Core Economics 3e

Gains from Trade

Multiple Choice Questions

After watching/exploring the Gains from Trade, consider the question(s) below. Then “submit” your response.

Question

1. Specialization and trade can occur between _____ or between _____.

rich countries; poor countries

countries; individuals

retailers; producers

hunters; gathers

Question

2. People and nations specialize in what they do best relative to others. The resulting benefits are referred to as the _____ trade.

downside of

deterrents to

barriers to

gains from

Question

3. Countries _____ goods they are relatively good at producing and _____ goods they are less efficient at producing.

export; import

import; export

import; import

export; export

Question

4. Comparative advantage occurs when a country or individual can produce a good at a _____ than another country or individual.

higher opportunity cost

lower raw material cost

lower opportunity cost

lower labor cost

Question

5. Trade allows (or forces) a country to consume:

beyond the limits of its production capability as represented by its production possibilities frontier (PPF).

at less than the limits of its production capability as represented by its PPF.

a different portfolio of goods than it can produce based on the resources available within its borders.

only the goods produced by its potential trading partner.

Question

6. From a consumer’s standpoint, the benefit(s) of international trade is (are):

the ability to see what people in other countries are buying.

the increased status that comes from buying goods made abroad.

a greater variety of goods to choose from at a lower price.

less variety in the marketplace and higher prices.

Question

7. A way the potential negative consequences of free trade can be minimized, while retaining trade’s benefits, is:

by retraining workers losing jobs to imports for jobs in high growth industries.

restricting trade to those items not made domestically.

imposing tariffs only on those goods whose workers would be hurt by trade.

limiting trade to countries with high wages.

True/False Questions

After watching/exploring the Gains from Trade, consider the question(s) below. Then “submit” your response.

Question

1. If a country or individual has an absolute advantage in a given activity, it does not necessarily mean that the country or individual should specialize in that activity.

True

False

Question

2. Every country or individual has a comparative advantage in something.

True

False

Question

3. Trade restrictions, such as tariffs or import quotas, do not reduce the benefits of international trade.

True

False

Short Answer/Discussion Questions

After watching/exploring the Gains from Trade, consider the question(s) below. Then “submit” your response.

Question

1. Describe the difference between absolute advantage and comparative advantage.

Suggested solution: Absolute advantage means that a country can produce more of a good than other countries because of resource differences, such as greater population or more raw materials. Comparative advantage means that a country gives up less of one good to specialize in another good than does a potential trading partner. Comparative advantage explains patterns of trade. Countries specialize in goods in whose production they have a comparative advantage and trade those goods for goods in which other countries have a comparative advantage. (Answers may vary.)

Question

2. In the table, which country has a comparative advantage in the production of automobiles, and how has this been determined?

Suggested solution: Germany has a comparative advantage over Switzerland in producing autos. The table provides the maximum output in either country assuming all of the country’s resources are devoted to the production of either watches or cars. To produce a car, Germany has to give up only 50 watches (5,000/100 = 50; each car costs 50 watches). Switzerland, on the other hand, has to give up 80 watches (1,600/20 = 80; each car costs 80 watches) to produce a car. Germany’s opportunity cost in terms of watches to produce a car is lower; therefore, it has a comparative advantage over Switzerland in the production of cars. (Answer may vary.)

Question

3. Why is international trade sometimes restricted with barriers such as tariffs or quotas?

Suggested solution: While free trade benefits a society overall, some segments of the economy may be harmed by trade. For example, the United States used to have a large furniture-making industry. With free trade, much of this manufacturing has moved to low-wage countries such as India and China, reducing the financial viability (and employment levels) of producing furniture in the United States. Domestic furniture businesses and their employees might respond by lobbying Congress to pass restrictive tariffs and quotas targeted at reducing the harm of trade to this segment of the economy.