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

$\text{Terms of Trade} = \frac{\text{Export Price}}{\text{Import Price}}$

Question 1

Which of the following best describes the concept of comparative advantage?

Accepted Answer

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

Question 2

Suppose Country A can produce 10 units of wheat or 5 units of cloth with the same resources, while Country B can produce 6 units of wheat or 6 units of cloth. Which country has a comparative advantage in producing cloth?

Accepted Answer

Country B, because its opportunity cost of cloth is lower.

Question 3

What is the main source of gains from international trade according to the law of comparative advantage?

Accepted Answer

Specialization in the production of goods for which a country has a lower opportunity cost.

Question 4

If the United States imposes a tariff on imported cars, what is the most likely effect on consumer surplus in the domestic market?

Accepted Answer

Consumer surplus will decrease due to higher prices.

Question 5

Which of the following is NOT a plausible source of comparative advantage for a country?

Accepted Answer

High domestic prices for imported goods.

Question 6

Consider the following scenario: The world price of ethanol is $1.00 per gallon, while the domestic price in the U.S. under autarky is $2.00 per gallon. If trade is allowed, what will happen to the price and quantity of ethanol consumed in the U.S.?

Accepted Answer

Price will fall to $1.00 and quantity consumed will increase.

Question 7

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

Accepted Answer

$	ext{Terms of Trade} = \frac{	ext{Export Price}}{	ext{Import Price}}$

Question 8

Which of the following is a common fallacy about trade restrictions?

Accepted Answer

Trade restrictions that limit imports save jobs for Americans.

Question 9

A quota on peanut imports will most likely result in which of the following outcomes?

Accepted Answer

Higher domestic prices and reduced imports.

Question 10

Which of the following arguments is most persuasive to economists for restricting trade?

Accepted Answer

Protecting infant industries.

Question 11

Suppose the U.S. has a comparative advantage in producing soybeans. If the U.S. prohibits soybean exports, what is the likely effect on domestic soybean prices?

Accepted Answer

Domestic prices will fall below the world price.

Question 12

Which of the following best explains why international trade leads to mutual gains for countries?

Accepted Answer

Countries can consume bundles of goods that would be impossible to produce domestically.

Question 13

What is the effect of a tariff on the domestic market for an imported good?

Accepted Answer

It decreases domestic consumer surplus and increases producer surplus.

Question 14

Which of the following is an example of an external economy that can lead to comparative advantage?

Accepted Answer

Reductions in a firm's costs due to an increase in the size of an industry.

Question 15

If a country is in autarky, which of the following statements is true?

Accepted Answer

The country does not trade with other countries.

Question 16

Which of the following is a likely secondary effect of restricting imports through tariffs or quotas?

Accepted Answer

Exports may decrease as other countries retaliate.

Question 17

Which formula 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 18

Which of the following is a reason why politicians may favor protectionist policies?

Accepted Answer

Protectionism delivers concentrated benefits to protected parties while imposing hidden costs on the public.

Question 19

Dumping is best defined as:

Accepted Answer

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

Question 20

Which of the following is a benefit of international trade for consumers?

Accepted Answer

Access to goods at more economical prices due to increased competition.

Comparative Advantage and the Gains from International Trade

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