Chapter 28
International Trade and Finance
1. The theory of comparative advantage suggests that a (an)
a. industrialized country should not import.
b. country that is not competitive should import everything.
c. country that specializes in producing goods or services for which it has a lower
opportunity cost.
d. None of the above answers are correct.
ANS
a. Incorrect. This is a meaningless statement.
b. Incorrect. This is a meaningless statement.
c. Correct. The theory of comparative advantage suggests that a country specialize in
producing goods or services for which it has a lower opportunity cost.
d. Incorrect. Answer a. is correct.
2. Assume the United States can use a given amount of its resources to produce either 20
airplanes or 8 automobiles and Japan can employ the same amount of its resources to
produce either 20 airplanes or 10 automobiles. The United States should specialize in
a. airplanes.
b. automobiles.
c. both goods.
d. neither good.
ANS
a. Correct. Japan is more productive in automobiles (10/8) so Japan should specialize in
automobiles and the United States specialize in airplanes.
b. Incorrect. Japan is more productive in automobiles (10/8) so Japan should specialize in
automobiles and the United States specialize in airplanes.
c. Incorrect. Japan is more productive in automobiles (10/8) so Japan should specialize in
automobiles and the United States specialize in airplanes.
d. Incorrect. Japan is more productive in automobiles (10/8) so Japan should specialize in
automobiles and the United States specialize in airplanes.
Exhibit 14 Potatoes and wheat output (tons per day)
Country
United States
Ireland
Potatoes
4
3
1
Wheat
2
1
3. In Exhibit 14, the United States has an absolute advantage in producing
a. potatoes.
b. wheat.
c. both potatoes and wheat.
d. neither potatoes nor wheat.
ANS
a. Incorrect. The United States produces more potatoes and wheat per day than Ireland.
b. Incorrect. The United States produces more potatoes and wheat per day than Ireland.
c. Correct. The United States produces more potatoes and wheat per day than Ireland.
d. Incorrect. The United States produces more potatoes and wheat per day than Ireland.
4. In Exhibit 14, Ireland's opportunity cost of producing one unit of wheat is
a. 1/3 ton of potatoes.
b. 3 tons of potatoes.
c. either a or b.
d. neither a nor b.
ANS
a. Incorrect. Ireland must give up production of 3 tons of potatoes to produce 1 ton of
wheat.
b. Correct. Ireland must give up production of 3 tons of potatoes to produce 1 ton of
wheat.
c. Incorrect. Ireland must give up production of 3 tons of potatoes to produce 1 ton of
wheat.
d. Incorrect. Ireland must give up production of 3 tons of potatoes to produce 1 ton of
wheat.
5. In Exhibit 14, the United States has a comparative advantage in producing
a. potatoes.
b. wheat.
c. both potatoes and wheat.
d. neither potatoes nor wheat.
ANS
a. Incorrect. To produce a ton of wheat, the United States must give up production of 2
tons of potatoes (2/4) and Ireland must give up 3 tons of potatoes (1/3).
b. Correct. To produce a ton of wheat, the United States must give up production of 2
tons of potatoes (2/4) and Ireland must give up 3 tons of potatoes (1/3).
c. Incorrect. To produce a ton of wheat, the United States must give up production of 2
tons of potatoes (2/4) and Ireland must give up 3 tons of potatoes (1/3).
d. Incorrect. To produce a ton of wheat, the United States must give up production of 2
tons of potatoes (2/4) and Ireland must give up 3 tons of potatoes (1/3).
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6. If each nation in Exhibit 14 specializes in producing the good for which it has a
comparative advantage, then
a. Ireland would produce neither potatoes nor wheat.
b. the United States would produce both potatoes and wheat.
c. the United States would produce potatoes.
d. Ireland would produce potatoes.
ANS
a. Incorrect. The United States has an absolute advantage in both potatoes and wheat, but
Ireland can produce 3 tons of potatoes per ton of wheat given compare to 2 tons of
potatoes per ton of wheat given up (4/2) for the United States.
b. Incorrect. The United States has an absolute advantage in both potatoes and wheat, but
Ireland can produce 3 tons of potatoes per ton of wheat given compare to 2 tons of
potatoes per ton of wheat given up (4/2) for the United States.
c. Incorrect. The United States has an absolute advantage in both potatoes and wheat, but
Ireland can produce 3 tons of potatoes per ton of wheat given compare to 2 tons of
potatoes per ton of wheat given up (4/2) for the United States.
d. Correct. The United States has an absolute advantage in both potatoes and wheat, but
Ireland can produce 3 tons of potatoes per ton of wheat given compare to 2 tons of
potatoes per ton of wheat given up (4/2) for the United States.
7. A tariff is a
a. tax on an exported product.
b. limit on the number of goods that can be exported.
c. limit on the number of goods that can be imported.
d. tax on an imported product.
ANS
a. Incorrect. A tariff is a tax on an imported product.
b. Incorrect. This is a quota.
c. Incorrect. This is a quota.
d. Correct. A tariff is a tax on an imported product.
8. The principal objective of the WTO is to
a. reduce the level of all tariffs.
b. establish fair prices for all goods traded internationally.
c. prevent the trading of services across nations’ borders.
d. encourage countries to establish quotas.
ANS
a. Correct. The principal objective of WTO is to reduce the level of all tariffs.
b. Incorrect. The principal objective of WTO is to reduce the level of all tariffs.
c. Incorrect. The principal objective of WTO is to reduce the level of all tariffs.
d. Incorrect. The principal objective of WTO is to reduce the level of all tariffs.
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9. Which of the following is not an argument used in favor of protectionism?
a. to protect an "infant" industry
b. to protect domestic jobs
c. to preserve national security
d. to protect against "unfair" competition because of cheap foreign labor
e. to reduce prices paid by domestic consumers
ANS
a. Incorrect. This argument is that new domestic industry needs protection to grow.
b. Incorrect. This argument is that important goods come at the expense of domestic jobs.
c. Incorrect. This argument is that defense-related industries must be protected.
d. Incorrect. This argument is that without protection from cheap labor overseas U.S.
wages will be driven down
e. Correct. Protectionism results in higher prices paid by domestic consumers.
10. The main explanation for why the cheap foreign labor argument is a poor reason for
restricting international trade is that
a. workers who get paid less tend to have lower productivity than those who get paid
more.
b. all firms and workers gain when there are no restrictions on international trade.
c. infant industries such as steel and automobiles need to be protected.
d. specialization and free trade usually raise the prices of all the traded goods, so that the
workers can get paid more.
ANS
a. Correct. The main explanation is that workers who get paid less tend to have lower
productivity than those who get paid more.
b. Incorrect. The cheap labor argument advocates trade restrictions.
c. Incorrect. The steel and automobile industries are not infant industries.
d. Incorrect. Specialization and tree trade lower prices.
11. The account that records a nation’s foreign economic transactions is called the
a. Trade Account.
b. T account.
c. Exchange Market.
d. Balance of Payments.
ANS
a. Incorrect. This is a meaningless term.
b. Incorrect. This is a meaningless term.
c. Incorrect. This is a meaningless term.
d. Correct. The account which records a nation’s foreign economic transactions is called
the balance of payments.
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12. Expenditures for services such as tourism, income for foreign investment, and foreign
gifts are tabulated in the
a. current account.
b. capital account.
c. official reserve account.
d. goods account.
ANS
a. Correct. Expenditures for services such as tourism, income for foreign investment, and
foreign gifts are tabulated in the current account.
b. Incorrect. This account records payments for financial capital, such as real estate,
stock, bonds, and government securities.
c. Incorrect. This is a meaningless term.
d. Incorrect. Goods exports and imports are under the current account.
13. Suppose a German bank purchases a U.S. Treasury bond. This transaction would be
recorded in the
a. capital account.
b. current account.
c. goods trade balance.
d. unilateral transfers.
ANS
a. Correct. This account records payments for financial capital, such as real estate, stock,
bonds, and government securities.
b. Incorrect. Expenditures for services such as tourism, income for foreign investment,
and foreign gifts are tabulated in the current account.
c. Incorrect. This is the difference between goods exports and goods imports.
d. Incorrect. This account includes gifts made by government, charitable organizations,
private individuals, and private organizations.
Exhibit 15 Foreign exchange market for U.S. dollars and British pounds
S1
1.00
0.80
Price
(pounds
per
dollars)
S2
E1
0.60
E2
0.40
D1
D2
0.20
0
100
200
300
400
Quantity of dollars
(millions per day)
5
500
14. Exhibit 15 shows a situation in which
a. both the dollar and the pound have depreciated.
b. both the dollar and the pound have appreciated.
c. the dollar has depreciated and the pound has appreciated.
d. the dollar has appreciated and the pound has depreciated.
ANS
a. Incorrect. The change from E1 to E2 results in depreciation of the pound relative to the
dollar.
b. Incorrect. The change from E1 to E2 results in depreciation of the pound relative to the
dollar.
c. Correct. The change from E1 to E2 results in depreciation of the pound relative to the
dollar.
d. Incorrect. The change from E1 to E2 results in depreciation of the pound relative to the
dollar.
15. Which of the following could cause the dollar-pound exchange rate to change as shown
in Exhibit 15?
a. American goods become more popular in Great Britain.
b. British incomes rise, while U.S. incomes remain unchanged.
c. The U.S. price level rises, while the British price level remains unchanged.
d. The U.S. real interest rate rises, while the British real interest rate remains unchanged.
ANS
a. Incorrect. This would cause an increase in the demand for dollars.
b. Incorrect. British buy more U.S. imports resulting in a rightward shift in the supply curve
for dollars and a decrease in equilibrium.
c. Correct. This change could result from a rise in the U.S price level.
d. Incorrect. The British buy more interest-bearing securities resulting in an increase in the
demand for dollars and an increase in equilibrium.
16. A country that has a lower opportunity cost of producing a good
a. has a comparative advantage.
b. can produce the good using fewer resources than another country.
c. requires fewer labor hours to produce the good.
d. all of the answers are correct.
ANS
a. Correct. A country that has a lower opportunity cost of producing a good has a
comparative advantage.
b. Incorrect. Opportunity cost is measured in terms of goods and services given up to
produce a given good or service.
c. Incorrect. Opportunity cost is measured in terms of goods and services given up to
produce a given good or service.
d. Incorrect. The only correct answer is answer a.
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17. If one country can produce a good with fewer resources than another country, this is
called
a. specialization.
b. geographic advantage.
c. comparative advantage.
d. absolute advantage.
ANS
a. Incorrect. Specialization is production of one good or service.
b. Incorrect. This is not an economic concept.
c. Incorrect. Comparative advantage is the ability of a country to produce a good at a lower
opportunity cost than another country. Stated differently, one country can produce greater
output of a good with the same resources than another country.
d. Correct. If one country can produce a good with fewer resources than another country,
this is called absolute advantage.
18. One big difference between tariffs and quotas is that tariffs
a. raise the price of a good while quotas lower it.
b. generate tax revenues while quotas do not.
c. stimulate international trade while quotas inhibit it.
d. hurt domestic producers while quotas help them.
ANS
a. Incorrect. Quotas also raise the price of a good.
b. Correct. One big difference between tariffs and quotas is that tariffs generate tax
revenues while quotas do not.
c. Incorrect. Tariffs restrict international trade.
d. Incorrect. Tariffs also help domestic producers by making foreign goods more expensive.
19. Which of the following is not included in the current account?
a. Exports of goods.
b. Imports of goods.
c. U.S. capital inflow and outflow.
d. Unilateral transfers.
ANS
a. Incorrect. Exports of good are included in the current account.
b. Incorrect. Imports of good are included in the current account.
c. Correct. U.S. capital inflow and outflow are included in the capital account.
d. Incorrect. Unilateral transfers are included in the current account.
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20. A shift of the U.S. demand curve for Mexican pesos to the left and a decrease in the
peso price per dollar would result from
a. an increase in the U.S. inflation rate relative to the rate in Mexico.
b. a change in U.S. consumers' tastes away from Mexican products and toward products
made in South Korea, India, and Taiwan.
c. U.S. buyers perceiving that domestically-produced products are of a lower quality than
products made in Mexico.
d. all of the answers are correct.
ANS
a. Incorrect. Lower relative prices in Mexico would increase the U.S. demand curve for
pesos to purchase Mexican goods.
b. Correct. A change in tastes can shift the U.S. demand curve for pesos leftward.
c. Incorrect. In this case, the change in tastes shifts the U.S. demand curve for peso
rightward.
d. Incorrect. Only answer b is correct.
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