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CHAPTER 2
EARLY TRADE THEORIES:
Mercantilism and the Transition to the Classical World of David Ricardo
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7. In the price-specie-flow doctrine, a deficit country will __________ gold, and this gold
flow will ultimately lead to __________ in the deficit country’s exports.
a. lose; a decrease
8. In the Mercantilist view of international trade (in a two-country world),
a. both countries could gain from trade at the same time, but the distribution of the gains
depended upon the terms of trade.
9. According to the labor theory of value,
a. the value of labor is determined by its value in production.
10. If the demand for traded goods is price-inelastic, the price-specie-flow mechanism will
result in
a. gold movements between countries that remove trade deficits and surpluses.
11. In Adam Smith’s view, international trade
a. benefited both trading countries.
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12. Which of the following policies would NOT be consistent with the Mercantilist balance-
of-trade doctrine?
d. prohibition of imports of manufactured goods
13. During the price-specie-flow adjustment process to a trade imbalance, if demands for
goods are inelastic, then, when the price level __________ in the country with the trade
deficit, the value of that country’s exports will __________ as the price-specie-flow
process takes place.
d. rises; decrease
14. David Hume’s price-specie-flow mechanism
d. works equally effectively whether demands for traded goods are “price–elastic” or
“price–inelastic.”
15. The price-specie-flow mechanism suggested that
d. a country’s internal price level has no relation to the country’s foreign trade activities.
16. The policy of minimum government interference in or regulation of economic activity,
advocated by Adam Smith and the Classical economists, was known as
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d. Mercantilism.
17. A Mercantilist policymaker would be in favor of which of the following policies or
events pertaining to his/her country?
a. a decrease in the size of the population
18. In the context of David Hume’s price-specie-flow mechanism that challenged the
feasibility of the Mercantilist ideas regarding a trade surplus, which one of the following
statements is NOT correct?
d. Price changes in the surplus country cause that country’s exports to decrease.
19. In David Hume’s price-specie-flow doctrine or adjustment mechanism, the assumption is
made that changes in the money supply have an impact on __________. Further, the
demand for traded goods is assumed to be __________ with respect to price.
d. output rather than on prices; inelastic
20. Two important assumptions contained in David Hume’s price specie-flow
adjustment mechanism are that
a. countries are at full employment and the demands for traded goods are
“inelastic.”
21. The “paradox of Mercantilism” reflected that fact that
a. trade surpluses were fostered by protective tariffs.
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22. Given the following Classical-type table showing the number of days of labor input
required to obtain one unit of output of each of the two commodities in each of the two
countries:
bicycles computers
United States 4 days 3 days
United Kingdom 5 days 6 days
The United States has an absolute advantage in the production of __________.
a. bicycles (only)
23. With MS = supply of money, V = velocity of money, P = price level, and Y = real output,
which one of the following indicates the quantity theory of money expression?
a. MSY = PV
24. In the price-specie-flow mechanism, there is a gold __________ a country with a
balance-
of-trade surplus, and this gold flow ultimately leads to __________ in the surplus
country’s exports.
a. inflow into; an increase
25. In the price-specie-flow adjustment mechanism, a country with a balance-of–trade surplus
experiences
a. a gold inflow and a decrease in the price level.
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26. Suppose that country A’s total exports are 10,000 units of good X at a price of $20 per
unit, meaning that country A’s export earnings or receipts are $200,000. Suppose also
that the foreign price elasticity of demand for country A’s exports of good X is (-) 0.6. If
country A’s prices for all goods, including its exports, now rise by 10% because of a gold
inflow such as in the Mercantilist model, then, other things equal, country A’s exports of
good X will fall by __________ and country A’s export earnings or receipts will become
__________.
a. 600 units; less than $200,000