Question 1

Suppose Country A can produce either 10 units of wine or 20 units of cheese with one unit of labor, while Country B can produce either 8 units of wine or 16 units of cheese with one unit of labor. According to the theory of comparative advantage, which good should Country A specialize in producing?

Accepted Answer

Country A should specialize in wine because it has a comparative advantage in wine production.

Question 2

According to the Heckscher-Ohlin (H-O) theory, a country will export goods that:

Accepted Answer

Use its abundant factor of production intensively.

Question 3

If the world price of a good is above the domestic equilibrium price, what is the likely effect on domestic consumers and producers after opening up to international trade?

Accepted Answer

Domestic producers benefit, and domestic consumers are worse off.

Question 4

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

Accepted Answer

$$OC_{X} = \frac{Q_{Y}}{Q_{X}}$$

Question 5

A country has a production possibility frontier (PPF) given by $$Q_{W} + 2Q_{C} = 100$$, where $$Q_{W} is $$the quantity of wheat and $$Q_{C} is $$the quantity of cloth. What is the opportunity cost of producing one more unit of cloth?

Accepted Answer

0.5 units of wheat

Question 6

Which of the following best describes intra-industry trade?

Accepted Answer

Trade of similar products within the same industry between countries.

Question 7

If a country moves from autarky (no trade) to free trade, what is the effect on total welfare (consumer surplus plus producer surplus plus government revenue)?

Accepted Answer

Total welfare increases due to gains from trade.

Question 8

According to Adam Smith's theory of absolute advantage, what is the main reason for international trade?

Accepted Answer

Countries can produce some goods more efficiently than others.

Question 9

Which of the following is a likely result of economies of scale in international trade?

Accepted Answer

Lower average costs as output increases, leading to increased trade.

Question 10

A country has a factor endowment of 100 units of labor and 50 units of capital. According to the H-O theory, which type of good is the country likely to export?

Accepted Answer

Labor-intensive goods

Question 11

If the relative price of a country's export good rises on the world market, what is the likely effect on the country's terms of trade?

Accepted Answer

The country's terms of trade improve.

Question 12

Which of the following best explains the difference between partial and total specialization?

Accepted Answer

Partial specialization means a country produces both goods, while total specialization means it produces only one good.

Question 13

Suppose the world price of steel is lower than the domestic price in a country before trade. After opening up to trade, what will happen to domestic steel producers and consumers?

Accepted Answer

Producers will lose, and consumers will gain.

Question 14

Which of the following is NOT a reason for intra-industry trade?

Accepted Answer

Differences in factor endowments between countries.

Question 15

If a country has an absolute advantage in producing both goods, what does the theory of comparative advantage suggest?

Accepted Answer

The country should specialize in the good for which it has the lowest opportunity cost.

Question 16

Which formula represents the calculation of comparative advantage for good X between two countries?

Accepted Answer

$$CA_{X} = \frac{OC_{X,Country1}}{OC_{X,Country2}}$$

Question 17

Which of the following is an example of inter-industry trade?

Accepted Answer

France exports wine to Germany and imports cars from Germany.

Question 18

If a country specializes according to its comparative advantage and trades, what is the effect on world production?

Accepted Answer

World production increases because resources are allocated more efficiently.

Question 19

Which of the following best explains the role of scale economies in trade?

Accepted Answer

Scale economies allow firms to lower average costs by producing larger quantities, encouraging international trade.

Question 20

Suppose the gains from trade for a country are calculated as the increase in consumer and producer surplus after trade. If consumer surplus increases by $$50$$ and producer surplus decreases by $$30$$, what are the net gains from trade?

Accepted Answer

$$20$$

International Trade: Theories, Welfare Effects, and Specialization

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