Chapter 3 Comparative Advantage and the Gains from Trade

3.1 Introduction: The Gains from Trade

1) Which of the following is true?
A) Adam Smith proposed the theory of comparative advantage as the basis for trade in The
Wealth of Nations.
B) David Ricardo proposed the theory of absolute advantage as the basis for trade.
C) Absolute advantage is based on comparing the opportunity costs of trading partners.
D) The Ricardian model assumes labor is perfectly mobile.
Answer: D
2) The economic philosophy that favors strict limits on imports and strong support for
exports is called
A) zero sum.
B) mercantilism.
C) comparative advantage.
D) absolute advantage.
Answer: B
3)
U.S. U.K
Wheat 12 6
Cloth 6 18
The table above shows United States and United Kingdom production of wheat (bushels
per hour) and cloth (yards per hour).
According to Adam Smith, which of the following is true?
A) The United States has an absolute advantage in the production of wheat.
B) The United States has an absolute advantage in the production of cloth.
C) There is no basis for trade between these countries.
D) The United States will gain more from trade than the United Kingdom.
Answer: A
4)
U.S. U.K
Wheat 12 6
Cloth 6 18
The table above shows United States and United Kingdom production of wheat (bushels per
hour) and cloth (yards per hour).
In order for both countries to gain from trade, one bushel of wheat must trade for
A) between 6 and 18 yards of cloth.
B) between 1/2 and 2 yards of cloth.
C) between 1/3 and 3 yards of cloth.
D) between 1/2 and 3 yards of cloth.
Answer: D
5) A country will gain relatively more from trade when
A) trade is regulated.
B) the world price is close to the country's opportunity cost of the good.
C) the world price is below the country's opportunity cost of the good.
D) the world price is much greater than the country's opportunity cost for the good.
Answer: D
 6) Mercantilists perceived trade as a zero sum game.
Answer: TRUE
7) Adam Smith created the theory of comparative advantage.
Answer: FALSE
8) What type of policies did Adam Smith attack in his book, An Inquiry into the Nature and
Causes of the Wealth of Nations?
Answer: Mercantilism
9) What did Adam Smith perceive was primarily responsible for improving standard of
living?
Answer: Increased specialization in production
10) What is productivity?
Answer: The amount of output from a unit of an input
11) In the simple trade model, what is assumed about labor?
Answer: It is perfectly mobile between the two industries within a nation.
12) Which economist introduced the simple trade model and the concept of trade based on
comparative advantage?
Answer: David Ricardo
3.2 Comparative Productivity Advantage and the Gains from Trade
Table 3.1
Output per Hour Worked

1) Based on Table 3.1, the opportunity cost of a pair of shoes in the United States is
A) three computers.
B) two computers.
C) one computer.
D) one-half computer.
Answer: D
2) Based on Table 3.1, the pre-trade relative price of a computer in Mexico is
A) three pairs of shoes.
B) one pair of shoes.
C) one-half pair of shoes.
D) one-third pair of shoes.
Answer: A
3) Based on Table 3.1, trade between the United States and Mexico will occur as long as the relative
price of shoes is between
A) three computers and one computer.
B) three computers and two computers.
C) one-half computer and one-third computer.
D) six computers and three computers.
Answer: C
4) Based on Table 3.1, which country or countries has an absolute advantage and a comparative
advantage in shoes?
A) Mexico has an absolute and comparative advantage in shoes.
B) The United States has an absolute and comparative advantage in shoes.
C) The United States has a comparative advantage, and Mexico has an absolute advantage in shoes.
D) Mexico has a comparative advantage, and the United States has an absolute advantage in shoes.
Answer: D
5) Based on Table 3.1, if the world price of computers is four pairs of shoes, then the optimal strategy
for each country would be
A) to specialize in shoes.
B) to specialize in computers.
C) for Mexico to specialize in shoes, and the United States in computers.
D) for the United States to specialize in shoes, and Mexico in computers.
Answer: B
6) Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or
20 corn. If opportunity costs are constant for both countries, then
A) the United States has a comparative advantage in corn production.
B) Mexico has a comparative advantage in corn production.
C) the United States cannot gain from trade with Mexico.
D) the United States has a comparative advantage in auto production.
Answer: A
7) Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or
20 corn. If opportunity costs are constant for both countries, which of the following would NOT be a
potential terms of trade?
A) 1 auto for 3 corn
B) 1 auto for 4 corn
C) 1 corn for 1/3 of an auto
D) 1 corn for 1 auto
Answer: D
8) Suppose Paraguay can produce 12 wheat or 3 corn. Suppose Bolivia can produce 4 wheat or 2 corn.
Suppose opportunity costs are constant. Given these production possibilities,
A) Paraguay has a comparative advantage in wheat.
B) Paraguay has a comparative advantage in corn.
C) Paraguay has a comparative advantage in both goods.
D) Paraguay has an absolute advantage in neither good.
Answer: A
9) Suppose that Paraguay can produce 12 wheat or 3 corn and Bolivia can produce 4 wheat or 2 corn.
Suppose that opportunity costs are constant. Which of the following is a potentially agreeable trade
arrangement for Paraguay and Bolivia?
A) Paraguay trades one corn to Bolivia for three units of wheat.
B) Bolivia trades one corn to Paraguay for three units of wheat.
C) Bolivia trades one corn to Paraguay for one wheat.
Answer: B
10) Suppose that Canada can produce 15 timber or 3 film and Mexico can produce 9 timber or 3 film.
Suppose that opportunity costs are constant. Which of the following is FALSE?
A) Canada has an absolute advantage in timber production.
B) Mexico has a comparative advantage in film production.
C) The opportunity costs for producing timber are lower in Canada than in Mexico.
D) Canada and Mexico would find trade mutually advantageous at a ratio of one unit of film to six units of
timber.
Answer: D
11) Suppose that Canada can produce 15 units of timber or 3 units of grain. Suppose that Mexico can
produce 6 units of timber or 2 units of grain. Which of the following is CORRECT?
A) Mexico has a comparative advantage in grain production.
B) Mexico has an absolute advantage in timber production.
C) Canada has a comparative advantage in grain production.
D) The countries would find trade mutually beneficial at a trading ratio of 1 grain for 2 timber.
Answer: A
12) Suppose that Sandy can produce 10 economic reports or make 2 sales calls. Suppose Tim can
produce 2 economic reports or make 1 sales call. Which of the following is CORRECT?
A) The opportunity cost for Sandy of producing one economics report is 1/5 of a sales call.
B) The opportunity cost for Sandy of producing one sales call is 10 economics reports.
C) The opportunity cost for Tim of producing one sales call is 1/2 of an economics report.
D) The opportunity cost for Tim of producing one economics report is 2 sales calls.
Answer: A
13) Given that Sandy can produce 10 economics reports or make 2 sales calls and Tim can produce 2
economics reports or make 1 sales call, we can conclude that
A) Sandy should specialize in economics reports, and Tim should specialize in sales calls.
B) Sandy should produce both economics reports and sales calls since she cannot possibly gain from trade
with Tim.
C) Tim should specialize in producing economics reports, and Sandy should specialize in producing sales
calls.
D) Tim should produce both economics reports and sales calls.
Answer: A
14) Given that Sandy can produce 10 economics reports or 2 sales calls and Tim can produce 2
economics reports or 1 sales call, which of the following is FALSE?
A) Sandy has a comparative advantage in sales calls.
B) Tim has a comparative advantage in sales calls.
C) Sandy has a comparative advantage in economics reports.
D) Sandy has an absolute advantage in both economics reports and sales calls.
Answer: A
15) Given that Sandy can produce 10 economics reports or 2 sales calls and Tim can produce 2
economics reports or 1 sales call, which of the following would NOT be a mutually agreeable terms of
trade for Sandy and Tim?
A) 1 economics report for 1 sales call
B) 1 sales call for 3 economics reports
C) 1 sales call for 4 economics reports
D) 1 economics report for 1/4 of a sales call
Answer: A
 16) For a country in autarky, the opportunity cost of the good on the horizontal axis is the same as
A) the relative price of the good on the vertical axis.
B) the relative price of the good on the horizontal axis.
C) the opportunity cost of the good on the vertical axis.
D) the nominal price of the good on the horizontal axis.
Answer: B
The graphs below show the production possibilities curves for the U.S. and Canada, which both
produce cars and wheat.

17)Based on the graphs above, which of the following is true?

A) The U.S. has an absolute advantage in both goods.
B) Canada has an absolute advantage in cars.
C) The U.S. has a comparative advantage in cars.
D) The U.S. has a comparative advantage in wheat.
Answer: C
18)Based on the graphs above, which of the following is true?
A) The opportunity cost of a car in the U.S. is 1 unit of wheat.
B) The opportunity cost of a car in the U.S. is 5 units of wheat.
C) The opportunity cost of a car in Canada is 1/2 unit of wheat.
D) The opportunity cost of a car in Canada is 2 units of wheat.
Answer: A
19) With trade, the slope of the Consumption Possibilities Curve (CPC) is equal to
A) the world price of the good on the horizontal axis.
B) the world price of the good on the vertical axis.
C) the opportunity cost of the good on the horizontal axis.
D) the opportunity cost of the good on the vertical axis.
Answer: A
3.3 Absolute and Comparative Productivity Advantage Contrasted
1) The United States' comparative advantage over Japan in the production of rock-n-roll music
implies that (for a similar quality of music) the
A) opportunity cost of production is less in Japan.
B) absolute cost of production is less in the United States.
C) absolute cost of production is less in Japan.
D) opportunity cost of production is less in the United States.
Answer: D
2) If one nation is able to produce a good at a lower opportunity cost than another, it has
A) an absolute advantage in that good.
B) a comparative advantage in that good.
C) a productivity advantage in that good.
D) a technological advantage in that good.
Answer: B
3) The basis for free trade is the concept of
A) absolute advantage.
B) differences in natural resources and climate.
C) differences in nominal wages.
D) comparative advantage.
Answer: D
4) In our simple trade model, having a comparative advantage in a product implies that a country will
specialize completely in the product
A) with the highest opportunity cost.
B) with the lowest opportunity cost.
C) where total output is lower per worker-hour.
D) where total output is greater per worker-hour.
Answer: B
5) A country possesses a comparative advantage in the production of a product if
A) the opportunity cost, in terms of the amount of other products that it gives up to produce this product, is
lower than it is for its trading partners.
B) it possesses an absolute advantage in the production of this good compared to its trading partners.
C) it is able to produce less of this good per worker than its trading partners.
D) it can produce more of this good per hour than its trading partners.
Answer: A
3.4 Gains from Trade with No Absolute Advantage
1) If a nation has no absolute advantage, then it
A) cannot gain from trade.
B) still gains from trade.
C) can only gain from trade if it raises its productivity levels.
D) can only gain from trade if it produces outside its production possibilities curve.
Answer: B
2) Which of the following statements is FALSE?
A) Comparative advantage is the principle upon which trade patterns are based.
B) Opportunity cost measures the real cost to a country of producing a certain product.
C) The gains from trade are the result of differences in opportunity cost and comparative advantage.
D) A country that possesses an absolute advantage will always have a comparative advantage.
Answer: D
3) If a country has lower overall productivity levels than its trading partners, then it will
A) be unable to export.
B) have a trade deficit.
C) not be able to obtain gains from trade.
D) have a lower standard of living than its trading partners.
Answer: D
4) If two countries agree to specialize and trade based on comparative advantage, which of the
following is most likely to be true?
A) Both of the countries will consume outside their respective production possibilities curves.
B) One of the countries will end up receiving all of the gains from trade.
C) One of the countries will both consume and produce on its production possibilities curve.
D) Only one of the countries will produce on and consume outside its production possibilities curve.
Answer: A
5) If the world price for a good is above a nation's pre-trade equilibrium price, then the nation
A) will export the good.
B) will import the good.
C) will neither export nor import the good.
D) cannot gain from trade.
E) Both C and D.
Answer: A
6) All of the following are true EXCEPT
A) trade between two nations reduces their opportunity costs.
B) trade makes nations dependent on each other.
C) trade between nations will not benefit all citizens.
D) the principle of comparative advantage does not apply to countries with limited resources.
Answer: D
7) When economists talk about the gains from trade they mean that
A) no one ever gets hurt by trade.
B) the benefits of trade outweigh the losses.
C) business firms benefit from trade but not necessarily individuals.
D) trade increases government revenue through taxes on imports.
E) economic restructuring is usually quick and painless.
Answer: B
8) Based on the theory of comparative advantage, nations maximize their well-being when they
A) create more jobs.
B) allocate resources more efficiently.
C) increase trade surpluses.
D) increase exports.
Answer: B
9) Economic restructuring ‫ إعادة الهيكلة‬that takes place as a result of opening to trade with other
countries
A) contradicts the idea of gains from trade.
B) causes some trading activity to be zero sum.
C) worsens the nation's allocation of resources.
D) improves the nation's allocation of resources.
Answer: D