In the long run, if imports increase, then exports
A) will not change.
B) will decrease.
C) will also increase.
D) will become zero.
3) Goods that are produced domestically and then sold in other countries are called
A) exports.
B) imports.
C) tariffs.
D) quotas.
4) Goods that are produced in other countries and then sold domestically are called
A) exports.
B) imports.
C) tariffs.
D) quotas.
5) Restricting imports usually leads to
A) a country producing beyond its production possibilities frontier.
B) a country consuming even further beyond its production possibilities frontier.
C) a reduction in exports and employment.
D) a higher per capita level of real consumption.
6) Restrictions on imports
A) eventually reduce exports, too.
B) enhance economic welfare by encouraging more exports.
C) are the quickest way for a country in recession to start on a path of economic recovery.
D) usually have no long-run effects on an economy.
7) One economic truism is that any nation’s restriction of imports will ultimately lead to
A) an increase in exports.
B) a reduction in exports.
C) an economic upswing.
D) an increase in GDP.
8) The basic proposition in international trade is that
A) trade is determined by absolute advantage.
B) in the long run, imports are paid for by exports.
C) everyone is made better off by free trade.
D) fair trade is more important than free trade.
9) In the long run, imports are paid for by
A) investment.
B) exports.
C) dollars.
D) gold or other universally accepted monies.
10) One way to reduce exports is to
A) base trade on comparative advantage.
B) base trade on opportunity costs.
C) trade with poor countries.
D) restrict imports.
11) Restrictions on imports
A) usually have no permanent effects on an economy.
B) is the best way to increase exports.
C) protect United States jobs.
D) eventually reduce exports.
12) Import restrictions
A) can protect United States jobs in the protected industry, which increases economic welfare of
the country as a whole.
B) can protect United States jobs in the protected industry but will also lead to job reductions in
other export industries.
C) hurt people who work in importing companies, but makes consumers better off.
D) cannot protect American jobs in any sector of the economy.
13) Restricting imports
A) can protect United States jobs in the protected industry, which increases economic welfare of
the country as a whole.
B) can protect United States final goods and services in the protected industry and makes
consumers better off.
C) can protect United States final goods and services in the protected industry and increase
economic welfare of the country as a whole.
D) can protect United States jobs in the protected industry but will also lead to reductions in U.S.
output and income.
14) When U.S. residents buy products that were made in Japan, then ultimately the Japanese
want
A) yen.
B) dollars.
C) Japanese goods.
D) goods, including U.S.-made goods.
15) During the Great Depression, many industrial countries tried protecting domestic jobs by
raising tariffs. Economic theory would suggest that the result would be
A) success for only the countries that raised tariffs first.
B) success for firms that had a comparative advantage in manufactured goods rather than
agricultural goods.
C) reduced exports and volume of trade for everyone.
D) increased incomes in the countries that pursued this policy.
16) It has been suggested that in order to protect U.S. jobs we need to restrict foreign
competition by restricting imports.
A) This is a sound economic statement since the U.S. will still export protecting U.S. jobs.
B) This is a sound economic statement since U.S. firms will have to increase output to make up
for the lack of imports leading to increase employment in the U.S.
C) This is not a sound economic statement since employment in the U.S. does not depend on
imports and exports.
D) This is not a sound economic statement since import restrictions lead to a reduction in
employment in the export industries of the U.S.
17) If in the long run, imports are paid for by exports, then
A) any restriction of imports ultimately reduces exports.
B) any restriction of imports ultimately expands exports.
C) any restriction of imports has no impact on exports.
D) any restriction of exports has no impact on imports.
18) If in the long run, any government policy that increases exports
A) also increases imports.
B) decreases imports.
C) has no impact on imports.
D) makes imports become negative.
19) Which of the following statements is FALSE?
A) When it comes to overall productive efficiency, compared to Japan, Germany and the rest of
the European Union, the United States lags far behind.
B) Sophisticated financial systems have given U.S. productive efficiency a boost.
C) The United States’ international competitive position has been helped by its long history of
widespread entrepreneurship.
D) Economic restructuring and investments in information technology have added to productive
efficiency in the United States.
20) The standard of living in a nation depends on
A) how well its economy functions relative to other countries.
B) the size of the country, with larger nations always doing better than smaller ones.
C) how well the economy functions within that country.
D) whether or not its currency is adopted as the world’s monetary standard.
21) One reason that U.S. exports of commercial services have increased steadily over the past 25
years is that
A) European and Asian nations have shown little interest in developing their own commercial
services sectors.
B) the United States has made significant investments in new information technologies.
C) the U.S. government owns and operates most of the economy’s service sector.
D) the U.S. economy operates like one big corporation.
22) Which of the following is consistent with international trade theory?
A) The United States needs trade restrictions to stay competitive.
B) The United States has been falling behind Europe and Japan because its economy is too open.
C) The standard of living within a country is a function of the economic strength of the economy
and not of its relative position.
D) A country should strive for comparative advantage in manufacturing.
23) A new industry develops, and our government wants to protect it from foreign competition.
Which one of the following arguments would appropriately describe this type of protection?
A) national security
B) cartelization
C) infant industry
D) protecting American jobs
24) Which of the following is an argument against free trade?
A) protecting infant industries
B) protecting against dumping
C) protecting domestic jobs
D) all of the above
25) Selling a good abroad below the price charged in the home market, or at a price below the
cost of production is called
A) dumping.
B) import substitution.
C) a quota.
D) a tariff.
26) One problem with the infant industry argument is that
A) the protection is typically never removed, creating a domestic monopoly.
B) it fails to protect domestic industries from foreign competition.
C) it must be approved by the IMF and the World Bank.
D) it must be approved by the Federal Reserve Board.
27) The infant industry argument suggests that
A) a country requires tariff protection when it has no comparative advantage in the production of
any good.
B) a country requires protection against unfair trade practices.
C) an industry may require temporary tariff protection until the industry matures.
D) the industry has no potential and must be protected to survive.
28) The infant industry argument has a normative economic basis because
A) clearly, all industries need to be protected.
B) protected industries are selected on a factual basis.
C) the government must decide which industries should be protected.
D) political corruption is the only deciding factor.
29) An assumption behind the infant industry argument for tariff protection is that
A) foreign competitors are selling output below average cost.
B) the domestic industry will be facing an upward adjustment in its average cost.
C) the domestic industry will eventually gain comparative advantage in producing the good.
D) the market needs additional competition to satisfy consumer demand.
30) For infant industry tariff protection to be valid requires that
A) the tariff must be allowed to last forever.
B) only industries that currently are producing efficiently should be protected.
C) government officials must predict which industries will eventually be able to compete with
more established foreign producers.
D) the industries protected must have substantial monopoly power in the absence of foreign
competition.
31) When one country “dumps” some of its products in another country, it
A) increases the aggregate level of employment in the importing country, thereby depressing that
nation’s market wages.
B) also exports new technology to the importing nation and thereby indirectly boosts the
importing nation’s real GDP.
C) sells its products abroad at a price lower than the price in the home market or lower than the
cost of production.
D) also exports pollution-causing technologies and thereby creates environmental hazards in the
receiving country.
32) Dumping occurs when, in a foreign market, a good is sold
A) below its cost of production or below the price in that market.
B) at a discount below the list price.
C) below its nominal price.
D) at a price above the equilibrium price.
33) Dumping typically occurs as long as the foreign producer sells its output at a price
A) above its total costs.
B) below its average total costs but above its average variable costs.
C) below its average variable costs.
D) above its average fixed costs but below its total variable costs.
34) Dumping typically occurs because
A) the exporting country raises its prices to increase profits.
B) the exporting country usually is experiencing a recession and has excess production.
C) the importing country is experiencing a recession.
D) the importing country has assessed significant tariffs.
35) Dumping is considered a practice that seriously harms domestic producers because
A) the quality of the dumped good is superior to that of the importing country.
B) it allows the exporting country to use poor quality materials.
C) it establishes a price that cannot be met by domestic producers.
D) it discriminates between wealthy and poor countries.
36) Dumping is defined as
A) selling a good abroad at prices above the costs of the firms in the foreign countries.
B) exporting goods that are of inferior quality.
C) selling a good abroad at prices below its cost of production or below the price charged in the
home market.
D) exporting goods that are sources of pollution.
37) Governments sometimes subsidize domestic industries. When this occurs
A) the governments also impose tariffs on imports to protect the industries even more.
B) the subsidized industries have an advantage in international markets relative to non-
subsidized industries.
C) firms cannot be guilty of dumping because their prices are not below their costs.
D) the subsidized industries sell less in international markets because it is more profitable to sell
domestically.
38) Which of the following is NOT a true statement regarding free trade?
A) Free trade promotes specialization and efficient production.
B) Free trade generally reduces the domestic prices of imports.
C) Free trade may stimulate economic growth through export sales.
D) Every individual in a country gains short-term benefits from free trade.
39) Free trade policies may lead to
A) a decrease in world output.
B) price increases in world markets.
C) some labor sectors experiencing some short-term job loss.
D) none of the above.
40) U.S. job losses cited by anti-trade critics
A) are mostly a short-term problem in isolated industries.
B) are non-existent.
C) affect only capital-intensive U.S. industries.
D) are mostly due to poor training by U.S. firms.
41) Using trade restrictions to protect special interests such as the U.S. auto industry
A) results in lower prices for U.S. auto consumers.
B) raises the prices that U.S. consumers must pay for autos.
C) is a very cost-efficient way of dealing with trade problems.
D) is the best long-term solution for threatened U.S. jobs.
42) According to the text, economists David Gould, G.L. Woodbridge, and Roy Ruffin examined
the data on the relationship between increases in imports and the rate of unemployment. They
found that
A) free trade leads to increased unemployment.
B) there is not a causal link between increases in imports and the rate of unemployment.
C) increases in imports always precede increases in unemployment by a period of 6 months to
one year.
D) increases in unemployment always precede increases in imports by a period of 6 months to
one year.
43) The infant industry argument says that
A) tariffs should be imposed to allow a new industry in a country to get established.
B) dumping should be allowed in order to establish a presence of an industry that has previously
not had a presence in another country.
C) countries should produce and trade goods according to their comparative advantage.
D) imports should target new products from other countries to take advantage of the transmission
of new ideas.
44) The contention that tariffs should be imposed to protect from import competition an industry
that is trying to get started is
A) a basic argument for free trade.
B) the infant industry argument.
C) dumping.
D) a voluntary restraint agreement.
45) The contention that tariffs should be imposed when a foreign government provides financial
assistance to its producers is
A) a national defense concern.
B) the infant industry argument.
C) dumping.
D) to counter foreign subsidies.
46) The argument a tariff on imported goods produced by an unlimited industry could benefit the
members of the domestic union is
A) the national defense argument.
B) the protect domestic jobs argument.
C) the infant industry argument.
D) the dumping argument.
47) The contention that domestic unions tend to want to restrict foreign competition with tariffs
is
A) a national defense concern.
B) the infant industry argument.
C) dumping.
D) to protect domestic jobs.