1. David Ricardo's theory that specialization and free trade will
benefit all trading partners is known as the theory of
(a) absolute advantage.
(b) mutual advantage.
(c) comparative advantage.
(d) unilateral advantage.
2. Country A would have an absolute advantage over Country B in the
production of corn, if
(a) Country A uses fewer resources to produce corn than Country B does.
(b) corn can be produced at lower cost in terms of other goods than it
could be in Country B.
(c) the demand for corn is higher in Country A than in Country B.
(d) corn sells for a higher price in Country A than in Country B.
3. Suppose that two countries, Argentina and Chile, are each engaged
in the production of two goods, wheat and copper. If Argentina has an
absolute advantage in the production of wheat and Chile has an absolute
advantage in the production of copper, then
(a) there is no basis for trade between the two countries.
(b) Argentina should specialize in the production of copper and Chile
should specialize in the production of wheat.
(c) both countries should engage in the production of both goods.
(d) Argentina should specialize in the production of wheat and Chile
should specialize in the production of copper.
4. The ratio at which a country can trade domestic products for
imported products is the
(a) exchange rate.
(b) balance of payments.
(c) customs duty.
(d) terms of trade.
5. Assume that Outland specializes in producing rollerblades and
Inland specializes in producing surfboards. After trade Outland
exports 500 pairs of rollerblades and imports 100 surfboards. The
terms of trade
(a) are 1 : 5 rollerblades to surfboards.
(b) are 5 : 1 rollerblades to surfboards.
(c) are 1/5 : 1 rollerblades to surfboards.
(d) cannot be determined from this information.
6. If you are traveling in Mexico and you purchase a meal that
costs 1,000 pesos and the current exchange rate is 200 pesos to the
dollar, then the price of the meal in U.S. currency is
(a) $.50.
(b) $2.
(c) $5.
(d) $20.
7. If the exchange rate between the United States and Japan
changes from $1 = 100 yen to $1 = 150 yen, then, ceteris paribus, the
price of Japanese goods in the United States
(a) will increase.
(b) will decrease.
(c) will remain the same.
(d) could either increase or decrease.
8. A tariff is
(a) a limit on the quantity of a good that can be imported into a country.
(b) the difference between the price a product sells for in the country it
is produced in and the price it is sold for in another country.
(c) a government payment made to domestic firms to encourage exports.
(d) a tax on imports.
9. The international agreement signed by the United States and 22
other countries in 1947 to promote the liberalization of foreign trade is
known by its initials as
(a) SALT.
(b) START.
(c) GATT.
(d) IMF.
10. Economic integration
(a) occurs when countries develop an acquired comparative advantage that
makes their industries more competitive in international markets.
(b) occurs when two or more nations join to form a free-trade zone.
(c) occurs when countries are granted most-favored-nation status.
(d) occurs when one country voluntarily agrees to reduce its exports to
another country.
11. Which of the following statements is NOT true?
(a) Trade is beneficial because it allows more efficient production.
(b) Trade is beneficial because it allows consumers to buy goods at
cheaper prices.
(c) Trade is beneficial because it allows all domestic industries to
increase production.
(d) Trade is beneficial because it allows consumption beyond the
production possibility frontier.
12. Which of the following statements is FALSE?
(a) The argument that U.S. industries need to be protected from foreign
competition because wages in foreign countries are lower than wages in
the United States is false because trade flows according to
comparative and not absolute advantage.
(b) The main argument for protection against foreign competition is that
it costs Americans their jobs.
(c) In the United States new industries are much more likely to seek
protection from foreign competition than established industries
because new industries need time to develop a comparative advantage.
(d) Trade protection may be necessary when a country's currency is
overvalued and therefore it buys more foreign currency than it should.
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