CHAPTER 3—SOURCES OF COMPARATIVE ADVANTAGE
MULTIPLE CHOICE
1. Which of the following suggests that a nation will export the commodity in the production of which a
great deal of its relatively abundant and cheap factor is used?
a.
The Linder theory
b.
The product life cycle theory
c.
The MacDougall theory
d.
The Heckscher-Ohlin theory
2. According to Staffan Linder, trade between two countries tends to be most pronounced when the
countries:
a.
Find their tastes and preferences to be quite harmonious
b.
Experience economies of large-scale production over large output levels
c.
Face dissimilar relative abundances of the factors of production
d.
Find their per capita income levels to be approximately the same
3. Which of the following is a long-run theory, emphasizing changes in the trading position of a nation
over a number of years?
a.
Theory of factor endowments
b.
Comparative advantage theory
c.
Theory of the product cycle
d.
Overlapping demand theory
4. The Leontief paradox questioned the validity of the theory of:
a.
Comparative advantage
b.
Factor endowments
c.
Overlapping demands
d.
Absolute advantage
5. Which of the following would least likely apply to the product life cycle theory?
a.
Calculators and computers
b.
Coal and crude oil
c.
Home movie cameras
d.
Office machinery
6. Classical trade theory emphasized which of the following as an underlying explanation of the basis for
trade?
a.
Productivities of labor inputs
b.
Tastes and preferences among nations
c.
Changes in technologies over time
d.
Quantities of economic resources
7. Concerning the influence that transportation costs have on the location of industry, which of the
following industries has generally attempted to locate production facilities close to resource supplies?
a.
Autos
b.
Steel
c.
Soft drinks
d.
Valuable electronics goods
8. Assume that Country A, in the absence of trade, finds itself relatively abundant in labor and relatively
scarce in land. The factor endowment theory reasons that with free trade, the internal distribution of
national income in Country A will change in favor of:
a.
Labor
b.
Land
c.
Both labor and land
d.
Neither labor nor land
9. When considering the effects of transportation costs, the conclusions of our trade model must be
modified. This is because transportation costs result in:
a.
Lower trade volume, higher import prices, smaller gains from trade
b.
Lower trade volume, lower import prices, smaller gains from trade
c.
Higher trade volume, higher import prices, smaller gains from trade
d.
Higher trade volume, lower import prices, greater gains from trade
10. Most economists maintain that the major factor underlying wage stagnation in the United States in the
1990s has been:
a.
Import competition
b.
Technological change
c.
Rising real value of the minimum wage
d.
Increasing union membership
11. Assume the cost of transporting autos from Japan to Canada exceeds the pretrade price difference for
autos between Japan and Canada. Trade in autos is:
a.
Impossible
b.
Possible
c.
Highly profitable
d.
Moderately profitable
12. Eli Heckscher and Bertil Ohlin are associated with the theory of comparative advantage that stresses
differences in:
a.
Income levels among countries
b.
Tastes and preferences among countries
c.
Resource endowments among countries
d.
Labor productivities among countries
13. Hong Kong is relatively abundant in labor, while Canada is relatively abundant in capital. In both
countries the production of shirts is relatively more labor intensive than the production of computers.
According to the factor endowment theory, Hong Kong will have a(n):
a.
Absolute advantage in the production of shirts and computers
b.
Absolute advantage in the production of computers
c.
Comparative advantage in the production of shirts
d.
Comparative advantage in the production of computers
14. If Japanese workers receive lower wages in the production of autos than do American workers:
a.
Japan will have a comparative advantage in the production of autos
b.
Japan will have an absolute advantage in the production of autos
c.
Production costs will be lower in Japan than in the U.S.
d.
Production costs could be lower in the U.S. if American labor productivity is higher than
the Japanese
15. Which trade theory suggests that a newly produced good, once exported, could ultimately end up being
imported as the technology is transferred to lower- cost nations?
a.
Factor endowment theory
b.
Product life cycle theory
c.
Overlapping demand theory
d.
Comparative advantage theory
16. A firm is said to enjoy economies of scale over the range of output for which the long-run average cost
is:
a.
Increasing
b.
Constant
c.
Decreasing
d.
None of the above
17. A product will be internationally traded as long as the pretrade price differential between the trading
partners is:
a.
Greater than the cost of transporting it between them
b.
Equal to the cost of transporting it between them
c.
Less than the cost of transporting it between them
d.
None of the above
18. Which of the following suggests that by widening the market’s size, international trade can permit
longer production runs for manufacturers, which leads to increasing efficiency?
a.
Economies of scale
b.
Diseconomies of scale
c.
Comparative cost theory
d.
Absolute cost theory
19. The Leontief paradox:
a.
Was applied to the product life cycle theory
b.
Suggested that the U.S. exports labor-intensive goods
c.
Found that national income differences underlie world trade patterns
d.
Implied that diseconomies of scale occur at low output levels
20. Which of the following best applies to the theory of overlapping demands?
a.
Manufactured goods
b.
Services
c.
Primary products
d.
None of the above
21. The Heckscher-Ohlin theory explains comparative advantage as the result of differences in countries’:
a.
Economies of large-scale production
b.
Relative abundance of various resources
c.
Relative costs of labor
d.
Research and development
22. Boeing aircraft company was able to cover its production costs of the first “jumbo jet” in the 1970s
because Boeing could market it to several foreign airlines in addition to domestic airlines. This
illustrates:
a.
How economies of scale make possible a larger variety of products in international trade
b.
A transfer of wealth from domestic consumers to domestic producers as the result of trade
c.
How a natural monopoly is forced to behave more competitively with international trade
d.
How a natural monopoly is forced to behave less competitively with international trade
23. Which trade theory contends that a country that initially develops and exports a new product may
eventually become an importer of it and may no longer manufacture the product?
a.
Theory of factor endowments
b.
Theory of overlapping demands
c.
Economies of scale theory
d.
Product life cycle theory
24. The theory of overlapping demands predicts that trade in manufactured goods is unimportant for
countries with very different:
a.
Tastes and preferences
b.
Expectations of future interest rate levels
c.
Per-capita income levels
d.
Labor productivities
25. The trade model of the Swedish economists Heckscher and Ohlin maintains that:
a.
Absolute advantage determines the distribution of the gains from trade
b.
Comparative advantage determines the distribution of the gains from trade
c.
The division of labor is limited by the size of the world market
d.
A country exports goods for which its resource endowments are most suited
26. According to the factor endowment model, countries heavily endowed with land will:
a.
Devote excessive amounts of resources to agricultural production
b.
Devote insufficient amounts of resources to agricultural production
c.
Export products that are land-intensive
d.
Import products that are land-intensive
27. For the United States, empirical studies indicate that over the past two decades the cost of international
transportation relative to the value of U.S. imports has:
a.
Increased
b.
Decreased
c.
Not changed
d.
None of the above
28. Should international transportation costs decrease, the effect on international trade would include:
a.
An increase in the volume of trade
b.
A smaller gain from trade
c.
A decline in the income of home producers
d.
A decrease in the level of specialization in production.
29. That the division of labor is limited by the size of the market best applies to which explanation of
trade?
a.
Factor endowment theory
b.
Product life cycle theory
c.
Economies of scale theory
d.
Overlapping demand theory
30. A larger variety of products results from international trade especially if:
a.
International trade affords producers monopoly power
b.
National governments levy import tariffs and quotas
c.
Producing goods entails increasing costs
d.
Economies of scale exist for producers
31. With economies of scale and decreasing unit costs, a country has the incentive to:
a.
Specialize completely in the product of its comparative advantage
b.
Specialize partially in the product of its comparative advantage
c.
Specialize completely in the product of its comparative disadvantage
d.
Specialize partially in the product of its comparative disadvantage
32. Proponents of ____ maintain that government should enact policies that encourage the development of
emerging, “sunrise” industries.
a.
Product life cycle policy
b.
Static comparative advantage policy
c.
Intraindustry trade policy
d.
Industrial policy
33. Legislation requiring domestic manufacturers to install pollution abatement equipment tends to
promote:
a.
Higher production costs and an increase in output
b.
Higher production costs and a decrease in output
c.
Lower production costs and an increase in output
d.
Lower production costs and a decrease in output
34. Stringent governmental regulations (e.g., air quality standards) imposed on domestic steel
manufacturers tend to:
a.
Enhance their competitiveness in the international market
b.
Detract from their competitiveness in the international market
c.
Increase the profitability and productivity of domestic manufacturers
d.
Reduce the market share of foreign firms selling steel in the domestic market
35. Among the determinants underlying a country’s international competitiveness in business services
(e.g., construction) are:
a.
The potential scale economies afforded by a market’s size
b.
Abundance of equipment including data processing facilities and computers
c.
Skills and capabilities of employees and their wage rates
d.
All of the above
36. The simultaneous import and export of computers by Germany is an example of:
a.
Intraindustry trade
b.
Interindustry trade
c.
Perfect competition
d.
Imperfect competition
37. Linder’s theory of overlapping demand provides an explanation of:
a.
Product life cycle theory
b.
Factor endowment model
c.
Economies of large-scale production
d.
Intraindustry trade
38. Intraindustry trade can be explained in part by:
a.
Adam Smith’s principle of absolute advantage
b.
Perfect competition in product markets
c.
Diseconomies of large scale production
d.
Transportation costs between and within nations
39. The Leontief paradox provided:
a.
Support for the principle of absolute advantage
b.
Support for the factor endowment model
c.
Evidence against the factor endowment model
d.
Evidence against the principle of absolute advantage
40. Which trade theory suggests that comparative advantage tends to shift from one nation to another as a
product matures?
a.
Interindustry trade theory
b.
Intraindustry trade theory
c.
Product life cycle theory
d.
Overlapping demand theory
41. Which trade theory is tantamount to a short-run version of the factor price equalization theory?
a.
Specific factors theory
b.
Product life cycle theory
c.
Economies of scale theory
d.
Overlapping demand theory
42. According to the specific factors trade theory:
a.
Owners of factors specific to export industries suffer from trade, while owners of factors
specific to import-competing industries gain
b.
Owners of factors specific to export industries gain from trade, while owners of factors
specific to import-competing industries suffer
c.
Both owners of factors specific to export industries and owners of factors specific to
import-competing industries gain from trade
d.
Both owners of factors specific to export industries and owners of factors specific to
import-competing industries suffer from trade
43. Which nation has sometimes been characterized as being a “pollution haven” due to its lenient
environmental standards that encourage the production of pollution-intensive goods?
a.
Japan
b.
Canada
c.
Germany
d.
Mexico
44. Boeing Inc. has criticized The Airbus Company’s competitiveness on the grounds that Airbus benefits
from:
a.
Import tariffs protecting Airbus in the European market
b.
Import quotas protecting Airbus in the European market
c.
Lenient environmental standards of European governments
d.
Production subsidies supplied by European governments
45. To justify the subsidies it has received from European governments, The Airbus Company has used all
of the following arguments except:
a.
Its subsidies have prevented U.S. aircraft firms from holding a world-wide monopoly
b.
U.S. aircraft firms have benefited from military-sponsored programs of the U.S.
government
c.
Airbus’ subsidies were totally repaid as the firm realized profits on its aircraft sales
d.
Without subsidies to Airbus, Europe would be dependent on the United States as a
supplier of aircraft
46. Expanding trade or technological improvements
a.
Increases the demand for skilled workers in the U.S.
b.
Decreases the demand for unskilled workers in the U.S.
c.
Increases the demand for unskilled workers in the U.S.
d.
Both a and b.
47. Economists agree that wages of unskilled workers are being held down by
a.
International trade
b.
Technology improvements
c.
Lack of education
d.
A combination of a, b, and c
48. The factor endowment theory states that comparative advantage is explained
a.
Exclusively by differences in relative supply conditions
b.
Exclusively by differences in relative national demand conditions
c.
Both supply and demand conditions
d.
None of the above
49. The factor endowment theory assumes
a.
Same tastes and preferences
b.
Factor inputs of uniform quality
c.
Same technology
d.
All of the above
50. In explaining international trade, the product life cycle theory focuses on
a.
Tastes and preferences
b.
The role of technological innovation
c.
Per-capita income levels of nations
d.
Both b and c
51. Considering Figure 3.1 prior to trade both China’s and the US production of textiles and aircraft is 19
and 9. Which of the following represents the pre-trade situation?
a.
China has a comparative advantage in the production of textiles and the US has a
comparative advantage in the production of aircraft.
b.
China has a comparative advantage in the production of aircraft and the US has a
comparative advantage in the production of textiles.
c.
China has an absolute advantage in the production of both textiles and aircraft.
d.
The US has an absolute advantage in the production of both textiles and aircraft.
52. Considering Figure 3.1 which of the following would be true?
a.
China has more of both labor and capital than the US.
b.
The US has more of both labor and capital than China.
c.
The US is relatively capital abundant and China is relatively labor abundant.
d.
The US is relatively labor abundant and China id relatively capital abundant.
53. Considering Figure 3.1, what are the terms of trade represented?
a.
The terms of trade are 1½ aircraft per textile.
b.
The terms of trade are 1½ textiles per aircraft.
c.
The terms of trade are 1 textile per aircraft.
d.
The terms of trade are 2/3 textile per aircraft.
TRUE/FALSE
1. According to Ricardian theory, comparative advantage depends on relative differences in labor
productivity.
2. The Heckscher-Ohlin theory asserts that relative differences in labor productivity underlie comparative
advantage.
3. The factor-endowment theory highlights the relative abundance of a nation’s resources as the key
factor underlying comparative advantage.
4. According to the factor-endowment theory, a nation will export that good for which a large amount of
the relatively scarce resource is used.
5. According to the factor-endowment theory, a nation will import that good for which a large amount of
the relatively abundant resource is used.
6. The Heckscher-Ohlin theory suggests that land-abundant nations will export land-intensive goods
while labor-abundant nations will export labor-intensive goods.
7. The Heckscher-Ohlin theory contends that over a period of years a country that initially is an exporter
of a product will become an importer of that product.
8. The Heckscher-Ohlin theory emphasizes the role that demand plays in the creation of comparative
advantage.
9. The factor-endowment theory asserts that with specialization and trade there tends to occur an
equalization in the relative resource prices of trading partners.
10. According to the factor-endowment theory, international specialization and trade cause a nation’s
cheap resource to become cheaper and a nation’s expensive resource to become more expensive.
11. Fears about the downward pressure that cheap foreign workers place on U.S. wages have led U.S.
labor unions to lobby for import restrictions such as tariffs and quotas.
12. According to the factor-price-equalization theory, international trade results in the relative differences
in resource prices between nations being eliminated.
13. Empirical testing by Wassily Leontief gave support to the Heckscher-Ohlin theory of trade.
14. The Leontief Paradox was the first major challenge to the product-life-cycle theory of trade.
15. The Leontief Paradox suggested that, in contrast to the predictions of the factor-endowment theory,
U.S. exports were less capital-intensive than U.S. import-competing goods.
16. The specific-factors theory analyzes the income distribution effects of trade in the short run when
resources are immobile among industries.
17. Owners of resources specific to export industries tend to lose from international trade, while owners of
factors specific to import-competing industries tend to gain.
18. The factor-price-equalization theory is a short-run version of the specific-factors theory.
19. With economies of scale, specialization in a few products allows a manufacturer to benefit from longer
production runs which lead to decreasing average cost.
20. With decreasing costs, a country has an incentive to partially specialize in the product of its
comparative advantage.
21. By widening the size of the domestic market, international trade permits companies to take advantage
of longer production runs and increasing efficiencies such as mass production.
22. The theory of overlapping demands applies best to trade in manufactured goods.
23. Decreasing cost conditions lead to complete specialization in the production of the commodity of
comparative advantage.
24. According to Staffan Linder, the factor endowment theory is useful in explaining trade patterns in
manufactured goods, but not primary products.
25. The theory of overlapping demands asserts that trade in manufactured goods is stronger the less similar
the demand structures of two countries.
26. The theory of overlapping demands contends that international trade in manufactured products is
strongest among nations with similar income levels.
27. According to the theory of overlapping demands, trade in manufactured goods would be greater among
two wealthy countries than among a wealthy country and a poor country.
28. Recent studies of U.S. resource endowments indicate that the United States is most abundant in
unskilled labor, followed by semi-skilled labor and skilled labor.
29. Intraindustry trade would occur if computers manufactured in the United States by IBM are exported
to Japan while the United States imports computers manufactured by Hitachi of Japan.
30. Because seasons in the Southern Hemisphere are opposite those in the Northern Hemisphere, one
would expect intraindustry trade to occur in agricultural products.
31. Intraindustry trade can be explained by product differentiation, economies of scale, seasons of the
year, and transportation costs.
32. According to the theory of intraindustry trade, many manufactured goods undergo a trade cycle in
which the home country initially is an exporter and eventually becomes an importer of a product.
33. The product-life-cycle theory applies best to trade in primary products in the short run.
34. According to the product-life-cycle theory, the first stage of a product’s trade cycle is when it is
introduced to the home market.
35. According to the product life cycle theory, the last stage of a product’s trade cycle is when it becomes
an import-competing good.
36. Ricardo’s theory of comparative advantage is a static theory that does not consider changes in
international competitiveness over the long run.
37. Dynamic comparative advantage refers to the creation of comparative advantage through the
mobilization of skilled labor, technology, and capital.
38. Industrial policy seeks to direct resources to declining industries in which productivity is low, linkages
to the rest of the economy are weak, and future competitiveness is remote.
39. Europe’s jumbo-jet manufacturer, Airbus, has justified receiving governmental subsidies on the
grounds that the subsidies prevent the United States from becoming a monopoly in the jumbo-jet
market.
40. The imposition of pollution-control regulations on domestic steel manufacturers leads to decreases in
production costs and an improvement in the steel manufacturers’ competitiveness.
41. Empirical studies conclude that U.S. environmental policies are a more important determinant of trade
performance than capital, raw materials, labor skills, and wages.
42. Most developing countries have pollution-control laws and enforcement policies that are more
stringent than those of the major industrial countries.
43. Although the theory of comparative advantage explains trade in manufactured goods, it has no
explanatory value for trade in business services.
44. When transportation costs are added to our trade model, the low-cost exporting country produces less,
consumes more, and exports less than that which occurs in the absence of transportation costs.
45. When transportation costs are added to our trade model, the degree of specialization in production
between two countries increases as do the gains from trade.
46. In the absence of transportation costs, free trade results in the equalization of the prices of traded
goods, as well as resource prices, in the trading nations.
47. In industries where the final product is much less weighty or bulky than the materials from which it is
made, firms tend to locate production near resource supplies.
48. Industrial processes that add weight or bulk to a commodity are likely to be located near the resource
market to minimize transportation costs.
49. A product will be traded only if the cost of transporting it between nations is less than the pretrade
difference between their relative product prices.
50. Generally speaking, transportation costs are more important than production costs as a source of
comparative advantage.
51. The product-life-cycle model contends that when a new product is introduced to the home market, it
generally requires low-skilled labor to produce it.
52. According to the product life cycle model, comparative advantage shifts from cheap-labor countries to
high-technology countries after a manufactured good becomes standardized.
SHORT ANSWER
1. Does factor price equalization occur in the real world?
2. What is the focus of the product life cycle theory, and where is it applicable?
ESSAY
1. Explain how immigration and trade may worsen wage inequality, and how college education may
mitigate against that.
2. How does Staffan Linder explain world trade patterns?