Sample Multiple Choice Questions Chapter 2: Labor Productivity Advantage - The Ricardian Model

1.

and

Comparative

Countries trade with each other because they are _______ and because of ______. A. different, increasing returns to scale technology B. similar, increasing returns to scale technology C. different, different endowments of labor D. similar, similar opportunity costs E. None of the above. Answer: E

2.

Trade between two countries can benefit both countries if A. each country exports that good in which it has a comparative advantage. B. each country enjoys superior terms of trade. C. each country has a more elastic demand for the imported goods. D. each country has a more elastic supply for the supplied goods. E. Both C and D. Answer: A

3.

The Ricardian theory of comparative advantage states that a country has a comparative advantage in widgets if A. output per worker of widgets is higher in that country. B. that country's exchange rate is low. C. wage rates in that country are high. D. the output per worker of widgets as compared to the output of some other product is higher in that country. E. Both B and C. Answer: D

4.

In order to know whether a country has a comparative advantage in the production of one particular product we need information on at least ____unit labor requirements A. B. C. D. E. one two three four five

Answer: D

5. A country engaging in trade according to the principles of comparative advantage gains from trade because it A. is producing exports indirectly more efficiently than it could alternatively. B. is producing imports indirectly more efficiently than it could domestically. C. is producing exports using fewer labor units. D. is producing imports indirectly using fewer labor units. E. None of the above. Answer: B 6. Given the following information: Unit Labor Requirements Cloth Widgets 10 20 60 30

Home Foreign

A. B. C. D. E.

Neither country has a comparative advantage. Home has a comparative advantage in cloth. Foreign has a comparative advantage in cloth. Home has a comparative advantage in widgets. Home has a comparative advantage in both products.

Answer: B 7. If it is should A. B. C. D. E. ascertained that Foreign uses prison-slave labor to produce its exports, then home export cloth. export widgets. export both and import nothing. export and import nothing. All of the above.

Answer: A 8. If the Home economy suffered a meltdown, and the Unit Labor Requirements in each of the products doubled (that is, doubled to 30 for cloth and 60 for widgets) then home should A. export cloth. B. export widgets. C. export both and import nothing. D. export and import nothing. E. All of the above.

Answer: A 9. If wages were to double in Home, then Home should: A. export cloth. B. export widgets. C. export both and import nothing. D. export and import nothing. E. All of the above. Answer: A 10. If the world equilibrium price of widgets were 1 Cloths, then A. both countries could benefit from trade with each other. B. neither country could benefit from trade with each other. C. each country will want to export the good in which it enjoys comparative advantage. D. neither country will want to export the good in which it enjoys comparative advantage. E. both a. and c. are correct. Answer: E

11. If the world equilibrium price of widgets were 1.5 cloths, then A. both countries could benefit from trade with each other. B. neither country could benefit from trade with each other. C. each country will want to export the good in which it enjoys comparative advantage. D. neither country will want to export the good in which it enjoys comparative advantage. E. both countries will want to specialize in cloth. F. Both a. and c. above Answer: F 12. In a two product two country world, international trade can lead to increases in A. consumer welfare only if output of both products is increased. B. output of both products and consumer welfare in both countries. C. total production of both products but not consumer welfare in both countries D. consumer welfare in both countries but not total production of both products. E. None of the above. Answer: B 13. As a result of trade, specialization in the Ricardian model tends to be A. complete with constant costs and with increasing costs. B. complete with constant costs and incomplete with increasing costs. C. incomplete with constant costs and complete with increasing costs.

D. E.

incomplete with constant costs and incomplete with increasing costs. None of the above.

Answer: B 14. A nation engaging in trade according to the Ricardian model will find its consumption bundle A. inside its production possibilities frontier. B. on its production possibilities frontier. C. outside its production possibilities frontier. D. inside its trade-partner's production possibilities frontier. E. on its trade-partner's production possibilities frontier. Answer: C 15. In the Ricardian model, if a country's trade is restricted, this will cause all except which? A. Limit specialization and the division of labor. B. Reduce the volume of trade and the gains from trade C. Cause nations to produce inside their production possibilities curves D. May result in a country producing some of the product of its comparative disadvantage E. None of the above. Answer: C 16. If a very small country trades with a very large country according to the Ricardian model, then A. the small country will suffer a decrease in economic welfare. B. the large country will suffer a decrease in economic welfare. C. the small country will enjoy gains from trade. D. the large country will enjoy gains from trade. E. None of the above. Answer: C 17. If the world terms of trade for a country are somewhere between the domestic cost ratio of H and that of F, then A. country H but not country F will gain from trade. B. country H and country F will both gain from trade. C. neither country H nor F will gain from trade. D. only the country whose government subsidizes its exports will gain. E. None of the above. Answer: B 18. If the world terms of trade equal those of country F, then A. country H but not country F will gain from trade. B. country H and country F will both gain from trade.

C. D. E.

neither country H nor F will gain from trade. only the country whose government subsidizes its exports will gain. None of the above.

Answer: A

19.

If a production possibilities frontier is bowed out (concave to the origin), then production occurs under conditions of A. constant opportunity costs. B. increasing opportunity costs. C. decreasing opportunity costs. D. infinite opportunity costs. E. None of the above. Answer: B

Questions 20-22 pertain to the graph drawn below (Figure 1).

Figure 1 PC /PF

World RS As rel. P =3 Bs rel. P =2 D1 D2

QC /QF 1

20. In Figure 1, if the world relative demand is D1, then A. Country A produces only food (F) B. Country B produces some food and some clothing (C), but country A specializes C. Both countries produce both goods D. Country A produces only clothing and country B produces only food E. None of the above Answer: E

21. Given Figure 1, if the world relative demand is at D2 then A. The international relative price of food is higher then 1/3 B. The international relative price of clothing is higher than 2 C. The international relative price of food can not be more than 1/2 D. All of the above E. None of the above (a., b., and c.) Answer: D

22. If the labor force in B increases while the labor force in A remains constant, then A. The world relative demand (RD) would shift to the right B. The step in the world relative supply (RS) would shift to the right C. The step in the world relative supply (RS) would shift to the left D. There would be a deterioration in the TOT of country B. E. Both b and d Answer: E 23. In the Ricardian world, if two countries have identical relative costs of labor for textiles A. Free trade between H and F would help the country with absolute advantage in textiles and hurt the other country B. Free trade between H and F will not increase or lower the level of welfare for any of these two countries. C. Free trade between H and F will help the smaller country the most and will not alter the level of welfare of the larger country. D. None of the above

Answer: B 24. In a Ricardian world with two countries, H and F, and two goods, cotton and wheat, the international relative price of cotton is 3 and the domestic relative price (relative cost) of cotton in H is 6. It implies that: A. PRHLWheat / PRFWheat < WH / WF < PRHLCotton / PRFCotton B. PRHLWheat / PRFWheat > WH / WF > PRHLCotton / PRFCotton C. PRHLWheat / PRFWheat = WH / WF = PRHLCotton / PRFCotton D. PRHLWheat / PRFWheat < WH / WF > PRHLCotton / PRFCotton Answer: B