Theme 17.

International Trade
Absolute and comparative advantage. Gains from trade.
1. International trade differs from domestic trade because:
(A) Resources are more mobile domestically than they are internationally
(B) Different currencies are involved in international trade
(C) There are more political impediments to international trade
(D) All of the above
(E) No true answer
2. The terms of trade reflect the:
(A) Rate at which gold exchanges internationally for any domestic currency.
(B) Ratio at which nations will exchange two goods.
(C) Fact that the gains from trade will be equally divided.
(D) Cost conditions embodied in a single country’s production possibilities curve.
(E) All of the above
3. If two nations have straight-line production possibilities curves:
(A) Then their trading possibilities curves must lie inside the production possibilities curves.
(B) There will be no basis for mutually advantageous trade.
(C) There will be a basis for mutually advantageous trade whether the slopes are equal or not.
(D) There will be a basis for mutually advantageous trade provided the slopes differ.
(E) No true answer.
4. The impact of increasing, as opposed to constant, costs is to:
(A) Intensify and prolong the comparative advantages which any nation may have initially.
(B) Expand the limits of the terms of trade.
(C) Cause the bases for specialization to tend to disappear as nations specialize in accordance with
comparative advantage.
(D) Cause nations to realize economies of scale in those products in which they specialize.
(E) All of the above
5. The gain from international trade is
(A) Increased employment in the domestic export sector.
(B) More goods than would be attainable through domestic production alone.
(C) Tariff revenue.
(D) Increased employment in the domestic import sector.
(E) Decreased inflation in both countries
6. Which of the following must exist to allow for mutual benefit from specialization and trade between
two countries?
(A) Comparative advantage in the production of a good or service
(B) Absolute advantage in the production of a good or service
(C) Increasing marginal returns in production
(D) Absolute and comparative advantage in the production of a good or service
(E) Absolute advantage and increasing marginal returns in production
7. If Nation A can produce a good at lower opportunity cost than Nation B can produce the same good, it
is said that
(A) Nation A has comparative advantage in the production of that good.
(B) Nation B has comparative advantage in the production of that good.
(C) Nation A has absolute advantage in the production of that good.
(D) Nation B has absolute advantage in the production of that good.
(E) Nation A has economic growth in the production of that good.
8. Which of the following explain how two countries using the same type of resources but different
methods to produce the same product can both be efficient?
(A) One of the countries is inside its production possibilities frontier.
(B) One of the countries is outside its production possibilities frontier.
(C) The opportunity costs of resources are different in the two countries.
 (D) Both countries are experiencing different rates of unemployment.
(E) Both countries are experiencing different rates of inflation.
9. If country F can produce both goods A and B more efficiently, that is, with smaller absolute amounts
of resources, than can country E:
(A) Mutually advantageous specialization and trade between F and E may still be possible.
(B) We can conclude that F is an advanced economy and E is less developed.
(C) It will necessarily be advantageous for E to import both A and B from F.
(D) Then there is no possible basis for mutually advantageous specialization and trade between Fand E
(E) No true answer.
10. Assume that by devoting all of its resources to the production of X, nation A can produce 40 units of
X. By devoting all of its resources to Y, A can produce 60Y. Comparable figures for nation V are 60X
and 40Y. On the basis of this information we can conclude that:
(A) The terms of trade will be 3X equals 1Y
(B) A should specialize in Y and V in X
(C) A should specialize in X and V in Y
(D) A and V should specialize in X
(E) There is no basis for mutually beneficial specialization and trade

Fish Wheat
Country A 10 labor-hours 20 labor-hours
Country B 20 labor-hours 60 labor-hours
11. The table above indicates labor-hours needed to produce a single unit of each of two commodities in
each of two countries. If labor is the only factor used to produce the commodities, which of the
following statements must be correct?
I. Country A has an absolute advantage in the production of both commodities, but a comparative
advantage in the production of fish.
II. Country B has an absolute disadvantage in the production of both commodities, but a
comparative advantage in the production of fish.
III. Mutually advantageous trade can occur between the two countries when 2.5 units of fish are
exchanged for 1 unit of wheat.
(A) I only
(B) II only
(C) III only
(D) I and III only
(E) II and III only
12. Country A can produce either 2 tons of cocoa or 4 cars with 10 units of labor. Country B can produce
either 5 tons of cocoa or 25 cars with 10 units of labor. Eased on this information, which of the
following is true?
(A) Country A has an absolute advantage in the production of cocoa, while Country B has a
comparative advantage in the production of cocoa.
(B) Country A has a comparative advantage in the production of cocoa, while Country B has a
comparative advantage in the production of cars.
(C) Country A has an absolute advantage in the production of cocoa, while Country B has a
comparative advantage in the production of cars.
(D) Country A has a comparative disadvantage in the production of both goods.
(E) Neither country has a comparative advantage in the production of either good.
The following question is based on the production possibilities of two nations that can produce both
crepes and paper.
Nation X Nation Y
Crepes Paper Crepes Paper
0 3 0 5
9 0 5 0
13. Which of the following statements is true of these production possibilities?
(A) Nation X has comparative advantage in paper production and should trade paper to Nation Y in
exchange for crepes.
(B) Nation X has comparative advantage in crepe production and should trade crepes to Nation Y in
exchange for paper.
(C) Nation X has absolute advantage in paper production and Nation Y has absolute advantage in
crepe production. No trade is possible.
(D) Nation Y has absolute advantage in paper production and Nation X has absolute advantage in
crepe production. No trade is possible.
(E) Nation Y has comparative advantage in crepe production and should trade paper to Nation X in
exchange for crepes.
14. Given the table below, which statement is true?
Labor hours needed to produce a unit of:
Wine Cheese
Country
France 40 80
Belgium 15 60
(A) France has the absolute advantage in both products
(B) Finance should specialize in and export wine while Belgium should specialize in and export
cheese.
(C) France has comparative advantage in cheese
(D) France has absolute advantage in cheese.
(E) Belgium has the comparative advantage in both products.
15. The table below indicates the number of labor hours required in Countries X and Y to produce one unit
of food or one unit of clothing.
Country Food Clothing
X 20 hours 50 hours
Y 10 hours 20 hours
Given this information, which of the following statements is correct?
(A) X has a comparative advantage in the production of both food and clothing.
(B) Y has a comparative advantage in the production of both food and clothing.
(C) X has a comparative advantage in food production, whereas Y has a comparative advantage in
clothing production.
(D) Y has a comparative advantage in food production, whereas X has a comparative
advantage in clothing production.
(E) Neither country has a comparative advantage in the production of either good.
16. The table below indicates the number of labour hours required in Countries A and B to produce one
unit of bread and jewellery.
Country Bread Jewellery
A 2 hours 57 hours
B 3 hours 25 hours
Given this information which of the following statements is correct?
(A) A has an absolute advantage in the production of both bread and jewellery.
(B) B has an absolute advantage in the production of both bread and jewellery.
(C) A has an absolute advantage in the production of bread but B has an absolute advantage in the
production of jewellery.
(D) B has an absolute advantage in the production of bread but A has an absolute advantage in the
production of jewellery.
(E) Neither country has an absolute advantage in the production of bread or jewellery
17. The table below indicates the number of units of hardware and software produced in Countries Xland
and Yland by 1000 hours of labour.
Country Hardware Software
Xland 36 units 18 units
Yland 77 units 40 units
Given this information which of the following statements is correct?
 (A) Xland has a comparative advantage in the production of both hardware and software.
(B) Yland has a comparative advantage in the production of both hardware and software.
(C) Yland has a comparative advantage in hardware production, whereas Xland has a comparative
advantage in software production.
(D) Xland has a comparative advantage in hardware production, whereas Yland has a comparative
advantage in software production.
(E) Neither country has a comparative advantage in the production of either good.
18. Suppose two countries are each capable of individually producing two given commodities. Instead,
each specializes by producing the commodity for which it has a comparative advantage and then trades
with the other country. Which of the following is most likely to result?
(A) The two countries will become more independent of each other
(B) Unemployment will increase in one country and decrease in the other.
(C) There will be more efficient production in one country but less efficient production in the other.
(D) Both countries will become better off
(E) Both countries will be producing their commodity inefficiently.
19. If country A is willing to trade 3 units of X for 2 units of Y, while country B is willing to trade 2 units
of Y for 3 units of X, then we would expect to see
(A) A trades Y to B for X
(B) B trades Y to A for X
(C) No trade between A and B
(D) A and B exchange only X
(E) None of the above
20. Suppose the terms of trade between Japan and the United States are 1 bushel or wheat for 1 radio,
where the United States exports wheat and Japan exports radios. Which of the following terms of trade
would be more favourable to the United States as an alternative to the given terms of trade?
(A) 2 bushels of wheat for 1 radio
(B) 3 bushels of wheat for 4 radios
(C) 5 radios for 6 bushels of wheat
(D) The answer is indeterminate because the price of yen in terms of dollars is not given.
(E) The answer is indeterminate because the larger total trade becomes, the better off the United States
is.
21. The table below indicates the number of labour hours required in Countries X and Y to produce one
unit of beef or one unit of pork.
Country Beef Pork
X 24 hours 16 hours
Y 10 hours 9 hours
Given this information would there be a trade between the countries X and Y, and what could be a ratio
of beef and pork prices if the countries would trade them?
(A) The trade would take place, and the ratio (Price of beef)/(Price of pork) may equal to 1.
(B) The trade would take place, and the ratio (Price of beef)/(Price of pork) may equal to 1.2.
(C) The trade would take place, and the ratio (Price of beef)/(Price of pork) may equal to 1.6.
(D) The trade would take place, and the ratio (Price of beef)/(Price of pork) may equal to 2.
(E) The trade would not place since the country Y is more efficient in producing both beef and pork.
Answer the next three questions on the basis of the following production possibilities data for two
countries A and B.
A production possibilities:
Combination 1 2 3 4 5
of resources
Tea 120 90 60 30 0
Pots 0 30 60 90 120
 B production possibilities:
Combination 1 2 3 4 5
of resources
Tea 40 30 20 10 0
Pots 0 30 60 90 120
22. On the basis of this information we can say that:
(A) A should export both tea and pots to B
(B) B should export tea to A and A should export pots to B
(C) A should export tea to B and B should export pots to A
(D) A should export tea to B, but it will not be profitable for the two nations to exchange pots.
(E) B should export tea and pots to A
23. What are the limits of the terms of trade between A and B?
(A) 1 tea = 2 pots to 1 tea = 6 pots
(B) 1 tea = 3 pots to 1 tea = 6 pots
(C) 1 tea = 2 pots to 1 tea = 3.5 pots
(D) 1 tea = 1 pot to 1 tea = 3 pots
(E) 1 tea = 2 pots to 1 tea = 3 pots
24. Assume that prior to specialization and trade A and B both chose production possibility “3”. Now if
each specializes according to comparative advantage, the resulting gains from specialization and trade
will be:
(A) 40 pots
(B) 20 tea and 20 pots
(C) 20 tea
(D) 40 tea
(E) 10 tea and 30 pots
Answer the next three questions on the basis of the following information about the cost ratios for two
products – fish (F) and chicken (H) - in Singsong and Harmony. Assume that production occurs under
conditions of constant costs and these are the only two nations in the world.
Singsong: 1F = 2H
Harmony: 1F = 4H
25. In Singsong the domestic real cost of each chicken:
(A) Is ½ a fish
(B) Is 2 fish
(C) Increases with the level of fish caught
(D) Decreases with the level of fish caught
(E) Is 1 fish
26. If these two nations specialize in accordance with the principle of comparative advantage:
(A) Singsong will both produce chicken and catch fish.
(B) Harmony will both produce chicken and catch fish.
(C) Harmony will produce chicken and Singsong will catch fish.
(D) Singsong will produce chicken and Harmony will catch fish.
(E) No true answer.
27. Which one of the following would not be a feasible terms for trade between Singsong and Harmony?
(A) 1 fish for 2.5 chicken
(B) 1 fish for 3 chicken
(C) 1 chicken for 1/5 of a fish
(D) 1 chicken for 1/3 of a fish
(E) all of the above are feasible terms of trade.
28. Which of the following statements are true of production possibility frontiers and trade between
nations?
I. Nations specialize and trade based on comparative advantage in production.
II. Free trade allows each nation to consume beyond the production possibility frontier.
III. The flow of goods and services is based on the principle of absolute advantage.
 IV. Nations can consume at points beyond the production possibility frontier by protecting domestic
industries from free trade.
(A) I and II only
(B) II and III only
(C) Ill and IV only
(D) I, II, and III only
(E) I, II, III, and IV

Trade Policy
29. Free trade based upon comparative advantage is economically beneficial because:
(A) It fosters an efficient allocation of world resources.
(B) It increases competition.
(C) It provides consumers with a wider range of products.
(D) Of all of the above reasons
(E) No true answer
30. Which of the following best explains why many United Slates economists support free international
trade?
(A) Workers who lose their jobs can collect unemployment compensation.
(B) It is more important to reduce world inflation than to reduce United States unemployment.
(C) Workers are not affected; only businesses suffer.
(D) The long-run gains to consumers and some producers exceed the losses to other producers.
(E) Government can protect United States industries while encouraging free trade.
31. The U.S. produces rice in a competitive market. With free trade, the world price is lower than the domestic
price. What must be true?
(A) The U.S. begins to import rice to make up for a domestic shortage.
(B) The U.S. begins to export rice to make up for a domestic shortage.
(C) The U.S. begins to import rice to eliminate a domestic surplus.
(D) The U.S. begins to export rice to eliminate a domestic surplus.
(E) There is no incentive to import or export rice.
32. Which of the following is a predictable consequence of import quotas?
(A) Increased competition and lower consumer prices.
(B) Increased government tax revenue from imported goods.
(C) Rising net exports and a rightward shift in aggregate demand.
(D) An improved allocation of resources away from inefficient producers and lower consumer prices.
(E) Higher consumer prices and a misallocation of resources away from efficient producers.
33. Which of the following is a consequence of removal of a protective tariff on imported steel?
(A) Imports fall.
(B) Income is transferred from steel consumers to domestic steel producers.
(C) Income is transferred from foreign steel producers to domestic steel producers.
(D) Allocative efficiency is improved.
(E) Aggregate supply is decreased.
34. An import quota on foreign automobiles is expected to
(A) Increase domestic efficiency, and protect domestic producers at the expense of foreign producers.
(B) Decrease the price of automobiles, and protect domestic consumers at the expense of foreign
producers.
(C) Increase the price of automobiles, and protect domestic producers at the expense of consumers.
(D) Increase the price of automobiles, and protect domestic consumers at the expense of domestic
producers.
(E) Decrease domestic efficiency, and protect domestic producers at the expense of domestic
autoworkers.
35. Which of the following is a likely effect of a higher tariff imposed by the U.S. on imported automobiles?
(A) Net exports will fall and the dollar will appreciate in value.
(B) Net exports will fall and the dollar will depreciate in value.
(C) The price of automobiles in the U.S. will fall.
 (D) Net exports will rise and the dollar will depreciate in value.
(E) Net exports will rise and the dollar will appreciate in value.
36. Which of the following is a consequence of a protective tariff on imported steel?
(A) Net exports fall.
(B) Income is transferred from steel consumers to steel producers.
(C) Allocative efficiency is improved.
(D) Income is transferred from domestic steel to foreign steel producers.
(E) Aggregate supply increases.
37. When the U.S. places an import quota on imported sugar, we expect which of the following effects?
(A) Consumers seek substitutes for sugar and products that use sugar.
(B) Consumers consume more sugar and products that use sugar.
(C) The supply of sugar increases.
(D) Net exports in the U.S. fall.
(E) The government collects revenue on every ton of imported sugar.
38. Tariffs and quotas
(A) Result in higher domestic prices
(B) Promote trade between nations
(C) Do not necessarily affect domestic
(D) Affect domestic prices: the former raises them while the latter lowers them.
(E) Are ways to fight inflation.
39. Tariffs and quotas
(A) Result in higher domestic prices.
(B) Sometimes raise and sometimes lower the amount of product sold domestically
(C) Lower the amount of product sold domestically
(D) Raise the amount of product sold domestically
(E) Do not affect domestic prices or quantities
40. Which of the following is NOT an argument for restricting trade?
(A) To protect infant industry
(B) To promote employment
(C) To fight inflation
(D) To promote a diversity of industries
(E) To prevent dumping
41. To protect high-cost domestic producers, a country imposes a tariff on an imported commodity, Y.
Which of the following is most likely to occur in the short run?
I. A decrease in domestic consumption of Y
II. An increase in domestic production of Y
III. An increase in foreign output of Y
(A) I only
(B) II only
(C) III only
(D) I and II only
(E) II and III only
42. The imposition of an import tariff will result in which of the following?
I. A widening of the price differential of the good between the country of import and the country of
export.
II. A reduction in the world's volume of trade.
III. A reduction in the world's gains from trade.
IV. A distortion in the allocation of resources from that indicated by comparative advantage.
(A) I and III only
(B) II and IV only
(C) I, II, and III only
(D) II, III, and IV only
(E) I, II, III, and IV
43. Country X produces canned milk and also imports some canned milk from Country Y. If Country X
imposes a non-prohibitive tariff of 10c per can on imports of such milk, what will happen to the price
per can? (Assume zero transportation costs.)
(A) It will rise by 10c in Country X and fall by 10c in Country Y.
(B) It will rise by 10c in Country X if foreign supply is inelastic.
(C) It will exceed the price in Country Y by 10c.
(D) It will fall by 10c in Country Y if Country Y's supply of milk is highly elastic.
(E) It will be unaffected in Country X because it is determined by domestic producers.
44. The burden of an import tariff imposed on a certain good by a country will be mostly borne by the
consumers of that country rather than by foreign producers if the
(A) Price elasticity of demand for the good among the consumers of that country is high
(B) Price elasticity of supply of that good among foreign producers is high
(C) Import demand from within that country constitutes most of the world demand for the product
(D) Price elasticity of supply of import-competing goods within that country is high
(E) Good is a superior good