6.Which type of advantage determines the pattern of trade in the world?

A)   Absolute advantage.

B)   Economic advantage.

C)   Advantages due to tariffs and quotas.

D)   Comparative advantage.

7.A country has a comparative advantage over another when:

A)   a nation can produce more output with a given amount of input than another nation.

B)   a nation can produce more in aggregate than another nation.

C)   a nation has the ability to produce a good with a lower opportunity cost than another nation.

D)   it can produce a product with the fewest resources.

8.According to the law of comparative advantage:

A)   if a foreign government subsidizes the textile industry, the domestic government should impose a tariff.

B)   Mexico is considered to have a comparative advantage in plastics if Mexico can produce plastic using fewer resources than the U.S.

C)   a nation will benefit from trade when its exports exceed its imports.

D)   a nation will benefit from trade when it imports goods for which it is the high cost producer and exports goods for which it is the low-cost producer.

9.The law of comparative advantage explains why a nation will benefit from trade when it:

A)   exports more than it imports.

B)   imports more than it exports.

C)   exports goods for which it is a low-cost producer, while importing those for which it is a high-cost producer.

D)   exports goods for which it is a high-cost producer, while importing those for which it is a low-cost producer.

10.Mike Harris in a research paper on free trade between high-wage countries and low-wage countries concluded free trade between low-wage countries such as China, India, and Pakistan and high-wage countries such as the U.S., Japan, and Germany would depress wages in high-wage countries. His conclusion was based on the following:

Point 1: U.S., Japanese, and German workers are unable to compete with cheap foreign labor from countries such as China, India, and Pakistan.

Point 2: U.S., Japanese, and German workers are less productive than workers in China, Pakistan, and India.

Point 3: Free-trade between high-wage countries and low-wage countries will reduce the consumption possibilities of people in high-wage countries.

Are Points 1, 2, and 3, as raised by Harris correct?

A)           Incorrect                             Incorrect                        Incorrect

B)           Incorrect                               Correct                          Correct

C)           Correct                                  Correct                          Incorrect

D)                  Correct                   Incorrect                           Correct

11.Suppose labor in Venezuela is less productive than labor in the United States in all areas of production. Which of the following statements about trading between Venezuela and the U.S. is most accurate?

A)   Both nations can benefit from trade.

B)   Neither nation can benefit from trade.

C)   Venezuela can benefit from trade but the U.S. cannot.

D)   Venezuela will not have a comparative advantage in any good.

12.This table below outlines the possible tradeoffs of producing milk and bread for Country A and Country B.

A)   Neither country would gain from trade.

B)   Both countries would gain if Country A traded bread for B's milk.

C)   Country A would not gain from trade, because it has an absolute advantage in the production of both goods.

D)   Both countries would gain if Country A traded milk for B's bread.

6.Which type of advantage determines the pattern of trade in the world?

A)   Absolute advantage.

B)   Economic advantage.

C)   Advantages due to tariffs and quotas.

D)   Comparative advantage.

The correct answer was D)

Comparative advantage is the ability to produce a good at a lower opportunity cost than others can produce it. According to the law of comparative advantage, trading partners are both better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for goods for which they are the high-opportunity cost producer.

7.A country has a comparative advantage over another when:

A)   a nation can produce more output with a given amount of input than another nation.

B)   a nation can produce more in aggregate than another nation.

C)   a nation has the ability to produce a good with a lower opportunity cost than another nation.

D)   it can produce a product with the fewest resources.

The correct answer was C)

A nation will have a comparative advantage in the production of good A when the number of units of B, given up to produce one unit of A, is lower than that for any other country.

8.According to the law of comparative advantage:

A)   if a foreign government subsidizes the textile industry, the domestic government should impose a tariff.

B)   Mexico is considered to have a comparative advantage in plastics if Mexico can produce plastic using fewer resources than the U.S.

C)   a nation will benefit from trade when its exports exceed its imports.

D)   a nation will benefit from trade when it imports goods for which it is the high cost producer and exports goods for which it is the low-cost producer.

The correct answer was D)

This statement is the law of comparative advantage.

The other choices are false. The law of comparative advantage supports international trade. According to the law of comparative advantage, both trading partners are better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for those goods for which they are the high-opportunity cost producer. Mexico is considered to have an absolute advantage in plastics if Mexico can produce plastic using fewer resources than the U.S.

9.The law of comparative advantage explains why a nation will benefit from trade when it:

A)   exports more than it imports.

B)   imports more than it exports.

C)   exports goods for which it is a low-cost producer, while importing those for which it is a high-cost producer.

D)   exports goods for which it is a high-cost producer, while importing those for which it is a low-cost producer.

The correct answer was C)

Comparative advantage is the ability to produce a good at a lower opportunity cost than others can produce it. When trading partners specialize in producing products for which they have a comparative advantage; costs are minimized, output is greater, and both trading partners benefit.

10.Mike Harris in a research paper on free trade between high-wage countries and low-wage countries concluded free trade between low-wage countries such as China, India, and Pakistan and high-wage countries such as the U.S., Japan, and Germany would depress wages in high-wage countries. His conclusion was based on the following:

Point 1: U.S., Japanese, and German workers are unable to compete with cheap foreign labor from countries such as China, India, and Pakistan.

Point 2: U.S., Japanese, and German workers are less productive than workers in China, Pakistan, and India.

Point 3: Free-trade between high-wage countries and low-wage countries will reduce the consumption possibilities of people in high-wage countries.

Are Points 1, 2, and 3, as raised by Harris correct?

A)           Incorrect                             Incorrect                        Incorrect

B)           Incorrect                               Correct                          Correct

C)           Correct                                  Correct                          Incorrect

D)                  Correct                   Incorrect                           Correct

The correct answer was A)

Points 1 and 3 are incorrect because due to the law of comparative advantage which states in part that when two countries trade products in which they both have a comparative advantage both countries will be better off because they will both be able to consume outside their respective production possibility frontiers. 

Point 2 is incorrect because as labor becomes more expensive as in industrialized countries, capital (technology) is substituted for labor increasing the productivity of each worker.

11.Suppose labor in Venezuela is less productive than labor in the United States in all areas of production. Which of the following statements about trading between Venezuela and the U.S. is most accurate?

A)   Both nations can benefit from trade.

B)   Neither nation can benefit from trade.

C)   Venezuela can benefit from trade but the U.S. cannot.

D)   Venezuela will not have a comparative advantage in any good.

The correct answer was A)

Although one country may have an absolute advantage in all areas, trade is based on differences in opportunity costs, or comparative advantage. Any country will always have a comparative advantage in the production of some goods; thus, all countries can benefit from trade.

12.This table below outlines the possible tradeoffs of producing milk and bread for Country A and Country B.

A)   Neither country would gain from trade.

B)   Both countries would gain if Country A traded bread for B's milk.

C)   Country A would not gain from trade, because it has an absolute advantage in the production of both goods.

D)   Both countries would gain if Country A traded milk for B's bread.

The correct answer was D)

Country A gives up 1 bread to produce 2 milks. Country B gives up 1 bread to produce 1.5 milks. Country A should make milk and Country B should make bread.