Q: Which equation correctly represents the terms of trade between two countries?

$$\text{Terms of Trade} = \frac{\text{Index of Export Prices}}{\text{Index of Import Prices}} \times 100$$

Question 1

Which of the following best defines comparative advantage?

Accepted Answer

The ability of a country to produce a good or service at a lower opportunity cost than competitors.

Question 2

Suppose Country A can produce either 10 tons of wheat or 5 tons of steel with its resources, while Country B can produce either 8 tons of wheat or 4 tons of steel. Which country has the comparative advantage in steel production?

Accepted Answer

Country B, because it has a lower opportunity cost for steel.

Question 3

Which of the following is NOT a source of comparative advantage?

Accepted Answer

High tariffs on imports

Question 4

If the world price of a good is lower than the domestic price, what is the likely effect of allowing free trade in that good?

Accepted Answer

Domestic consumers will gain, and producer surplus will fall.

Question 5

Which equation correctly represents the terms of trade between two countries?

Accepted Answer

$$	ext{Terms of Trade} = \frac{	ext{Index of Export Prices}}{	ext{Index of Import Prices}} 	imes 100$$

Question 6

A country is in autarky. What does this mean?

Accepted Answer

It does not trade with other countries.

Question 7

Which of the following is a likely result of imposing a tariff on imported cars?

Accepted Answer

Producer surplus for domestic car makers will increase.

Question 8

Suppose the U.S. imposes a quota on imported peanuts. What is the most likely effect?

Accepted Answer

Consumers will pay higher prices and consume fewer peanuts.

Question 9

Which of the following is a fallacy regarding trade restrictions?

Accepted Answer

Trade restrictions that limit imports save jobs for Americans.

Question 10

If the U.S. has a comparative advantage in soybeans, what is the effect of allowing free trade in soybeans?

Accepted Answer

U.S. soybean producers will gain from higher prices.

Question 11

Which of the following best describes the 'infant industry' argument for trade protection?

Accepted Answer

New industries need protection from foreign competition until they become established.

Question 12

Which of the following is an example of an external economy as a source of comparative advantage?

Accepted Answer

A country with a large, established textile industry experiences lower costs as the industry grows.

Question 13

Suppose the U.S. government imposes a tariff on imported shoes. Which group is most likely to benefit?

Accepted Answer

U.S. shoe producers

Question 14

Which of the following is a likely secondary effect of restricting imports?

Accepted Answer

A reduction in exports as other countries retaliate

Question 15

Which of the following equations represents the opportunity cost of producing one unit of Good X in terms of Good Y?

Accepted Answer

$$	ext{Opportunity Cost of X} = \frac{	ext{Units of Y foregone}}{	ext{Units of X gained}}$$

Question 16

Which of the following is a potential negative effect of globalization cited by anti-globalization forces?

Accepted Answer

It may erode distinctive cultures.

Question 17

What is 'dumping' in the context of international trade?

Accepted Answer

Selling a product for a price below its cost of production.

Question 18

Which of the following best explains why politicians may favor trade restrictions despite overall economic losses?

Accepted Answer

The benefits of protection are concentrated among a few, while the costs are spread across many.

Question 19

Which of the following is a real-world example of economies of scale as a gain from international trade?

Accepted Answer

A car manufacturer lowers its per-unit cost by producing for the global market.

Question 20

If a country specializes in producing goods for which it has a comparative advantage and trades for other goods, what is the likely outcome?

Accepted Answer

The country will consume a bundle of goods it could not produce on its own.

Comparative Advantage and the Gains from International Trade

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