Chapter 32
Comparative Advantage and the Open Economy
32.1 The Worldwide Importance of International Trade
1) Since World War II, world trade has
A) decreased in importance as nations turn inward due to security concerns.
B) increased, but not as dramatically as annual world real GDP has climbed.
C) risen sharply, outpacing gains in annual world real GDP.
D) increased in relative importance for most nations, but not for the United States.
2) Today, the share of international trade in U.S. GDP is
A) almost 0 percent. B) about 10 percent.
C) about 27 percent. D) about 99 percent.
3) The importance of international trade in the U.S. economy
A) has been decreasing and is expected to continue to decrease.
B) has been decreasing but is expected to start to increase.
C) has been increasing and is expected to continue to increase.
D) has been increasing but is expected to decrease in the future.
4) For the United States since 1950, imports as a percentage of GDP has
A) tripled. B) increased slightly.
C) remained constant. D) decreased.
5) Since 1950, the balance of trade for United States has
A) gone from a surplus to a deficit.
B) gone from a deficit to a surplus.
C) remained constant.
D) gone from a small deficit to a larger deficit.
6) Since World War II, the world inflation adjusted output of goods and services has increased by
a multiple of
A) 2. B) 3. C) 4. D) 9.
7) Today, in the United States, imports are over
A) 15 percent of GDP. B) 1 percent of GDP.
C) 8 percent of GDP. D) 4 percent of GDP.
8) Today, in the United States, exports are over
A) 15 percent of GDP. B) 12 percent of GDP.
C) 28 percent of GDP. D) 4 percent of GDP.
9) Over the past 25 years, commercial services exports from the United States have ________ as a
percentage of merchandise exports.
A) held steady B) dropped sharply
C) risen dramatically D) fluctuated wildly
10) Discuss the relationship between world trade and world Gross Domestic Product (GDP) since
the early 1950s.
32.2 Why We Trade: Comparative Advantage and Mutual Gains from Exchange
1) Assume that U.S. producers can manufacture cookies at a lower opportunity cost than Canadian
producers. If this is the case,
A) it will not be possible for Canada to have an comparative advantage in the production of
any other products.
B) Canada could still have the comparative advantage in cookie production.
C) it would still be possible for Canada to have a comparative advantage in trade for some
other products.
D) Canada would have the comparative advantage in all products compared to the United
States.
2) The ability to produce a good or service at a lower opportunity cost than other producers is
called
A) absolute advantage. B) comparative advantage.
C) implicit advantage. D) marginal advantage.
3) Specialization in trade will be economically efficient if it is based upon
A) national security needs. B) absolute advantage.
C) comparative advantage. D) government regulations.
4) The principle of comparative advantage essentially states that
A) there are some goods for which the opportunity costs of production are the same
regardless of who produces them.
B) some goods have high opportunity costs and low absolute costs.
C) specialization can reduce output rather than increase it.
D) total output of an economic system is greatest when each good is produced by those who
have the lowest opportunity cost of producing the good.
5) Abdul and Maria each produce two goods. According to the principle of comparative
advantage, the total output produced by these individuals will be greatest
A) if Maria produces both goods and Abdul produces nothing.
B) if each good is produced by the individual who has the lower opportunity cost of
producing that good.
C) if each good is produced by the individual who has the higher absolute cost of producing
that good.
D) if Abdul produces both goods and Maria produces nothing.
6) Suppose John can produce 80 rhymes per hour or can produce 1 short story. Zia, on the other
hand, can produce 60 rhymes per hour or can produce 1 short story (of equal length and quality
to any story written by John). It can be concluded that
A)
J
ohn has a comparative advantage in writing short stories.
B) Zia has an absolute advantage in writing rhymes.
C) Zia has a comparative advantage in writing short stories.
D)
J
ohn has an absolute advantage in writing short stories.
7) Given two economic systems, A and B, if economy A has a comparative advantage in the
production of widgets, then
A) the inputs necessary to produce widgets in economy A cost less than in economy B.
B) economy A must give up less of all other goods to produce widgets than economy B.
C) economy A is less efficient in the production of some goods than economy B.
D) economy A would not benefit from the specialization of production.
8) Given two economic systems, A and B, if economy A has a absolute advantage in the
production of widgets, then
A) fewer inputs are necessary to produce widgets in economy A than in economy B.
B) economy A must give up less of all other goods to produce widgets than economy B.
C) economy A is less efficient in the production of widgets than economy B.
D) economy A would not benefit from the specialization of production.
9) That each individual should engage in economic activities in which he or she is relatively more
efficient is an application of the concept of
A) competition. B) absolute advantage.
C) scarcity. D) comparative advantage.
10) According to the principle of comparative advantage, a nation should specialize in economic
activities
A) that incur lower opportunity costs. B) that incur higher opportunity costs.
C) for which it has an absolute advantage. D) for which it has no absolute advantage.
11) If Kamilah can produce 4 computers or 3 radios during a month s time, while Sally can produce
1 computer or 2 radios during the same period, then it is correct to state that
A) Kamilah has a comparative advantage in producing computers.
B) Kamilah has a comparative advantage in producing both computers and radios.
C) Sally has a comparative advantage in computers.
D) Sally has an absolute advantage in computers.
12) If Kamilah can produce 4 computers or 3 radios during a month s time, while Sally can produce
1 computer or 2 radios during the same period, then it is correct to state that
A) Kamilah has a comparative advantage in producing radios.
B) Kamilah has an absolute advantage in producing computers but not radios.
C) Sally has a comparative advantage in radios.
D) Sally has an absolute advantage in radios.
Maximum Feasible Hourly Production Rate
Chen Holly
Units of Good X 50 40
Units of Good Y 25 100
13) According to the above table, which assumes that opportunity costs of producing goods X and Y
are constant, the opportunity cost of producing one unit of Good X is ________ units of Good Y
for Chen and ________ units of Good Y for Holly.
A) 25; 100 B) 0.5; 2.5 C) 2; 0.4 D) 100; 25
14) According to the above table, which assumes that opportunity costs of producing goods X and Y
are constant, the opportunity cost of producing one unit of Good Y is ________ units of Good X
for Chen and ________ units of Good X for Holly.
A) 50; 40 B) 25; 10 C) 2; 2/5 D) 1/2; 2 1/2
15) According to the above table, which assumes that opportunity costs of producing goods X and Y
are constant, Chen has comparative advantage in production of
A) Good X. B) Good Y. C)
b
oth goods. D) neither good.
16) According to the above table, which assumes that opportunity costs of producing goods X and Y
are constant, Holly has comparative advantage in production of
A) Good X. B) Good Y. C)
b
oth goods. D) neither good.
17) According to the above table, which assumes that opportunity costs of producing goods X and Y
are constant, which of the following statements is TRUE?
A) Chen will be willing to produce only good X and trade units of that good to Holly as long
as he receives more than 0.5 units of good Y from her in exchange.
B) Holly will be willing to produce only good X and trade units of that good to Chen as long
as she receives less than 2.5 units of good Y in exchange.
C) Chen will be willing to produce only good Y and trade units of that good to Holly as long
has he receives less than 2 units of good X from her in exchange.
D) Holly will be willing to produce only good Y and trade units of that good to Chen as long
as she receives less than 0.4 unit of good X in exchange.
18) Suppose that the opportunity cost of producing goods differs between two nations. We can
correctly state that
A) the two nations should not specialize in the production of goods.
B) specialization can lead to an increase in the production of all goods.
C) specialization can lead to an increase in the consumption of all goods.
D) neither country has a comparative advantage in the production of any good.
19) A country will specialize in the good for which
A) it has absolute advantage.
B) it has moderate production costs.
C) it can produce at minimum average cost.
D) it has comparative advantage.
20) Specialization and international trade lead to
A) an outward shift in the production possibilities curve.
B) an inward shift in the consumption possibilities frontier.
C) a lower opportunity cost of domestic production of all goods.
D) an enhanced level of consumption.
21) Comparative advantage is defined as
A) producing all goods at lower opportunity costs than other countries can.
B) producing more output of all goods than anyone else can.
C) producing one good at a lower opportunity cost than another country can.
D) the ability to produce more output from given inputs than anyone else can.
22) Consider a world of two countries producing only wheat and cloth In one hour, residents of
Country A can produce 1 unit of wheat and 0.5 unit of cloth, whereas residents of Country B can
produce 0.3 unit of wheat and 0.4 unit of cloth. Country A should export
A) wheat and cloth; country B should not export anything.
B) wheat and country B should export cloth.
C) nothing and country B should export both wheat and cloth.
D) cloth and country B should export wheat.
23) Consider a world of two countries facing opportunity costs and producing only wheat and
cloth. In one hour, residents of Country A can produce a maximum of either 1 unit of wheat or
0.5 unit of cloth, whereas residents of Country B can produce a maximum of either 0.3 unit of
wheat or 0.4 unit of cloth. Country B should export
A) wheat and cloth; country A should not export anything.
B) wheat and country A should export cloth.
C) nothing and country A should export both wheat and cloth.
D) cloth and country A should export wheat.
24) Suppose Mexico has a comparative advantage relative to the United States in the manufacture
of clothing and the United States has a comparative advantage in producing agricultural
products. Which of the following is most likely to occur?
A) Mexico and the United States will not trade agricultural products or clothing.
B) Mexico will sell clothing to the United States and the United States will sell agricultural
products to Mexico.
C) Mexico will sell agricultural products to the United States and Mexico will buy clothing
from the United States.
D) Mexico will sell clothing to the United States but not buy any agricultural products from
the United States.
25) When the principle of comparative advantage determines trade, then a country will
A) specialize only in that good with the highest opportunity cost.
B) specialize only in goods with the lowest opportunity costs.
C) specialize only in that good where output is less per worker hour than another country.
D) specialize only in that good where production costs are more than average total costs.
26) Consider the following information, and assume that opportunity costs are constant: On one
hand, residents of Country A can produce more corn in a year than residents of Country B, but
they can produce computers at a lower opportunity cost than residents of country B. On the
other hand, residents of country B can produce more computers in a year than residents of
Country A, but they can produce corn at a lower opportunity cost than residents of country A.
It can be concluded that residents of
A) Country A should produce corn and trade it for computers produced in Country B.
B) Country B should produce computers and trade them for corn produced in Country B.
C) Country A should produce computers and trade them for corn produced in Country B.
D)
b
oth countries should choose not to trade.
27) If country X can produce a unit of good 1 at a lower opportunity cost than can country Y, it is
correct to state that country X
A) has a comparative advantage in producing good 1.
B) has an absolute advantage in producing good 1.
C) will import good 1 from country Y.
D) will not produce good 1.
28) Consider a world with two countries and two goods. Under which of the following conditions
does comparative advantage NOT exist?
A) One country can produce both goods more cheaply than the other country.
B) One country has more productive resources or inputs than another country.
C) The opportunity cost of producing each good is the same in each country.
D) One country has an absolute advantage in producing one good while the other country
has an absolute advantage in producing the other good.
29) Suppose that opportunity costs are constant in both France and Germany. In France, maximum
feasible hourly production levels are either 3 units of wheat or 5 units of wine. In Germany,
maximum feasible hourly production levels are either 4 units of wheat or 10 units of wine. It is
correct to state that
A) Germany has an comparative advantage in producing both wheat and wine.
B) Germany has a comparative advantage in producing wine.
C) France has a comparative advantage in producing both wheat and wine.
D) France has a comparative advantage in producing wine.
30) Suppose that opportunity costs in India and Australia are constant. In India, maximum feasible
hourly production rates are either 0.3 unit of cloth or 0.2 unit of food. In Australia, maximum
feasible hourly production rates are either 0.5 unit of cloth or 0.5 unit of food. It is correct to
state that
A) India has a comparative advantage in producing cloth.
B) India has a comparative advantage in producing both cloth and wheat.
C) India has no comparative advantage in producing cloth or wheat.
D) Australia has a comparative advantage in producing cloth.
Maximum Feasible Hourly Production Rates for Either
Food or Cloth Using All Available Resources
Food Cloth
U.S. 4 3
Mexico 12 6
31) Using the data in the above table and assuming constant opportunity costs, it is correct to state
that
A) the United States has a comparative advantage in producing cloth.
B) Mexico has an absolute advantage in producing both food and cloth.
C) the United States has a comparative advantage in producing both food and cloth.
D) Mexico has a comparative advantage in producing cloth.
32) Using the data in the above table and assuming constant opportunity costs, it is correct to state
that
A) the United States has an absolute advantage in producing cloth.
B) Mexico has a comparative advantage in producing food.
C) the United States has a comparative advantage in producing both food and cloth.
D) Mexico has an absolute advantage in producing both food and cloth.
33) Using the data in the above table, and assuming constant opportunity costs, it is likely that
A) the United States will import food.
B) Mexico will export cloth.
C) the United States will export both cloth and food.
D) Mexico will export both cloth and food.
34) Using the data in the above table, and assuming constant opportunity costs, it is likely that
A) the United States will export food.
B) Mexico will import cloth.
C) the United States will import both cloth and food.
D) Mexico will import both cloth and food.
35) If country A exports good X to country B and country B exports good Y to country A, it is most
likely that
A) A has an absolute advantage in the production of good X.
B) B has a comparative advantage in the production of good Y.
C) the opportunity cost of domestic production of good Y for country A is lowered with
trade.
D) B is producing less of good Y than in the no trade case.
36) Comparative advantage is defined as
A) the ability to produce more output of one good relative to another good than another
country can.
B) the ability to produce more output from given inputs of resources than others can.
C) the ability to use more input of resources than others can.
D) having a lower average fixed cost in the production of a good than does someone else.
Maximum Feasible Hourly Production Rates for either
Computers or Bicycles Using All Available Resources
Product United States Mexico
Computers 8 2
Bicycles 6 4
37) Assuming that opportunity costs are constant, which of the following is a correct statement?
(See the above table.
A) The United States has a comparative advantage in bicycle production.
B) The United States has a comparative advantage in producing both goods.
C) Mexico has a comparative advantage in producing bicycles.
D) Mexico has a comparative advantage in producing both goods.
38) According to the above table, if these two countries trade,
A) Mexico should specialize in computers and the United States in bicycles.
B) the United States should specialize in both computers and bicycles.
C) the United States should specialize in computers and Mexico should specialize in bicycles.
D) we cannot tell which country should specialize in which good without knowing the
amount of labor utilized in each country.
39) According to the above table, if these two countries trade,
A) Mexico should export computers and the United States export bicycles.
B) the United States should import computers and Mexico should import bicycles.
C) the United States should export computers and Mexico should export bicycles.
D) we cannot tell which country should export which good without knowing the amount of
labor utilized in each country.
40) According to the above table, if these two countries trade,
A) Mexico should import computers and the United States import bicycles.
B) the United States should import computers and Mexico should import bicycles.
C) the United States should export bicycles and Mexico should export computers.
D) we cannot tell which country should export which good without knowing the amount of
labor utilized in each country.
41) According to economic historians, one result of international trade is that it
A) aids in the international transmission of ideas.
B) reduces the world wide output of goods.
C) reduces the world wide consumption of goods.
D) causes persistent world wide inflation.
42) Which of the following is counted as a benefit from international trade?
A) New production processes developed in one nation are transmitted to others.
B) Intellectual property such as music and computer applications is introduced throughout
the world.
C) New goods have been introduced to other parts of the world.
D) All of the above are benefits from international trade.
43) The ability to produce an item at a lower opportunity cost compared with other producers is
known as
A) competitive dominance. B) productive dominance.
C) comparative advantage. D) absolute advantage.
44) The ability to produce the same quantity of a good or service using fewer units of labor is
known as
A) competitive dominance. B) productive dominance.
C) comparative advantage. D) absolute advantage.
45) Comparative advantage is
A) the ability to produce more output from given inputs than another producer can.
B) the ability to produce a good at a lower opportunity cost than other producers.
C) the ability to produce more output of all goods than anyone else can.
D) the ability to produce all goods at lower costs than anyone else can.
46) Absolute advantage is
A) the ability to produce more output from given inputs than another producer can.
B) the ability to produce a good at a lower opportunity cost than other producers.
C) is always a relative concept.
D) the ability to produce all goods at lower costs than anyone else can.
47) Mary can clean 20 windows per hour or type 30 pages of paper per hour. Tom can clean 18
windows per hour or he can type 25 pages of paper per hour. Based on this
A) Mary has comparative advantages in activities.
B) Tom has comparative advantages in both activities.
C) Tom has a comparative advantage in cleaning windows.
D) Mary has a comparative advantage in cleaning windows.
48) The ability to produce a good or service at a lower opportunity cost than other producers is
A) absolute advantage. B) the quota system.
C) intellectual property. D) comparative advantage.
49) When nations specialize according to their comparative advantage
A) Total production and consumption in the world increase.
B) Consumption rises in one country but must fall in all others.
C) Total world production rises but total consumption in the world declines.
D) none of the above
50) If there are two goods and two countries, then one country can have
A) a comparative advantage in only one good.
B) a comparative advantage in both goods.
C) a higher opportunity cost of producing both goods.
D) a lower opportunity cost of producing both goods.
51) If there are two goods and two countries, then one country can have
A) an absolute advantage in only one good.
B) an absolute advantage in both goods.
C) a higher opportunity cost of producing both goods.
D) a lower opportunity cost of producing both goods.
52) In an hour Jane can solder 50 connections or inspect 20 parts while Jim can solder 25 connections
or inspect 20 parts in an hour.
A)
J
ane has a comparative advantage over Jim in both soldering and inspecting.
B)
J
ane has a comparative advantage over Jim in soldering while Jim has a comparative
advantage in inspecting.
C)
J
im has a comparative advantage over Jane in soldering while Jane has a comparative
advantage in inspecting.
D)
J
im had a comparative advantage over Jane in both soldering and inspecting.
53) Country A can product 100 units of Good X in a day and 40 units of Good Y while Country B
can produce 50 units of Good X and 40 units of Good Y.
A) These countries will not trade since Country A has a comparative advantage in the
production of both goods.
B) These countries will not trade since Country A will always be able to take advantage of
Country B.
C) These countries should trade since Country A has a comparative advantage in the
production of Good X and Country B has a comparative advantage in the production of
Good Y.
D) These countries should trade since Country B has a comparative advantage in the
production of Good X and Country A has a comparative advantage in the production of
Good Y.
566 Miller Economics Today, 16th Edition
Maximum Feasible Hourly Production Rates of Either
Product A or Product B Using All Available Resources
Product Country X Country Y
A 4 8
B 4 4
54) Refer to the above table. If opportunity costs are constant, then the opportunity cost of
producing good B in country X is ________, and the opportunity cost of producing good B in
country Y is ________.
A) 1 unit of A; 2 units of A B) 1 unit of A; 0.5 unit of A
C) 1 unit of B; 2 units of A D) 1 unit of A; 0.5 unit of B
55) Refer to the above table. If opportunity costs are constant, each nation produces only the one
good for which it has a comparative advantage, and trade can occur between the two countries,
A) country X will produce product A and country Y will produce product B.
B) country X will produce product B and country Y will produce product A.
C) country X will refuse to trade with country Y since country X has a comparative advantage
in both products.
D) country Y will refuse to trade with country X since country Y has a comparative advantage
in both products.
56) Refer to the above table. If opportunity costs are constant and both countries produce only the
goods for which they have comparative advantages and then trade, hourly world output would
equal
A) 4 units of product A and 4 units of product B.
B) 8 units of product A and 4 units of product B.
C) 8 units of product A and 8 units of product B.
D) 12 units of product A and 8 units of product B.
57) Refer to the above table. Assuming constant opportunity costs,
A) Country X has a comparative advantage in the production of both goods.
B) Country Y has a comparative advantage in the production of both goods.
C) Country X has a comparative advantage in the production of Product A while Country Y
has a comparative advantage in the production of Product B.
D) Country Y has a comparative advantage in the production of Product A while Country X
has a comparative advantage in the production of Product B.
58) Refer to the above table. Assuming constant opportunity costs,
A) neither country will be willing to engage in trade at any rate of exchange of product A for
product B.
B)
b
oth countries will be willing to engage in trade at a rate of exchange of 0.3 unit of product
A for 1 unit of product B.
C)
b
oth countries will be willing to engage in trade at a rate of exchange of 3 units of product
A for 1 unit of product B.
D)
b
oth countries will be willing to engage in trade at a rate of exchange of 1.5 unit of product
A for 1 unit of product B.
Maximum Feasible Hourly Production Rates of Either
Computers or Bicycles Using All Available Resources
Product United States Mexico
Computers 8 3
Bicycles 2 6
59) Refer to the above table. Assuming that opportunity costs are constant, the opportunity cost of
producing a computer in the United States is equal to ________, and the opportunity cost of
producing a computer in Mexico is ________.
A) 4 bicycles; 0.5 bicycles B) 0.25 bicycle; 2 bicycles
C) 2.67 computers; 0.33 bicycles D) 0.375 bicycle; 3 computers
7
60) Refer to the above table. Assuming that opportunity costs are constant, the opportunity cost of
producing a bicycle in the United States is equal to ________, and the opportunity cost of
producing a bicycle in Mexico is ________.
A) 4 computers; 0.5 computer B) 0.25 computer; 2 computers
C) 2.67 bicycles; 0.33 computers D) 0.375 computer; 3 bicycles
61) Refer to the above table. Assuming that opportunity costs are constant, which of the following is
a correct statement?
A) The United States has a comparative advantage in computers.
B) The United States has a comparative advantage in bicycles.
C) Mexico has a comparative advantage in computers.
D) Mexico has a comparative advantage in both goods.
62) Refer to the above table. If opportunity costs are constant and the two countries trade,
A) the United States should specialize in computers and Mexico in bicycles.
B) the United States should specialize in bicycles and Mexico in computers.
C) the United States should specialize in both bicycles and computers, and Mexico should
specialize in neither.
D) there will be no trade because they are so different.
63) Refer to the above table. If opportunity costs are constant, the two countries will gain from trade
at a rate of exchange of
A) 0.1 computer for 1 bicycle B) 5 computers for 1 bicycle
C) 1 computer for 1 bicycle D) 8 bicycles for 1 computer