Check your knowledge

According to the theory of comparative advantage, even if a nation has an absolute disadvantage in both commodities compared to another nation, what can still happen?

• That nation cannot participate in international trade

• That nation can still engage in mutually beneficial trade

• That nation will become poorer

• That nation can only be self-sufficient

In which of the following cases does comparative advantage not occur for either nation?

• When one nation has an absolute advantage in both goods at the same ratio.

• When one nation has an absolute advantage in both goods at different ratios.

• When one nation has no absolute advantage in either good.

• When both nations have an absolute advantage in one good each.

The H-O model’s assumptions includes new factors compared to David Ricardo’s trade theory

• labor and technology

• labor and capital

• labor and transportation costs

• labor and goods

Vietnam has a unique set of fators

• relatively young labor force

• abundant natural resources

• strategic geographical location

• all answer are correct

Suppose that the US and the Netherlands have the following unit labor requirements:

Which country has comparative advantage in bicycles?

• The US

• Netherlands

• Both countries

Which of the following best describes the relationship between labor wages and comparative advantage?

• Higher wages result in a comparative advantage in producing all goods.

• Lower wages in one nation make its goods cheaper and enhance comparative advantage.

• Wages have no impact on comparative advantage in international trade.

• Only nations with equal wages can benefit from comparative advantage.

In Ricardo’s theory of comparative advantage, why can two nations benefit from trade even if one has an absolute disadvantage in producing both goods?

• The nation with absolute disadvantage has lower wages.

• The nation with absolute disadvantage has better technology.

• The other nation has no access to international markets.

• The labor productivity difference cancels out in international trade.

Comparative advantage in the Ricardian trade model theory is determined by its:

• 1. Differences in technology

• The ratio of capital/labor (K/L)

• Similarity in demand

• The abundance of endowments

What is the title of David Ricardo’s most influential book, and what central economic concept does it introduce?

• The Wealth of Nations – introduces the division of labor

• Principles of Political Economy and Taxation – introduces comparative advantage

• The General Theory of Employment, Interest, and Money – introduces demand-side economics

• Capital: Critique of Political Economy – introduces the labor theory of value

Which of the following is a key assumption in David Ricardo’s model of comparative advantage used to explain the theory? (choose the best answer)

• There are no transportation costs between countries

• Labor as the measure of value

• Two countries, two goods model

• There is no technological change