International Economics, 7e (Gerber)

Chapter 4 Comparative Advantage and Factor Endowments

4.2 Modern Trade Theory

1) A production possibilities curve that is bowed out represents the case of
A) constant costs.
B) increasing costs.
C) decreasing costs.
D) external costs.
Answer: B
2) A production possibilities curve that is a straight line represents the case of
A) constant costs.
B) increasing costs.
C) constant opportunity costs but increasing real costs.
D) constant opportunity costs but decreasing real costs.
Answer: A
3) The straight-line production possibilities curve
A) does not show increasing opportunity costs.
B) fails to reflect tradeoffs.
C) fails to benefit trading nations.
D) refutes the principles of comparative advantage.
Answer: A
Endowment of Labor and Capital

4) Based on Table 4.1, according to the Heckscher-Ohlin Theorem, U.S. exports should be
goods that
A) intensively use labor input.
B) intensively use capital input.
C) use capital and labor in about equal proportions.
D) use either labor or capital input, depending on the good.
Answer: A
5) The Heckscher-Ohlin Theorem predicts
A) who benefits and who loses from trade.
B) which factors are abundant.
C) the income distribution effects of trade.
D) which goods will be exported.
Answer: D
6) Suppose that a country is producing on its PPC at a point to the left of the tangency
between the trade line and the PPC. At the production point,
A) the opportunity cost in production of the good on the horizontal axis is less than its trade price.
B) the opportunity cost in production of the good on the horizontal axis is more than its trade price.
C) the opportunity cost in production of the good on the vertical axis is less than its trade price.
D) the opportunity cost in production of the good on the horizontal axis may be either less than
or more than its trade price.
Answer: A
7) If a country is currently producing at a production point such that the trade line has a
slope that is flatter than the slope of the PPC at the same point, then
A) the country can get greater gains from trade if it moves production away from the good on the
vertical axis.
B) the country can get greater gains from trade if it moves production toward the good on the
vertical axis.
C) the country cannot improve on its gains from trade.
D) There are no gains from trade in this example.
Answer: B
8) Which of the following is NOT a proposition of the Heckscher-Ohlin model?
A) A country has a comparative advantage in the production of that commodity which uses more
intensively the country's more abundant resource.
B) The effect of international trade is to tend to equalize factor prices between the trading
nations.
C) If the United States is a skilled labor abundant country, then the United States has a
comparative advantage in the production of goods that use skilled labor more intensively.
D) Countries will completely specialize in the product in which they have a comparative
advantage if free trade is allowed to occur.
Answer: D
9) Suppose that Brazil is capital abundant and Chile is natural resource abundant. If
timber is natural resource intensive and computers are capital intensive, then
A) Chile will produce more computers after trade begins with Brazil.
B) Brazil will produce more timber after trade begins with Chile.
C) Chile will produce more timber after trade begins with Brazil.
D) Brazil will completely specialize in computers once trade begins with Chile.
Answer: C
10) Suppose that Brazil is capital abundant and Chile is natural resource abundant. If
timber is natural resource intensive and computers are capital intensive, then according to
the Heckscher-Ohlin Theorem, Chile should export goods that
A) intensively use labor input.
B) intensively use capital input.
C) intensively use natural resources.
D) use capital and labor in about equal proportions.
Answer: C
11) Using the HO model, assume that the United States is capital abundant and Mexico is
labor abundant. If soybeans are capital intensive and avocados are labor intensive,
A) Mexico will produce more soybeans once trade is introduced.
B) the United States will produce more avocados once trade is introduced.
C) avocado prices in the United States will fall once trade begins.
D) soybean prices in Mexico will rise once trade begins.
Answer: C
12) Using the HO model, assume that the United States is capital abundant and Mexico is
labor abundant. If soybeans are capital intensive and avocados are labor intensive, it would
be reasonable to expect the United States to
A) specialize completely in soybean production.
B) specialize completely in avocado production.
C) increase soybean production, but still produce some avocados.
D) increase avocado production, but still produce some soybeans.
Answer: C
13)

The graph above shows the PPC for a country that can produce oil or televisions.
The straight line is the trade line and CPC if production is at Point A.
Which of the following is a true statement?
A) This country should produce relatively more oil and relatively fewer televisions.
B) This country should produce relatively more televisions and relatively less oil.
C) This country should produce more of both goods.
D) This country is producing the optimal mix of oil and televisions to maximize its income.
Answer: A
14)

The graph above shows the PPC for a country that can produce oil or televisions.
The straight line is the trade line and CPC if production is at Point A.
Which of the following is a true statement?
A) This country should produce relatively more butter and relatively less coffee.
B) This country should produce relatively less butter and relatively more coffee.
C) This country should produce more of both goods.
D) This country is producing the optimal mix of butter and coffee to maximize its income.
Answer: B
15) What is the source of comparative advantage in the Heckscher-Ohlin model?
Answer: Differences in factor endowments
16) In the Heckscher-Ohlin model, what assumption is made about opportunity costs?
Answer: Opportunity costs increase with increased production of any good.
4.3 Trade and Income Distribution
Use the table for the following question(s).
Table 4.1
Endowment of Labor and Capital

1) Based on Table 4.1, according to the Stolper-Samuelson Theorem, the income

distribution effects of free trade in the United States are likely to favor
A) capital.
B) labor.
C) either capital or labor, depending on U.S. productivity.
D) neither capital nor labor.
Answer: B
2) The Stolper-Samuelson Theorem predicts
A) the level of productivity in export industries.
B) which factors are abundant.
C) the income distribution effects of trade.
D) which goods will be exported.
Answer: C
3) If the price of a good rises, then the effect on the income of the factors that are used
intensively in its production will be
A) to raise income by an absolute amount that is less than the rise in prices.
B) to raise income by an absolute amount that is more than the rise in prices.
C) to raise income by a smaller percentage than the rise in prices.
D) to raise income by a greater percentage than the rise in prices.
Answer: D
4) After trade opens, the short run impact on the income of the variable factor will be
A) a decrease.
B) an increase.
C) zero.
D) indeterminate, depending on the consumption pattern of the owners of the variable factor.
Answer: D
5) After trade opens, the short run impact on the income of the specific factor that is
relatively scarce will be
A) a decrease in its income.
B) an increase in its income.
C) no change in its income.
D) indeterminate, income effects are not possible to know.
Answer: A
6) Suppose that Brazil is capital abundant and Chile is natural resource abundant. If
timber is natural resource intensive and computers are capital intensive, then according to
the Stolper-Samuelson Theorem, the incomes of the owners of ________ are likely to rise in
Brazil after trade with Chile begins.
A) capital
B) labor
C) natural resources
D) It is impossible to determine which will be favored.
Answer: A
7) Using the specific factors model, assume that strawberry production requires the specific
factor of land, tractor production requires the specific factor of capital, and labor is
variable. If the United States is capital abundant compared to Mexico, and Mexico is land
abundant compared to the United States, then in the short run with trade we would expect
A) the income of U.S. land owners to increase.
B) the income of U.S. workers to increase.
C) the income of Mexican workers to increase.
D) the income of Mexican land owners to increase.
Answer: D
8) Using the specific factors model, assume that strawberry production requires the specific
factor of land, tractor production requires the specific factor of capital, and labor is
variable. If the United States is capital abundant compared to Mexico, and Mexico is land
abundant compared to the United States, then in the short run with trade, which of the
following is true?
A) Mexican wages will rise more than the increase in the price of tractors in Mexico.
B) U.S. wages will rise less than the fall in the price of tractors in the United States.
C) The owners of capital in the United States will see a larger increase in their incomes in
percentage terms than the increase in the price of tractors.
D) The owners of land in Mexico will see a smaller increase in their incomes in percentage terms
than the increase in the price of strawberries.
Answer: C
9)

The graph above shows the PPC for a country that can produce oil, which is labor intensive, or
televisions, which are capital intensive.
The country is currently producing at point A and not trading with the rest of the world. With
trade, the world price can be represented by slope of the straight line through Point A.
Which of the following is a true statement?
A) When this country produces the optimal amount with trade, workers in this country will be
better off.
B) When this country produces the optimal amount with trade, capital in this country will be
better off.
C) When this country produces the optimal amount with trade, both factors of production will be
better off.
D) When this country produces the optimal amount with trade, the income of factors of
production will not change.
Answer: A
10) Suppose that strawberries are a labor-intensive good. An increase in the price of
strawberries will ________ the demand for strawberries, which will ________ the demand
for strawberry pickers.
A) increase, increase
B) increase, decrease
C) decrease, increase
D) decrease, decrease
Answer: A
11) Nations that have only a single abundant resource face significant risks, even when that
resource is highly valued.
Answer: TRUE
12) Which types of workers are most likely to favor lowering trade barriers in the United States?
Answer: Highly educated and more skilled workers
4.4 Empirical Tests of the Theory of Comparative Advantage
1) Empirical tests of the theory of comparative advantage have provided
A) strong support for both the Ricardian and Heckscher-Ohlin models.
B) mixed support for the Ricardian model and strong support for the Heckscher-Ohlin model.
C) strong support for the Ricardian model and mixed support for the Heckscher-Ohlin model.
D) mixed support for both Ricardian and Heckscher-Ohlin models.
E) no support for either the Ricardian or the Heckscher-Ohlin models.
Answer: C
2) Empirical tests of the HO model have had mixed results. One explanation for this is that
A) the Ricardian model is more detailed.
B) it is difficult to measure factor endowments.
C) it does not explain the effects of trade on income.
D) it assumes that countries have different technologies.
Answer: B
3) Test of the HO theory have clearly been successful.
Answer: FALSE
4) Since empirical tests of the HO theory have given mixed results, the theory has little
value.
Answer: FALSE
4.5 Extension of the Heckscher-Ohlin Model

1) Tijuana, Mexico is across the border from San Diego, California. It has become a world-
leading producer and exporter of television sets and computer monitors, which it assembles in
modern factories owned by multinational consumer electronics firms such as Sony. Initially,
these electronics were produced in the industrialized countries of their parent companies, and
after several years, the production moved to Tijuana. This is an example of
A) the product cycle.
B) intraindustry trade.
C) the specific factors model.
D) the magnification effect.
Answer: A
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.3 Discuss the limits of the HO model.
AACSB: Application of knowledge

2) Which of the following would NOT be associated with the LATE PHASE of the product
cycle?
A) Consumption in high income countries begins to exceed production.
B) Increasing share of output is moving to developing countries where abundant low skilled and
semi-skilled labor keep production costs low.
C) Consumption continues to grow in low income countries.
D) There is experimentation and improvement in design and manufacturing.
Answer: D
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.3 Discuss the limits of the HO model.
AACSB: Application of knowledge
3) Which of the following would be associated with the early phase of the product cycle?
A) Large amounts of production in low-income, developing countries
B) A standardized product with an assembly-line style production process
C) Sophisticated marketing and customer feedback mechanisms
D) More consumption in low-income, developing countries
Answer: C
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.3 Discuss the limits of the HO model.
AACSB: Application of knowledge

4) Which of the following is true according to the case study on U.S. / China trade presented in
the chapter?
A) China has relative abundance in capital.
B) China has relative abundance in skilled labor.
C) The United States has relative scarcity in unskilled labor.
D) The United States has relative scarcity in capital.
Answer: C
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two
countries with two inputs and two outputs.
AACSB: Application of knowledge

5) If the case study on U.S. / China trade is correct in its analysis of factor abundance,
A) Chinese capital owners should see their income rise as trade increases.
B) U.S. skilled labor inputs should see their incomes fall as trade increases.
C) U.S. capital owners should see their income fall as trade increases.
D) Chinese unskilled labor should see their income rise as trade increases.
Answer: D
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.
AACSB: Application of knowledge

6) The opportunity cost of producing in low-income, developing countries rises over the product
cycle, according to theory.
Answer: FALSE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.3 Discuss the limits of the HO model.
AACSB: Application of knowledge
7) Chinese exports of toys and footwear can be explained by factor endowments, while Chinese
exports of telecommunications equipment and computers and accessories can be explained by
product-cycle analysis.
Answer: TRUE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.3 Discuss the limits of the HO model.
AACSB: Application of knowledge

8) The O in OLI theory stands for ownership, and the asset owned can be tangible or intangible.
Answer: TRUE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

9) The L in OLI theory stands for loyalty, and this factor makes it more difficult for firms to
substitute foreign operations for domestic as they fear a loss of sales due to negative publicity.
Answer: FALSE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

10) According to OLI theory, a firm might be unwilling to license its production to a foreign firm
for fear that its technology may be stolen or its brand name harmed, which leads the firm to
internalize control over its asset and set up its own foreign subsidiary.
Answer: TRUE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

11) OLI theory is a direct contradiction of trade theory, especially trade theory based on
comparative advantage.
Answer: FALSE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge
12) Offshoring became a concern in the 1980s when modern communication and transport
technology made it possible for firms to relocate production abroad.
Answer: TRUE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

13) Offshoring by domestic firms causes job losses rather than job expansion in the home
market.
Answer: FALSE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

14) The bulk of offshoring is vertical, relating to producing a component piece in an overall
supply chain production.
Answer: FALSE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

15) The primary interest of firms engaging in offshoring is to find lower wages and to decrease
production costs.
Answer: FALSE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

16) Most migrants move from developing to developed nations.

Answer: TRUE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.5 Give examples of the determinants of international migration and its impact
on comparative advantage.
AACSB: Application of knowledge
17) The United States has the largest percentage of foreigners in its overall population of any
nation.
Answer: FALSE
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.5 Give examples of the determinants of international migration and its impact
on comparative advantage.
AACSB: Application of knowledge

18) How is offshoring of services different from past trade patterns?

Answer: Services were consumed where they were produced and not traded.
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

19) Offshoring required which types of advances?

Answer: Advances in communications technology, such as fax machines, video conferencing,
the Internet, and in general, lower prices for long distance communication
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

20) What does research thus far suggest about job loss and offshoring?
Answer: That outsourcing can be complementary and not just a substitute for domestic labor
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

21) Forces inside a nation that cause people to think about leaving that nation are called what in
migration theory?
Answer: Supply-push factors
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.5 Give examples of the determinants of international migration and its impact
on comparative advantage.
AACSB: Application of knowledge
22) The relocation of service industry functions to another country is called what?
Answer: Offshoring
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

23) If General Motors imports parts from its plants in Canada and Mexico for finished trucks that
it will sell across the NAFTA region, what type of trade does this represent?
Answer: Intrafirm
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Easy
Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.
AACSB: Application of knowledge

24) Describe the product cycle, including addressing the various inputs that are required over
time and the resulting production location decisions.
Answer: Manufactured products go through a product cycle in which inputs change over time.
The early phase is characterized by experimentation in both the product and the manufacturing
process used to produce it. Sophisticated marketing and consumer feedback mechanisms are
some of the inputs needed that necessitate manufacturing being near a high-income market.
Experimentation and improvement in design and manufacturing require scientific and
engineering inputs and capital that is willing to risk failure and some periods of little or no
profits. As time passes, the product becomes standardized in size, features, and the
manufacturing process. Production begins to shift to countries with low labor costs as
manufacturing routines are standardized, assembly line type operations. In the early stage,
opportunity costs are lowest in high-income countries because of their unique resource
endowments. In the later stages, opportunity costs are lower in low wage countries as the factors
of production in the manufacturing process shift to being more labor intensive.
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Difficult
Objective: LO 4.3 Discuss the limits of the HO model.
AACSB: Application of knowledge
25) What are the factors that have been identified that affect a migration decision? Give
examples of each.
Answer: Supply push factors are forces inside a country that cause people to think about
leaving, such as poor economic opportunities or instability. Demand pull factors are forces that
pull migrants to a particular country or region. These could include high rates of economic
growth or high demand for particular types of workers. Social networks are made up of family or
community members that have previously migrated. They can share information and help recent
migrants transition to the new community.
Topic: Extension of the Heckscher-Ohlin Model
Difficulty: Moderate
Objective: LO 4.5 Give examples of the determinants of international migration and its impact
on comparative advantage.
AACSB: Analytical thinking

4.6 The Impact of Trade on Wages and Jobs

1) Wage inequality has been on the rise in virtually all high-income industrial economies since
the 1970s. The causes are probably numerous, but the leading explanation for the greatest share
of the increase in inequality is
A) the growth of trade with developing countries.
B) the growth of trade with other high income industrial countries.
C) technological change which increased the relative demand for skilled workers.
D) technological change which increased the relative demand for unskilled workers.
Answer: C
Topic: The Impact of Trade on Wages and Jobs
Difficulty: Moderate
Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on
wages and jobs.
AACSB: Application of knowledge

2) Most economists attribute the growing income inequality in the United States to
A) trade.
B) macroeconomic policies.
C) technological change.
D) changing values.
E) taxes.
Answer: C
Topic: The Impact of Trade on Wages and Jobs
Difficulty: Moderate
Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on
wages and jobs.
AACSB: Application of knowledge
3) Which of the following is NOT a primary determinant of the number of jobs in a nation in the
long run?
A) Age and size of the population
B) Labor market policies
C) Macroeconomics policies
D) International trade
Answer: D
Topic: The Impact of Trade on Wages and Jobs
Difficulty: Moderate
Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on
wages and jobs.
AACSB: Application of knowledge

4) International trade is the major cause of rising income inequality in the United States.
Answer: FALSE
Topic: The Impact of Trade on Wages and Jobs
Difficulty: Easy
Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on
wages and jobs.
AACSB: Application of knowledge

5) In the long run, the number of jobs in country is primarily determined by macroeconomic
factors, not international trade.
Answer: TRUE
Topic: The Impact of Trade on Wages and Jobs
Difficulty: Moderate
Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on
wages and jobs.
AACSB: Application of knowledge

6) Carefully explain the relationship between the number of jobs in a country and international
trade.
Answer: International trade has little effect on the number of jobs in a country in the long run.
The number of jobs is far more closely linked to the age and size of the population, labor market
policies, the business cycle, and macroeconomic policies. However, trade may have an impact on
the kinds of jobs that are available in an economy. Trade may also have some impact on wages,
particularly on the wage stagnation observed in the last decade or so, although evidence on this is
mixed.
Topic: The Impact of Trade on Wages and Jobs
Difficulty: Difficult
Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on
wages and jobs.
AACSB: Analytical thinking