A country can have an absolute advantage in a good without having a comparative advantage in that good.
Correct Answer
True
True. Absolute advantage depends on using fewer resources, while comparative advantage depends on giving up less of other goods. A country that is more productive at everything has an absolute advantage in every good but a comparative advantage in only some of them.
Category: Comparative Advantage
Question 2
A country with an absolute disadvantage in producing every good cannot gain from international trade.
Correct Answer
False
False. Even a country that is less productive at everything has a lower opportunity cost in some good, so it can specialize in that good and trade. This insight is the core of comparative advantage.
Category: Absolute Advantage
Question 3
When two countries specialize according to comparative advantage, total world output of both goods can rise.
Correct Answer
True
True. Moving each country's resources toward the good it makes at lower opportunity cost lets the same resources produce more in total. That larger output is what makes it possible for both countries to consume more.
Category: Gains From Trade
Question 4
If a country needs 1 hour to make a hat and 4 hours to make a coat, its opportunity cost of one coat is 1/4 of a hat.
Correct Answer
False
False. The 4 hours used for one coat could make 4 hats, so a coat costs 4 hats. The value 1/4 is the cost of one hat measured in coats.
Category: Opportunity Cost
Question 5
Natural endowments such as fertile farmland, a favorable climate or rich mineral deposits can give a country an absolute advantage in a good.
Correct Answer
True
True. A country with better natural resources can produce more of certain goods from the same labor and capital. Examples include oil reserves, copper mines and climates well suited to crops such as coffee.
Category: Absolute Advantage
Question 6
Intra-industry trade is trade in which countries exchange goods from completely different industries, such as wheat for computers.
Correct Answer
False
False. Intra-industry trade is the exchange of goods from the same industry, such as one country both exporting and importing cars. Trading wheat for computers is trade between different industries.
Category: Intra-Industry Trade
Question 7
Cheaper communication and transportation have made it easier for firms to place different stages of production in different countries.
Correct Answer
True
True. When information and goods move cheaply, a firm can design a product in one place, make parts in another and assemble it in a third. This is why much world trade today is in components rather than finished goods.
Category: Intra-Industry Trade
Question 8
Economies of scale exist when a firm's average cost of production rises as its output increases.
Correct Answer
False
False. Economies of scale exist when average cost falls as output increases, up to some point. Rising average cost with more output is the opposite pattern.
Category: Economies of Scale
Question 9
A large share of trade among high-income countries involves similar goods traded in both directions.
Correct Answer
True
True. Countries with similar incomes often trade goods from the same industries, such as cars, machinery and chemicals. Specialization in particular products and economies of scale explain much of this trade.
Category: Intra-Industry Trade
Question 10
Trade between countries rests on the same logic as specialization among individuals, who gain by not making all of their own food, clothing and housing.
Correct Answer
True
True. Individuals specialize in a job and buy most of what they need from others, and they are far better off than if each made everything alone. Countries gain from specialization and exchange for the same reasons.
Category: Benefits of Open Trade
Question 11
A trade is mutually beneficial when each country obtains the imported good for less than its own domestic opportunity cost of producing it.
Correct Answer
True
True. If a country can get a good through trade for less than it would give up to make the good at home, trading makes it better off. When this holds for both countries, both gain.
Category: Gains From Trade
Question 12
A country that specializes fully in its comparative advantage good must consume only that good.
Correct Answer
False
False. A fully specialized country trades part of its output for other goods. That exchange is what lets it consume a mix of goods beyond what it could produce on its own.
Category: Gains From Trade
Question 13
The gains from reducing trade barriers recur every year rather than arriving only once.
Correct Answer
True
True. Lower barriers permanently raise the economy's productivity, so the extra output appears year after year. Even a gain that is small as a share of output adds up to a large total over time.
Category: Benefits of Open Trade
Question 14
Under the theory of comparative advantage, countries specialize in whichever good they can produce in the greatest absolute quantity.
Correct Answer
False
False. Countries specialize in the goods they can produce at the lowest opportunity cost relative to their trading partners. Producing the most of a good is absolute advantage, which does not decide the pattern of trade.
Category: Comparative Advantage
Question 15
Trade lets consumers in a small economy choose among products from many more producers than their home market alone could support.
Correct Answer
True
True. A small market may support only one or two producers in an industry with large economies of scale. Trade brings in products from foreign firms, adding variety and competition.
Category: Economies of Scale
Question 16
Tariffs are payments that governments give to domestic firms that export goods.
Correct Answer
False
False. Tariffs are taxes that governments place on imported goods. Payments to firms that export would be export subsidies, a different policy.
Category: Benefits of Open Trade
Question 17
Estimates of the gains from trade may be too low because they leave out hard-to-measure benefits such as the transfer of knowledge between firms.
Correct Answer
True
True. When firms work together across countries, they share skills in technology, management, finance and law. Benefits like this, along with greater variety and competition, are difficult to measure and are often left out of estimates.
Category: Benefits of Open Trade
Question 18
In a two-good model, a country with a comparative advantage in the first good also has a comparative advantage in the second good.
Correct Answer
False
False. If a country gives up less of the second good to make the first, its trading partner must give up less of the first good to make the second. So each country can hold the comparative advantage in only one of the two goods.
Category: Comparative Advantage
Question 19
Splitting up the value chain means that a single factory performs every stage of making a product.
Correct Answer
False
False. Splitting up the value chain means that the stages of production are spread across different firms and locations, often in different countries. A single factory doing every stage is the opposite arrangement.
Category: Intra-Industry Trade
Question 20
If Country B's opportunity cost of a computer is 5 shirts and Country C's is 2 shirts, Country B has the comparative advantage in computers.
Correct Answer
False
False. Country C gives up only 2 shirts per computer, fewer than Country B's 5, so Country C has the comparative advantage in computers. Country B has the comparative advantage in shirts.
Category: Opportunity Cost