Comparative Advantage and Open Economy

1. Chapter 32: Comparative Advantage and the Open Economy

2. Since World War II, world trade has • decreased in importance as nations turn inward due to security concerns. • increased, but not as dramatically as annual world real GDP has climbed. • risen sharply, outpacing gains in annual world real GDP. • increased in relative importance for most nations, but not for the United States.

3. For the United States since 1950, imports as a percentage of GDP has • tripled. • increased slightly. • remained constant. • decreased.

4. Assume that U.S. producers can manufacture cookies at a lower opportunity cost than Canadian producers. If this is the case, • it will not be possible for Canada to have an comparative advantage in the production of any other products. • Canada could still have the comparative advantage in cookie production. • it would still be possible for Canada to have a comparative advantage in trade for some other products. • Canada would have the comparative advantage in all products compared to the United States.

5. Suppose that the opportunity cost of producing goods differs between two nations. We can correctly state that • the two nations should not specialize in the production of goods. • specialization can lead to an increase in the production of all goods. • specialization can lead to an increase in the consumption of all goods. • neither country has a comparative advantage in the production of any good.

6. In the long run, imports will most likely be paid for with • exports. • the sale of real and financial assets. • the extension of credit. • higher domestic unemployment.

7. Goods that are produced domestically and then sold in other countries are called • exports. • imports. • tariffs. • quotas.

8. The basic proposition in international trade is that • trade is determined by absolute advantage. • in the long run, imports are paid for by exports. • everyone is made better off by free trade. • fair trade is more important than free trade.

9. Which of the following statements is FALSE? • When it comes to overall productive efficiency, compared to Japan, Germany, and the rest of the European Union, the United States lags far behind. • Sophisticated financial systems have given U.S. productive efficiency a boost. • The United States' international competitive position has been helped by its long history of widespread entrepreneurship. • Economic restructuring and investments in information technology have added to productive efficiency in the United States.

10. The concept of "global competitiveness" • is not practical because economic well-being is evaluated within each country. • means that the economic well-being of each nation must be compared with nations with same size population. • means that the economic well-being of each nation must be compared with nations on the same continent. • means that the export-import ratio of each nation must be compared.

11. People who focus on the "competitiveness" of the United States are • focusing on the right thing if the United States is to stay a leading economic power. • treating the United States as if it is a business firm. • also focusing on the importance of education. • correctly recognizing that trade is a zero-sum game.

12. A new industry develops, and our government wants to protect it from foreign competition. Which one of the following arguments would appropriately describe this type of protection? • national security • cartelization • infant industry • protecting American jobs

13. For infant industry tariff protection to be valid requires that • the tariff must be allowed to last forever. • only industries that currently are producing efficiently should be protected. • government officials must predict which industries will eventually be able to compete with more established foreign producers. • the industries protected must have substantial monopoly power in the absence of foreign competition.

14. U.S. job losses cited by anti-trade critics • are mostly a short-term problem in isolated industries. • are nonexistent. • affect only capital-intensive U.S. industries. • are mostly due to poor training by U.S. firms.

15. Import restrictions due to the imposition of tariffs by the U.S. government • will ultimately cause inefficient resource allocation in the United States. • will lead to lower incomes in the economy of U.S. trade partners. • will lead to a decline in the quantity of the product consumed in the United States. • All of the above are likely to occur.

16. If a country voluntarily agrees to have its companies import more goods from another country, the country has • a voluntary import expansion (VIE) agreement. • a voluntary restraint (VR) agreement. • a mandated tariff. • a mandated agreement.

17. The General Agreement on Tariffs and Trade is an international agreement • to establish the North American continent as a free trade area. • to encourage peaceful settlements of trade disputes, but has no particular point of view about the desirability of higher or lower tariffs. • to encourage world trade by lowering tariffs and other trade barriers. • to make all tariffs illegal.

18. The World Trade Organization is a successor organization to the • United Nations. • World Bank. • International Court of Justice. • GATT.

19. Trade diversion results in • an increase in the total amount of trade in the world. • a decrease in the total amount of trade in the world. • no change in the total amount of trade in the world. • either an increase or decrease in the amount of trade in the world, depending on where trade takes place.

20. U.S. automakers have an interest to make it more difficult for European competitors to locate assembly plants in Canada or Mexico and thereby ship finished automobiles to the United States duty-free. This is an example of • trade deflection. • trade diversion. • quotas. • rules of origin.

21. Groups of nations that grants members trade privileges are called • local trade protectionists. • trade settlements. • regional trade blocs. • allies.