Chapter 2 Review

Adam Smith

•  believed that trade in local communities is good for the economy, but trading with people located in foreign countries is bad for the economy.

• did not discuss or have an opinion about international trade.

• argued that it is beneficial to buy a product if the seller can sell it to us cheaper than we can make it for ourselves, regardless of the product's country of origin.

• believed that trade in local communities is bad for the economy, but trading with people located in foreign countries is good for the economy

Anita can bake 10 cakes in a day, but has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John makes equally delicious cakes and cookies but can only make 7 cakes or 100 cookies in a day. Based on this information, which of the following statements is TRUE?

• Anita has the comparative advantage in the production of cakes.

• John has the comparative advantage in the production of cakes.

• John has the absolute advantage in the production of cookies.

• Anita has the comparative advantage in the production of both cakes and cookies.

Although trade increases productivity, it decreases society's collective knowledge because people specialize in a very limited number of things.

• True

• False

According to the theory of comparative advantage, the reason wages are lower in China than in the United States is:

• the higher cost of living in the US

• lower Productivity in China

• Lower opportunity cost to work in china

• more trade restrictions in the US

Suppose the figure illustrates the United States' PPF for the production of corn and TVs. Which of the following is TRUE?

• The United States should specialize in the production of corn, since they can produce more corn than TVs.

• For each TV that the United States produces, it gives up 25 units of corn.

• The United States should produce 50 TVs and 1,250 units of corn to maximize value to society.

• The United States has the comparative advantage in the production of TVs.

Adam Smith advocated the benefits of:

• Protectionism

• trade tariffs over quotas

• international trade

• absolute advantage

Refer to the figure. According to the diagram about countries A and B, which of the following statement(s) is correct?
I. Country A has a comparative advantage in Good Y.
II. Country B has an absolute advantage in both goods.
III. Country B has a comparative advantage in Good X.

• I and II only

• I and III only

• II and III

• I, II, III

A production possibilities frontier shows:

• supply and demand for a good in a country

• all combinations of goods that a country can produce given its productivity and supply of inputs.

• the uninhabited territory of a country that is full of new possibilities.

• the goods that a country will be able to produce in the future if it continues to grow.

An advantage to specialization is that it can decrease the average cost of production by concentrating on smaller-scale production.

• True

• False

Refer to the figure: Point A represents an allocation of resources that is:

• impossible

• inefficient

• the result of trade

• efficient