Chapter 20 Test Bank
Multiple Choice Questions
1. The slope of the production possibility frontier is determined by the ________________ of
expanding production of one good, measured by how much of the other good would be lost.
A. absolute advantage
B. opportunity cost
C. relative advantage
D. specialization
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Remember
2. When one nation can produce a product at lower cost relative to another nation, it is said to
have a(n) __________________ in producing that product.
A. relative advantage
B. absolute advantage
C. economy of scale
D. production efficiency
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
3. Colombia produces coffee with less labor and land than any other country; it therefore
necessarily has:
A. a comparative advantage in coffee production.
B. both a comparative and absolute advantage in coffee production.
C. an absolute advantage and comparative disadvantage in coffee production.
D. an absolute advantage in coffee production
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
4. The idea behind comparative advantage reflects the possibility that one party:
A. may be able to produce everything relatively more efficiently than another party.
B. may be able to produce something at a lower dollar cost than another party.
C. with an absolute advantage in producing two different may export goods both of those goods
to the other party.
D. may be able to produce something at a lower opportunity cost than another party.
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Understand
5. Alternate Outputs from One Day's Labor Input:
USA: 12 bushels of wheat or 3 yards of textiles.
India: 3 bushels of wheat or 12 yards of textiles.
From the data, the USA:
A. has an absolute advantage over India in the production of textiles.
B. has an absolute advantage over India in the production of wheat.
C. has a comparative advantage in the production of textiles.
D. should export textiles to India.
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Understand
6. Alternate Outputs from One Day's Labor Input:
USA: 12 bushels of wheat or 3 yards of textiles.
India: 3 bushels of wheat or 12 yards of textiles.
The opportunity cost of one bushel of wheat in India is:
A. 1 yard of textiles.
B. 3 yards of textiles.
C. 4 yards of textiles.
D. 12 yards of textiles.
Answer: C Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Understand
7. The slope of the production possibility frontier is determined by the ________________ of
expanding production of one good, measured by how much of the other good would be lost.
A. absolute advantage
B. relative cost
C. opportunity cost
D. comparative advantage
Answer: C Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
8. In India one person can produce 330 pounds of rice or 110 shirts in one year. In China one
person can produce 400 pounds of rice or 200 shirts in one year. Which of the following
statements is true?
A. India has a comparative advantage in the production of rice.
B. China has a comparative advantage in the production of rice.
C. China has both an absolute and comparative advantage in the production of rice.
D. India has an absolute advantage in the production of rice.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Analyze
9. Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16
oranges or 4 apples an hour. The opportunity cost of producing 1 orange for Alpha and Beta,
respectively, are:
A. 0.25 apples; 0.5 apples.
B. 9 apples; 4 apples.
C. 0.5 apples; 0.25 apples.
D. 2 apples; 4 apples
Answer: C Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Apply
10. Which of the following is true?
A. A nation can have a comparative advantage in the production of a good only if it also has an
absolute advantage.
B. A nation can have a comparative advantage in the production of every good, but not an
absolute advantage.
C. A nation cannot have an absolute advantage in the production of every good.
D. A nation cannot have a comparative advantage in the production of every good.
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Understand
11. Suppose that Canada can produce 100,000 hockey sticks or 10,000 gallons of maple syrup in a
typical workweek, while Germany can produce 90,000 hockey sticks or 10,000 gallons of maple
syrup in a typical workweek. From these numbers, we can conclude:
A. Canada has a comparative advantage in the production of hockey sticks.
B. Germany has a comparative advantage in the production of hockey sticks.
C. Canada has an absolute advantage in the production of maple syrup.
D. Germany has an absolute advantage in the production of maple syrup.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Evaluate
12. The underlying reason why trade benefits both sides of a trading arrangement is rooted in the
concept of __________________.
A. opportunity cost
B. specialization
C. absolute advantage
D. maximum production
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
13. If the USA could produce 1 ton of potatoes or 0.5 tons of wheat per worker per year, while
Ireland could produce 3 tons of potatoes or 2 tons of wheat per worker per year, there can be
mutual gains from trade if:
A. The USA specializes in potatoes because of its comparative advantage in producing potatoes.
B. The USA specializes in wheat because of its absolute advantage in producing wheat.
C. The USA specializes in wheat because of its comparative advantage in producing wheat.
D. There can be no mutual gains from trade.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Understand
14. According to international trade theory, a country should:
A. import goods in which it has an absolute advantage.
B. import goods in which it has a comparative disadvantage.
C. export goods in which it has an absolute advantage.
D. import goods in which it has an absolute disadvantage.
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
15. _____________________ identifies the area where a producer’s absolute advantage is relatively
greatest, or where the producer’s absolute disadvantage in productivity is relatively least.
A. relative advantage
B. opportunity cost
C. productivity advantage
D. comparative advantage
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
16. When nations increase production in their area of _________________ and trade with each other,
both sides can benefit.
A. relative advantage
B. absolute advantage
C. comparative advantage
D. opportunity cost
Answer: C Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
17. The theory of comparative advantage shows that the gains from international trade do not
just result from the absolute advantage of producing at lower cost, but also from pursuing
comparative advantage and producing at a lower ________________.
A. opportunity cost
B. absolute cost
C. relative cost
D. comparative cost
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
18. Jethro has a(n) __________________ in all aspects of camping: he is faster at carrying a backpack,
gathering firewood, paddling a canoe, setting up tents, making a meal, and washing up.
A. relative advantage
B. opportunity cost
C. absolute advantage
D. comparative advantage
Answer: C Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Understand
19. Say that Alland can produce 32 units of food per person per year or 16 units of clothing per
person per year, but Georgeland can produce 16 units of food per year or 8 units of clothing.
Which of the following is true?
A. Georgeland has a comparative advantage, but not an absolute advantage, in producing
clothing.
B. Georgeland has both a comparative and absolute advantage in producing clothing.
C. Alland has a comparative advantage, but not an absolute advantage, in producing food.
D. Alland has an absolute advantage, but not comparative advantage, in producing food.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Understand
20. The idea behind comparative advantage reflects the possibility that one party:
A. may be able to produce everything relatively more efficiently than another party.
B. may be able to produce something at a lower opportunity cost than another party.
C. may be able to produce something at a lower dollar cost than another party.
D. with an absolute advantage in producing two different may export goods both of those goods
to the other party.
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Understand
21. The concept of _________________ means that as the measure of output goes up, average costs
of production decline—at least up to a point.
A. relative advantage
B. economies of scale
C. absolute advantage
D. comparative advantage
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
22. Intra-industry trade between similar trading partners allows the gains from
______________________ that arise when firms and workers specialize in the production of a certain
product.
A. comparative advantage
B. learning and innovation
C. creating the value chain
D. relative advantage
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
23. International trade currently involves about ______________ worth of goods and services
thundering around the globe.
A. $200 trillion
B. $20 trillion
C. $2 trillion
D. $200 billion
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Remember
24. The reasons that nations trade includes the fact that:
A. no one country produces all of what citizens within the country want.
B. the wants of their citizens exceeds their productive capacity.
C. different countries have different levels of greed.
D. labor costs are too high in some countries to efficiently produce goods.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Understand
25. What matters most in determining the efficient distribution of production over the world is:
A. absolute advantage.
B. efficiency.
C. the allocation of resources.
D. comparative advantage.
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Understand
26. Trade allows each country to take advantage of _________________ in the other country.
A. economies of scale
B. lower opportunity costs
C. specialization
D. worker productivity
Answer: B Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
27. As measured in 2008, about _________ of U.S. trade and ________ of European trade is intraindustry trade.
A. 10%; 10%
B. 30%; 30%
C. 60%; 60%
D. 90%; 90%
Answer: C Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Remember
28. Say that Alland can produce 32 units of food per person per year or 16 units of clothing per
person per year, but Georgeland can produce 24 units of food per year or 12 units of clothing.
Which of the following is true?
A. Alland has an absolute advantage in producing food but will not trade with Georgeland.
B. Alland has a comparative advantage, but not an absolute advantage, in producing food.
C. Georgeland has both a comparative and absolute advantage in producing clothing.
D. Georgeland has a comparative advantage, but not an absolute advantage, in producing
clothing.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Hard
Category: Analyze
29. Say that Alland can produce 32 units of food per person per year or 16 units of clothing per
person per year, but Georgeland can produce 24 units of food per year or 12 units of clothing.
Which of the following is true?
A. Alland has both a comparative and absolute advantage in producing food.
B. Alland has comparative advantage, but not an absolute advantage, in producing food.
C. Georgeland has both a comparative and absolute disadvantage in producing clothing.
D. Georgeland has an absolute disadvantage, but not a comparative disadvantage, in producing
clothing.
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Hard
Category: Analyze
30. Say that Alland can produce 32 units of food per person per year or 16 units of clothing per
person per year, but Georgeland can produce 36 units of food per year or 18 units of clothing.
Which of the following is true?
A. Georgeland has an absolute but not a comparative advantage in producing clothing.
B. Georgeland has both an absolute and a comparative advantage in producing clothing.
C. Alland has an absolute but not a comparative advantage in producing food.
D. Alland has both an absolute and a comparative advantage in producing food.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Hard
Category: Analyze
31. Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16
oranges or 4 apples an hour. Which of the following statements is true?
A. Alpha should export to Beta, but Beta should not export to Alpha.
B. Since Alpha has an absolute advantage in both goods, no mutual gains from trade are possible.
C. If Alpha specializes in growing oranges and Beta specializes in growing apples, they could both
gain by specialization and trade.
D. If Alpha specializes in growing apples and Beta specializes in growing oranges, they could both
gain by specialization and trade.
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Analyze
32. Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16
oranges or 4 apples an hour. Which of the following terms of trade between apples and oranges
would allow both Alpha and Beta to gain by specialization and exchange?
A. 1 orange for 0.2 apples
B. 2 apples for 3 oranges
C. 3 apples for 3 oranges
D. 1 apple for 3 oranges
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Hard
Category: Evaluate
33. Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16
oranges or 4 apples an hour. If the terms of trade are established as 1 apple for 2 oranges, then:
A. there are no incentives for Alpha to specialize and trade with Beta.
B. it is in the interest of both countries to specialize and trade with one another.
C. it is in the interest of Beta to grow oranges and trade for apples.
D. there are no incentives for Beta to engage in international specialization and trade of apples
and oranges.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Analyze
34. Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16
oranges or 4 apples an hour. If the terms of trade are established as 1 apple for 4 oranges, then:
A. there are no incentives for Beta to engage in international specialization and trade with Alpha.
B. it is in the interest of Beta to grow oranges and trade for apples.
C. it is in the interest of both countries to specialize and trade with one another.
D. there are no incentives for Alpha or Beta to specialize and trade with one another.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Analyze
35. Suppose that the USA can make 15,000,000 cars or 20,000,000 bottles of wine with one year's
worth of labor. France can make 10,000,000 cars or 18,000,000 bottles of wine with one year's
worth of labor. From these numbers, we can conclude:
A. The USA has a comparative advantage in the production of wine.
B. France has a comparative advantage in the production of cars.
C. The USA has an absolute advantage in the production of cars.
D. France has an absolute advantage in the production of wine.
Answer: C Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Analyze
36. Assume that one day's labor in Argentina can produce either 20 units of cloth or 2 units of
wine, while in Chile one day's labor can produce either 24 units of cloth or 12 units of wine. If
Argentina transfers 2 units of labor from wine to cloth and Chile transfers 1 unit of labor from
cloth to wine, the increase in combined output by those two workers will be:
A. 16 wine; 8 cloths
B. 16 wine; 16 cloths
C. 12 wine; 12 cloths
D. 8 wine; 16 cloths
Answer: D Reference:
Explanation:
Type: Multiple Choice
Difficulty: Hard
Category: Apply
37. The opportunity cost of producing a pair of pants in the USA is 5 bushels of wheat, while in
China, it is 2 bushels of wheat. As a result:
A. there can be mutual gains from trade to the two countries if the USA exports wheat to China in
exchange for pants.
B. The USA has a comparative advantage over China in the production of pants.
C. China has a comparative advantage over the USA in the production of wheat.
D. there can be mutual gains from trade to the two countries if the USA exports pants to China in
exchange for wheat.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Easy
Category: Analyze
38. If a nation has a comparative disadvantage in the production of some commodity:
A. it cannot gain from international trade unless it has an absolute advantage in every other
commodity.
B. it cannot gain from international trade in the commodity.
C. it can still gain from international trade in that commodity, by getting it at a lower opportunity
cost than if it produced it domestically.
D. it can gain from international trade in that commodity only if it has an absolute advantage in
that commodity.
Answer: C Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Understand
39. Some nations that seek to produce all of their own needs face the problem that:
A. some industries are too small to be efficient if restricted to their domestic markets alone.
B. they can deplete their natural resources as a result.
C. the opportunity cost of producing some of their own goods is lower than that of trading with
others for them.
D. they will not be able to satisfy the wants of all of their citizens.
Answer: A Reference:
Explanation:
Type: Multiple Choice
Difficulty: Medium
Category: Understand
Essay Questions
1. What benefits are to be gained from countries producing according to the concept of
comparative advantage? What if a country is absolutely more productive in all goods?
Reference:
Explanation: When countries produce according to the concept of comparative advantage, and
then trade, the consumption possibilities expand for all countries involved. This is because
producing goods for which a country has a comparative advantage means that goods are
produced at the lowest relative opportunity cost, thus freeing resources for the production of
more goods. Even if a country has an absolute advantage, it will still gain from trade, because it is
comparative, not absolute, advantage that determines which countries should produce which
goods.
Type: Essay
Difficulty: Hard
Category: Understand
2. Describe "the value chain" and illustrate with an example.
Reference:
Explanation: The “value chain” describes how a good is produced in stages; for example, the value
chain for making a toaster oven would include making metal, plastic, elements that provide the
heat, electrical cords, designing how the parts will fit together, assembly of the toaster ovens,
packaging, shipping, and selling in a retail store.
Type: Essay
Difficulty: Easy
Category: Understnd
3. What is comparative advantage, and why is it important in international trade?
Reference:
Explanation: Comparative advantage states that aggregate output is maximized when countries
specialize in the production of goods for which they are the lowest opportunity cost producer,
and then trade for other goods. This explains how countries can improve their situation through
trade, rather than producing all goods themselves.
Type: Essay
Difficulty: Medium
Category: Understand
4. Define the term in economics "absolute advantage" and illustrate with an example.
Reference:
Explanation: When one nation can produce a product at lower cost relative to another nation, it is
said to have an absolute advantage in producing that product. A worker in Saudi Arabia can
produce more oil, by a margin of 6 barrels to 2 barrels. However, a worker in the United States
can produce more corn, by a margin of 8 bushels to 1 bushel.
Type: Essay
Difficulty: Easy
Category: Understand
5. Define "splitting up the value chain." List some factors that have allowed this trend to
accelerate in recent years.
Reference:
Explanation: Thanks in large part to improvements in technology for communication, sharing of
information, and transportation, it has become easier to split up the value chain so that instead of
being done in a single large factory, all of these steps can be split up among different firms
operating in different places and even different countries.
Type: Essay
Difficulty: Medium
Category: Understand
6. A skeptic about the gains from global trade might offer up some challenging counterpoint
questions regarding trade. Ask at least two questions that counter the numeric benefits of
globalization.
Reference:
Explanation: What if one nation becomes dependent on the other for oil or food, and then the
exporter cuts off the supply? What if oil workers in the United States lose jobs when oil is
imported from Saudi Arabia and farmers in Saudi Arabia lose jobs when corn is imported from the
United States?
Type: Essay
Difficulty: Easy
Category: Apply
7. The gains from expanding trade are probably most important for the low-income economies in
the world as opposed to the gains though trade benefitting the USA. Why might this be so? Offer
at least three different reasons comparing and contrasting the USA economy with that of smaller
nations.
Reference:
Explanation: In some ways, the giant U.S. economy has less need for international trade, because
it can already take advantage of internal trade within its economy. The United States has a variety
of different climates, natural resources, and geographic areas where workers are more skilled or
less skilled. It is a large enough economy that firms can become extremely specialized and
focused on producing small slices of the value chain. In the huge U.S. economy, large firms can
take advantage of economies of scale and still compete against each other within the U.S.
economy.
Type: Essay
Difficulty: Hard
Category: Understand
8. Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their
economic activity consists of either gathering pineapples or fishing. We know Steve can catch four
fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish
or harvest two baskets of pineapples. If they each spend four hours a day fishing and four hours a
day harvesting pineapples, how many of each will Steve produce? How many will Craig produce?
What will their total production be?
Reference:
Explanation: Steve produces 16 fish per day (4 hours x 4 fish per hour) and 8 baskets of
pineapples (4 hours x 2 baskets per hour). Craig produces 8 fish per day (4 hours x 2 fish per hour)
and 8 baskets of pineapples (4 hours x 2 baskets per hour). Total production is 24 fish per day and
16 baskets of pineapples.
Type: Essay
Difficulty: Medium
Category: Apply
9. Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their
economic activity consists of either gathering pineapples or fishing. We know Steve can catch four
fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish
or harvest two baskets of pineapples.
If Steve and Craig don't trade with each other, who is better off? Why?
Reference:
Explanation: Steve is better off because he has more fish and the same number of pineapples and
works no more time than Craig. Steve has an absolute advantage in fish production.
Steve's opportunity cost of a basket of pineapples is 2 fish; his opportunity cost of a fish is 2
basket of pineapples. Lee's opportunity cost of a basket of pineapples is 1 fish; his opportunity
cost of a fish is 1 basket of pineapples.
Type: Essay
Difficulty: Medium
Category: Understand
10. Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their
economic activity consists of either gathering pineapples or fishing. We know Steve can catch four
fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish
or harvest two baskets of pineapples.
Assume Craig and Steve both operate on straight-line production possibilities curves. What is
Steve's opportunity cost of producing a basket of pineapples? Of a producing a fish? What is
Craig's opportunity cost of producing a basket of pineapples? Of a producing a fish?
Reference:
Explanation: Steve's opportunity cost of a basket of pineapples is 2 fish; his opportunity cost of a
fish is 2 basket of pineapples. Lee's opportunity cost of a basket of pineapples is 1 fish; his
opportunity cost of a fish is 1 basket of pineapples.
Type: Essay
Difficulty: Hard
Category: Apply
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