The Law of Comparative Advantage

The mercantilists views on trade

During the seventeenth and eighteenth centuries, a group of bankers, merchants,
government officials and philosophers) wrote essays about their thoughts of international
trade.
 A nation should export more than its imports.
 The resulting export surplus will be stored as bullion of precious metal basically gold and
silver.
 A government should do its best to encourage exports and restrict imports.
 All nations cannot simultaneously have an export surplus and the amount of gold and silver
is fixed at any point of time, one nation can only gain from trade at the expense of other
nations (Zero-Sum Game)
 Having exports surplus means more money in circulation and higher business activity which
lead to raise national output and increase employment.
 These days, as nations suffer from higher levels of unemployment, they attempt to limit
imports to stimulate domestic production and employment.
 The mercantilists measured the wealth of a nation by the stock of precious metals it
owned. This can be understood because the mercantilists were writing primarily for rulers
and to enhance national power.
 With more gold, rulers could maintain larger and better armies and strengthen their power
at home and get more colonies. In addition, more gold meant more money in circulation and
greater business activity.
 By encouraging exports and restricting imports, the government would increase national
output and raise employment.
 Today, we measure the wealth of nations by its stock of human, man-made, and natural
resources available for producing goods and services. The greater the stock of useful
resources, the greater the flow of goods and services to satisfy human wants and the
higher the standard level of living in the nation.
Limitations of The mercantilists views on trade:
 Trade surplus could be achieved in the short-run only and vanishes in the long run. As the
exported surplus will increase the money in circulation, this should result in:
o Increasing spending  increasing production  increasing national income
increasing imports (as the imports is positively related to national income)
o Increasing demands for goods and services  increasing prices of locally produced
goods and services  decreasing exports.
Increasing imports +decreasing exports = cancellation of the export surplus
 It is not necessary that the gains of any country should be at the expense of other
countries. International trade encourage specialization and division of labour, then these
benefits could be shared between trade partners.

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 Trade based on Absolute Advantage: Adam Smith
 Trade between two countries is based on absolute advantage. When any country is more
efficient in the production of one commodity, and the other country is more efficient in the
production of the other commodity, then both countries can gain from specialization and
trade. Thus, each of them will specialise in producing the good with absolute advantage
and then they exchange part of the output with other nations with absolute disadvantage in
producing these goods.
 In contrast with mercantilists views, all nations would gain from free trade (advocates
laissez-faire policy excluding the protection of industries important to national defense)
Assumptions:
 For a variety of reasons, including difference in technology and climate, countries differ
in their ability to produce various commodities.
 There are only two countries A and B and only two commodities wheat and cloth.
 Perfect competition.
 The theory depends on the labour theory of value (i.e., factor is the only factor of
production or is used in the same proportion in the production of all commodities, and
labour units are homogenous.
 Labour is mobile inside the country and immobile between countries.
 No barriers to trade between countries.
 Constant return to scale between labour and output.
 Each country could produce one commodity at a lower real cost than the other country.
Example:
Cost of production (labour hours)
Country USA UK
Wheat 6 1
Cloth 4 5
 U.S. has absolute advantage over U.K. in wheat.
 U.K. has absolute advantage over U.S. in cloth.
 Both nations can gain from specialization in production and trade.

 Assuming each country has 2 unit labor hours and specialize on the product that has
Absolute Advantage
 US Specialize on Wheat then gain 2 additional Cloth
 UK Specialize on Cloth then gain 4 additional Wheat

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Shortcomings of the theory of absolute advantage:
 The theory focuses on the supply side and ignore the demand side.
 The theory considered the labour as the only relevant factor of production. However,
o Labour is only one factor combined with other factors of production to produce the
commodity.
o Labour does not enter the production of the two commodities with a constant ratio
o Labour units are not considered standardised.
 The theory failed to explain the situation in which one country has an absolute advantage
over the two commodities.

Trade based on Comparative Advantage: David Ricardo

Assumptions:
 There are only two countries and two commodities
 Free trade prevail between the two countries
 There is perfect mobility of labor within each country but is immobile between the two
countries
 There is no transaction cost
 There is no technical change
 There is constant return to scale
 The theory depends on the labor theory of value (i.e., factor is the only factor of
production or is used in the same proportion in the production of all commodities, and
labor units are homogenous.
 Perfect competition.
Comparative advantage
 A person or a nation has a comparative advantage in the production of a product when it
can produce the product at a lower domestic opportunity cost than can a trading partner.
 Comparative advantage is the basis for all trade between individuals, regions, and
nations.
 The theory states that even if one country has absolute advantage in producing two
commodities, specialization can occur as the first country specialize in producing the
commodity in which it has comparative advantage and leaves the second commodity to
be produced by the other country.

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Example:
Cost of production (labour hours)
Country USA UK
Wheat 6 1
Cloth 4 2
 The UK has an absolute disadvantage in the production of both commodities with respect
to the USA
However, since the UK is half as productive in cloth but 6 times less productive in wheat, it
has a comparative advantage in cloth.
 The USA has an absolute advantage in the production of both commodities with respect
to UK.
Since the US absolute advantage is greater in wheat (6:1) than in cloth (4:2), it has a
comparative advantage in wheat.
The Gains from Trade
For USA
 In USA they domestically exchange 6W = 4C
 The USA is indifferent to trade if it received only 4C from the UK in exchange for 6W,
since the USA can produce exactly 4C domestically using resources released in giving up
6W. And would not trade if it received less than 4C for 6W.
For UK
 In UK they domestically exchange 1W = 2C
 The UK is indifferent to trade if it had to give up 2C for each 1W it received from the USA.
And would not trade it had to give up more than 2C for 1W.
Suppose the USA exchanges 6W for 6C with the UK.
 The USA gains 2C (or saves ½ hour) since it could only exchange 6W for 4C domestically.
 For the UK, the 6W it received would require 6 hours to produce domestically. These 6
hours can be used to produce 12C and give up only 6C for 6W from US
Thus, the UK gains 6W or save 3hours of labor time.
 The USA gains from trade as long as it receives more than 4C for 6W.
 The UK gains from trade as long as it gives up less than 12C for 6W.
 The range for mutually advantageous trade is:
4C > 6W > 12C
 The spread between 12C and 4C (i.e. 8C) represents total gains from trade available to
be shared by the two nations by trading 6W.

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 Production Possibilities Frontier
A curve that shows alternative combinations of the two commodities a nation can produce
by fully using all resources with best available technology.
Constant opportunity costs arise when:
- Resources are either perfect substitutes for each other or used in fixed proportion in
production of both commodities.
- All units of the same factor are homogeneous.

- In the absence of trade, a nation’s production possibilities frontier also represents its
consumption frontier.
- Increased output resulting from specialization and trade represents nations’ gains from
trade, allowing nations to consume outside production possibilities frontier.

- Under constant cost conditions, nations will completely specialize in their comparative
advantage.
- With complete specialization in both nations, the equilibrium-relative commodity price of
each commodity lies between the pre-trade relative commodity price in each nation.

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 Chapter (1) Questions
Multiple Choice Questions (MCQs)
1. The Mercantilists did not advocate:
a. free trade
b. stimulating the nation's exports
c. restricting the nations' imports
d. the accumulation of gold by the nation
2. According to Adam Smith, international trade is based on:
a. absolute advantage
b. comparative advantage
c. both absolute and comparative advantage
d. neither absolute nor comparative advantage
3. What proportion of international trade is based on absolute advantage?
a. All
b. Most
c. Some
d. None
4. The commodity in which the nation has the smallest absolute disadvantage is the
commodity of its:
a. absolute disadvantage
b. absolute advantage
c. comparative disadvantage
d. comparative advantage
5. If in a two-nation (A and B), two-commodity (X and Y) world, it is established that
nation A has a comparative advantage in commodity X, then nation B must have:
a. an absolute advantage in commodity Y
b. an absolute disadvantage in commodity Y
c. a comparative disadvantage in commodity Y
d. a comparative advantage in commodity Y
6. If with one hour of labor time nation A can produce either 3X or 3Y while nation B
can produce either 1X or 3Y (and labor is the only input):
a. nation A has a comparative disadvantage in commodity X
b. nation B has a comparative disadvantage in commodity Y
c. nation A has a comparative advantage in commodity X
d. nation A has a comparative advantage in neither commodity
7. If with one hour of labor time nation A can produce either 3X or 3Y while nation B
can produce either 1X or 3Y (and labor is the only input):
a. Px/Py=1 in nation A
b. Px/Py=3 in nation B
c. Py/Px=1/3 in nation B
d. Px/Py=3 in nation A
8. With one hour of labor time nation A can produce either 3X or 3Y, while nation B can
produce either 1X or 3Y (and labor is the only input). If 3X is exchanged for 3Y:
a. nation A gains 2X
b. nation B gains 6Y
c. nation A gains 3Y
d. nation B gains 3Y

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9. With one hour of labor time nation A can produce either 3X or 3Y while nation B can
produce either 1X or 3Y (and labor is the only input). The range of mutually
beneficial trade between nation A and B is:
a. 3Y < 3X < 5Y
b. 5Y < 3X < 9Y
c. 3Y < 3X < 9Y
d. 1Y < 3X < 3Y
10. If domestically 3X=3Y in nation A, while 1X=1Y domestically in nation B:
a. there will be no trade between the two nations
b. the relative price of X is the same in both nations
c. the relative price of Y is the same in both nations
d. all of the above
11. Ricardo explained the law of comparative advantage on the basis of:
a. the labor theory of value
b. the opportunity cost theory
c. the law of diminishing returns
d. all of the above
12. Which of the following statements is true?
a. The combined demand for each commodity by the two nations is negatively sloped
b. the combined supply for each commodity by the two nations is rising stepwise
c. the equilibrium relative commodity price for each commodity with trade is given by the
intersection of the demand and supply of each commodity by the two nations
d. All of the above statements are true
13. A difference in relative commodity prices between two nations can be based upon a
difference in:
a. factor endowments
b. technology
c. tastes
d. all of the above
14. In trade between a small and a large nation
a. the large nation is likely to receive all of the gains from trade
b. the small nation is likely to receive all of the gains from trade
c. the gains from trade are likely to be equally shared
d. we cannot say
15. “The importance of being unimportant” refers to which of the following?
a. Small countries are likely to gain a great deal from trade since they have little impact
on world prices.
b. Small countries are likely to gain a great deal from trade because they will be able to
sell large amounts on world markets.
c. Large countries are likely to gain a great deal from trade since they have a large impact
on world prices.
d. All countries are will gain from trade because every country will have a comparative
advantage in at least one good
16. The Ricardian trade model has been empirically
a. Verified
b. Rejected
c. not tested
d. tested but the results were inconclusive
17. If nation A can produce 5 units of good X or 10 units of good Y and nation B can
produce 4 units of good X or 12 units of good Y we can conclude that nation A has a
a. Comparative advantage in X and an absolute advantage in Y
b. Comparative advantage in X and an absolute advantage in X
c. Comparative advantage in Y and an absolute advantage in X
d. Comparative advantage in Y and an absolute advantage in Y

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18. If nation A can produce 5 units of good X or 10 units of good Y and nation B can
produce 4 units of good X or 12 units of good Y we can conclude that both nations
would gain from trade if nation A sold ___ units of good __ for one unit of good __
a. 0.4; Y; X
b. 2.5; Y; X
c. 2.5; X; Y
d. 0.4; X; Y
19. The Mercantilists believed in
a. running trade surpluses
b. balanced trade
c. the logic of Adam Smith
d. no government intervention in markets
20. The theory of comparative advantage was first proposed by
a. Adam Smith
b. David Ricardo
c. J.M. Keynes
d. Paul Krugman
21. Which of the following is NOT a reason why countries trade goods with one another?
a. differences in technology used in different countries
b. differences in countries' total amount of resources
c. the proximity of countries to one another
d. differences in countries' languages and cultures
22. David Ricardo's model explains trade based on:
a. labor supply
b. technology.
c. population.
d. government control
23. A country's factors of production includes:
a. its labor, capital, natural resources, and markets
b. only its labor and capital
c. only its capital and natural resources
d. its labor, capital, and natural resources
24. Which of the following is NOT considered to be a factor of production?
a. Labor
b. Capital
c. natural resources
d. government
25. When a firm in one nation purchases unfinished products internationally and adds
further processing to sell in the domestic market, this is known as:
a. barter.
b. offshoring.
c. factor movement
d. marketing arrangements
26. In trade, if a nation has the technology to produce a good with fewest resources
(such as Germany's production of snowboards), it is known as a(n):
a. absolute advantage
b. technology advantage
c. comparative advantage
d. resource advantage
27. The Ricardian model focuses on how:
a. countries' resource bases explain international trade.
b. countries' different technologies explain international trade.
c. transportation costs explain international trade.
d. different languages and cultures explain international trade.

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28. When a country requires fewer resources to produce a product than other countries,
it is said to have a(n):
a. absolute advantage in the production of the product.
b. comparative advantage in the production of the product.
c. higher opportunity cost of producing the product.
d. lower opportunity cost of producing the product.
29. When a country requires more resources to produce a product than other countries,
it is said to have a(n):
a. absolute disadvantage in the production of the product
b. comparative disadvantage in the production of the product
c. lower opportunity cost of producing the product
d. higher opportunity cost of producing the product
30. The primary explanation of trade among nations is Ricardo's theory of:
a. offshoring.
b. resource abundance
c. absolute advantage
d. comparative advantage
31. The Ricardian model focuses on how differences in _________ influence
international trade patterns
a. Demand
b. comparative costs
c. absolute costs
d. transportation costs
32. Ricardo's theory of trade discredited the school of economic thought that believed
inflows of gold or silver as a result of exporting helped a nation, while outflows of
gold or silver as a result of importing hurt a nation. This school of economic thought
was known as:
a. export preference
b. mercantilism.
c. monetary economics
d. price-specie-flow mechanism
33. Ricardo's theory made a number of assumptions, including which of the following?
a. Nations had balanced trade with their partners
b. There were barriers to trade
c. There was no transfer of gold or silver
d. Nations' factors of production consisted of labor and capital
34. According to Ricardo:
a. all countries can gain from trade if they export goods for which they have an absolute
advantage.
b. one country can gain from trade only at the expense of another country.
c. all countries can gain from trade if they export goods for which they have a
comparative advantage
d. all countries lose from international trade
35. According to the Ricardian principle of comparative advantage, international trade
increases a nation's total output because:
a. the nation's resources are used where they are most productive
b. the output of the nation's trading partner declines
c. the nation can produce outside of its production possibilities frontier
d. the nation is able to increase its consumption
36. David Ricardo believed that:
a. trade is a zero-sum game; that is, a country benefits at the expense of other countries
b. trade will benefit countries when it generates gold and silver for the national treasury
c. all nations can gain from free international trade
d. trade cannot increase the world's output of goods

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37. Mercantilists believed that
a. exporting goods will leave fewer goods for the local economy
b. importing goods is beneficial for the economy
c. exports and imports are both bad for the economy
d. exports are good and imports are bad for the economy
38. Ricardo's theory showed that if nations are allowed to trade freely, the result will be
that:
a. all trading nations benefit by trade
b. the manufacturing sector benefits but the consumers lose out
c. workers benefit but the government loses tax revenue
d. the gains from trade offset the losses from trade exactly
39. The Ricardian model can be simplified and made more explanatory by assuming that
there is only one resource used in producing goods. What did Ricardo assume the
resource was?
a. Capital
b. Technology
c. Labor
d. loanable funds
40. What is the marginal product of labor?
a. the average output of a unit of labor
b. the extra output obtained by using one more unit of labor
c. the average output obtained by using one more unit of labor
d. the total output obtained by using one more unit of labor
41. Production possibilities frontiers in the Ricardian model:
a. are linear (i.e., straight lines), with end points showing a country's production when it
produces only one or the other good.
b. are bowed out from the origin, with end points showing a country's production when it
produces only one or the other good.
c. are linear and begin from the origin
d. are curvilinear and increase at a decreasing rate
42. When the production possibilities frontier is a straight line, then production occurs
under conditions of:
a. increasing costs
b. decreasing costs
c. constant costs
d. increasing, then decreasing, then constant costs
43. The Ricardian model employs the concept of alternate uses of economic resources in
production. We refer to this technique as:
a. the production possibilities frontier
b. the labor theory of value technique
c. the least-cost option
d. the labor productivity model
44. With the assumption that the marginal product of labor is constant and that labor is
the only variable resource, the slope of the PPF is:
a. positive and increasing
b. negative and decreasing
c. negative and constant
d. unrelated to the issue at hand
45. Assume the MPLt = 5 tennis rackets and MPLb = 4 baseball bats. If the economy has
100 workers, then the economy can produce:
a. a maximum of 500 tennis rackets
b. a maximum of 350 baseball bats
c. 500 tennis rackets and 400 baseball bats.
d. either 100 tennis rackets only or 100 baseball bats only

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46. Assume the MPLc = 2 cars and the MPLb = 5 boats. There are 150 workers in this
hypothetical economy. What is the maximum number of boats that can be produced?
a. 30
b. 300
c. 750
d. 150
47. The slope of the PPF can be expressed as:
a. the ratio of abundance of capital to labor
b. preferences of consumers in terms of marginal utility
c. the ratio of the quantities of good 1 and good 2.
d. the negative of the ratio of the marginal products of labor in producing each good.
48. If the maximum number of units of cloth produced is 300 and the maximum number of
units of corn produced is 600, then with an MPLcloth = 2, what is the number of
workers in the economy?
a. 100
b. 200
c. 150
d. 600
49. If the maximum number of units of cloth produced is 300 and the maximum number of
units of corn produced is 600, then with an MPLcloth = 2, what is the MPLcorn?
a. 4
b. 5
c. 6
d. 7
50. International trade allows countries to:
a. produce outside their PPF.
b. produce inside their PPF.
c. consume inside their PPF.
d. consume outside their PPF.
51. A nation will gain from trade if it:
a. produces and consumes along its PPF.
b. produces outside its PPF and consumes along its PPF.
c. consumes outside its PPF and produces along its PPF.
d. produces and consumes outside its PPF.
52. The United States requires 20 hours of labor to produce 1 ton of steel and 30 hours
of labor to produce 1,000 board feet of lumber. In Canada, 20 hours of labor are
required to produce 1 ton of steel and 25 hours of labor to produce 1,000 board feet
of lumber. Which country has an absolute advantage in the production of steel?
a. the United States
b. Canada
c. Neither the United States nor Canada has an absolute advantage.
d. Both the United States and Canada have an absolute advantage
53. The United States requires 20 hours of labor to produce 1 ton of steel and 30 hours
of labor to produce 1,000 board feet of lumber. In Canada, 20 hours of labor are
required to produce 1 ton of steel and 25 hours of labor to produce 1,000 board feet
of lumber. Which country has an absolute advantage in the production of lumber?
a. the United States
b. Canada
c. Neither the United States nor Canada has an absolute advantage.
d. Both the United States and Canada have an absolute advantage

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54. The United States requires 20 hours of labor to produce 1 ton of steel and 30 hours
of labor to produce 1,000 board feet of lumber. In Canada, 20 hours of labor are
required to produce 1 ton of steel and 25 hours of labor to produce 1,000 board feet
of lumber. Which country has a comparative advantage in the production of steel?
a. the United States
b. Canada
c. Neither the United States nor Canada has an absolute advantage.
d. Both the United States and Canada have an absolute advantage
55. The United States requires 20 hours of labor to produce 1 ton of steel and 30 hours
of labor to produce 1,000 board feet of lumber. In Canada, 20 hours of labor are
required to produce 1 ton of steel and 25 hours of labor to produce 1,000 board feet
of lumber. Which country has a comparative advantage in the production of lumber?
a. the United States
b. Canada
c. Neither the United States nor Canada has an absolute advantage.
d. Both the United States and Canada have an absolute advantage
56. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. Which country has an
absolute advantage in the production of wheat?
a. Poland
b. the Czech Republic
c. Neither country has an absolute advantage
d. Both countries have an absolute advantage
57. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. Which country has an
absolute advantage in the production of coal?
a. Poland
b. the Czech Republic
c. Neither country has an absolute advantage
d. Both countries have an absolute advantage
58. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. Which country has a
comparative advantage in the production of coal?
a. Poland
b. the Czech Republic
c. Neither country has an absolute advantage
d. Both countries have an absolute advantage
59. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. Which country has a
comparative advantage in the production of wheat?
a. Poland
b. the Czech Republic
c. Neither country has an absolute advantage
d. Both countries have an absolute advantage

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60. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. What is the opportunity
cost of coal in Poland?
a. 0.25 hours of labor per ton of coal
b. 0.25 bushels of wheat per ton of coal
c. 4 hours of labor per ton of coal
d. 4 bushels of wheat per ton of coal
61. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. The international price
of wheat must fall between which of the following two prices?
a. between 1/6 ton and 1/4 ton of coal per bushel of wheat
b. between 1/4 ton and 1/3 ton of coal per bushel of wheat
c. between 1/3 ton and 1.5 tons of coal per bushel of wheat
d. between 4 tons and 6 tons of coal per bushel of wheat
62. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. Suppose that the
international price of coal is 4 1/4 bushels of wheat per ton of coal. Which country is
likely to have the larger gain from trade?
a. Poland
b. the Czech Republic
c. Neither country has the larger gain
d. Both countries have the larger gain
63. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. Suppose that Poland has
1,000 hours of labor and that it completely specializes according to its comparative
advantage. How many units of which product will it produce?
a. 250 tons of coal
b. 1,000 bushels of wheat
c. 100 bushels of wheat
d. 4,000 tons of coal
64. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to
produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1
ton of coal and 1 hour of labor to produce a bushel of wheat. In Poland, what is the
marginal product of labor in coal production?
a. 0.25 tons per hour
b. 0.4 tons per hour
c. 2.5 tons per hour
d. 4 tons per hour
65. To explain why some nations purchase products from abroad, even when they have
an absolute advantage in production, we have to use the theory of:
a. absolute advantage
b. relative pricing
c. comparative advantage
d. industrial advantage

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66. Whenever a nation has a lower opportunity cost of producing any good or service in
relative terms, that nation is said to have:
a. an absolute advantage
b. a comparative advantage
c. low labor costs
d. better technology to produce that good or service
67. Comparative advantage in production of a product is reflected in:
a. a lower relative price
b. a lower opportunity cost
c. higher labor productivity
d. a lower relative price and a lower opportunity cost

(Table: Output in the United States and China)

68. Which of the following statements is correct?

a. The United States has an absolute advantage in both apparel and wheat and a
comparative disadvantage in wheat
b. China has an absolute advantage in both apparel and wheat and a comparative
advantage in apparel
c. The United States has an absolute disadvantage in both apparel and wheat and a
comparative advantage in wheat
d. China has an absolute disadvantage in both apparel and wheat and a comparative
advantage in apparel
69. Which of the following products will the United States export to China?
a. Wheat
b. Apparel
c. The United States will export neither wheat nor apparel
d. The United States will export both wheat and apparel
70. A nation will export the product in which it has a comparative advantage, which
results from the good being relatively ____ than in the importing nation.
a. less expensive
b. more expensive
c. lower in quality
d. less available
71. The Ricardian model (with constant opportunity costs) predicts that a nation will
______________ in the production of the good it exports.
a. have a comparative disadvantage
b. develop shortages
c. lower the cost of production
d. specialize completely

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 (Figure: Upperia's Production and Consumption)

72. The graph shows Upperia's international trading pattern. Point P is production with
trade, and point C is consumption with trade. Which product does Home export?
a. Shoes
b. Shirts
c. Home exports neither shirts nor shoes
d. Home exports both shirts and shoes
73. The graph shows Upperia's international trading pattern. Point P is production with
trade, and point C is consumption with trade. Which product does Home import?
a. Shoes
b. Shirts
c. Home imports neither shirts nor shoes
d. Home imports both shirts and shoes.
74. The graph shows Upperia's international trading pattern. Point P is production with
trade, and point C is consumption with trade. What is the international price of shoes
(shirts/pair of shoes)?
a. 125/80 shirts per unit of pair of shoes
b. 4/3 shirts per unit of pair of shoes
c. 5/4 shirts per unit of pair of shoes
d. 3/4 shirt per unit of pair of shoes
75. The graph shows Upperia's international trading pattern. Point P is production with
trade, and point C is consumption with trade. Assume that the marginal product of
labor in producing shoes is one pair per hour. How many hours of labor occur in
Upperia?
a. 125
b. 100
c. 80
d. 65
76. The graph shows Upperia's international trading pattern. What is the autarkic
relative price of shirts in Upperia?
a. 4/3 pairs of shoes per shirt
b. 3/4 pair of shoes per shirt
c. 5/4 pairs of shoes per shirt
d. 4/5 pair of shoes per shirt

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77. If the international terms of trade settle at a level that is between each country's
opportunity cost:
a. there is no basis for gainful trade for either country
b. both countries gain from trade
c. only one country gains from trade
d. one country gains and the other country loses from trade

# Ans. # Ans. # Ans. # Ans. # Ans.

1 A 17 A 33 A 49 A 65 C
2 A 18 C 34 C 50 D 66 B
3 C 19 A 35 A 51 C 67 D
4 D 20 B 36 C 52 C 68 D
5 D 21 D 37 D 53 B 69 A
6 C 22 B 38 A 54 A 70 A
7 D 23 D 39 C 55 B 71 D
8 B 24 D 40 B 56 C 72 A
9 C 25 B 41 A 57 A 73 B
10 D 26 A 42 C 58 A 74 B
11 A 27 B 43 A 59 B 75 A
12 D 28 A 44 C 60 D 76 C
13 D 29 A 45 A 61 A 77 B
14 B 30 D 46 C 62 B
15 A 31 B 47 D 63 A
16 A 32 B 48 C 64 A

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