Econ 340 Alan Deardorff Winter Term 2014 Comparative Advantage Study Questions Page 1 of 6 Study Questions Lecture 3 Comparative Advantage and the Gains from Trade Part 1: Multiple Choice Select the best answer of those given. 1. According to the theory of comparative advantage, which of the following is not a reason why countries trade? a. Comparative advantage. b. Costs are higher in one country than in another. c. Prices are lower in one country than in another. d. The productivity of labor differs across countries and industries. e. Exports give a country a political advantage over other countries that export less. 2. Which of the following statements would a mercantilist not agree with? a. Imports are desirable. b. Trade is a zero-sum activity. c. The purpose of trade is to amass revenues from exports. d. A country can benefit by granting monopoly rights to individuals. e. Policies should promote exports and discourage imports. 3. If all prices in one country (country A) are higher than all prices in another country (B) when compared at the wage rates that happen to prevail in the two countries, and if the countries share the same currency, then if the nominal wage rate in country B remains fixed a. The nominal wage rate in country A will have to fall. b. Unemployment must be higher in country B than in country A. c. The real wage in country A must be higher than in country B. d. Workers in country A must be less productive than workers in country B. e. Trade cannot be beneficial for country A.Econ 340 Alan Deardorff Winter Term 2014 Comparative Advantage Study Questions Page 2 of 6 4. According to the theory of comparative advantage, a country will export a good only if a. It can produce it using less labor than other countries. b. Its productivity is higher in producing the good than the productivity of other countries in producing it. c. Its wage rate in producing the good is lower than in other countries. d. Its cost of producing the good, relative to other goods, is at least as low as in other countries. e. All of the above. 5. Suppose that Austria and Belgium have the unit labor requirements for producing steel and brooms shown in the table at the right. Then a. Belgium has a comparative advantage in brooms. b. Austria has a comparative advantage in steel. c. Austria has an absolute advantage in steel. d. Belgium has an absolute advantage in brooms. e. All of the above. 6. Suppose that Australia and Brazil have the outputs per worker in producing sleds and clarinets shown in the table at the right. Then Brazil has a a. Comparative advantage in sleds. b. Comparative advantage in clarinets. c. Absolute advantage in sleds. d. Absolute advantage in clarinets. e. None of the above. 7. According to the theory of comparative advantage, countries gain from trade because a. Trade makes firms behave more competitively, reducing their market power. b. All firms can take advantage of cheap labor. c. Output per worker in each firm increases. d. World output can rise when each country specializes in what its does relatively best. e. Every country has an absolute advantage in producing something. Country Output per worker Australia Brazil Sleds 300 200 Good Clarinets 2 1 Country Unit labor requirements Austria Belgium Steel 3 8 Good Brooms 2 1Econ 340 Alan Deardorff Winter Term 2014 Comparative Advantage Study Questions Page 3 of 6 8. If international trade takes place as a result of comparative advantage, it will cause which of the following effects in the participating countries? a. Inequality among households will be reduced. b. All individuals in each country will be better off. c. The average well-being of people in both countries will increase. d. Both countries will grow faster over time. e. All of the above. 9. Scholars at MIT recently tested the theory of comparative advantage. One problem with doing this is that a. The theory was never meant to apply after the 19th century. b. One cannot observe productivity in industries that are not producing. c. Countries keep their data on international trade secret. d. The theory is only valid if the world really only produces two goods. e. The theory turned out to be incorrect. 10. Clyde Prestowitz, in his assigned reading, cites a study that measures various costs of US trade with China. Which of the following is not one of those costs? a. Unemployment compensation paid by government b. The income lost by workers who become unemployed c. Food stamps d. Lost tax receipts e. School budgets Part II: Short Answer Answer in the space provided. 1. Define the following terms: a. Trade Adjustment Assistance: b. Opportunity cost:Econ 340 Alan Deardorff Winter Term 2014 Comparative Advantage Study Questions Page 4 of 6 c. Absolute advantage: 2. Each table below shows the amounts of labor required to produce one unit of each of two goods, X and Y, in two countries, A and B. In each case, identify which country has a comparative advantage in good X. a. b. c. 3. The table here, unlike those above, shows labor productivities, i.e., outputs per worker. That is, these numbers report the quantity of output per unit of labor that each country can produce in the two industries, X and Y. Determine which country has a. Absolute advantage in good X. b. Absolute advantage in good Y. c. Comparative advantage in good X. d. Comparative advantage in good Y. CountryGood A BX 1 6Y 4 8CountryGood A BX 3 6Y 4 12CountryGood A BX 8 6Y 4 2Output per WorkerCountryGood A BX 8 6Y 4 2Econ 340 Alan Deardorff Winter Term 2014 Comparative Advantage Study Questions Page 5 of 6 4. The table on the left below shows labor endowments of two countries, Stonia and Venia, and their unit labor requirements for producing two goods, stuff and nonsense. The table on the right shows the quantities of these two goods that each produces in autarky, and below that has cells to record what they might consume with free trade. Stonia Venia Stonia Venia Labor 300 600 Autarky consumption Unit labor requirements Stuff 90 40 Stuff 2 4 Nonsense 120 88 Nonsense 1 5 Free trade consumption Stuff Nonsense a. Fill in these empty cells, assuming that each country specializes completely in (that is, uses all of its labor to produce only) the good in which it
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