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International Economics: Theory and Policy, 12e (Krugman) Chapter 1 Introduction 1.1

What Is International Economics About?

1) Historians of economic thought often describe ________ written by ________ and published in ________ as the first real exposition of an economic model. A) "Of the Balance of Trade"; David Hume; 1776 B) "Wealth of Nations"; David Hume; 1758 C) "Wealth of Nations"; Adam Smith; 1758 D) "Wealth of Nations"; Adam Smith; 1776 E) "Of the Balance of Trade"; David Hume; 1758 Answer: E Difficulty: Easy AACSB: Application of knowledge 2) From 1960 to 2019 A) the U.S. economy roughly tripled in size. B) U.S. imports roughly tripled in size. C) the share of U.S. trade in the global economy roughly tripled in size compared with the economy as a whole. D) U.S. imports roughly tripled as compared to U.S. exports. E) U.S. exports roughly tripled in size. Answer: C Difficulty: Easy AACSB: Application of knowledge 3) From 1960 to 2019, both U.S. imports and exports have increased, ________ have grown more, leading to a large excess of ________. A) imports; imports over exports B) exports; exports over imports C) imports; exports over imports D) exports; imports over exports Answer: A Difficulty: Easy AACSB: Application of knowledge 4) The facts that U.S. imports and exports plunged in 2009 during the global economic crisis and in 2020 during the Covid-19 pandemic demonstrated the close links between A) world trade and the overall state of the world economy. B) crisis and unemployment. C) the pandemic and shortage of goods and services. D) the business cycle and trade policies. Answer: A Difficulty: Easy AACSB: Application of knowledge 1 Copyright © 2022 Pearson Education, Inc.

5) The United States is less dependent on trade than most other countries because A) the United States is a relatively large country with diverse resources. B) the United States is a "Superpower." C) the military power of the United States makes it less dependent on anything. D) the United States invests in many other countries. E) many countries invest in the United States. Answer: A Difficulty: Easy AACSB: Application of knowledge 6) Theories of international economics from the 18th and 19th centuries are A) not relevant to current policy analysis. B) only of moderate relevance in today's modern international economy. C) highly relevant in today's modern international economy. D) the only theories that are actually relevant to modern international economy. E) not well understood by modern mathematically oriented theorists. Answer: C Difficulty: Easy AACSB: Application of knowledge 7) International economics ________ use the same fundamental methods of analysis as other branches of economics, because ________. A) does not; the level of complexity of international issues is unique B) does not; the interactions associated with international economic relations is highly mathematical C) does not; international economics takes a different perspective on economic issues D) does; international economists must reach an agreement with other economists on every economic issue E) does; the motives and behavior of individuals are the same in international trade as they are in domestic transactions Answer: E Difficulty: Easy AACSB: Application of knowledge 8) Because the Constitution forbids restraints on interstate trade A) the U.S. may not impose tariffs on imports from NAFTA countries. B) the U.S. may not affect the international value of the $ U.S. C) the U.S. may not put restraints on foreign investments in California if it involves a financial intermediary in New York State. D) the U.S. may not impose export duties. E) the U.S. may not disrupt commerce between Florida and Hawaii. Answer: E Difficulty: Easy AACSB: Application of knowledge

9) An important insight of international economics is that when countries sell goods and services to each other, A) the exchange is almost always mutually beneficial. B) one country always benefits at the expense of the other. C) it only benefits the low wage country. D) it only benefits the high wage country. E) it is almost never beneficial to both countries. Answer: A Difficulty: Easy AACSB: Application of knowledge 10) "Trade is generally harmful if there are large disparities between countries in wages." A) This is generally true. B) This is generally false. C) Trade theory has nothing to say about this issue. D) This is true if the trade partner ignores child labor laws. E) This is true if the trade partner uses prison labor. Answer: B Difficulty: Easy AACSB: Application of knowledge 11) If there are large disparities in wage levels between countries, then A) trade is likely to be harmful to both countries. B) trade is likely to be harmful to the country with the high wages. C) trade is likely to be harmful to the country with the low wages. D) trade is likely to be harmful to neither country. E) trade is likely to have no effect on either country. Answer: D Difficulty: Easy AACSB: Application of knowledge 12) If there are large disparities in productivity between countries, then A) trade is likely to be harmful to neither country. B) trade is likely to be harmful to the country with the high wages. C) trade is likely to be harmful to the country with the low wages. D) trade is likely to be harmful to both countries. E) trade is likely to have no effect on either country. Answer: A Difficulty: Easy AACSB: Application of knowledge

13) Which of the following statements is TRUE? A) Trade is mutually beneficial when countries exchange goods and services. B) Trade is harmful if large disparities exist between countries in productivity. C) Trade is harmful if large disparities exist between countries in wages. D) Trading with less-advanced, lower-wage countries will drag down a country's standard of living. Answer: A Difficulty: Easy AACSB: Application of knowledge 14) The benefits of international trade are derived from trade in A) tangible goods only. B) intangible goods only. C) goods but not services. D) services but not goods. E) anything of value. Answer: E Difficulty: Easy AACSB: Application of knowledge 15) Which of the following statements is NOT TRUE? A) International trade will have no effects on income distribution. B) International trade may hurt particular groups within nations. C) International trade can adversely impact owners of resources that are specific to industries that compete with imports. D) International trade can alter the distribution of income between broad groups, such as workers and the owners of capital. Answer: A Difficulty: Moderate AACSB: Application of knowledge 16) Who sells what to whom A) has been a major preoccupation of international economics. B) is not a valid concern of international economics. C) is not considered important for government foreign trade policy since such decisions are made in the private competitive market. D) is determined by political rather than economic factors. E) is less important than international economic theory. Answer: A Difficulty: Easy AACSB: Application of knowledge

17) The insight that patterns of trade are primarily determined by international differences in labor productivity was first proposed by A) David Ricardo. B) David Hume. C) Adam Smith. D) Eli Heckscher. E) Lerner and Samuelson. Answer: A Difficulty: Easy AACSB: Application of knowledge 18) International economists cannot discuss the effects of international trade or recommend changes in government policies toward trade with any confidence unless they know A) their theory is the best available. B) their theory is internally consistent. C) their theory passes the "reasonable person" legal criteria. D) their theory is good enough to explain the international trade that is actually observed. E) their theory accounts for China's unique position in international trade. Answer: D Difficulty: Easy AACSB: Application of knowledge 19) Which of the following is NOT a major concern of international economic theory? A) protectionism B) the balance of payments C) exchange rate determination D) bilateral trade relations with China E) the international capital market Answer: D Difficulty: Easy AACSB: Application of knowledge 20) Which of the following does NOT belong? A) NAFTA B) Uruguay Round C) World Trade Organization D) non-tariff barriers E) major free trade agreements of the 1990s Answer: D Difficulty: Easy AACSB: Application of knowledge

21) In 1998 an economic and financial crisis in South Korea caused it to experience A) a surplus in their balance of payments. B) a deficit in their balance of payments. C) a balanced balance of payments. D) an unbalanced balance of payments. E) a lull in international trade. Answer: A Difficulty: Easy AACSB: Application of knowledge 22) In 1998, countries that ran large trade surpluses include A) China and South Korea. B) U.S. and Japan. C) China and U.S. D) U.S. and South Korea. Answer: A Difficulty: Easy AACSB: Application of knowledge 23) After World War II, the United States has pursued a broad policy of A) strengthening "Fortress America" protectionism. B) removing barriers to international trade. C) isolating Iran and other members of the "axis of evil." D) protecting the U.S. from the economic impact of oil producers. E) restricting trade of manufactured goods. Answer: B Difficulty: Easy AACSB: Application of knowledge 24) Cost-benefit analysis of international trade A) is basically useless. B) is empirically intractable. C) focuses attention primarily on conflicts of interest within nations. D) focuses attention on conflicts of interest between nations. E) never leads to government intervention in international trade. Answer: C Difficulty: Moderate AACSB: Application of knowledge

25) An improvement in a country's balance of payments means a decrease in its balance of payments deficit, or an increase in its surplus. In fact, we know that a surplus in a balance of payments A) is always beneficial. B) is usually beneficial. C) is never harmful. D) is sometimes harmful. E) is always harmful. Answer: D Difficulty: Moderate AACSB: Application of knowledge 26) The GATT is A) an international agreement. B) an international U.N. agency. C) an international IMF agency. D) a U.S. government agency. E) a collection of tariffs. Answer: A Difficulty: Easy AACSB: Application of knowledge 27) The balance of payments has become a central issue for the United States because A) when the balance of payments is not balanced, society is unbalanced. B) the U.S. economy cannot grow when the balance of payments is in deficit. C) the U.S. has run huge trade deficits in every year since 1982. D) the U.S. never experienced a surplus in its balance of payments. E) the U.S. once ran a large trade surplus of about $40 billion. Answer: C Difficulty: Easy AACSB: Application of knowledge 28) In September 2010, the finance minister of ________ declared that the world was "in the midst of an international currency war" because of rapid appreciation in the value of the country's currency, the ________. A) England; pound sterling B) Germany; euro C) Japan; yen D) China; renminbi E) Brazil; Real Answer: E Difficulty: Easy AACSB: Application of knowledge

29) The study of exchange rate determination is a relatively new part of international economics, since A) for much of the past century, exchange rates were fixed by government action. B) the calculations required for this were not possible before modern computers became available. C) economic theory developed by David Hume demonstrated that real exchange rates remain fixed over time. D) dynamic overshooting asset pricing models are a recent theoretical development. E) the exchange rate never fluctuates. Answer: A Difficulty: Easy AACSB: Application of knowledge 30) A fundamental problem in international economics is how to produce A) a perfect degree of monetary harmony. B) an acceptable degree of harmony among the international trade policies of different countries. C) a world government that can harmonize trade and monetary policies. D) a counter-cyclical monetary policy so that all countries will not be adversely affected by a financial crisis in one country. E) a worldwide form of currency. Answer: B Difficulty: Easy AACSB: Application of knowledge 31) For almost 70 years international trade policies have been governed A) by the World Trade Organization. B) by the International Monetary Fund. C) by the World Bank. D) by an international treaty known as the General Agreement on Tariffs and Trade (GATT). E) by the North American Free Trade Agreement (NAFTA). Answer: D Difficulty: Easy AACSB: Application of knowledge 32) International capital markets experience a kind of risk not faced in domestic capital markets, namely A) "economic meltdown" risk. B) Flood and hurricane crisis risk. C) the risk of unexpected downgrading of assets by Standard and Poor. D) the risk of currency fluctuations. E) the risk of political upheaval. Answer: D Difficulty: Moderate AACSB: Application of knowledge

33) Since 1994, trade rules have been enforced by A) the WTO. B) the G10. C) the GATT. D) The U.S. Congress. E) the European Union. Answer: A Difficulty: Easy AACSB: Application of knowledge 34) The international capital market is A) the place where you can rent earth moving equipment anywhere in the world. B) a set of arrangements by which individuals and firms exchange money now for promises to pay in the future. C) the arrangement where banks build up their capital by borrowing from the Central Bank. D) the place where emerging economies accept capital invested by banks. E) exclusively concerned with the debt crisis that ended in the 1990s. Answer: B Difficulty: Easy AACSB: Application of knowledge 35) The international financial crisis of 2007 was the result of A) failure of the Euro currency. B) runaway inflation in the U.S. C) a deep global recession. D) the collapse of global currency markets. E) defaults on U.S. mortgage-backed securities. Answer: E Difficulty: Easy AACSB: Application of knowledge 36) It is argued that global trade tends to be more important to countries with smaller economies than the U.S. Is this empirically verified? Answer: Yes. Figure 1-2 shows exports and imports as a percentage of national income in the U.S. and five other countries and notes that "International trade is even more important to most other countries than it is to the U.S." Difficulty: Moderate AACSB: Application of knowledge 37) It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument? Answer: The student may think anything. The purpose of the question is to set up a discussion, which will lead to the models in the following chapters. Difficulty: Moderate AACSB: Reflective thinking 9 Copyright © 2022 Pearson Education, Inc.

38) How are the patterns of international trade, that is the pattern of what different countries export and import, explained? Answer: Climate explains why Brazil exports coffee. Natural resources explains why Saudi Arabia exports oil. More generally, differences in labor productivity and in the availability of land, labor, and capital within different countries explain patterns of trade. More recent research suggests that there is a significant random component involved, as well. Difficulty: Moderate AACSB: Application of knowledge 39) International trade theory implies that international trade is beneficial to all trading countries. However, casual observation leads to the conclusion that official obstruction of international trade flows is widespread. How might you reconcile these two facts? Answer: This question is meant to allow students to offer preliminary discussions of issues, which will be explored in depth later in the book. Difficulty: Moderate AACSB: Application of knowledge 1.2

International Economics: Trade and Money

1) International economics can be divided into two broad sub-fields A) macro and micro. B) developed and less developed. C) monetary and barter. D) international trade and international money. E) static and dynamic. Answer: D Difficulty: Easy AACSB: Application of knowledge 2) International trade analysis focuses on A) the real transactions that involve a physical movement of goods or a tangible commitment of economic resources in the international economy. B) the monetary side of the international economy. C) the financial transactions such as foreign purchases of U.S. dollars. D) the devaluation of currencies of the international economy. Answer: A Difficulty: Easy AACSB: Application of knowledge

3) International monetary analysis focuses on A) the real side of the international economy. B) the international trade side of the international economy. C) the international investment side of the international economy. D) the issues of international cooperation between Central Banks. E) the monetary side of the international economy, such as currency exchange. Answer: E Difficulty: Easy AACSB: Application of knowledge 4) The distinction between international trade and international money is NOT entirely clear because A) real developments in the trade accounts do not have monetary implications. B) the balance of payments includes only real measures. C) developments caused by purely monetary changes have no real effects. D) trade models focus on real, or barter relationships. E) most international trade involves monetary transactions. Answer: E Difficulty: Easy AACSB: Application of knowledge 5) The distinction between international trade and international money is NOT entirely clear because A) many monetary events have important consequences for trade. B) real developments in the trade accounts do not have monetary implications. C) the balance of payments includes only real measures. D) developments caused by purely monetary changes have no real effects. E) trade models focus on real, or barter relationships. Answer: A Difficulty: Easy AACSB: Application of knowledge

International Economics: Theory and Policy, 12e (Krugman) Chapter 2 World Trade: An Overview 2.1

Who Trades with Whom?

1) Approximately what percent of all world production of goods and services is exported to other countries? A) 10% B) 30% C) 50% D) 100% E) 90% Answer: B Difficulty: Easy AACSB: Application of knowledge 2) In 2019, United States top 15 trading partners do not include A) Australia. B) Mexico. C) Canada. D) China. E) Vietnam. Answer: A Difficulty: Easy AACSB: Application of knowledge 3) In 2019, United States top 15 trading partners account for ________ of the value of U.S. trade that year. A) 75 percent B) 25 percent C) 50 percent D) 85 percent E) 90 percent Answer: A Difficulty: Easy AACSB: Application of knowledge

4) Annual Gross Domestic Product (GDP) measures A) the total value of all goods and services produced domestically in a country's economy in one year. B) the total value of all goods and services produced domestically and abroad by a country's citizens in one year. C) the total value of all goods and services attributed to each individual citizen of a country in one year. D) the total value of all goods and services imported and exported by a country in one year. Answer: A Difficulty: Easy AACSB: Application of knowledge 5) The gravity model offers a logical explanation for the fact that A) trade between Asia and the U.S. has grown faster than NAFTA trade. B) trade in services has grown faster than trade in goods. C) trade in manufactures has grown faster than in agricultural products. D) Intra-European Union trade exceeds international trade by the European Union. E) the U.S. trades more with Western Europe than it does with Canada. Answer: D Difficulty: Moderate AACSB: Application of knowledge 6) The gravity model suggests that over time A) trade between neighboring countries will increase. B) trade between all countries will increase. C) world trade will eventually be swallowed by a black hole. D) the value of trade between two countries will be proportional to the product of the two countries' GDP. Answer: D Difficulty: Easy AACSB: Application of knowledge 7) The gravity model explains why A) trade between Sweden and Germany exceeds that between Sweden and Spain. B) countries with oil reserves tend to export oil. C) capital rich countries export capital intensive products. D) intra-industry trade is relatively more important than other forms of trade between neighboring countries. E) European countries rely most often on natural resources. Answer: A Difficulty: Moderate AACSB: Application of knowledge

8) The gravity model explains why A) trade between the U.S. and Germany exceeds that between the U.S. and Sweden. B) countries with oil reserves tend to export oil. C) capital rich countries export capital intensive products. D) intra-industry trade is relatively more important than other forms of trade between neighboring countries. E) European countries rely most often on natural resources. Answer: A Difficulty: Moderate AACSB: Application of knowledge 9) According to the Gravity Model, the reason why the United States trades more heavily with Germany, the United Kingdom, and France than with other countries in Europe is because of A) the size of their economies. B) their ties to the European Union. C) mutual rights and responsibilities. D) their currencies and trade policies. Answer: A Difficulty: Easy AACSB: Application of knowledge 10) According to the gravity model, a characteristic that tends to affect the probability of trade existing between any two countries is A) their cultural affinity. B) the average weight/value of their traded goods. C) their colonial-historical ties. D) the distance between them. E) the number of different product varieties produced by their industries. Answer: D Difficulty: Easy AACSB: Application of knowledge 11) In general, which of the following do NOT tend to increase trade between two countries? A) linguistic and/or cultural affinity B) historical ties C) larger economies D) mutual membership in preferential trade agreements E) the existence of well controlled borders between countries Answer: E Difficulty: Moderate AACSB: Application of knowledge

12) Why does the gravity model work? A) Large economies became large because they were engaged in international trade. B) Large economies have relatively large incomes, and hence spend more on government promotion of trade and investment. C) Large economies have relatively larger areas, which raises the probability that a productive activity will take place within the borders of that country. D) Large economies tend to have large incomes and tend to spend more on imports. E) Large economies tend to avoid trading with small economies. Answer: D Difficulty: Easy AACSB: Application of knowledge 13) We see that the Netherlands, Belgium, and Ireland trade considerably more with the United States than with many other countries. A) This is explained by the gravity model, since these are all large countries. B) This is explained by the gravity model, since these are all small countries. C) This fails to be consistent with the gravity model, since these are small countries. D) This fails to be consistent with the gravity model, since these are large countries. E) This is explained by the gravity model, since they do not share borders. Answer: C Difficulty: Easy AACSB: Application of knowledge 14) The two neighbors of the United States do a lot more trade with the United States than European economies of equal size. A) This contradicts predictions from gravity models. B) This is consistent with predictions from gravity models. C) This is irrelevant to any inferences that may be drawn from gravity models. D) This is because these neighboring countries have exceptionally large GDPs. E) This relates to Belgium's trade record with the U.S. Answer: B Difficulty: Moderate AACSB: Application of knowledge 15) Trade between British Columbia and a Canada province is likely much larger than trade with an equally distant U.S. state because of A) negative effects of the borders. B) size of local economy. C) population. D) religion. Answer: A Difficulty: Easy AACSB: Application of knowledge

16) Which of the following does NOT explain the extent of trade between Ireland and the U.S.? A) historical ties B) cultural linguistic ties C) gravity model D) multinational corporations E) large numbers of Irish-Americans Answer: C Difficulty: Moderate AACSB: Application of knowledge 17) Canadian and Mexican economies combined are only as big as the economy of France, but they do 12 times as much trade of the United States. Using the gravity model, explain. Answer: Based on gravity model, student may discuss how Canada and Mexico are closer to the United States than France. In addition, they are also part of US-Mexico-Canada agreement (USMCA) (previously known as NAFTA) and France is not. Difficulty: Moderate AACSB: Reflective thinking 2.2

The Changing Pattern of World Trade

1) Since the early 1970s, world's trade as a share of world production has A) remained constant. B) increased. C) decreased. D) fluctuated widely with no clear trend. E) increased slightly before dropping off. Answer: B Difficulty: Easy AACSB: Application of knowledge 2) What caused the ratio of world exports to world GDP to fall sharply before World War I and not return to 1913 level until 1970s? A) Wars and protectionism. B) Natural disasters. C) Loss of interest among trading nations. D) Invention of railroad and steamship. E) Jets and Internet. Answer: A Difficulty: Easy AACSB: Application of knowledge

3) A situation where a final product goes through many production stages by different companies in different countries instead of being produced by one company in one country is called A) vertical disintegration. B) vertical integration. C) horizontal integration. D) horizontal disintegration. Answer: A Difficulty: Easy AACSB: Application of knowledge 4) In 2017, the biggest share of world trade is in A) manufactured goods. B) fuels and mining products. C) agricultural products. D) services. Answer: A Difficulty: Easy AACSB: Application of knowledge 5) In the early 20th century, the United Kingdom exported mainly A) manufactured goods. B) services. C) primary products including agricultural. D) technology intensive products. E) livestock. Answer: A Difficulty: Easy AACSB: Application of knowledge 6) In the early 20th century, the United Kingdom imported mainly A) manufactured goods. B) services. C) primary products including agricultural. D) technology intensive products. E) from the United States. Answer: C Difficulty: Easy AACSB: Application of knowledge

7) In the early 20th century, the United States imported and exported mainly A) primary products. B) services. C) manufactured goods. D) technology intensive products. E) livestock. Answer: A Difficulty: Easy AACSB: Application of knowledge 8) In 2015, the United States imported and exported mainly A) manufactured goods. B) primary products. C) services. D) technology intensive products. E) livestock. Answer: A Difficulty: Easy AACSB: Application of knowledge 9) Over the past 50 years, developing countries' exports have seen a(n) ________ in manufactured goods and a(n)_______ in agricultural products. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease Answer: A Difficulty: Easy AACSB: Application of knowledge 10) In the present, most of the exports from China are A) manufactured goods. B) services. C) primary products including agricultural. D) technology intensive products. E) overpriced by world market standards. Answer: A Difficulty: Easy AACSB: Application of knowledge

11) In today's modern economy, international trade in services A) dominates world trade. B) does not exist. C) is an increasingly important component of global trade. D) is relatively stagnant. E) far surpasses the predictions of economist Alan Blinder. Answer: C Difficulty: Easy AACSB: Application of knowledge 12) When a service previously done within a country is shifted to a foreign location, the change is known as A) service outsourcing. B) location shifting. C) service outreaching. D) global transferring. Answer: A Difficulty: Easy AACSB: Application of knowledge 13) Jobs that must be done close to the customer or non-tradable consist of ________ of total U.S. employment. A) 60 percent B) 50 percent C) 40 percent D) 30 percent E) 70 percent Answer: A Difficulty: Easy AACSB: Application of knowledge 14) World trade grew rapidly in the decade leading up to World War I but then fell significantly and did not return to pre-World War I levels until the late 1970s. Explain the fall and rise of world trade. Answer: Two subsequent world wars, the Great Depression of the 1930s and the widespread protectionism depressed world trade between 1913 and 1970s. Since 1970s, world trade has risen, partly reflecting the so-called "vertical disintegration" of production where a product often goes through many production stages in different countries before reaching the hands of consumers. Difficulty: Moderate AACSB: Application of knowledge

15) When comparing the composition of world trade in the early 20th century to the early 21st century, we find major compositional changes. These include a relative decline in trade in agricultural and primary-products (including raw materials). How would you explain this in terms of broad historical developments during this period? Answer: The typical composition of world production during this period experienced major changes. Focusing on today's Industrialized Countries (primarily members of the OECD), the industrial-employment composition was focused primarily on agriculture. Most value was in land. The predominant single consumption category was food. Since then, the economies shifted from the agricultural to the manufacturing sectors (continuing trends begun over a century earlier in the industrial revolution). Incomes rose, and consumption shifted in favor of (increasingly affordable) manufactures. Both income and price elasticities were greater in manufactures than in agricultural products. At the same time there was a steady tendency for synthetic (manufactured) inputs to replace agricultural based raw materials and industrial inputs. Hence, trade and, of course, international trade conformed to overall changes in patterns of world production and consumption. Difficulty: Moderate AACSB: Application of knowledge 16) Third world or developing countries mainly exported primary products in the 1970s. How have things changed since then? Explain. Answer: The developing countries have experienced major compositional shifts from exports of primary products (including agricultural and raw materials) to exports of manufactures. Depending on how much is covered during the lecture, students can explain further or do more research on their own to answer this question. Difficulty: Moderate AACSB: Application of knowledge 17) Explain how important service trade may become in the years ahead. Answer: With the advancement of telecommunication and Internet, new types of service trading such as service outsourcing will become more popular and play an important role. One example is the rise of overseas call and help center, where the person answering a customer's request for information may be thousands of miles away. Given 40% of total US employment that is in tradable activities includes more service than manufacturing jobs, trade in services may eventually become bigger than trade in manufactures. Difficulty: Moderate AACSB: Reflective thinking

2.3

Do Old Rules Still Apply?

1) How have the roles of natural resources and human resources changed over the past century? Answer: A century ago, each country's exports were shaped largely by its climate and natural resources. Tropical countries exported tropical products such as coffee and cotton; land-rich countries such as the United States and Australia exported food to densely populated European nations. In modern trade, human resources and human-created resources (in the form of machinery, other types of capital, technology) are more important than natural resources. Difficulty: Moderate AACSB: Application of knowledge 2) The Services sector has been steadily rising in relative importance in GDP of the United States, as well as elsewhere around the world. Since "services" have been identified as "nontradable" (e.g., it is difficult to export haircuts), it may be argued that this trend will likely slow the rapid growth in international trade. Discuss. Answer: This argument stands on questionable logical foundations. The past half century has seen a steady growth in the absolute and relative importance of international trade. This trend has been reversed only by global conflicts, i.e. the two World Wars. This trend has remained steady and robust despite major compositional shifts (e.g., from primary to manufacturing), and location shifts (e.g., the sudden rise of NICs as a significant group of exporters). The trend will probably continue into the reasonable future, fueled by both super-regional preferential trade regions and a growing impact of the multilateral forces, represented institutionally by the World Trade Organization (WTO)—as illustrated by the recent abolishment of the epitome cartelized trade, the world trade in textiles. Driven by technology—especially in the areas of communication and transportation—a reversal of the growing trade trend is not likely in the near future. In any case, many "services" are in fact quite tradable. Examples would be financial services, long-distance teaching, "help-desk" outsourcing, consulting and management services and others. In fact, when a tourist gets a haircut, we see that even haircuts become a "tradable" service. Difficulty: Moderate AACSB: Application of knowledge

International Economics: Theory and Policy, 12e (Krugman) Chapter 3 Labor Productivity and Comparative Advantage: The Ricardian Model 3.1

The Concept of Comparative Advantage

1) In order to produce winter roses, the U.S. economy must produce fewer of other things, such as computers. Such a trade-off is an example of A) opportunity cost. B) trade cost. C) sunk cost. D) production cost. Answer: A Difficulty: Easy AACSB: Application of knowledge 2) A country has a ________ in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. A) comparative advantage B) absolute advantage C) trading advantage D) cost advantage Answer: A Difficulty: Easy AACSB: Application of knowledge 3) When a country can produce a good or service at a lower opportunity cost than another country, the country is said to have a(n) A) comparative advantage B) absolute advantage C) trading advantage D) cost advantage Answer: A Difficulty: Easy AACSB: Application of knowledge 4) Trade between two countries can benefit both countries if A) each country exports that good in which it has a comparative advantage. B) each country enjoys superior terms of trade. C) each country has a more elastic demand for the imported goods. D) each country has a more elastic supply for the exported goods. E) each country produces a wide range of goods for export. Answer: A Difficulty: Easy AACSB: Application of knowledge

5) A country engaging in trade according to the principles of comparative advantage gains from trade because it A) is producing exports indirectly more efficiently than it could alternatively. B) is producing imports indirectly more efficiently than it could domestically. C) is producing exports using fewer labor units. D) is producing imports indirectly using fewer labor units. E) is producing exports while outsourcing services. Answer: B Difficulty: Easy AACSB: Application of knowledge 6) The earliest statement of the principle of comparative advantage is associated with A) David Hume. B) David Ricardo. C) Adam Smith. D) Eli Heckscher. E) Bertil Ohlin. Answer: B Difficulty: Easy AACSB: Application of knowledge 7) The Ricardian model attributes the gains from trade associated with the principle of comparative advantage result to A) differences in technology. B) differences in preferences. C) differences in labor productivity. D) differences in resources. E) gravity relationships among countries. Answer: C Difficulty: Easy AACSB: Application of knowledge 8) The Ricardian model demonstrates that A) trade between two countries will benefit both countries. B) trade between two countries may benefit both regardless of which good each exports. C) trade between two countries may benefit both if each exports the product in which it has a comparative advantage. D) trade between two countries may benefit one but harm the other. E) trade between two countries always benefits the country with a larger labor force. Answer: C Difficulty: Easy AACSB: Application of knowledge

9) In the Ricardian model, comparative advantage is likely to be due to A) scale economies. B) home product taste bias. C) greater capital availability per worker. D) labor productivity differences. E) political pressure. Answer: D Difficulty: Easy AACSB: Application of knowledge 10) In a two-country, two-product world, the statement "Germany enjoys a comparative advantage over France in autos relative to ships" is equivalent to A) France having a comparative advantage over Germany in ships. B) France having a comparative disadvantage compared to Germany in autos and ships. C) Germany having a comparative advantage over France in autos and ships. D) France having no comparative advantage over Germany. E) France should produce autos. Answer: A Difficulty: Moderate AACSB: Application of knowledge 3.2

A One-Factor Economy

1) Unit labor requirement is defined as A) the number of hours of labor required to produce one unit of output. B) the quantity of output that can be produced with one hour of labor. C) the amount of input other than labor required to produce one unit of output. D) the quantity of output that can be produced without using labor input. Answer: A Difficulty: Easy AACSB: Application of knowledge 2) The production possibility frontier shows A) the maximum amount of goods and services that can be produced by an economy during a given time period using all its limited resources. B) the minimum amount of goods and services that can be produced by an economy during a given time period using all its limited resources. C) the potential amount of goods and services that can be produced by an economy in the future with current limited resources. D) the increasing amount of goods and services that can be produced by an economy during a given time period without sacrificing some production of another good. E) the decreasing amount of goods and services that can be produced by an economy during a given time period with sacrificing some production of another good. Answer: A Difficulty: Easy AACSB: Application of knowledge 3 Copyright © 2022 Pearson Education, Inc.

3) If a production possibilities frontier is a straight line, then production occurs under conditions of A) increasing opportunity costs. B) constant opportunity costs. C) decreasing opportunity costs. D) infinite opportunity costs. E) uncertain opportunity costs. Answer: B Difficulty: Easy AACSB: Application of knowledge 4) The number of gallons of wine the economy would have to give up in order to produce an extra pound of cheese is called A) the opportunity cost of a pound of cheese in terms of wine. B) the opportunity cost of a gallon of wine in terms of cheese. C) the opportunity cost of a pound of cheese and a gallon of wine. D) the opportunity cost of either a pound of cheese or a gallon of wine. Answer: A Difficulty: Easy AACSB: Application of knowledge 5) Assume aLW and aLC are the unit labor requirements in wine and cheese production, respectively. The opportunity cost of cheese in terms of wine is A) aLC/aLW B) aLW/aLC C) 1/aLW D) 1/aLC Answer: A Difficulty: Easy AACSB: Application of knowledge 6) The economy will specialize in the production of ________ if the relative price of cheese exceeds its opportunity cost in terms of wine; it will specialize in the production of ________ if the relative price of cheese is less than its opportunity in terms of wine. A) cheese; wine B) wine; cheese C) cheese; cheese D) wine; wine Answer: A Difficulty: Moderate AACSB: Application of knowledge

7) Assume PC and PW are the prices of cheese and wine, and aLW and aLC are the unit labor requirements in wine and cheese production, respectively. The economy will specialize in the production of cheese and will not produce wine if A) PC/PW > aLC/aLW B) PC/PW < aLC/aLW C) PC/PW = aLC/aLW D) PC/aLC = PW/aLW Answer: A Difficulty: Difficult AACSB: Application of knowledge 8) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain. (b) What is the opportunity cost of wheat in each country? (c) What is the opportunity cost of beef in each country? (d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina. Answer: (a) The U.S. has an absolute advantage in the production of both wheat and beef because labor productivity in the U.S. exceeds labor productivity in Argentina for both products. (b) In the U.S., the opportunity cost of wheat is 100/300 or 0.33 units of beef. In Argentina, the opportunity cost of wheat is 20/20 or 1.0 unit of beef. (c) In the U.S., the opportunity cost of beef is 300/100 or 3.0 units of wheat. In Argentina, the opportunity cost of beef is 20/20 or 1.0 unit of wheat. (d) The U.S. has a comparative advantage in wheat production and Argentina has a comparative advantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.33 units of beef per unit of wheat, then the U.S. will benefit. If Argentina can trade beef to the U.S. at a rate of more than one unit of wheat per unit of beef, then Argentina will benefit. Difficulty: Moderate AACSB: Application of knowledge

9) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain. (b) What is the opportunity cost of wheat in each country? (c) What is the opportunity cost of beef in each country? (d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina. Answer: (a) The U.S. has an absolute advantage in the production of both wheat and beef because labor productivity in the U.S. exceeds labor productivity in Argentina for both products. (b) In the U.S., the opportunity cost of wheat is 100/200 or 0.5 units of beef. In Argentina, the opportunity cost of wheat is 80/20 or 4.0 units of beef. (c) In the U.S., the opportunity cost of beef is 200/100 or 2.0 units of wheat. In Argentina, the opportunity cost of beef is 20/80 or 0.25 units of wheat. (d) The U.S. has a comparative advantage in wheat production and Argentina has a comparative advantage in beef production. If the U.S. can trade wheat to Argentina at a rate of more than 0.5 units of beef per unit of wheat, then the U.S. will benefit. If Argentina can trade beef to the U.S. at a rate of more than 0.25 unit of wheat per unit of beef, then Argentina will benefit. Difficulty: Moderate AACSB: Application of knowledge 10) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain. (b) What is the opportunity cost of wheat in each country? (c) What is the opportunity cost of beef in each country? (d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina. Answer: (a) Argentina has an absolute advantage in the production of both wheat and beef because labor productivity in Argentina exceeds labor productivity in the U.S. for both products. (b) In the U.S., the opportunity cost of wheat is 200/100 or 2.0 units of beef. In Argentina, the opportunity cost of wheat is 400/200 or 2.0 units of beef. (c) In the U.S., the opportunity cost of beef is 100/200 or 0.5 units of wheat. In Argentina, the opportunity cost of beef is 400/200 or 0.5 units of wheat. (d) Neither country has a comparative advantage and there is, therefore, no opportunity for beneficial trade. Difficulty: Moderate AACSB: Application of knowledge 6 Copyright © 2022 Pearson Education, Inc.

3.3

Trade in a One-Factor World

1) Assume Home's unit labor requirements in cheese and wine production are aLW and aLC; and Foreign's unit labor requirements in cheese and wine production are a*LW and a*LC. Home has a comparative advantage in cheese when A) aLC/aLW < a*LC/a*LW B) aLC/aLW > a*LC/a*LW C) aLC/aLW = a*LC/a*LW D) aLC/ a*LC = aLW /a*LW Answer: A Difficulty: Moderate AACSB: Analytical thinking 2) When one country can produce a unit of a good with less labor than another country, the first country has a(n) ________ in producing that good. A) absolute advantage B) comparative advantage C) advanced advantage D) comparable advantage Answer: A Difficulty: Easy AACSB: Application of knowledge 3) In order to know whether a country has a comparative advantage in the production of one particular product we need information on at least ________ unit labor requirements. A) four B) one C) two D) three E) five Answer: A Difficulty: Easy AACSB: Application of knowledge

4) Given the information in the table above A) Neither country has a comparative advantage in cloth. B) Foreign has a comparative advantage in cloth. C) Home has a comparative advantage in both cloth and widgets. D) Home has a comparative advantage in cloth. E) Neither country has a comparative advantage in widgets. Answer: D Difficulty: Easy AACSB: Application of knowledge 5) Given the information in the table above, Home should A) export cloth. B) export widgets. C) export both and import nothing. D) export and import nothing. E) export widgets and import cloth. Answer: A Difficulty: Moderate AACSB: Application of knowledge 6) Given the information in the table above, if the Home economy suffered a meltdown, and the Unit Labor Requirements doubled to 20 for cloth and 40 for widgets then home should A) export cloth. B) export widgets. C) export both and import nothing. D) export and import nothing. E) export widgets and import cloth. Answer: A Difficulty: Moderate AACSB: Application of knowledge 7) Given the information in the table above, if wages were to double in Home, then Home should A) export cloth. B) export widgets. C) export both and import nothing. D) export and import nothing. E) export widgets and import cloth. Answer: A Difficulty: Moderate AACSB: Application of knowledge

8) Given the information in the table above A) neither country has a comparative advantage in cloth. B) Home has a comparative advantage in widgets. C) Foreign has a comparative advantage in widgets. D) Home has a comparative advantage in both cloth and widgets. E) neither country has a comparative advantage in widgets. Answer: C Difficulty: Moderate AACSB: Application of knowledge 9) Given the information in the table above, Home's opportunity cost of cloth is A) 0.5. B) 2.0. C) 6.0. D) 1.5. E) 3.0. Answer: A Difficulty: Moderate AACSB: Analytical thinking 10) Given the information in the table above, Home's opportunity cost of widgets is A) 0.5. B) 2.0. C) 6.0. D) 1.5. E) 3.0. Answer: B Difficulty: Moderate AACSB: Analytical thinking 11) Given the information in the table above, Foreign's opportunity cost of cloth is A) 0.5. B) 2.0. C) 6.0. D) 1.5. E) 3.0. Answer: B Difficulty: Moderate AACSB: Analytical thinking

12) Given the information in the table above, Foreign's opportunity cost of widgets is A) 0.5. B) 2.0. C) 6.0. D) 1.5. E) 3.0. Answer: A Difficulty: Moderate AACSB: Analytical thinking 13) Given the information in the table above, if the world equilibrium price of widgets were 4 cloth, then A) both countries could benefit from trade with each other. B) neither country could benefit from trade with each other. C) each country will want to export the good in which it enjoys comparative advantage. D) neither country will want to export the good in which it enjoys comparative advantage. E) both countries will want to specialize in cloth. Answer: A Difficulty: Moderate AACSB: Application of knowledge 14) Given the information in the table above, if the world equilibrium price of widgets were 40 cloths, then A) both countries could benefit from trade with each other. B) neither country could benefit from trade with each other. C) each country will want to export the good in which it enjoys comparative advantage. D) neither country will want to export the good in which it enjoys comparative advantage. E) both countries will want to specialize in cloth. Answer: A Difficulty: Moderate AACSB: Application of knowledge 15) 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. E) prices of both goods in both countries. Answer: B Difficulty: Moderate AACSB: Application of knowledge

16) A nation engaging in trade according to the Ricardian model will find its consumption bundle A) inside its production possibilities frontier. B) on its production possibilities frontier. C) outside its production possibilities frontier. D) inside its trade-partner's production possibilities frontier. E) on its trade-partner's production possibilities frontier. Answer: C Difficulty: Moderate AACSB: Application of knowledge 17) 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. E) labor is outsourced to neighboring countries. Answer: B Difficulty: Moderate AACSB: Application of knowledge 18) Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the United States as compared to Japan if A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour. B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour. C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour. D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour. E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour. Answer: A Difficulty: Moderate AACSB: Application of knowledge

19) An examination of the Ricardian model of comparative advantage yields the clear result that trade is (potentially) beneficial for each of the two trading partners since it allows for an expanded consumption choice for each. However, for the world as a whole the expansion of production of one product must involve a decrease in the availability of the other, so that it is not clear that trade is better for the world as a whole as compared to an initial situation of non-trade (but efficient production in each country). Are there in fact gains from trade for the world as a whole? Explain. Answer: If we were to combine the production possibility frontiers of the two countries to create a single world production possibility frontier, then it is true that any change in production points (from autarky to specialization with trade) would involve a tradeoff of one good for another from the world's perspective. In other words, the new solution cannot possibly involve the production of more of both goods. However, since we know that each country is better off at the new solution, it must be true that the original points were not on the trade contract curve between the two countries, and it was in fact possible to make some people better off without making others worse off, so that the new solution does indeed represent a welfare improvement from the world's perspective. Difficulty: Difficult AACSB: Application of knowledge

20) Given the information in the table above. What is the opportunity cost of cloth in terms of widgets in Home? Answer: One half a widget. Difficulty: Moderate AACSB: Analytical thinking 21) Given the information in the table above. What is the opportunity cost of cloth in terms of widgets in Foreign? Answer: 2 widgets. Difficulty: Moderate AACSB: Analytical thinking

3.4

Misconceptions About Comparative Advantage

1) Which of the following statements is TRUE? A) The competitive advantage of an industry depends not only on its productivity relative to the foreign industry, but also on the domestic wage rate relative to the foreign wage rate. B) The competitive advantage of an industry only depends on its productivity relative to the foreign industry. C) The competitive advantage of an industry only depends on the domestic wage rate relative to the foreign wage rate. D) The competitive advantage of an industry depends on a country's absolute productivity advantage over other countries. Answer: A Difficulty: Moderate AACSB: Application of knowledge 2) Mahatma Gandhi exhorted his followers in India to promote economic welfare by decreasing imports. This approach A) makes no sense. B) makes no economic sense. C) is consistent with the Ricardian model of comparative advantage. D) is not consistent with the Ricardian model of comparative advantage. E) guarantees benefits for Indian workers. Answer: D Difficulty: Moderate AACSB: Application of knowledge 3) The Country of Rhozundia is blessed with rich copper deposits. The cost of copper produced (relative to the cost of widgets produced) is therefore very low. From this information we know that A) Rhozundia has a comparative advantage in copper. B) Rhozundia should import copper and export widgets. C) Rhozundia should export both widgets and copper. D) Rhozundia should invest in more widget production. E) Rhozundia may or may not have a comparative advantage in copper. Answer: E Difficulty: Moderate AACSB: Application of knowledge

4) We know that in antiquity, China exported silk because no one in any other country knew how to produce this product. From this information we know that A) China had a comparative advantage in silk. B) China had an absolute advantage, but not a comparative advantage in silk. C) no comparative advantage could exist because the technology was not diffused. D) China exported silk for political reasons even though it had no comparative advantage. E) China was unable to profit by exporting silk because it was unknown in the rest of the world. Answer: A Difficulty: Moderate AACSB: Application of knowledge 5) The pauper labor and the exploitation arguments A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative advantage. B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance. C) are not relevant because the Ricardian model is based on the labor theory of value. D) are not relevant because the Ricardian model allows for different technologies in different countries. E) invalidate the Ricardian model. Answer: B Difficulty: Easy AACSB: Application of knowledge 6) If labor productivities were exactly proportional to wage levels internationally, this would A) not negate the logical basis for trade in the Ricardian model. B) render the Ricardian model theoretically correct but practically useless. C) negate the logical basis for trade in the Ricardian model. D) negate the applicability of the Ricardian model if the number of products were greater than the number of trading partners. E) demonstrate the validity of the Ricardian model. Answer: A Difficulty: Moderate AACSB: Application of knowledge 7) Many countries in sub-Saharan Africa have very low labor productivities in many sectors, for example in manufacturing and agriculture. They often despair of even trying to attempt to build their industries unless it is done in an autarkic context, behind protectionist walls because they do not believe they can compete with more productive industries abroad. Discuss this issue in the context of the Ricardian model of comparative advantage. Answer: The Ricardian model of comparative advantage argues that every country must have a comparative advantage in some product (assuming there are more products than countries). However, the Ricardian model is not a growth model, and cannot be used to identify growth modes or linkages. Difficulty: Difficult AACSB: Application of knowledge

8) In 1975, wage levels in South Korea were roughly 5% of those in the United States. It is obvious that if the United States had allowed Korean goods to be freely imported into the United States at that time, this would have caused devastation to the standard of living in the United States, because no producer in this country could possibly compete with such low wages. Discuss this assertion in the context of the Ricardian model of comparative advantage. Answer: According to the Ricardian Model, regardless of relative wage levels, the United States would be able to provide its populace with a higher standard of living than would be possible without trade. Also, low wages tend to be associated with low productivities. Difficulty: Moderate AACSB: Application of knowledge 3.5

Comparative Advantage with Many Goods

1) Assume w and w* are wage rates per hour in Home and in Foreign; aLi and a*Li are the unit labor requirements for Home and Foreign in production of good i. Any good for which a*Li/aLi > w/w* will be produced A) at Home. B) in Foreign. C) both at Home and in Foreign. D) neither at Home nor in Foreign. Answer: A Difficulty: Moderate AACSB: Application of knowledge 2) The two-country, multi-product model differs from the two-country, two-product model in that, in the former A) the relative wage ratio will determine the pattern of trade (which good is exported by which country). B) which country will export which product is determined entirely by labor productivity data. C) full specialization is likely to hold in equilibrium. D) none of the goods are potentially nontraded. E) domestic relative prices are not relevant. Answer: A Difficulty: Moderate AACSB: Application of knowledge 3) In a many-good Ricardian model, equilibrium relative wage is determined by A) the intersection of the derived relative demand curve for labor with the relative supply. B) the intersection of the demand curve for labor with the supply curve for labor. C) the intersection of the production possibility frontier and the horizontal axis. D) the intersection of the production possibility frontier and the vertical axis. Answer: A Difficulty: Moderate AACSB: Application of knowledge

4) In a two-country, multi-product Ricardian model, the relative demand for labor has a ________ shape. A) stepped B) round C) straight line D) zigzag Answer: A Difficulty: Easy AACSB: Application of knowledge 5) How does the two-good, two-country version of the Ricardian model differ from the twocountry, many-good model in terms of the determination which goods are produced and exported by each country? Answer: In the two-good-two-country version of the Ricardian model, comparative advantage is totally determined by physical productivity ratios. Changes in wage rates in either country do not change physically determined comparative advantages, and therefore cannot affect which product will be exported by which country. However, when there are more than two goods in the two-country model, changes in wage rates in one or the other country can in fact determine which good or goods each of the countries will export. The physical productivity definition of comparative advantage employed in the two-good model becomes ambiguous. Instead, changes in relative wage rates will alter international competitiveness along the "chain of comparative advantage." Difficulty: Moderate AACSB: Application of knowledge 6) Explain the "stepped" shape of the relative demand for labor in a two-country, multiple-good Ricardian model. Answer: When we increase the wage rate of Home workers relative to Foreign workers, the relative demand for good produced in Home will decline and the demand for Home labor will decline with it. In addition, the relative demand for Home labor will drop off abruptly whenever an increase in the relative Home wage makes a good cheaper to produce in Foreign. So the curve alternates between smooth downward sloping sections where the pattern of specialization does not change and "flats" where the relative demand shifts abruptly because of shifts in the pattern of specialization. These "flats" correspond to the relative wages that equal the ratio of Home to Foreign productivity for each of the goods. Difficulty: Moderate AACSB: Application of knowledge 7) Explain the vertical shape of the relative supply of labor in a two-country, multiple-good Ricardian model. Answer: The relative supply of labor is determined by the relative sizes of Home's and Foreign's labor forces. Assuming the number of person-hours available does not vary with the wage, the relative wage has no effect on relative labor supply and RS is a vertical line. Difficulty: Moderate AACSB: Application of knowledge 16 Copyright © 2022 Pearson Education, Inc.

3.6

Adding Transport Costs and Nontraded Goods

1) Assume that transportation costs are especially high for Widgets in the two-country, twoproduct Ricardian model, and Country A enjoys a comparative advantage in Widgets, then A) country B must also enjoy a comparative advantage in Widgets. B) country B may end up exporting Widgets. C) country A may switch to having a comparative advantage in the other good. D) country A will still export Widgets. E) trade may be impossible between the two countries. Answer: E Difficulty: Moderate AACSB: Application of knowledge 2) Which of the following is most likely to be a nontraded good in a Ricardian two-country, multi-good model? A) steel B) textiles C) haircuts D) petroleum E) telemarketer services Answer: C Difficulty: Easy AACSB: Application of knowledge 3) Which of the following is most likely to be a traded good in a Ricardian two-country, multigood model? A) textiles B) cement C) haircut D) auto repair Answer: A Difficulty: Easy AACSB: Application of knowledge 4) Which of the following statements is TRUE? A) Free trade is beneficial only if your country is strong enough to stand up to foreign competition. B) Free trade is beneficial only if your competitor does not pay unreasonably low wages. C) Free trade is beneficial only if both countries have access to the same technology. D) Free trade is never beneficial for developing countries. E) Free trade can be beneficial to the economic welfare of all countries involved. Answer: E Difficulty: Moderate AACSB: Application of knowledge

3.7

Empirical Evidence on the Ricardian Model

1) Which of the following has been confirmed by empirical tests of the Ricardian model? A) All predictions of the model for a multi-product, multi-country world are highly unrealistic. B) The existence of nontraded goods results in a high degree of specialization among countries. C) International trade has no impact on income distribution. D) The unimportance of economies of scale as a cause of trade. E) Companies tend to export goods in which they have a relatively high level of productivity. Answer: E Difficulty: Moderate AACSB: Application of knowledge 2) When compared with China, the growth of clothing exports originating in Bangladesh is the result of A) the comparative advantage that Bangladesh has in the production of clothing for export. B) the absolute advantage that China has in the production of clothing for export. C) the absolute advantage that Bangladesh has in the production of clothing for export. D) the comparative and absolute advantage that China has in the production of clothing for export. E) the comparative and absolute advantage that Bangladesh has in the production of clothing for export. Answer: A Difficulty: Easy AACSB: Application of knowledge 3) The growth of clothing exports originating in Bangladesh is the result of the A) high productivity of workers in Bangladesh. B) low wages in Bangladesh. C) low productivity of workers in other countries. D) low productivity of workers in Bangladesh in industries other than those that produce clothing for export. E) high wages in other countries. Answer: D Difficulty: Easy AACSB: Application of knowledge 4) Which of the following statements is TRUE? A) A country's exports are determined by its relative high productivity in the industry compared with relative productivity in other sectors. B) A country's exports are determined by its high productivity in the industry compared with that of foreigners. C) A country's exports are determined by its low productivity in the industry compared with that of foreigners. D) A country's exports are determined by its ability to match other countries' productivity. Answer: A Difficulty: Moderate AACSB: Application of knowledge 18 Copyright © 2022 Pearson Education, Inc.

5) When compared with China, the growth of clothing exports originating in Bangladesh clearly illustrates the difference between absolute and comparative advantage. Discuss and explain. Answer: While Bangladesh has an absolute disadvantage in clothing (and, on average, everything else), the country has a comparative advantage in clothing manufacture and export. Exports of clothing from Bangladesh have consequently surpassed those from China. Difficulty: Moderate AACSB: Application of knowledge 6) When compared with China, the growth of clothing exports originating in Bangladesh clearly illustrates the Ricardian model of comparative advantage. Discuss and explain. Answer: While Bangladesh has an absolute disadvantage in clothing (and, on average, everything else), the country has a comparative advantage in clothing manufacture and export. Exports of clothing from Bangladesh have consequently surpassed those from China. Difficulty: Moderate AACSB: Application of knowledge

International Economics: Theory and Policy, 12e (Krugman) Chapter 4 Specific Factors and Income Distribution 4.1

The Specific Factors Model

1) The Ricardian model of international trade demonstrates that trade can be mutually beneficial. Why, then, do governments restrict imports of some goods? A) The Ricardian model is often incorrect in its prediction that trade can be mutually beneficial. B) Import restrictions are the result of trade wars between hostile countries. C) Trade can have substantial effects on a country's distribution of income. D) Imports are only restricted when foreign-made goods do not meet domestic standards of quality. E) Restrictions on imports are intended to benefit domestic consumers. Answer: C Difficulty: Easy AACSB: Application of knowledge 2) The Ricardian two-country, two-good model predicts that there are potential benefits from trade, but NOT A) when both countries have the same types of technology available. B) when one country has significantly lower wages than the other country. C) the mechanism that determines which country will specialize in which good. D) the effect of trade on income distribution. E) when one country has an absolute advantage in the production of both goods. Answer: D Difficulty: Easy AACSB: Application of knowledge 3) International trade can have important effects on the distribution of income because A) the more powerful country dictates the terms of trade. B) some resources are immobile in the short run. C) different countries use different currencies. D) of government corruption. E) rich countries take advantage of poor countries. Answer: B Difficulty: Moderate AACSB: Application of knowledge

4) The Ricardian model of international trade demonstrates that trade can be mutually beneficial. Why, then, do governments restrict imports of some goods? A) Import restrictions are the result of trade wars between hostile countries. B) Trade can have significant harmful effects on some segments of a country's economy. C) Restrictions on imports can have significant beneficial effects on domestic consumers. D) The Ricardian model is often incorrect in its prediction that trade can be mutually beneficial. E) Imports are only restricted when foreign-made goods do not meet domestic standards of quality. Answer: B Difficulty: Moderate AACSB: Application of knowledge 5) The effect of trade on income distribution A) implies that there are no real gains from trade. B) is insignificant in the short run. C) can be significant in the short run. D) refutes the model of comparative advantage. E) is positive for all segments of an economy. Answer: C Difficulty: Easy AACSB: Application of knowledge 6) International trade can have important effects on the distribution of income because A) different industries employ different factors of production. B) rich countries take advantage of poor countries. C) of government corruption. D) different countries use different currencies. E) the more powerful country dictates the terms of trade. Answer: A Difficulty: Easy AACSB: Application of knowledge 7) U.S.'s trade policies with regard to sugar import restrictions reflect the fact that A) U.S. sugar cane farmers have significant political power. B) U.S. imports most of the sugar consumed in the country. C) U.S. has a comparative advantage in sugar production and therefore exports most of its sugar crop. D) there would be no gains from trade available to U.S. if it engaged in free trade in sugar. E) there are gains from trade that U.S. captures by engaging in free trade in sugar. Answer: A Difficulty: Easy AACSB: Application of knowledge

8) The specific factors model was developed by A) Adam Smith and David Ricardo. B) C.B. deMille and Gordon Willis. C) Paul Samuelson and Ronald Jones. D) Bill Clinton and Monica Lewinsky. E) Richard Nixon and Robert Kennedy. Answer: C Difficulty: Easy AACSB: Application of knowledge 9) In the specific factors model, labor is defined as a(an) A) intensive factor. B) mobile factor. C) variable factor. D) fixed factor. E) specific factor. Answer: B Difficulty: Easy AACSB: Application of knowledge 10) In the specific factors model, which of the following is treated as a specific factor? A) food B) land C) labor D) technology E) cloth Answer: B Difficulty: Easy AACSB: Application of knowledge 11) In the specific factors model, which of the following is treated as a specific factor? A) capital B) technology C) cloth D) food E) labor Answer: A Difficulty: Easy AACSB: Application of knowledge

12) The specific factors model assumes that there are ________ goods and ________ factor(s) of production. A) two; two B) two; one C) three; two D) four; three E) two; three Answer: E Difficulty: Easy AACSB: Application of knowledge 13) A factor of production that cannot be used outside of a particular sector of an economy is a(an) A) variable factor. B) export-competing factor. C) mobile factor. D) import-competing factor. E) specific factor. Answer: E Difficulty: Easy AACSB: Application of knowledge 14) A factor of production that can be used only in the production of one good is a(an) A) import-competing factor. B) export-competing factor. C) mobile factor. D) variable factor. E) specific factor. Answer: C Difficulty: Easy AACSB: Application of knowledge 15) The degree of a factor's specificity is directly related to A) the cost of the factor as a proportion of the long-run total cost of production. B) technology differences between two countries, with a more advanced technology resulting in more factor specificity. C) the amount of time required to redeploy the factor to a different industry. D) factor quality, with higher quality factors having a higher level of specificity. E) the mobility of the factor, with more mobile factors having more specificity. Answer: C Difficulty: Easy AACSB: Application of knowledge