Chapters 1-3

Question 1

The GATT was:

a) a US government agency
b) a collection of tariff standards
c) an international UN agency with trade oversight
d) an international treaty governing trade e) an International Monetary Fund agency with trade oversight

Answer 1

d) An international treaty governing trade

Question 2

The international debt crisis of early 1982 was precipitated when _____ could not pay its international debts:

a) Mexico
b) China
c) Malaysia
d) Russia
e) Brazil

Answer 2

a) Mexico

Question 3

The coordination of international macroeconomic policies among sovereign nations:

a) has only recently been advocated by economists.
b) is a well-established tradition.
c) is achieved through the governance of the UN
d) is unnecessary in a world populated with many nations.

Answer 3

a) has only recently been advocated by economists. In an integrated world economy one country’s economic policies usually affect other countries as well. As a result, attempts at international macroeconomic coordination are occurring with growing frequency. Only in the last few years have economists formatted at all precisely the case for policy coordination.

Question 4

International capital markets:

a) link the capital markets of individual countries
b) have grown significantly since the 1960s
c) differ in trivial ways from domestic capital markets
d) all of the above
e) A & B only

Answer 4

e) A&B: International capital markets, which have seen enormous growth since the 1960s, differ in important ways from the domestic capital markets which they serve to link.

Question 5

According to the figure, trade is least important for which country?

a) Alpha
b) Charlie
c) Bravo
d) Delta

Answer 5

With Alpha’s exports and imports at 10% percent of its GDP, trade for it is of relatively little importance.

Question 6

International economics can be divided into two broad subfields:

a) monetary and barter
b) international trade and international money
c) static and dynamic
d) macro and micro
e) developed and less developed

Answer 6

b) international trade and international money

Question 7

Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of:

a) international trade analysis
b) international intrigue
c) international diplomacy
d) international monetary analysis

Answer 7

a) international trade analysis

Question 8

Classify each of the following transactions as belonging primarily to the sphere of international trade analysis or international monetary analysis.

1) Foreigners purchase US dollars.
2) US imports crude oil from the Middle East.
3) US imposes tariffs on foreign steel.
4) The Chinese government purchases US treasury bonds
5) The Chinese currency is seen as being undervalued

Answer 8

1) Foreigners purchase US dollars.
a) Monetary
2) US imports crude oil from the Middle East.
a) Trade
3) US imposes tariffs on foreign steel.
a) Trade
4) The Chinese government purchases US treasury bonds
a) Monetary
5) The Chinese currency is seen as being undervalued
a) Monetary

Question 9

In the real world, the dividing line between trade and monetary issues is:

a) always clear and distinct.
b) neither simple nor clear-cut.
c) subject to negotiation between trading partners.
d) determined by the legal system

Answer 9

a) neither simple nor clear-cut. Because most trade involves monetary transactions and most monetary events have consequences for trade, the dividing line between trade and monetary issues is not clear-cut.

Question 10

Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada’s is 60% larger). But Canadian trade is twice as large, relative to GDP, as Australia’s. Why should this be the case? (choose all that apply)

a) Transportation costs for imports and exports are higher in Australia because the distance goods must travel.
b) Canada is a member of the WTO while Australia is not.
c) Australia’s GDP is very large; therefore, its volume of trade relative to GDP would be expected to be small.
d) Canada is close to a major economy
e) Canada’s GDP is approximately double that of Australia’s.

Answer 10

a) Transportation costs for imports and exports are higher in Australia because the distance goods must travel.
d) Canada is close to a major economy

Question 11

Mexico and Brazil have very different trading patterns. Mexico trades mainly with the United States and Brazil trades about equally with the United States and with the European Union. Mexico does much more trade relative to its GDP. These differences can be explained via the gravity model. Which of the following equations is the most general form of the gravity​ model?

Answer 11

d)

Question 12

Evaluate the following​ statement: “Mexico is quite close to the​ U.S., but it is far from the European Union​ (E.U.). So it makes sense that it trades largely with the U.S. Brazil is far from​ both, so its trade is split between the two.” Do you agree or​ disagree?

Based on the gravity​ model, I would:

a) disagree. The larger the difference in size the more the countries will trade. Since Mexico is much smaller than the​ U.S., it makes sense that it trades largely with the U.S. Brazil is a much larger​ economy; therefore, it splits its trade with other large​ economies, such as the U.S. and the E.U.  
b) disagree. The gravity model predicts that trade volume is proportional to the ratio of the GDPs of the trading partners. The larger the difference in​ size, the larger the​ ratio, and the greater the trade volume.
c) agree. The gravity model predicts trade volume is proportional to the product of the GDPs of the trading partners and inversely related to the distance from each other.  
d) agree. The gravity model predicts trade volume is proportional to the product of the GDPs of the trading partners and directly related to the distance from each other.  

Answer 12

c) agree. The gravity model predicts trade volume is proportional to the product of the GDPs of the trading partners and inversely related to the distance from each other.  

Question 13

Over the last few​ decades, East Asian economies have increased their share of world GDP.​ Similarly, intra-East Asian tradelong dash—that ​is, trade among East Asian nationslong dash—has grown as a share of world trade. More than​ that, East Asian countries do an increasing share of their trade with each other.

Using the gravity​ model, explain why East Asian countries do an increasing share of their trade with each other.

a) The GDP of some East Asian countries has grown faster than​ others; therefore, the difference in GDP between some East Asian countries is now larger. And as the gravity model​ predicts, exports from richer countries to poorer countries have increased.
b) Since the GDP of East Asian countries has​ grown, the product of any two East Asian​ countries’ GDP is now larger. And as the gravity model​ predicts, the trade volume between them has grown.
c) Since the GDP of East Asian countries has​ grown, the ratio of any two East Asian​ countries’ GDP is now larger. And as the gravity model​ predicts, the trade volume between them has grown.
d) The GDP of some East Asian countries has grown faster than​ others; therefore, the difference in GDP between some East Asian countries is now larger. And as the gravity model​ predicts, exports from poorer countries to richer countries have increased.

Answer 13

b) Since the GDP of East Asian countries has​ grown, the product of any two East Asian​ countries’ GDP is now larger. And as the gravity model​ predicts, the trade volume between them has grown.

Question 14

In 2013, what percent of all world consumption (private and public, including real investment) was imported?

a) 30%
b) 100%
c) 50%
d) 15%

Answer 14

a) 15%

Question 15

A century​ ago, most British imports came from relatively distant​ locations: North​ America, Latin​ America, and Asia. ​ Today, most British imports come from other European countries. How does this fit in with the changing types of goods that make up world​ trade?

a) A century ago trade was mostly in commodities that were not produced in Europe.​ Today, 61 percent of trade is in manufactured​ goods, and as the gravity model​ predicts, Britain trades with the other large European economies.
b) A century ago trade was mostly in agricultural and mining products not produced in Europe.​ Today, 38 percent of trade is in​ services, and as the gravity model​ predicts, Britain trades with the other large European economies.
c) A century ago trade was mostly in commodities that were not produced in Europe. Although they are​ inferior, these commodities are now purchased from European countries because of higher transportation costs.
d) A century ago trade was mostly in commodities such as​ sugar, wheat, and cotton that were not produced in Europe.​ Today, oil and mining products are the most important commodities​ traded, which Britain imports from Eastern European countries and Ireland.

Answer 15

a) A century ago trade was mostly in commodities that were not produced in Europe.​ Today, 61 percent of trade is in manufactured​ goods, and as the gravity model​ predicts, Britain trades with the other large European economies.

Question 16

In the present, most of the exports from China are in:

a) manufactured goods
b) services
c) technology intensive products
d) primary products in eluding agricultural

Answer 16

a) Manufactured goods account for more than 90% of China’s exports

Question 17

The current process of increasing economic integration among national economies, better known as globalization,

a) has been a constant since the start of the 20th century.
b) is a new phenomenon and hence an issue posing some apprehension.
c) is not considered to be an issue of much importance.
d) is actually the world’s second wave of such integration.

Answer 17

d) According to economic historians, the ongoing enhancement of economic linkages between nations is not new. The world’s first wave of globalization began around 1940 and ended in 1914.

Question 18

Since World War II (the early 1950s), the proportion of most countries’ production being used in some other country

a) remained constant.
b) increased.
c) fluctuated widely with no clear trend.
d) decreased.

Answer 18

b) increased

Question 19

In the current Post-Industrial economy, international trade in services (including banking and financial services):

a) does not exist
b) is relatively stagnant
c) dominates world trade
d) is relatively small.

Answer 19

d) In 2005, servies comprised 19.2% of total world exports.

Question 20

The Ricardian trade model put forth by British economist David Ricardo nearly two centuries ago is one that:

a) expounds principles still valid in today’s world.
b) is not valid in a world dominated by technological change.
c) is relevant only to agrarian-based economies.
d) holds little relevance in today’s world.

Answer 20

a) Even though much about international trade has changed since 1819, the fundamental principles elucidated by and through Ricardo’s model still apply today.

Question 21

A century ago each country’s exports were shaped largely by:

a) treaties and diplomacy
b) climate and natural resources
c) physical capital
d) human resources

Answer 21

b) For example, tropical countries exported tropical products (e.g. coffee, cotton) while land rich nations such as the US and Australia exported food.

Question 22

The sources of modern trade are largely rooted in:

a) country differences in climate and natural resources.
b) treaties written by capitalist governments.
c) country differences in human and human-created resources.
d) decisions implemented by multinational organizations.

Answer 22

c) The more subtle modern sources have come to supersede climate and natural resources, the dominate underpinnings of trade in the global economy of a bygone era.

Question 23

The nature of political battles over trade in the modern era:

a) centers on disputes between landowners and manufacturers.
b) originates with the fundamental conflict between workers and capitalists.
c) has remained unchanged from he battles fought throughout history.
d) typically centers on issues involving the trade-induced devaluation of labor skills.

Answer 23

d) Particularly in the developed world, where workers are seeing the value of their skills diminished by imports coming increasingly from the developing countries, there is a considerable political agitation.

Question 24

1. Assume the US currently grows 2.7 million tons of fresh winter fruit and that the resources absorbed in the production of this fruit could have produced 250,000 laptop computers. Therefore, the opportunity cost of those 2.7 million tons of fruit is ___ computers.
2. Suppose that South America could have instead produced those 2.72.7 million tons of fruit at an opportunity cost of​ 150,000 laptops. Because of the difference in opportunity costs between the two​ regions, it can be shown that trade gives the possibility of
   a) unfair competition for U.S. winter fruit producers.
   b) U.S. exploitation of its poorer neighbors to the south.
   c) unfair competition for South American laptop makers.
   d) a mutually beneficial rearrangement of world production.

Answer 24

1) 250,000
2) d: a mutually beneficial rearrangement of world production. Because opportunity costs differ, specialization by the two regions will raise total global output.

Question 25

Suppose that the resource base in Country X can produce either 150 units of alpha or 400 units of beta.​ Similarly, suppose that Country​ Y's resource base is capable of producing 150 units of alpha or 300 betas.​ 1) Clearly, the opportunity cost of 150 alphas is lower in \_\_\_\_\_ 2) Based on this result, it would be best for Country Y to concentrate on good \_\_\_\_\_ 3) Calculate the over all production changes in goods Alpha and Bata based on specialization.

Answer 25

1) Fewer betas are sacrificed when Country Y specializes in alphas 2) Country Y should concentrate on good Alpha and country X should specialize in good Beta 3) See image:

Question 26

Economists use the term opportunity cost to refer to: a) only those goods which are in short supply b) the value of all alternatives forgone as a result of making a particular choice c) the value of the next best alternative occurring as a result of making a particular choice d) either B or C

Answer 26

c) Opportunity cost is the highest-valued, next best alternative that must be sacrificed as a result of making a particular choice.

Question 27

The potential for gains from the rearrangement of production among countries is due to: a) trade-offs b) absolute advantage c) differing opportunity costs d) scarcity

Answer 27

c) Differences in opportunity costs among countries is the basis for specialization which, in turn, leads to gains in total world production.

Question 28

Complete the following chart

Answer 28

See Image

Question 29

Draw the PPF

Answer 29

See image

Question 30

Calculate Opportunity Cost

Answer 30

1.5

Question 31

Calculate Price

Answer 31

1.5 bananas per apple; without trade, the relative prices of the goods are equal to their relative unit labor requirements.

Question 32

Draw the PPF

Answer 32

The production possibilities frontier is a straight line with veritcal intercept 40 (120 / 3) and horizontal intercept 120 (120/1). The frontier is linear because the Reicardian model has only one factor of producation (labor).

Question 33

Where will the workers want to work?

Answer 33

a) recall that everyone will wish to work where wages are highest.

Question 34

Which of the following represents the opportunity cost of canvas? a) Alc / Als b) Pc / Ps c) Pc d) Als / Alc

Answer 34

a) Alc / Als gives the amount of steel that is sacrificed when a unit of canvas is produced. In other words, the opportunity cost of canvas.

Question 35

In the absence of international trade, Home will have to produce both canvas and steel for itself. However, it will do so only if: a) Pc/ Alc = Ps / Als b) Pc / Ps = Alc / Als c) Workers are indifferent as to where (canvas or steel) they work d) A and B are correct e) All of the above are correct

Answer 35

e) All these responses tell us that Home will produce both goods.

Question 36

Home has​ 1,200 units of labor available. It can produce two​goods, apples and bananas. The unit labor requirement in apple production is​ 3, while in banana production it is 2. There is now also another​ country, Foreign, with a labor force​(L) of 800. ​Foreign's unit labor requirement in apple production (Ala) is ​5, while in banana production (aLB) it is 1. a. Derive the equation for​ Foreign's production possibility frontier​ (assume the quantity of bananas is the dependent ​variable)​:

Answer 36

See image

Question 37

Which of the 4 diagrams represents the relative supply curve given: Qb = 800/1 - 5/1 \* Qa

Answer 37

Choice C

Question 38

There are two countries Home and Foreign. Home has​ 1,200 units of labor available. It can produce two​ goods, apples and bananas. The unit labor requirement in apple production is​ 3, while in banana production it is 2. Foreign has a labor force of 800.​ Foreign's unit labor requirement in apple production is​ 5, while in banana production it is 1. Suppose world relative demand takes the following​ form: Demand for​apples/demand for bananas​ = price of​ bananas/price of apples. On the graph to the​ right: ​1.) Using the​ 3-point curved line drawing​ tool, draw the relative demand curve. Label the curve RD. ​2.) Using the point drawing​ tool, indicate the equilibrium relative price of apples. Label this point EQ.

Answer 38

See Graph

Question 39

Given the equilibrium relative​ price, describe the pattern of trade. a) Home produces both​ goods, Foreign produces only​bananas, each country trades with the other. b) Home produces only​ apples, Foreign produces only​bananas, and each country trades with the other. c) Home produces only​ bananas, Foreign produces only​apples, and each country trades with the other. d) Each country produces both goods and they do not trade with each other.

Answer 39

b) Home produces only apples, Foreign produces only bananas, each country trades with the other.

Question 40

With respect to the equilibrium relative​ price, which of the following statements is​ FALSE?   a) Through specialization and​ trade, each country gains because it can purchase the other good at a lower opportunity cost than if it produced it itself. b) Without​ trade, Home gains 1.5 bananas for every apple it gives​ up, but with​ trade, it can trade one apple for 2 bananas. c) With​ trade, Foreign is worse off because one apple can only purchase 2​ bananas, whereas without trade one apple can purchase 5 bananas. d) With​ trade, the exchange rate is one apple for two bananas.

Answer 40

c) With trade, a relative price of 2/1 means that one apple can purchase 2 bananas. Without trade, Home would be worse off because giving up one apple only gains it 1.5 bananas instead of two with trade. Without trade, Foreign would be worse off because to gain one apple it must give up 5 bananas instead of just two with trade. Therefore, Home will specialize in the production of apples, Foreign will specialize in the production of bananas, and each country will trade its good for the other country's good. At this exchange rate, both countries gain from trade.

Question 41

There are two countries Home and Foreign. Home has​ 1,200 units of labor available. It can produce two​ goods, apples and bananas. The unit labor requirement in apple production is​ 3, while in banana production it is 2. Foreign has a labor force of 800.​ Foreign's unit labor requirement in apple production is​ 5, while in banana production it is 1. Suppose world relative demand takes the following​ form: Demand for​apples/demand for bananas​ = price of​ bananas/price of apples. ​1.)  Using the​ 3-point curved line drawing​ tool, draw the relative demand curve on the graph to the right. Label the curve RD. Now suppose that instead of​ 1,200 workers, Home had​ 2,400. The relative supply curve​ (RS) would shift to the right​ (as shown by RS1​). ​2)  Using the point drawing​ tool, indicate the new equilibrium relative price of apples. Label this point EQ.

Answer 41

See image

Question 42

What can you say about the efficiency of world production and the division of the gains from trade between Home and Foreign in this​case? a) Although there are gains from​ trade, the outcome is inefficient. b) Home gains from trade the most because it is the larger​country; however, Foreign does gain from trade. c) Foreign gains from​ trade, but Home is indifferent between trade and autarky. d) Home gains from​ trade, but Foreign is indifferent between trade and autarky.

Answer 42

c) Foreign gains from trade, but Home is indifferent between trade and autarky.

Question 43

There are two countries Home and Foreign. Home has​ 2,400 units of labor available. It can produce two​ goods, apples and bananas. The unit labor requirement in apple production is​ 3, while in banana production it is 2. Foreign has a labor force of 800. ​ Foreign's unit labor requirement in apple production is​ 5, while in banana production it is 1. Suppose world relative demand takes the following​form: Demand for​ apples/demand for bananas​ = price of​ bananas/price of apples. ​1.)  Using the​ 3-point curved line drawing​ tool, draw the relative demand curve on the graph to the right. Label the curve RD. Now suppose that​ Home's workers are only half as productive in both industries as we have been assuming. The relative supply curve​ (RS) would shift to the left​ (as shown by RS1​). ​2.)  Using the point drawing​ tool, indicate the equilibrium relative price of apples. Label this point EQ.

Answer 43

See image

Question 44

How does the change in worker productivity in Home affect the gains from​ trade? a) Because of the decrease in worker productivity in​ Home, neither country gains from trade. b) The loss of worker productivity in Home has cut its and​ Foreign's gains from trade in half. c) The loss of worker productivity in Home has cut its gains from trade in​ half; however,​Foreign's gains remain unchanged. d) Whereas before only Foreign gained from​trade, now both countries gain from trade.

Answer 44

d) Whereas before only Foreign gained from​trade, now both countries gain from trade. Before the loss in worker productivity, Foreign gained from trade but the opportunity cost of apples in terms of bananas for Home is the same whether or not there is trade, so Home neither gains nor looses from trade. Following the loss in working productivity, the change in relative prices is such that both Home and Foreign gain from trade.

Question 45

Japanese labor productivity is roughly the same as that of the US in the manufacturing sector (higher in some industries, lower in others), while hte US is still considerably more productive in the service sector. But most services are nontraded. Some analysts have argued that this poses a problem for the US, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument? a) The argument compares comparative advantage when it should be comparing absolute​ advantage, which is a LS \< aLS.\* b) The argument incorrectly calculates comparative advantage. Its calculation is based on a LS c) The argument incorrectly calculates comparative advantage. Its calculation is based on aLS / aLM \< aLS\* / aLM\* instead of a LS \< aLS.\* d) The argument compares comparative advantage when it should be comparing absolute​ advantage, which is a LS / aLM \< aLS\*/ aLM\*.

Question 46

The​ one-factor Ricardian model refutes the myth that free trade is beneficial only if a country is strong enough to stand up to foreign competition by: a) only requiring that one country have an absolute productivity advantage over another country. b) arguing that trade depends on the sheer amount of a good a country could produce. c) indicating that a country only needs a comparative advantage to benefit from trade. d) stating that trade is solely dependent upon the productivity level of a​ country's workers.

Answer 46

c) indicating that a country only needs a comparative advantage to benefit from trade. ## Footnote Benefits from trade accrue to any country, regardless of size, due to the concept of comparative advantage.

Question 48

The claim that trade exploits a country and makes it worse off if its workers receive much lower wages than workers in other countries is shown by the Ricardian model to: a) be incorrect because it is based on relative poverty and not absolute poverty. b) miss the point because it fails to consider the​ alternative, which would be even lower wages. c) be true because autarky or isolationism makes countries unambiguously better off. d) be true because countries with lower wages have greater levels of poverty.

Answer 48

b) miss the point because it fails to consider the​ alternative, which would be even lower wages. The model refutes this claim of exploitation as it indicates that the country with lower wages accrues benefits from trade and is better off with trade than without trade.

Question 49

According to the pauper labor argument​, foreign competition is unfair and hurts other countries when it is based on: a) high subsidies. b) high productivity. c) low taxes. d) low wages.

Answer 49

d) low wages Those who subscribe to this view contned that domestic industries should not have to compete with foreign industires that are less efficient but pay lower wages.

Question 50

We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods​ (apples and​ bananas), and that each country has only one factor of​ production, labor. The graph to the right shows the world relative supply and relative demand curves. As in the two country​ case, the flat sections of the RS curve are countries with different unit labor requirement ratios (aLA/aLB). Referring to the​ graph, countries to the left of the equilibrium relative price would _____ (export or import) apples to the countries to the right of the intersection. 

Answer 50

Export

Question 51

The table below contains the unit labor requirements in Home and Foreign for each of five goods as well as the relative productivity advantage of Home. Assume there are no transportation costs. Fill in the five blanks in the table below. ​(Enter your responses rounded to one decimal place where​ necessary.)

Answer 51

See Image

Question 52

The condition for Home production of good i ​{​w\*(A\*Li) \>w(ALi)} can be shown to be equivalent to​ {​(a\*Li​/aLi​)​ \>​ (w/w\*)​}. In this latter formulation the​ left-hand term is the relative productivity advantage of 1. _______ (home or foreign) and the​ right-hand term denotes the relative 2. ______ (wage or size) of​ Home's labor.

Answer 52

1. Home 2. Wage

Question 53

Given the data in the preceding​ table, we know that if the relative Home wage​ (w/w\*) = 1: a) Home produces cell phones, jackets, laptops, and MP 3 players; foreign produces MP3 players, sneakers. b) Foreign produces all products. c) Foreign produces sneakers and Home produces cell phones, jackets, and laptops. d) Home produces all products.

Answer 53

a) Home produces cell phones, jackets, laptops, and MP 3 players; foreign produces MP3 players, sneakers. Home produces cell phones, jackets, and laptops because for these goods it has the relative advantage in productivity. Foreign produces sneakers because it has the relative advantage in productivity for these goods. Each country produces MP3 Players since neither has the relative advantage in their production.

Question 54

The diagram to the right shows the determination of the relative wage of​ Home's workers ​(​w/w\*​). The world demand for​ Home's labor relative to its demand for​ Foreign's labor is shown by the curve RD. Note that the​ "flats" (i.e., the horizontal​ segments) in RD correspond to relative wages that equal​ Home's relative productivity advantage. The world supply of​ Home's labor relative to​ Foreign's labor is shown by the line RS. Assume in this​ multi-good, single-factor Ricardian model that there are NO transportation costs. The equilibrium relative wage in this market is equal to 1. \_\_\_\_\_\_\_. According to the rule for allocating world​ production, Home will only specialize in those goods for which its relative productivity advantage is 2. _________ (larger, smaller, or equal to) 3.

Answer 54

1. Equilibrium wage is 3. The equilibrium at 3 signifies that Home's wages are 3 times greater than the wages prevailing in Foreign. 2. Larger. If its relative productivity advantage is equal to or less than 7, Home will either share production (=3) or not produce the goods (\<7) at all.

Question 55

How does the fact that many goods are nontraded affect the extent of possible gains from​ trade? a) As the number of nontraded goods​ increases, the gains from trade decrease. b) The presence of nontraded goods has no effect on the gains from trade. c) The effect of nontraded goods on gains from trade depends on the nature of the​ goods; they can either increase or decrease. d) As the number of nontraded goods​ increases, the gains from trade increase.

Answer 55

a) As the number of nontraded goods​ increases, the gains from trade decrease.

Question 56

The table below contains the unit labor requirements in Home and Foreign for each of five goods as well as the relative productivity advantage of Home. If the relative Home wage​ (w/w\*) = 2 and transportation costs are​ 100% of production​ costs, it will be the case that: a) cell phones and sneakers are nontraded. ​b) jackets, laptops, and MP3 players are nontraded goods. c) all five of the goods are traded. d) all five of the goods are nontraded.

Answer 56

​b) jackets, laptops, and MP3 players are nontraded goods. Home's ability to export jackets and laptops and Foreign's ability to export MP3 players is nullified when transport costs rise from 0 to 100% of production costs. Since both countries produce these three goods in the presence of 100% transport costs, they are said to be nontraded.

Question 57

The Ricardian model of international trade makes predictions about actual international trade flows that a) are supported without qualification by the empirical evidence. b) are supported with qualification by the empirical evidence. c) cannot be evaluated with empirical evidence. d) are contradicted by the empirical evidence.

Answer 57

b) are supported with qualification by the empirical evidence. Although more recent evidence is less clear-cut than older research, it is nevertheless true that the model's two principle implications are supported by the evidence.

Question 59

The degree of specialization predicted by the basic Ricardian model: a) is much more extreme than is observed in the real world. b) cannot be compared to the real world since the model is theoretical. c) is nearly identical to that observed in the real world. d) is much less extreme than is observed in the real world.

Answer 59

a) is much more extreme than is observed in the real world. The basic Ricardian model predicts that specialization will be complete. In otherwords, it predicts that only nontraded goods will be produced by more than one country. In the real world, specialization is incomplete.

Question 60

The Ricardian model unequivocally asserts that countries as a whole will always gain from trade because it: a) ignores the effects of trade on the distribution of income across countries. b) shows that trade makes everyone more productive. c) proves that trade raises​ everyone's income. d) ignores the effects of trade on the distribution of income within countries.

Answer 60

d) ignores the effects of trade on the distribution of income within countries. ## Footnote In reality international trade has strong effects on the distribution of income within countries. These have the potential of at least clouding the national gains from trade.