Global Economy Quiz

The main reason that international trade occurs is because of geographical differences in

• living standards

• resource endowments

• economic growth rates

• international mobility of goods and services

Answer explanation

International trade primarily occurs due to geographical differences in resource endowments. Countries have varying natural resources, leading them to trade to obtain what they lack and to specialize in what they produce best.

The principle of comparative advantage is based on

• reductions in the level of protection

• resource mobility between nations

• relative exchange rates in trading countries

• the concept of opportunity cost

Answer explanation

The principle of comparative advantage is based on the concept of opportunity cost, which emphasizes that countries should specialize in producing goods where they have a lower opportunity cost, leading to more efficient trade.

The next four questions are based on the table attached which shows the production of motor vehicles and tractors in Country A and Country B using one unit of labour.

According to the table Country B has absolute advantage in:

• the production of motor vehicles only

• the production of tractors only

• the production of both tractors and motor vehicles

•  neither the production of tractors or motor vehicles

Answer explanation

Country B has an absolute advantage if it can produce more of a good with the same amount of labor compared to Country A. The table shows that Country B produces more motor vehicles and tractors than Country A, confirming the correct choice.

The opportunity cost of one motor vehicle in Country A is

• 4 tractors

• 0.25 tractors

• 0.8 tractors

• 2 tractors

Answer explanation

The opportunity cost of one motor vehicle is calculated by determining how many tractors could be produced instead. If one motor vehicle costs 4 tractors, then 1 vehicle = 0.25 tractors, making 0.25 tractors the correct answer.

Country B has a:

• comparative advantage in the production of motor vehicles

•  comparative advantage in the production of tractors

•  no comparative advantage in the production of tractors and motor vehicles

• comparative advantage in both tractors and motor vehicles

Answer explanation

Country B has a comparative advantage in the production of tractors, meaning it can produce them at a lower opportunity cost compared to motor vehicles. This makes tractors the correct choice.

A country which is relatively more efficient than other countries in producing a good A must

• have an absolute advantage in production of this product

• benefit from specialization and trade in that good A

• impose restrictions on the import of good A

• subsidize exports of good A

Answer explanation

A country efficient in producing good A can benefit from specialization and trade, allowing it to focus on what it does best and trade for other goods, enhancing overall economic efficiency.

Protection is government action designed to

• prevent consumers from the exploitation of large corporations

• assist local industry by some artificial advantages over foreign competitors

• increase welfare payments to import industries

• prevent foreign firms from competing in the domestic economy

Answer explanation

Protection often involves government measures that provide local industries with advantages over foreign competitors, helping them compete effectively in the domestic market.

The theory of comparative advantage as the basis for world trade is distorted in the real world by

• domestic economic considerations

• the immobility of resources

• high transport and insurance costs

• all of the above

Answer explanation

The theory of comparative advantage is affected by domestic economic considerations, resource immobility, and high transport and insurance costs, making 'all of the above' the correct choice.

The terms of trade refers to the

• exchange rate differential between trading nations

• index of export volumes compared to imports

• difference between merchandise exports and merchandise imports

• the ratio of export prices to import prices

Answer explanation

The terms of trade specifically refer to the ratio of export prices to import prices, indicating how much of imports can be obtained for a given amount of exports. This is the correct definition.

The terms of trade will deteriorate if

• export prices rise more rapidly than import prices

• export prices fall more rapidly than import prices

• export prices fall more slowly than import prices

• export prices rise faster than import prices fall

Answer explanation

The terms of trade deteriorate when export prices fall more rapidly than import prices, meaning the country receives less value for its exports compared to what it pays for imports, leading to a negative impact on trade balance.