Chapter 17 The Global Economy: Trade True/False Questions
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Chapter 17 The Global Economy: Trade True/False Questions 1. A country has an absolute advantage if it can produce a good at a lower opportunity cost than its trading partner. ANSWER: F 2. Suppose the opportunity cost of producing wheat is higher in the United States than in Brazil. This means that the United States should import wheat from Brazil. ANSWER: T 3. If a country can produce a good with fewer resources, it has a comparative advantage in production. ANSWER: F 4. Trade between two countries is based on comparative advantage. ANSWER: T 5. Consumer surplus increases as a result of international trade. ANSWER: T 6. Producer surplus increases as a result of international trade. ANSWER: F 7. Net gains from international trade are positive. ANSWER: T 8. Tariffs benefit all of society. ANSWER: F 9. A quota restricts the quantity of imports that may enter a country. ANSWER: T 10. Tariffs decrease society's welfare because resources are directed into industries that have a comparative disadvantage. ANSWER: T 11. Prices tend to be higher under tariffs than under quotas. ANSWER: F 12. Like tariffs, quotas generate revenues for the federal government. ANSWER: F 13. Under a voluntary export restraint (VER), exporting nations agree to limit the amounts of a good they ship to importing nations. ANSWER: T 14. Free trade causes average costs to increase as industries expand output. ANSWER: F 15. Free trade results in increased competition that forces domestic producers to charge lower prices. ANSWER: T 16. Trade restrictions can increase the number of jobs available in the economy by maintaining jobs in the import sector. ANSWER: F 17. Wages in the United States are high because worker productivity is high. ANSWER: T 18. The WTO uses a regional approach to lowering trade barriers. ANSWER: F 19. David Ricardo, a famous English economist, developed the concept of comparative advantage. ANSWER: T 20. For the United States, exports typically exceed imports. ANSWER: F 21. Measured as a percentage of GDP, U.S. exports are much less important than in many other countries. ANSWER: T 22. Environmentalists have generally been pleased with rulings by the WTO against the policies of the United States. ANSWER: F 23. In the future, economists expect multilateral trade negotiations to become even more complex and time consuming than they already are. ANSWER: T
1. A country has a comparative advantage if: a. it can produce a commodity at a lower opportunity cost than its trading partner. b. it can produce a commodity with fewer resources than its trading partner. c. it can produce a commodity at a lower average cost than its neighbor. d. labor costs are, on average, less than the trading partner's labor costs. ANSWER: a 2. A country has an absolute advantage if: a. it can produce a commodity at a lower opportunity cost than its trading partner. b. it can produce a commodity with fewer resources than its trading partner. c. it can produce a commodity at a lower average cost than its neighbor. d. labor costs are, on average, less than the trading partner's labor costs. ANSWER: b 3. According to economists, trade is based on: a. related advantage. b. positive advantage. c. absolute advantage. d. comparative advantage. ANSWER: d 4. Given that the import price of a commodity is lower than the equilibrium domestic price, international trade: a. would not be beneficial to the society. b. would not be beneficial to the consumers. c. would be beneficial to the domestic producers. d. would be beneficial to the society. ANSWER: d 5. A tax levied upon a good when it crosses a nation's border is known as a (an): a. quota. b. export tax. c. tariff. d. poll tax. ANSWER: c 6. An upper limit on the amount of goods that may be imported during any time period is knows a (an): a. quota. b. export tax. c. tariff. d. poll tax. ANSWER: a 7. Agreements whereby exporting nations limit the amounts of goods that they ship to importing nations are known as: a. a negotiated tariff. b. a quota. c. a voluntary export restraint. d. a limiting restraint. ANSWER: c 8. Which of the following arguments is sometimes used in support of free trade? a. Free trade allows firms to increase output and take advantage of lower average production costs. b. Free trade can decrease the competition faced by domestic producers. c. Free trade can decrease the diversity of products available to consumers. d. Free trade is necessary to national security. ANSWER: a 9. Which of the following is used to support free trade? a. Free trade can increase competition and thereby lower monopoly power that may exist in a nation. b. Free trade may cause total production costs to fall. c. Free trade limits diversity, thereby causing employees to work harder to achieve their goals. d. Free trade can increase unemployment, thereby lowering wages as workers compete for a limited number of jobs. ANSWER: a 10. Which of the following is used as a case for protectionism? a. Protection from free trade will allow firms to expand output and thereby lower cost. b. Protection from free trade will allow firms to develop monopoly power and thereby earn higher profits. c. Protection from free trade will increase domestic competition. d. Protection from free trade will save American jobs. ANSWER: d 11. Arguments in support of protectionist measures include which of the following? a. decreasing cost argument. b. increased competitiveness argument. c. increased diversity argument. d. cheap foreign labor argument. ANSWER: d 12. Which of the following might be used to justify increased trade restrictions? a. Industry XYZ can compete with foreign firms even though it pays its workers a much higher wage because labor at XYZ is highly productive. b. It is not vital to national security that Industry ABC is protected. c. The New Industry should be protected until it matures. d. All of the above are used as justifications to increase trade restrictions. ANSWER: c 13. Suppose that high wages in the United States resulted in an absolute disadvantage in the production of all goods. This would mean that: a. trade, based on comparative advantage, could still be beneficial to the economy. b. the high price of domestic output would stifle other countries' willingness to trade with the United States. c. trade restrictions in the form of voluntary export restraints would be beneficial to the economy. d. government should impose a price ceiling on wages in order to control costs and make domestic goods competitive on world markets. ANSWER: a 14. Which of the following statements is correct? a. Since World War II, barriers to international trade have increased significantly. b. The WTO uses a regional approach to lowering trade barriers. c. The European Union has eliminated trade barriers between the United States and member European nations. d. NAFTA created a free-trade area for the United States, Canada, and Mexico. ANSWER: d 15. Which economist developed the idea of comparative advantage: a. John M. Keynes b. David Ricardo c. Adam Smith d. Alfred Marshall ANSWER: b 16. The main trading partner of the United States is: a. Japan b. Canada c. Mexico d. Russia ANSWER: b 17. In international trade based on the principle of comparative advantage: a. only the partner with an absolute advantage is better off after the trade. b. both trading partners are better off after the trade. c. only the trading partner with a comparative advantage is better off after the trade. d. neither trading partner is better off after the trade. ANSWER: b 18. Which statement is correct? a. Society, in general, is better off because of quotas. b. Free, unrestricted international trade is common. c. Most countries, including the United States, impose barriers to international trade. d. Quotas shift resources to industries that have a comparative advantage. ANSWER: c 19. Which is not an argument for restricting trade? a. Infant industries need to be protected. b. Industries important to our national security need to be protected. c. Restrictions will save American jobs. d. Restrictions help increase competition. ANSWER: d 20. Which statement is false? a. Tariffs and quotas are valuable tools in helping to maintain full employment. b. Imports can cause unemployment in import-competing industries. c. Over time, some industries lose their comparative advantage and become vulnerable to foreign competition. d. Government may need to help some workers who lose their jobs due to international trade upgrade their skills. ANSWER: a 21. Industries that use the infant industry argument often claim that: a. the protection is only needed on a temporary basis. b. they will use the time during which they are protected to modernize and become more competitive. c. industries already established in other countries have a comparative advantage. d. All of the above. ANSWER: d 22. Why are environmental groups critical of the World Trade Organization (WTO)? a. The WTO sided in favor of trade restrictions imposed by the United States. b. The WTO appears to participate in a conspiracy against the United States. c. The WTO appears to participate in a conspiracy against third-world nations. d. The WTO ruled against a U.S. embargo on tuna caught by foreign fishing fleets. ANSWER: d
23. France can produce 2 bicycles with 6 units of inputs. Italy can produce 1 bicycles with 6 units of inputs. France is said to have: a. a comparative advantage in the production of bicycles. b. a comparative disadvantage in the production of bicycles. c. an absolute advantage in the production of bicycles. d. an absolute disadvantage in the production of bicycles. ANSWER: c Use the following information to answer questions 24 – 31. Country Steaks BeerBig Sky Country 4 2 Pure Water Country 1 3 24. Pure Water Country has a (an): a. absolute advantage in the production of steaks. b. absolute advantage in the production of beer. c. comparative advantage in the production of both steaks and beer. d. comparative disadvantage in the production of both steaks and beer. ANSWER: b 25. Big Sky Country has a (an): a. absolute advantage in the production of steaks. b. absolute advantage in the production of beer. c. comparative advantage in the production of both steaks and beer. d. comparative disadvantage in the production of both steaks and beer. ANSWER: a 26. Pure Water Country's opportunity cost of producing an additional beer is: a. 3 steaks. b. 1 steak. c. 1/3 steak. d. 1/4 steak. ANSWER: c 27. Pure Water Country's opportunity cost of producing an additional steak is: a. 3 beers. b. 1 beer. c. 1/3 beer. d. 1/4 beer. ANSWER: a 28. Big Sky Country's opportunity cost of producing an additional beer is: a. 4 steaks. b. 2 steaks. c. 1/2 steak. d. 1/4 steak. ANSWER: b 29. Big Sky Country's opportunity cost of producing an additional steak is: a. 4 beers. b. 2 beers. c. 1/2 beers. d. 1/4 beer. ANSWER: c 30. Based on the above information, Big Sky Country should: a. specialize in the production of steak. b. specialize in the production of beer. c. produce both goods for its own consumption because Pure Water will be unwilling to trade because it produces both goods more efficiently. d. produce some of both goods to trade because it produces both goods more efficiently than Pure Water. ANSWER: a 31. Based on the above information, Pure Water Country should: a. specialize in the production of steak. b. specialize in the production of beer. c. produce both goods for its own consumption because Pure Water will be unwilling to trade because it produces both goods more efficiently. d. produce some of both goods to trade because it produces both goods more efficiently than Pure Water. ANSWER: b 32. A worker in France can produce 8 bottles of wine or 2 apples. A worker in Spain can produce 3 bottles of wine or 3 apples. France has the comparative advantage in: a. apples b. wine. c. both goods. d. neither good. ANSWER: b Use the following graph to answer questions 33 – 35. 
33. Given that the domestic equilibrium U.S. price of cloth is Pb and the U.K. price is Pa, trade will increase the net gain of consumers by area: a. B+D b. B
c. A+B d. A+B+D ANSWER: a 34. Given that the domestic equilibrium U.S. price of cloth is Pb and the U.K. price is Pa, trade will reduce the net gain of producer by area: a. B+D b. B
c. A+B d. A+B+D ANSWER: b 35. Given that the domestic equilibrium U.S. price of cloth is Pb and the U.K. price is Pa, the net social gain from trade is represented by area: a. D b. B+D
c. A+B d. A+B+D ANSWER: a 36. A tariff is placed on cloth imported from Thailand. The most likely effect of the tariff will be to: a. increase the price domestic producers receive for cloth. b. increase the quantity of cloth bought by domestic buyers. c. decrease the price domestic producers receive for cloth. d. increase the quantity of cloth imported into the country. ANSWER: a 37. Suppose a tariff on cars imported into the United States is eliminated. This will result in: a. an increase in government revenues. b. a decrease in the price paid by domestic buyers. c. a decrease in the number of cars imported into the country. d. an increase in the price received by domestic producers. ANSWER: b 38. Suppose a quota on electronic imports from Germany is lifted. This will result in: a. a decrease in government revenues. b. a decrease in the price paid by domestic buyers. c. a decrease in the quantity of electronic equipment imported into the country. d. an increase in the price received by domestic producers. ANSWER: b 39. Suppose the U.S. demand for Japanese cars increases. Which of the following would most likely result in the greatest increase in price? a. tariff. b. quota. c. export tax. d. voluntary import restraint. ANSWER: b 40. The United States and Canada reach an agreement under which Canada volunteers to limit the number of automobile parts shipped to the U.S. This is an example of: a. a negotiated tariff. b. a quota. c. a voluntary export restraint. d. a limiting restraint. ANSWER: c 41. If Billington Company could increase production, its average cost of production would fall. Because domestic demand is so small, Billington is unable to take advantage of this opportunity. In this instance, free trade could: a. allow Billington to increase its production and sell the additional output abroad; however, its profits will fall as a result of this action because this output will have to be sold at a lower price. b. allow Billington to increase its production because it could sell the additional output abroad. This increased production should increase Billington's profits. c. help the consumer because output will be sold at a lower price, but harm the producer because profits will fall. d. harm the consumer because as output increases, Billington will charge a higher price. ANSWER: b 42. Suppose the country of Oz has only one firm producing bicycles. In this instance: a. lowering trade restrictions can result in increased competition for the firm and, hence, lower prices. b. consumers will pay a lower price for the product because it is produced under monopoly conditions. c. government will be forced to break up the firm in order to eliminate the monopoly and encourage competition in the economy. d. Both b and c. ANSWER: a 43. Congressperson Smith argues that tariffs must be passed because American labor cannot compete with cheap foreign labor. This is an example of: a. the national defense argument. b. the infant industry argument. c. the save American jobs argument. d. the cheap foreign labor argument. ANSWER: d 44. Congressperson Jones argues that tariffs must be passed to protect the aviation industry because this industry is necessary to national defense. This is an example of: a. the national defense argument. b. the infant industry argument. c. the save American jobs argument. d. the cheap foreign labor argument. ANSWER: a 45. Suppose protectionist measures are passed in attempts to save jobs in the automobile industry. The most likely result of this action will be to: a. decrease the overall unemployment rate. b. increase household income in the economy because more people will now have jobs. c. increase employment in the automobile industry, but decrease employment in other industries. d. The overall effect cannot be determined as some individuals will benefit from the policy while others will be harmed by it. ANSWER: c 46. The U.S. government has agreed with the Rubber Thread Industry of America that a 15% tax should be levied on all rubber thread that enters the United States from foreign countries. This is an example of a: a. quota. b. tariff. c. voluntary export restraint. d. global approach to international trade agreements. ANSWER: b 47. If a quota is in place, what will happen to the price of rubber thread if there is a large increase in demand for spandex clothing (a major user of rubber thread)? a. Quantity will be limited, but price will not be affected. b. Price will increase, but as it does so, the quantity imported will also increase. This will limit the price increase somewhat. c. Because of the quantity restriction, the increased demand will cause prices to increase. d. The impact on prices is not clear. ANSWER: c 48. Which barrier to international trade provides revenue to the federal government? a. a quota b. a tariff c. a voluntary export restraint d. all of the above ANSWER: b 49. Which statement about the commercial aircraft industry is false? a. The industry would prefer to limit its sales to the United States. b. By producing in the international market, this industry lowers its average costs and prices. c. Producing in an international market allows this industry to produce more. d. The industry would prefer to sell both internationally and domestically. ANSWER: a 50. Why would Japan agree to voluntarily limit the number of automobiles it shipped to the U.S.? a. They feared military action by the United States. b. They feared that even more stringent import restrictions might be imposed if they did not agree. c. GATT agreed that they should do so. d. Japanese auto firms put pressure on their government to abide by the voluntary restriction. ANSWER: b 51. International trade increases the diversity of products that we have available. Which of the following products would be very difficult for us to purchase if there was no international trade? a. tobacco b. milk
c. silk d. wheat ANSWER: c 52. Which is true about wages in America? a. Wages in the U.S. are no higher than in most foreign countries. b. Wages in the U.S. are high because productivity is high. c. Wages in the U.S. are high; therefore, U.S. firms must be operating with high costs. d. High wages in the U.S. would mean that it would not be advantageous to the U.S. to trade with other nations. ANSWER: b 53. Which is not a provision of the North American Free Trade Agreement? a. Trade barriers with nonmember nations will be phased out within 25 years. b. It is an agreement between Canada, the United States and Mexico. c. Tariffs between the three nations will be eliminated within 15 years. d. Members countries will open investment opportunities to other members. ANSWER: a 54. Which of the following is an example of trade negotiation on a global level? a. The European Union b. World Trade Organization c. North American Free Trade Agreement d. all of the above ANSWER: b 55. Which of the following is incorrect about the World Trade Organization (WTO)? a. Evidence seems to indicate that the WTO is involved in a conspiracy against the United States. b. Under the agreement, many tariffs and other barriers will be reduced or eliminated. c. The WTO was formed as a successor to the GATT. d. The WTO monitors trade among numerous countries. ANSWER: a 56. Some individuals believe that trade agreements should also contain linkages to negotiations relating to: a. wages in less developed countries. b. working conditions in less developed countries. c. environmental standards. . d. all of the above ANSWER: d
1. "If a country has an absolute advantage in the production of all goods, this means there is no reason for it to trade with other countries." Explain why this statement is incorrect. The student should recognize that absolute advantage is not the basis for trade. Trade is based upon the principle of comparative advantage. So long as a country has a comparative advantage in the production of good, trade can increase the well-being of society by making more goods and services available to it. 2. Suppose government, attempting to prevent layoffs in import-competing industries, enacts trade restrictions. Explain why this action will make society worse off. The student should recognize that this action, while increasing the well-being of both the firms and the inputs used in these industries, will decrease the well-being of society as a whole. This occurs because resources are redirected from industries that have a comparative advantage to those industries that have a comparative disadvantage. 3. Evaluate the following statement. “Quotas and tariffs will have the same impact on product prices.” In a sense the statement is true. Both quotas and tariffs will increase the price of the good in question. The student should recognize, however, that quotas may increase price more than will tariffs because of the strict limitation on quantity imposed by a quota. 4. Describe what some view as the benefits associated with the infant industry argument. Why is this argument not particularly valid for industries in the United States? The primary benefit of the infant industry argument is that trade restrictions will protect an emerging industry as it struggles to gain a comparative advantage against international competitors. The argument may have some relevance for less-developed countries, but not for mature industries in the United States. These industries still request protection, often claiming that they need time to modernize in order to become more competitive. 5. Do the actions of the World Trade Organization indicate an international conspiracy against the United States. Although the WTO has ruled against the United States on several occasions, it has also ruled for the U.S. on several occasions. In resolving disputes, it is rarely possible to please everyone. Thus, no evidence indicates an international conspiracy against the United States.
1. Suppose a unit of labor in France can produce 8 bicycles while a unit of labor in Italy can produce 7 bicycles. Which country has the absolute advantage? Absolute advantage refers to a country's ability to produce a greater level of output for a given level of inputs. In this case, France can produce more bicycles with a unit of inputs, therefore, it has the absolute advantage in bicycle production. 2. Suppose Alpha can produce no guns and 60 pounds of butter or no butter and 30 guns. What is the opportunity cost of butter? of guns? The opportunity cost is what Alpha must give up to produce an additional unit of a good. If Alpha produces 60 pounds of butter it must give up 30 guns. Thus, the opportunity cost of one pound of butter is 1/2 gun (30/60). If Alpha produces 30 guns, it must give up 60 pounds of butter. Thus, the opportunity cost of one gun is 2 pounds of butter (60/30). 3. Suppose Buenos Noche can produce 250 bushels of corn or 1,000 pounds of beef. What is the opportunity cost of corn? of beef? If Buenos Noche produces 250 bushels of corn it must give up 1,000 pounds of beef. The opportunity cost of one bushel of corn is 4 pounds of beef (1,000/250). If Buenos Noche produces 1,000 pounds of beef it must give up 250 bushels of corn. The opportunity cost of one pound of beef is 1/4 bushel of corn (250/1,000). 4. Use the following information to determine: a. Abbington's opportunity costs of producing beer and pretzels. b. Zipzurl's opportunity costs of producing beer and pretzels. c. Which country has the comparative advantage in the production of beer? in the production of pretzels? d. Which country should export beer and which should export pretzels? Beer PretzelsCountry (quarts per day) (boxes per day) Abbington 20 100 Zipzurl 50 50
a. Abbington's opportunity cost of producing beer is 5 (100/20) boxes of pretzels. Abbington's opportunity cost of producing pretzels is 1/5 (20/100) quart of beer. b. Zipzurl's opportunity cost of producing beer is 1 (50/50) box of pretzels. Zipzurl's opportunity cost of producing pretzels is 1 (50/50) quarts of beer. c. Because Abbington produces pretzels at a lower opportunity cost it has the comparative advantage in the production of pretzels, while Zipzurl has the comparative advantage in the production of beer. d. Since Abbington has the comparative advantage in producing pretzels, it should export pretzels and import beer. Zipzurl should export beer and import pretzels. Download 159.49 Kb. Share with your friends:
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