International Trade: Comparative Advantage & Economic Impact

Posted on Jan 21, 2025 in International Trade

International Trade Theories: True or False

  1. Increased foreign competition tends to increase profits of domestic import-competing companies. False

  2. The development of diesel engines and gas turbines helped reduce transportation costs and thus increase international trade among nations. True

  3. According to Adam Smith, mutually beneficial trade requires each nation to be the least-cost producer of at least one good that it can export to its trading partner. True

  4. Answer questions 205 and 206 using the information in the following table: Germany 30, 80; Brazil 20, 40. Germany has the comparative advantage in producing steel. False

  5. Compared to Ricardian trade theory, modern trade theory provides a more general view of comparative advantage since it is based on all factors of production rather than just labor. True

  6. With constant opportunity costs, a nation will achieve the greatest possible gains from trade if it partially specializes in the production of the commodity of its comparative disadvantage. False

  7. The basic idea of mercantilism was that wealth consisted of the goods and services produced by a nation. False

  8. Because the Ricardian theory of comparative advantage was based only on a nation’s supply conditions, it could only determine the outer limits within which the equilibrium terms of trade would lie. True

  9. The theory of reciprocal demand best applies when two countries are of equal economic size, so that the demand conditions of each nation have a noticeable impact on market prices. True

  10. According to Ricardian theory, comparative advantage depends on relative differences in labor productivity. True

  11. The specific-factors theory analyzes the income distribution effects of trade in the short run when resources are immobile among industries. True

  12. With economies of scale, specialization in a few products allows a manufacturer to benefit from longer production runs, which lead to decreasing average cost. True

  13. Although some people may be harmed by international trade, the Heckscher-Ohlin theory asserts that free trade will promote the standard of living for the nation as a whole. True

  14. Brazil is labor abundant relative to Germany if the ratio of labor to capital in Brazil is higher than that in Germany. True

  15. Open economies have less firm turnover due to more stable markets. False

  16. The term “economic interdependence” implies that the wealth and success of one country impacts the wealth and success of another country. True

  17. According to the trade model of David Ricardo, the direction of trade is determined by absolute advantage. False

  18. In his empirical test of the principle of comparative advantage, G. MacDougall found that relatively high export ratios are associated with relatively high labor productivity. True

  19. With increasing opportunity costs, a nation totally specializes in the production of the commodity of its comparative advantage; with constant opportunity costs, a nation partially specializes in the production of the commodity of its comparative advantage. False

  20. According to the principle of comparative advantage, an open trading system results in resources being channeled from uses of low productivity to those of high productivity. True

  21. MacDougall’s empirical study of comparative advantage was based on the notion that a product’s labor cost is underlaid by labor productivity and the wage rate. True

  22. In autarky equilibrium, a nation realizes the lowest possible level of satisfaction given the constraint of its production possibilities frontier. False

  23. If the international terms of trade lies beneath (inside) the Mexican cost ratio, Mexico is worse off with trade than without trade. True