ECN U3T1 MCQ

The concept of ‘opportunity cost’ highlights the benefits that can be gained from world trade.

• True

• False

Answer explanation

True. Opportunity cost refers to the benefits lost when choosing one option over another. In world trade, countries can specialize and trade, maximizing their resources and benefits, illustrating the concept of opportunity cost.

To enjoy the benefits of specialisation, countries need to trade.

• True

• False

Answer explanation

True. Specialization allows countries to focus on producing goods where they have a comparative advantage, and trade enables them to exchange these goods, maximizing efficiency and benefits for all involved.

Exports are a leakage from the circular flow of income model because goods are sent overseas.

• True

• False

Answer explanation

False. Exports are not a leakage; they represent an injection into the circular flow of income model, as they bring money into the economy from foreign buyers for domestic goods.

A country that has an absolute advantage in the production of all goods cannot gain from specialisation and trade.

• True

• False

Answer explanation

False. A country with an absolute advantage in all goods can still benefit from specialization and trade by focusing on goods where it has a comparative advantage, allowing for more efficient resource allocation and mutual gains.

Different countries have a comparative advantage because opportunity costs differ.

• True

• False

Answer explanation

True. Different countries have varying opportunity costs for producing goods, leading to comparative advantages. This means they can produce certain goods more efficiently than others, benefiting from trade.

Consumers gain when a business exports a good to overseas nations.

• True

• False

Answer explanation

The statement is false because while businesses may benefit from exporting, consumers in the exporting country may face higher prices and reduced availability of goods, leading to a net loss for them.

An open economy is one that trades freely with the rest of the world.

• True

• False

Answer explanation

True. An open economy is characterized by the ability to trade freely with other countries, allowing for the exchange of goods, services, and capital without significant restrictions.

Revenue from exports is considered to be a leakage from the circular flow.

• True

• False

Answer explanation

False. Revenue from exports is not a leakage; it represents an inflow of money into the economy, contributing positively to the circular flow of income.

Multinational corporations produce more than 25 per cent of global production.

• True

• False

Answer explanation

True. Multinational corporations are significant players in the global economy, contributing over 25% of global production through their extensive operations and investments across various countries.

Technical differences are not a problem in international trade.

• True

• False

Answer explanation

False is correct because technical differences, such as standards and regulations, can create barriers in international trade, affecting product compatibility and market access.