Question 1

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

Accepted Answer

The ability of a country to produce a good at a lower opportunity cost than another country.

Question 2

Suppose the world price of ethanol is $$1.00 per gallon, but the U.S. imposes a 0.50 $$per gallon tariff. What is the new price U.S. consumers pay for imported ethanol?

Accepted Answer

$1.50

Question 3

If the United States has an absolute advantage in producing both wheat and smartphones, but China has a lower opportunity cost for producing smartphones, which country should specialize in smartphone production according to the theory of comparative advantage?

Accepted Answer

China

Question 4

What is the main economic effect of a quota on sugar imports in the United States?

Accepted Answer

It raises the price of sugar and increases producer surplus for U.S. sugar producers.

Question 5

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

Accepted Answer

High tariffs on imports

Question 6

If the U.S. opens its ethanol market to free trade and the world price is below the domestic price, what will happen to consumer surplus and producer surplus?

Accepted Answer

Consumer surplus will increase and producer surplus will decrease.

Question 7

Which of the following equations correctly represents opportunity cost?

Accepted Answer

$$Opportunity\ Cost = \frac{What\ is\ Given\ Up}{What\ is\ Gained}$$

Question 8

Which of the following best explains why not all goods are completely specialized in one country, even if there is a comparative advantage?

Accepted Answer

Increasing opportunity costs and differences in consumer preferences.

Question 9

A tariff on imported shoes in the U.S. is an example of which type of policy?

Accepted Answer

A protectionist policy

Question 10

Suppose the U.S. sugar quota raises the domestic price of sugar from $$0.12 to 0.25 $$per pound. What is the likely effect on U.S. candy manufacturers?

Accepted Answer

They face higher input costs and may relocate production abroad.

Question 11

Which of the following is a likely result of a trade war, such as the one in 2018 between the U.S. and China?

Accepted Answer

Deadweight loss and higher prices for consumers

Question 12

What is the main argument used by special interest groups to support tariffs and quotas?

Accepted Answer

They save domestic jobs and protect high wages.

Question 13

If the U.S. unilaterally eliminates all tariffs and quotas, what is the predicted effect according to economic theory?

Accepted Answer

The U.S. economy would gain overall, even if other countries do not reduce their trade barriers.

Question 14

Which of the following best describes the concept of deadweight loss due to a tariff?

Accepted Answer

The loss of economic surplus that occurs when a tariff distorts market outcomes.

Question 15

Which of the following is an example of a non-tariff barrier to trade?

Accepted Answer

A regulation banning the sale of raw milk across state lines

Question 16

Suppose the U.S. and China agree to trade at a one-for-one ratio of smartphones to wheat. If China has a lower opportunity cost for smartphones and the U.S. for wheat, what is the likely outcome?

Accepted Answer

Both countries can consume more than they could in autarky.

Question 17

Which of the following best describes the role of the World Trade Organization (WTO)?

Accepted Answer

To oversee international trade agreements and provide dispute resolution

Question 18

What is the economic rationale behind the 'infant industry' argument for protectionism?

Accepted Answer

New industries need temporary protection to become competitive.

Question 19

If a country sells a product abroad for a lower price than it charges domestically, what is this practice called?

Accepted Answer

Dumping

Question 20

Which of the following best illustrates the concept of opportunity cost in international trade?

Accepted Answer

A country must give up producing some wheat to produce more smartphones.

Comparative Advantage and the Gains from International Trade: Study Notes

Study Guide - Practice Questions

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