Problem Set 04

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Econ 103 – Macroeconomic Principles

Multiple-choice questions Identify the letter of the choice that best completes the statement or answers the question. 1. A) B) C) D) E)

Having an absolute advantage in the production of a good implies that a country should specialize in the production of the good is able to produce the good with fewer resources than another country should not specialize in the production of the good also has the comparative advantage in the production of the good cannot have an absolute advantage in the production of the good

2. A) B) C) D) E)

Having a comparative advantage in the production of a good implies that a country should specialize in the production of the good is able to produce the good with fewer resources than another country should not specialize in the production of the good also has the absolute advantage in the production of the good cannot have an absolute advantage in the production of the good

Table 1 Razil Uba

Tobacco 20 30

Sugar 40 60

3. Table 1 shows Razil's and Uba's production costs in terms of labor-hours per ton. Which of the following would be true? A) Uba has the comparative advantage in the production of both sugar and tobacco. B) Razil has the comparative advantage in the production of both sugar and tobacco. C) Uba has the absolute advantage in the production of both sugar and tobacco. D) There are no gains from trade for both Razil and Uba. E) Uba has the comparative advantage in the production of sugar. 4. Table 1 shows Razil's and Uba's production costs in terms of labor-hours per ton. Which of the following is true? A) Uba has the comparative advantage in the production of both sugar and tobacco. B) Razil has the comparative advantage in the production of both sugar and tobacco. C) Razil has the absolute advantage in the production of both sugar and tobacco. D) Razil has the comparative advantage in the production of tobacco. E) Uba has the comparative advantage in the production of sugar. 5. A) B) C) D) E)

In international trade, dumping refers to producing a lower quality good for export than what is produced for domestic consumption selling an export at a higher price than its price to domestic consumers selling an export at a price below its cost of production producing a lower quality good for domestic consumption than for export paying workers below subsistence wages

6. A) B) C) D) E)

A tariff is a tax on exports limit on the quantity of exports limit on the quantity of imports tax on imports subsidy on imports

Problem Set 04 Econ 103 – Macroeconomic Principles

7. A) B) C) D) E)

A tariff has the effect of raising the price of the exported good increasing the demand for the exported good increasing the demand for the imported good increasing the supply of the imported good raising the price of the imported good

8. A) B) C) D) E)

GATT is an acronym (stands for) Good and Total Trade General Agreement on Tariffs and Trade Greater Agreements Toward Trade Gold and Trade Transactions Greater Area Trade Transactions

9. A) B) C) D) E)

The rules of the GATT apply only to domestic trade within a nation apply to both domestic trade within a nation and international trade with other nations apply only to trade among nations prohibit tariffs encourage high tariffs

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10. Suppose rice can be produced in China at a lower cost than in Thailand, while tuna can be produced in Thailand at a lower cost than in China. International competition will A) destroy the rice market in both countries B) drive China to specialize in rice and Thailand to specialize in tuna C) drive Thailand to specialize in rice and China to specialize in tuna D) cause both countries to reject international specialization E) result in lower total output of rice and tuna 11. If Israel has a lower opportunity cost producing oranges than Canada, then compared to Canada's orange production, it A) is less efficient in producing other goods B) has an absolute advantage producing oranges C) cannot export oranges to other countries successfully D) has a comparative advantage producing oranges E) will have reason to import oranges 12. A) B) C) D) E)

The U.S. military aircraft industry sought protection from foreign competition by using the argument to persuade Congress to impose trade restrictions. infant industries diversity of industries retaliation antidumping defense (or national security)

13. The main problem with using the infant industries argument to justify protecting an industry from foreign competition is that A) all industries will claim that they are infant industries in order to gain protection B) the protected industry will become too efficient and drive out foreign competition C) once in place, it is difficult to remove protection even as the industry matures D) it causes the goods that are produced in the protected industry to have lower prices E) this policy compromises national security if the infant industry produces military goods

Problem Set 04 Econ 103 – Macroeconomic Principles

14. trade? A) B) C) D) E)

Dumping is designed to sell off surplus goods, especially agricultural goods. Dumping leads to higher competition in the long run. Dumping is illegal in the United States. Dumping creates toxic wastes in the importing country. Dumping can only be practiced by a monopolist.

15. A) B) C) D) E)

One big difference between tariffs and quotas is that tariffs raise the price of a good while quotas lower it generate tax revenues while quotas do not stimulate international trade while quotas inhibit it hurt domestic producers while quotas help them generate the same outcome as free trade while quotas do not

16. A) B) C) D) E)

The principal objective of GATT is to reduce the level of all tariffs establish fair prices for all goods traded internationally act as the world's police officer to prevent dumping prevent the trading of services across nations' borders encourage countries to establish quotas

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Which of the following statements is true with respect to the concept of dumping in international

17. Textile workers in the U.S. complain that they cannot compete with low cost foreign textile producers. While some U.S. textile workers may lose their jobs, an advantage is A) the U.S. gets cheaper textiles B) U.S. imports will become more expensive so U.S. domestic producers gain C) workers in other countries will buy more U.S. clothing exports D) the U.S. can retaliate and its exporting strength is greater E) the U.S. can dump its textiles on other markets without fearing retaliation because U.S. textiles are made with high cost labor 18. Assuming a competitive world, does your country have a comparative advantage in making pizza? You can get your answer by A) observing if your country makes more pizza than any other country B) comparing pizza prices in other countries C) calculating the opportunity cost of a pizza in your country D) comparing the opportunity cost of producing pizza in your country with the opportunity cost of producing pizza in other countries E) comparing your country's terms of trade to the terms of trade in other countries 19. A lawyer once boasted, "I can fix my plumbing problem faster than that plumber." His friend replied, "Then why don't you fix it?" The lawyer explained: "Because A) the plumber could practice law, and I prefer law." B) I have an absolute advantage practicing law." C) the plumber uses fewer labor resources." D) the plumber is more efficient." E) I have a comparative advantage practicing law." 20. In the text, U.S. and Mexico trade corn and oil and both end up with more corn and oil. Economists refer to this increased global output as A) terms of trade B) advantage of trade C) absolute advantage D) comparative advantage E) gains from trade

Problem Set 04 Econ 103 – Macroeconomic Principles

Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

B A D C C D E B C B D E C C B A A D E E

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