Unit 4.1-4.6

1. Which of the following is considered an advantage of international trade?

• Greater dependance on foreign products

• Increased tax revenue from the imposition of tariffs

• Increased competition

• Greater economies of scale from increased imports

2. What is comparative advantage?

• When a country can produce a good or service for a lower unit cost than another product

• When a country can produce a good or service for a lower unit cost than another country

• When a country can produce a good or service for a lower opportunity cost than another country

• When a country can produce a good or service for a lower opportunity cost than another product

3. What is absolute advantage?

• When a country can produce a good or service for a lower opportunity cost than another country

• When a country can produce a good or service for a lower opportunity cost than another product

• When a country can produce a good or service for a lower unit cost than another product

• When a country can produce a good or service at a lower unit cost than another country

4. Country A has a maximum productive capacity of either 50 million tonnes of sugar or 40 million tonnes of tea.  Country B can produce a maximum of 100 million tonnes of sugar and 50 million tonnes of tea.  What is the opportunity cost for each nation of producing 1 unit of tea?

• Country A 1.2 tonnes of sugar, country B 0.5 tonnes of sugar

• Country A 1.2 tonnes of sugar, country B 2 tonnes of sugar

• Country A 1.25 tonnes of sugar, country B 0.5 tonnes of sugar

• Country A 1.25 tonnes of sugar, country B 2 tonnes of sugar

5. Which of the following statements is true about the following countries, A and B?

• It will always be advantageous for both nations to trade providing a suitable exchange rate can be negotiated

• It will be advantageous for both nations to trade providing at least one has an absolute advantage

• It will be advantageous for both nations to trade providing they have different factor resource endowments

• It will be advantageous for both nations to trade providing both have a comparative advantage

6. Which of the following is a weakness of comparative advantage theory?

•   It assumes constant returns to scale

•   It ignores the fact in the real world countries have different factor resources

•   It ignores the fact that countries may wish to be self sufficient

• The gains of trade are not equally distributed with losers as well as winners from trade

7. A country joins a new bilateral trade agreement and is forced to purchase their raw materials from a country inside the trading bloc rather than from a third country outside of the bloc.  This is known as:

• Diseconomies of scale

• Trade diversion

• Trade creation

• Customs Union

8. A group of countries join together to form an association which grants free trade between members, common external tariff barriers as well as a single currency.  This is called a:

• Customs Union

• Preferential Trade Agreement

• Monetary Union

• Free Trade Association

9. Which of the following is an advantage of a fixed exchange rate system?

• Governments are able to use monetary policy in order to control macro economic objectives

• It requires central banks to hold large reserves of currency in order to keep the currency in equilibrium

• It provides greater certainty for exporters which encourages trade

• Governments are forced into macro economic policy objectives which prioritise growth

10. An advantage of a floating exchange rate system is the following:

• They allow a central bank to use fiscal policy to control macro economic objectives

• They are self correcting in the case of a current account deficit or surplus

• They encourage greater trade through the certainty of knowing the price of one currency relative to another

• They do not require central banks to give up control to a larger European wide central bank