Exercise 2

1. International trade develops because certain countries are able to produce some goods more efficiently than other countries. They exchange these goods in order to satisfy their needs and wants.

• A. Countries import the goods which they produce efficiently.

  
  

• B. Countries probably export the goods which are not efficiently produced.

• C. Countries probably exchange goods which they produce efficiently for goods which other countries produce efficiently.

  
  

• D. Efficiently exchange results from international trade.

  
  

2. A certain climate in a particular country may allow that country to grow agricultural products in abundance.

• A. This country probably has a comparative advantage in agriculture.

• B. This country most likely exports farm products.

  
  

• C. This country can grow food efficiently.

  
  

• D. All of the above.

  
  

3. In an uncontrolled free market trade situation, there would be an international division of labor resulting in the most efficient production of goods.

• A. With trade restrictions, countries specialize in what they produce.

  
  

•    B. The most efficient production is a result of a free market.

  
  

• C. Specialization in production should be left uncontrolled.

  
  

• D. Labor always favors a free market trade situation.

  
  

4. Price is determined by the supply side of the market.

•          A. If the demand for products increased so would the price.

  
  

•          B. There is such an abundance of products for sale that prices would have to increase.

  
  

•          C. If the supply is low, the price is low.

  
  

•          D. Supply is more of a factor than demand in determining the price.

  
  

5. A basis for mutually beneficial trade is the fact that one country has a comparative advantage.

•          A. Both the importing country and the exporting country benefit from trade.

  
  

•          B. One country's comparative advantage can benefit another country.

  
  

•          C. The comparative advantage of one country can result in trade between countries.

  
  

•          D. All of the above.

  
  

6. A country can accrue wealth if it exports more than it imports.

• A. This country has a balance of trade deficit.

  
  

• B. Demand for this country’s currency with fall.

  
  

• C. This country receives money from countries which import its products.

  
  

• D. All of the above.

  
  

7. Government try to control imports of products to protect domestic industries.

• A. Protectionist measures take the form of import duties and quotas.

  
  

• B. Protectionist measures insure free trade.

  
  

• C. Workers are always opposed to protectionism.

  
  

• D. All protecionist policies have the same effect on the market.

  
  

8. Selling products abroad at prices lower than the cost of production is known as dumping.

• A. Dumping is always against government policy.

  
  

• B. Dumping is always beneficial to importing country because buyers pay lower prices.

  
  

• C. Exporters dump products on foreign markets to lower domestic employment.

  
  

• D. Some reasons for dumping could be inventory reduction, maintenance of domestic employment, and continuation of high production levels.

  
  

9. Most currencies are now exchanged on a floating rate basis in which there are no official exchange rates, and rates fluctuate according to market forces.

• A. If money changers want to sell dollars for yen, the price of the dollar will decline.

  
  

• B. An exporting country with a balance of payments surplus may accumulate a lot of foreign currency for which the demand is low, thus making their exports more expensive.

  
  

• C. The supply and demand for currencies determine the exchange rates.

  
  

• D. All of the above.

  
  

10. Multinational companies set up production facilities in countries where production is most efficient.

• A. All countries allow foreign ownership of production facilities.

  
  

• B. The larger company is called the parent company; the production facilities are referred to as a subsidiary.

  
  

• C. Subsidiary companies eliminate the problem of worldwide competition.

  
  

• D. Each subsidiary needs to consider only local market conditions.