9708 Free Trade Theory

The statements that follow relate to possible gains from an increase in free trade. Which gain is least certain to result?

• Increased specialisation leads to improvements in productivity.

• Trade extends the choice of goods available to consumers.

• Trade leads to an increase in the number of jobs.

• Trade leads to a reduction in costs of production.

The diagram shows production possibility curves for two countries, X and Y. What can be deduced from the diagram?

• Both countries can benefit from specialisation.

• Country X has a higher opportunity cost than Y in producing good M.

• Country Y has a comparative advantage in both goods.

• Trade between X and Y will not take place.

Each diagram shows the production possibility curves of two economies, X and Y, which produce food and clothes. In which diagram would both economies benefit by specialising in the good in which they have comparative advantage and trading at an exchange rate of 1 unit of clothes to 1.5 units of food?

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Thailand produces rubber at a lower opportunity cost than China. It does, however, import some rubber from China. What could explain Thailand importing rubber from China?

• China imposes lower tariffs on rubber imports than Thailand

• China is consuming increasing quantities of rubber in industry.

• Thailand has the absolute but not the comparative advantage in rubber production

• Thailand wants to avoid the risks involved in overspecialising in rubber production.

A country has a comparative advantage in producing spices. Why may it choose not to specialise in spices?

• The country experiences a lower opportunity cost in producing spices than other countries.

• There are high tariffs imposed by other countries on the import of spices.

• There is a low cost of transporting spices to other countries.

• There is high world income elasticity of demand for spices.

The diagram shows the production possibility curves for two countries, X and Y. A decrease in productivity moves country X’s production possibility curve from X1 to X2.

Which statement is correct?

• After the change X would export raw materials and import manufactured goods.

• After the change there is no economic basis for trade

• Before the change Y had an absolute advantage in the production of raw materials.

• Before the change X had a comparative advantage in both products.

The table shows the output of cars and televisions per worker per week before trade and specialisation.

Each country specialises in the product where it has a comparative advantage and trades on the basis of an exchange rate which lies between their opportunity cost ratios. Which change would stop the countries specialising and trading?

• The exchange rate moves to one car for five televisions.

• The exchange rate moves to one car for eight televisions.

• The productivity of workers in country X rises to three cars per week.

• The productivity of workers in country Y rises to fifty six televisions per week.