Chapter 23: International Trade

1. Suppose Country A has an absolute advantage in producing good X. Which of the following statements about Country A is/are CORRECT?

(1) Country A also has a comparative advantage in producing good X.

(2) Country A has an absolute disadvantage in producing another good.

(3) Country A may gain from importing good X from the international market.

• A. (1) only

• B. (3) only

• C. (1) and (3) only

• D. (2) and (3) only

2. Assume both Country A and Country B produce and consume bread and orange juice only. If Country A uses more resources in producing a unit of bread than Country B,

(1) Country A has an absolute disadvantage in producing bread.

(2) Country A has a comparative disadvantage in producing bread.

(3) Country B has an absolute advantage in producing bread.

(4) Country B has a comparative advantage in producing bread.

• A. (1) and (2) only

• B. (1) and (3) only

• C. (2) and (4) only

• D. (3) and (4) only

3. Suppose Country X is less productive in producing every good than Country Y. Which of the following statements is CORRECT?

• A. Country X will produce nothing and import every good from Country Y.

• B. No trade will take place between the two countries.

• C. The two countries may still gain from trading with each other.

• D. Country Y can produce every good at a lower opportunity cost than Country X.

4. Suppose Country A and Country B only produce good X and good Y. If Country A has an absolute advantage and a comparative advantage in producing good X,

• A. Country A must have an absolute disadvantage in producing good Y.

• B. Country B must have an absolute disadvantage in producing good Y.

• C. Country B must have a comparative advantage in producing good Y.

• D. Country A must export good X to Country B.

5. Country A and Country B possess the same amount of resources. The table below shows the output of the two countries with all their resources evenly allocated between the production of butter and cakes before trade.

Based on the above information, ________________ has an absolute advantage and _________________ has a comparative advantage in producing butter.

• A. Country A … Country A

• B. Country A … Country B

• C. Country B … Country A

• D. Country B … Country B

6. The following table shows the number of man-hours required by Country A and Country B in the production of grapes and apples.

It can be seen that Country A has a/an _____________________ in producing ___________________.

• A. absolute advantage … grapes

• B. comparative advantage … grapes

• C. absolute advantage … apples

• D. comparative advantage … apples

7. The following table shows the amount of goods that Country A and Country B can produce with 1,000 units of resources respectively.

Which of the following statements is CORRECT?

• A. Country A can benefit from exporting skirts to Country B.

• B. Country B has an absolute disadvantage and a comparative disadvantage in producing hats.

• C. Country A uses more resources than Country B in producing 1 unit of hats.

• D. The two countries will not engage in trade if the terms of trade is 1 unit of skirts = 0.3 units of hats.

8. According to the principle of comparative advantage,

• A. a country may trade with another country which has an absolute disadvantage in producing all goods.

• B. a country may have a comparative advantage in producing all goods.

• C. a country will not trade with another country which has a lower opportunity cost in production.

• D. a country cannot increase its output without engaging in trade.

9. The following table shows the amount of resources required to produce pencils and calculators by Country A and Country B respectively.

Which of the following terms of trade is mutually beneficial to the two countries if the transportation cost is zero?

• A. 1 unit of calculators = 0.7 units of pencils

• B. 1 unit of calculators = 0.9 units of pencils

• C. 1 unit of calculators = 1.1 units of pencils

• D. 1 unit of calculators = 1.3 units of pencils

10. The following table shows the quantities of smartphones or calculators produced by Country A and Country B with 1 unit of resources.

If 1 unit of smartphones can be exchanged for _________________ units of calculators, both countries can gain from trade.

• A. 3

• B. 3.5

• C. 4.5

• D. 5.5