International Economics, 14th Edition Robert Carbaugh solutions manual and test bank
CHAPTER 2—FOUNDATIONS OF MODERN TRADE THEORY: COMPARATIVE ADVANTAGE
MULTIPLE CHOICE
1. The mercantilists would have objected to:
| a. | Export promotion policies initiated by the government |
| b. | The use of tariffs or quotas to restrict imports |
| c. | Trade policies designed to accumulate gold and other precious metals |
| d. | International trade based on open markets |
ANS: D PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Knowledge
2. Unlike the mercantilists, Adam Smith maintained that:
| a. | Trade benefits one nation only at the expense of another nation |
| b. | Government control of trade leads to maximum economic welfare |
| c. | All nations can gain from free international trade |
| d. | The world's output of goods must remain constant over time |
ANS: C PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Knowledge
3. The trading principle formulated by Adam Smith maintained that:
| a. | International prices are determined from the demand side of the market |
| b. | Differences in resource endowments determine comparative advantage |
| c. | Differences in income levels govern world trade patterns |
| d. | Absolute cost differences determine the immediate basis for trade |
ANS: D PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Knowledge
4. Unlike Adam Smith, David Ricardo's trading principle emphasizes the:
| a. | Demand side of the market |
| b. | Supply side of the market |
| c. | Role of comparative costs |
| d. | Role of absolute costs |
ANS: C PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Knowledge
5. When a nation requires fewer resources than another nation to produce a product, the nation is said to have a:
| a. | Absolute advantage in the production of the product |
| b. | Comparative advantage in the production of the product |
| c. | Lower marginal rate of transformation for the product |
| d. | Lower opportunity cost of producing the product |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Comprehension
6. According to the principle of comparative advantage, specialization and trade increase a nation's total output since:
| a. | Resources are directed to their highest productivity |
| b. | The output of the nation's trading partner declines |
| c. | The nation can produce outside of its production possibilities curve |
| d. | The problem of unemployment is eliminated |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Comprehension
7. 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 |
ANS: B PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Comprehension
8. As a result of international trade, specialization in production tends to be:
| a. | Complete with constant costs--complete with increasing costs |
| b. | Complete with constant costs--incomplete with increasing costs |
| c. | Incomplete with constant costs--complete with increasing costs |
| d. | Incomplete with constant costs--incomplete with increasing costs |
ANS: B PTS: 1 DIF: Challenging
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Comprehension
9. A nation that gains from trade will find its consumption point being located:
| a. | Inside its production possibilities curve |
| b. | Along its production possibilities curve |
| c. | Outside its production possibilities curve |
| d. | None of the above |
ANS: C PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Application
Table 2.1. Output Possibilities of the U.S. and the U.K.
| Output per Worker per day | ||
| Country | Tons of Steel | Televisions |
| United States | 5 | 45 |
| United Kingdom | 10 | 20 |
10. Referring to Table 2.1, the United States has the absolute advantage in the production of:
| a. | Steel |
| b. | Televisions |
| c. | Both steel and televisions |
| d. | Neither steel nor televisions |
ANS: C PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Analysis
11. Referring to Table 2.1, the United Kingdom has a comparative advantage in the production of:
| a. | Steel |
| b. | Televisions |
| c. | Both steel and televisions |
| d. | Neither steel nor televisions |
ANS: A PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Analysis
12. Refer to Table 2.1. If trade opens up between the United States and the United Kingdom, American firms should specialize in producing:
| a. | Steel |
| b. | Televisions |
| c. | Both steel and televisions |
| d. | Neither steel nor televisions |
ANS: B PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Analysis
13. Referring to Table 2.1, the opportunity cost of producing one ton of steel in the United States is:
| a. | 3 televisions |
| b. | 10 televisions |
| c. | 20 televisions |
| d. | 45 televisions |
ANS: A PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Analysis
14. Refer to Table 2.1. Mutually advantageous trade will occur between the United States and the United Kingdom so long as one ton of steel trades for:
| a. | At least 1 television, but no more than 2 televisions |
| b. | At least 2 televisions, but no more than 3 televisions |
| c. | At least 3 televisions, but no more than 4 televisions |
| d. | At least 4 televisions, but no more than 5 televisions |
ANS: B PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Analysis
15. Referring to Table 2.1, the United Kingdom gains most from trade if:
| a. | 1 ton of steel trades for 2 televisions |
| b. | 1 ton of steel trades for 3 televisions |
| c. | 2 tons of steel trade for 4 televisions |
| d. | 2 tons of steel trade for 5 televisions |
ANS: B PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Analysis
16. Concerning international trade restrictions, which of the following is false? Trade restrictions:
| 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 |
ANS: C PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Comprehension
17. If a production possibilities curve is bowed out (i.e., concave) in appearance, production occurs under conditions of:
| a. | Constant opportunity costs |
| b. | Increasing opportunity costs |
| c. | Decreasing opportunity costs |
| d. | Zero opportunity costs |
ANS: B PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Comprehension
18. Increasing opportunity costs suggest that:
| a. | Resources are not perfectly shiftable between the production of two goods |
| b. | Resources are fully shiftable between the production of two goods |
| c. | A country's production possibilities curve appears as a straight line |
| d. | A country's production possibilities curve is bowed inward (i.e., convex) in appearance |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Comprehension
19. The trading-triangle concept is used to indicate a nation's:
| a. | Exports, marginal rate of transformation, terms of trade |
| b. | Imports, terms of trade, marginal rate of transformation |
| c. | Marginal rate of transformation, imports, exports |
| d. | Terms of trade, exports, imports |
ANS: D PTS: 1 DIF: Challenging
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Comprehension
20. Assuming increasing cost conditions, trade between two countries would not be likely if they have:
| a. | Identical demand conditions but different supply conditions |
| b. | Identical supply conditions but different demand conditions |
| c. | Different supply conditions and different demand conditions |
| d. | Identical demand conditions and identical supply conditions |
ANS: D PTS: 1 DIF: Challenging
NAT: BPROG: Reflective Thinking TOP: Trading Under Increasing-Cost Conditions
KEY: BLOOM'S: Application
Table 2.2. Output possibilities for South Korea and Japan
| Output per worker per day | ||
| Country | Tons of steel | VCRs |
| South Korea | 80 | 40 |
| Japan | 20 | 20 |
21. Referring to Table 2.2, the opportunity cost of one VCR in Japan is:
| a. | 1 ton of steel |
| b. | 2 tons of steel |
| c. | 3 tons of steel |
| d. | 4 tons of steel |
ANS: A PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Application
22. Referring to Table 2.2, the opportunity cost of one VCR in South Korea is:
| a. | 1/2 ton of steel |
| b. | 1 ton of steel |
| c. | 1 1/2 tons of steel |
| d. | 2 tons of steel |
ANS: D PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Application
23. Refer to Table 2.2. According to the principle of absolute advantage, Japan should:
| a. | Export steel |
| b. | Export VCRs |
| c. | Export steel and VCRs |
| d. | None of the above; there is no basis for gainful trade |
ANS: D PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Application
24. Refer to Table 2.2. According to the principle of comparative advantage:
| a. | South Korea should export steel |
| b. | South Korea should export steel and VCRs |
| c. | Japan should export steel |
| d. | Japan should export steel and VCRs |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Application
25. Refer to Table 2.2. With international trade, what would be the maximum amount of steel that South Korea would be willing to export to Japan in exchange for each VCR?
| a. | 1/2 ton of steel |
| b. | 1 ton of steel |
| c. | 1-1/2 tons of steel |
| d. | 2 tons of steel |
ANS: D PTS: 1 DIF: Challenging
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Application
26. Refer to Table 2.2. With international trade, what would be the maximum number of VCRs that Japan would be willing to export to South Korea in exchange for each ton of steel?
| a. | 1 VCR |
| b. | 2 VCRs |
| c. | 3 VCRs |
| d. | 4 VCRs |
ANS: A PTS: 1 DIF: Challenging
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Application
27. The earliest statement of the principle of comparative advantage is associated with:
| a. | Adam Smith |
| b. | David Ricardo |
| c. | Eli Heckscher |
| d. | Bertil Ohlin |
ANS: B PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Knowledge
28. If Hong Kong and Taiwan had identical labor costs but were subject to increasing costs of production:
| a. | Trade would depend on differences in demand conditions |
| b. | Trade would depend on economies of large-scale production |
| c. | Trade would depend on the use of different currencies |
| d. | There would be no basis for gainful trade |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Comprehension
29. If the international terms of trade settle at a level that is between each country's opportunity cost:
| a. | There is no basis for gainful trade for either country |
| b. | Both countries gain from trade |
| c. | Only one country gains from trade |
| d. | One country gains and the other country loses from trade |
ANS: B PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Production Possibilities Schedules
KEY: BLOOM'S: Comprehension
30. International trade is based on the notion that:
| a. | Different currencies are an obstacle to international trade |
| b. | Goods are more mobile internationally than are resources |
| c. | Resources are more mobile internationally than are goods |
| d. | A country's exports should always exceed its imports |
ANS: B PTS: 1 DIF: Easy NAT: #^
TOP: Production Possibilities Schedules KEY: BLOOM'S: Comprehension
Figure 2.1. Production Possibilities Schedule
31. Referring to Figure 2.1, the relative cost of steel in terms of aluminum is:
| a. | 4.0 tons |
| b. | 2.0 tons |
| c. | 0.5 tons |
| d. | 0.25 tons |
ANS: C PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Application
32. Referring to Figure 2.1, the relative cost of aluminum in terms of steel is:
| a. | 4.0 tons |
| b. | 2.0 tons |
| c. | 0.5 tons |
| d. | 0.25 tons |
ANS: B PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Application
33. Refer to Figure 2.1. If the relative cost of steel were to rise, then the production possibilities schedule would:
| a. | Become steeper |
| b. | Become flatter |
| c. | Shift inward in a parallel manner |
| d. | Shift outward in a parallel manner |
ANS: A PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Application
34. Refer to Figure 2.1. If the relative cost of aluminum were to rise, then the production possibilities schedule would:
| a. | Become steeper |
| b. | Become flatter |
| c. | Shift inward in a parallel manner |
| d. | Shift outward in a parallel manner |
ANS: B PTS: 1 DIF: Moderate NAT: BPROG: Analysis
TOP: Production Possibilities Schedules KEY: BLOOM'S: Application
35. When a nation achieves autarky equilibrium:
| a. | Input price equals final product price |
| b. | Labor productivity equals the wage rate |
| c. | Imports equal exports |
| d. | Production equals consumption |
ANS: D PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Trading Under Constant-Cost Conditions
KEY: BLOOM'S: Comprehension
36. When a nation is in autarky and maximizes its living standard, its consumption and production points are:
| a. | Along the production possibilities schedule |
| b. | Above the production possibilities schedule |
| c. | Beneath the production possibilities schedule |
| d. | Any of the above |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Trading Under Constant-Cost Conditions
KEY: BLOOM'S: Comprehension
37. If Canada experiences increasing opportunity costs, its supply schedule of steel will be:
| a. | Downward-sloping |
| b. | Upward-sloping |
| c. | Horizontal |
| d. | Vertical |
ANS: B PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Trading Under Increasing-Cost Conditions
KEY: BLOOM'S: Comprehension
38. If Canada experiences constant opportunity costs, its supply schedule of steel will be:
| a. | Downward-sloping |
| b. | Upward-sloping |
| c. | Horizontal |
| d. | Vertical |
ANS: C PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Trading Under Constant-Cost Conditions
KEY: BLOOM'S: Comprehension
39. The gains from international trade increase as:
| a. | A nation consumes inside of its production possibilities schedule |
| b. | A nation consumes along its production possibilities schedule |
| c. | The international terms of trade rises above the nation's autarky price |
| d. | The international terms of trade approaches the nation's autarky price |
ANS: C PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Equilibrium Terms of Trade
KEY: BLOOM'S: Comprehension
40. In a two-country, two-product world, the statement "Japan enjoys a comparative advantage over France in steel relative to bicycles" is equivalent to:
| a. | France having a comparative advantage over Japan in bicycles relative to steel |
| b. | France having a comparative disadvantage against Japan in bicycles and steel |
| c. | Japan having a comparative advantage over France in steel and bicycles |
| d. | Japan having a comparative disadvantage against Japan in bicycles and steel |
ANS: A PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Trading Under Constant-Cost Conditions
KEY: BLOOM'S: Comprehension
41. Ricardo's theory of comparative advantage was of limited real-world validity because it was founded on the:
| a. | Labor theory of value |
| b. | Capital theory of value |
| c. | Land theory of value |
| d. | Entrepreneur theory of value |
ANS: A PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Knowledge
42. Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in the United Kingdom equal $10 per hour. Production costs would be lower in the United States than the United Kingdom if:
| a. | U.S. labor productivity equaled 40 units per hour while U.K. labor productivity equaled 15 units per hour |
| b. | U.S. labor productivity equaled 30 units per hour while U.K. labor productivity equaled 20 units per hour |
| c. | U.S. labor productivity equaled 20 units per hour while U.K. labor productivity equaled 30 units per hour |
| d. | U.S. labor productivity equaled 15 units per hour while U.K. labor productivity equaled 25 units per hour |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Productions Gains From Specialization
KEY: BLOOM'S: Comprehension
43. According to Ricardo, a country will have a comparative advantage in the product in which its:
| a. | Labor productivity is relatively low |
| b. | Labor productivity is relatively high |
| c. | Labor mobility is relatively low |
| d. | Labor mobility is relatively high |
ANS: B PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Comprehension
44. The Ricardian model of comparative advantage is based on all of the following assumptions except:
| a. | Only two nations and two products |
| b. | Product quality varies among nations |
| c. | Labor is the only factor of production |
| d. | Labor can move freely within a nation |
ANS: B PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Historical Development of Modern Trade Theory
KEY: BLOOM'S: Comprehension
45. The writings of G. MacDougall emphasized which of the following as an explanation of a country's competitive position?
| a. | National income levels |
| b. | Relative endowments of natural resources |
| c. | Domestic tastes and preferences |
| d. | Labor compensation and productivity levels |
ANS: D PTS: 1 DIF: Easy
NAT: BPROG: Reflective Thinking TOP: Empirical Evidence on Comparative Advantage
KEY: BLOOM'S: Knowledge
46. The introduction of community indifference curves into our trading example focuses attention on the nation's:
| a. | Income level |
| b. | Resource prices |
| c. | Tastes and preferences |
| d. | Productivity level |
ANS: C PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Trading Under Increasing-Cost Conditions
KEY: BLOOM'S: Comprehension
47. Introducing indifference curves into our trade model permits us to determine:
| a. | Where a nation chooses to locate along its production possibilities curve in autarky |
| b. | The precise location of a nation's production possibilities curve |
| c. | Whether absolute cost or comparative cost conditions exist |
| d. | The currency price of one product in terms of another product |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Trading Under Increasing-Cost Conditions
KEY: BLOOM'S: Comprehension
48. In the absence of trade, a nation is in equilibrium where a community indifference curve:
| a. | Lies above its production possibilities curve |
| b. | Is tangent to its production possibilities curve |
| c. | Intersects its production possibilities curve |
| d. | Lies below its production possibilities curve |
ANS: B PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Trading Under Increasing-Cost Conditions
KEY: BLOOM'S: Comprehension
49. The use of indifference curves helps us determine the point:
| a. | Along the terms-of-trade line a country will choose |
| b. | Where a country maximizes its resource productivity |
| c. | At which a country ceases to become competitive |
| d. | Where the marginal rate of transformation approaches zero |
ANS: A PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Trading Under Increasing-Cost Conditions
KEY: BLOOM'S: Application
50. With trade, a country will maximize its satisfaction when it:
| a. | Moves to the highest possible indifference curve |
| b. | Forces the marginal rate of substitution to its lowest possible value |
CHAPTER 2
FOUNDATIONS OF MODERN TRADE THEORY: COMPARATIVE ADVANTAGE
CHAPTER OVERVIEW
This chapter introduces students to the foundations of modern trade theory which seeks to answer three questions: (1) What constitutes the basis for trade? (2) At what terms of trade are products exchanged in international markets? (3) What are the gains from trade in terms of production and consumption?
The chapter first examines the historical development of modern trade theory by introducing the ideas of the mercantilists, Adam Smith, and David Ricardo. Next, the deficiencies of mercantilism and Adam Smith’s principle of absolute advantage are noted and attention shifts to David Ricardo’s principle of comparative advantage. This principle is explained in terms of a production possibilities table and also in terms of money.
The principle of comparative advantage is then explained under conditions of constant opportunity cost and increasing opportunity cost. The analysis concludes that international trade can provide economic gains for all trading nations. The chapter then extends the principle of comparative advantage to more than two products and two countries. The chapter concludes by examining the empirical evidence regarding comparative advantage.
Attention then shifts to the determination of the equilibrium terms of trade. The chapter emphasizes the theory of reciprocal demand and offer curves in the determination of the equilibrium terms of trade. The effect of economic growth on the terms of trade is also examined as is empirical data regarding the terms of trade.
This chapter also discusses the role of demand in the trading model. The inclusion of demand allows us to determine the autarky point on each nation’s production possibilities schedule, the equilibrium value of the international terms of trade, and the equilibrium consumption point of each nation under free trade.
Indifference curves are used to show the role of demand in the trading model. It is noted that a country in autarky will maximize its well being at the point where its community indifference curve is tangent to its production possibilities schedule. Similarly, a trading nation will maximize its welfare at the point where its community indifference curve is tangent to its international terms of trade ratio.
After completing the chapter, students should be able to:
• Identify the trading ideas of the mercantilists, Adam Smith, and David Ricardo.
• Compare and contrast the principle of absolute advantage and the principle of comparative advantage.
• Identify the effects of comparative advantage under conditions of constant opportunity costs and increasing opportunity costs.
• Explain how exit barriers and trade barriers modify the conclusions of the principle of comparative advantage.
• Summarize the empirical evidence regarding comparative advantage.
• Explain how the equilibrium terms of trade is influenced by changing supply and demand conditions.
• Show how the commodity-terms-of-trade concept measures the direction of the gains from trade.
• Discuss how the introduction of community indifference curves into the trade model allows a restatement of the basis for trade and the gains from trade.
BRIEF ANSWERS TO STUDY QUESTIONS
1. Modern trade theory addresses the following questions: (1) What constitutes the basis for trade? (2) At what terms of trade do nations export and import certain products? (3) What are the gains from trade in terms of production and consumption?
2. The mercantilists maintained that government should stimulate exports and restrict imports so as to increase a nation's holdings of gold. A nation could only gain at the expense of other nations because not all nations could simultaneously have a trade surplus. Smith maintained that with free trade, international specialization of resources in production leads to an increase in world output which can be shared by both trading partners. All nations simultaneously can enjoy gains from trade in terms of production and consumption.
3. Assume that by devoting all of its resources to the production of steel, France can produce 40 tons. By devoting all of its resources to televisions, France can produce 60 televisions. Comparable figures for Japan are 20 tons of steel and 10 televisions. In this example, France has an absolute advantage in the production of steel and televisions. France has a comparative advantage in televisions.
4. Ignoring the role of demand's impact on market prices, Smith and Ricardo maintained that a country's competitive position is underlaid by cost conditions. Smith's trade theory is based on absolute costs, while comparative costs underlie Ricardo's trade theory.
5. The principle of comparative advantage can be explained in opportunity cost, which indicates the amount of one product that must be sacrificed in order to release enough resources to be able to produce one more unit of another product. The slope of the production possibilities curve (i.e., the marginal rate of transformation) indicates this rate of sacrifice. A nation facing a straight‑line production possibilities curve produces under conditions of constant costs, while production under increasing costs refers to a bowed‑out (i.e., concave) production possibilities curve.
6. Constant opportunity costs refer to a situation where the cost of each additional unit of one product in terms of another product remains the same. Constant costs occur when resources are completely adaptable to alternative uses. Under increasing cost conditions, a nation must sacrifice more and more of one product to produce each additional unit of another product. Increasing costs occur when resources are not completely adaptable to alternative uses.
7. Where a nation produces along its production possibilities curve in autarky affects the nation's comparative costs under increasing cost conditions. This is because the slope of a bowed‑out production possibilities curve, which indicates the marginal rate of transformation, varies at each point along the curve. Under conditions of constant costs, the production possibilities curve is a straight line. The marginal rate of transformation does not change in response to movements along the production possibilities curve.
8. Under constant opportunity cost conditions, specialization is complete. A country can devote all of its resources to the production of a good without losing its comparative advantage. Under increasing cost conditions, specialization tends to be partial. As production costs rise with expanded production, the home country eventually loses its comparative advantage.
9. Production gains from trade refer to the increased output of goods and services made possible by the international division of labor and specialization. Consumption gains from trade refer to the increased amount of goods made available to consumers as the result of international trade.
10. The trade triangle includes a nation's exports, its imports, and international terms of trade.
11. The free trade argument maintains that international trade permits international division of labor and specialization and results in resources being transferred to their highest productivity. World output thus rises above autarky levels.
12. a. Canada's MRT of steel into aluminum equals 1/3 ton of steel per ton of aluminum while France's MRT of steel into aluminum equals 1 ½ tons of steel per ton of aluminum. Canada specializes in the production of aluminum while France specializes in the production of steel. Complete specialization occurs in each country. The production gains from trade for the two countries total 500 tons of aluminum and 300 tons of steel.
b. Lower limit, 1 ton of aluminum = 1/3 ton of steel; upper limit, 1 ton of aluminum = 1 ½ tons of steel. The consumption gains from trade for Canada consist of 400 tons of aluminum and 200 tons of steel; the consumption gains from trade for France consist of 100 tons of aluminum and 100 tons of steel.
c. Canada's trade triangle is bounded by 500 tons of aluminum (export), 500 tons of steel (import), and a terms of trade equal to 1 ton of aluminum per ton of steel. France's trade triangle is bounded by 500 tons of steel (export), 500 tons of aluminum (import), and a terms of trade equal to 1 ton of steel per ton of aluminum.
13. a. Concave production possibilities schedules are explained by increasing opportunity costs.
b. Japan's MRT of steel into autos equals 1/6 ton of steel per auto; South Korea's MRT of steel into autos equals 6 tons of steel per auto.
c. Japan specializes in the production of autos while South Korea specializes in steel.
d. With partial specialization, Japan produces 200 tons of steel and 1300 autos while South Korea produces 900 tons of steel and 400 autos. The production gains for the two countries combined total 400 tons of steel and 300 autos.
e. Japan's consumption gains from trade consist of 200 tons of steel and 200 autos; South Korea's consumption gains consist of 200 tons of steel and 100 autos.
14. Japan's commodity terms of trade improved to 107. Canada's commodity terms of trade remained constant at 100. Ireland's commodity terms of trade worsened to 88.
15. The gains a country enjoys from free trade depend on the equilibrium terms of trade, which is determined by world supply and demand conditions. By recognizing only the role of supply, Ricardo was unable to determine the equilibrium terms of trade.
16. The law of reciprocal demand suggests that if we know the domestic demands expressed by both trading partners for both products, the equilibrium terms of trade can be defined.
17. The commodity terms of trade considers the direction of the gains from trade by measuring the relationship between the prices a country gets for its exports and the prices it pays for its imports, over a given time period.
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