International Economics, 7e (Husted/Melvin)

Chapter 3 The Classical Model of International Trade

Multiple-Choice Questions
1)

Mercantilism
A)

is the philosophy of free international trade.

B)

was a system of export promotion and barriers to imports practiced by governments, especially in the
17th and 18th centuries.
C)

was praised by Adam Smith in The Wealth of Nations.

D)

Both A and C.
Answer:

2)

If factors of production cannot flow between countries

A)

there is no reason to expect that wages should be equal worldwide.

B)

multinational corporations would not exist.

C)

trade in goods could still occur.

D)

All of the above.

Answer:

1
D

3)

The labor theory of value

A)

is what economists believe determines prices today.

B)

says that wages must always be greater than prices.

C)

says that the price of a good is determined by the amount of labor required to produce it.
D)

All of the above.

Answer:

4)

Given constant returns to scale between labor and output, if it takes 10 hours to make 1 yard of cloth,
then 100 yards of cloth can be made in
A)

10 hours.
B)

100 hours.
C)

1000 hours.
D)

Can't tell without knowing how much capital is used.

Answer:

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3
Answer the question(s) below based on the information in the following table

Country
Goods A B
X 3 9
Y 4 2

(numbers indicate hours of labor per unit of output)

5)

Refer to the table above. Country A has absolute advantage in

A)

Good X.
B)

Good Y.
C)

Neither X nor Y.
D)

Both X and Y.
Answer:

6)

Refer to the table above. Country B has absolute advantage in

A)

Good X.
B)

Good Y.
C)

Neither X nor Y.
D)

Both X and Y.
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 Answer:

7)

Refer to the table above. If countries were to trade along the lines of absolute advantage
A)

A would export X to B.
B)

B would import Y from A.

C)

neither country would want to trade.

D)

More information is needed to determine the pattern.

Answer:

8)

Refer to the table above. If countries were to trade along the lines of comparative advantage
A)

A would export X to B.
B)

B would import Y from A.

C)

neither country would want to trade.

D)

More information is needed to determine the pattern.

Answer:

5
A

9)

Refer to the table above. In autarky the relative price of X (in terms of Y) in A would be
A)

3/4
B)

4/3
C)

3/9
D)

$3
Answer:

6
Answer the question(s) below based on the information in the following table

Country
Goods A B
Beer 3 9
Wine 1 2

(numbers indicate hours of labor per unit of output)

10)

Refer to the table above. Country A has a comparative advantage in

A)

beer.
B)

wine.
C)

both beer and wine.

D)

neither beer nor wine.

Answer:

11)

Refer to the table above. Country A has an absolute advantage in

A)

beer.
B)

wine.
C)

both beer and wine.

D)

neither beer nor wine.

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C

12)

Refer to the table above. For trade to occur along the lines of comparative advantage, wages in A relative
to wages in B (measured in the same currency)
A)

must be at least twice but less than 3 times as great.

B)

must be less than three times as small.

C)

must be greater than $2 but less than $3.

D)

Need more information to answer.

Answer:

13)

Refer to the table above. If each country were to reduce production of its comparative disadvantage good
by 1 unit, world output of wine would rise by
A)

1.5 units.
B)

2 units.
C)

3 units.
D)

3.5 units.
Answer:

8
 14)

Refer to the table above. The relative price of beer in terms of wine in B is
A)

$4.50.
B)

2.
C)

4.5.
D)

$2.00.
Answer:

9
Answer the question(s) below based on the following diagram of a country in international trade
equilibrium.

15)

Refer to the figure above. This country has comparative advantage in good
A)

S.
B)

T.
C)

Y.
D)

Z.
Answer:

16)

Refer to the figure above. In equilibrium, this country produces at point

A)

B.
B)

10
C.
C)

D.
D)

E.
Answer:

17)

Refer to the figure above. In equilibrium, this country consumes at point

A)

B.
B)

C.
C)

D.
D)

E.
Answer:

18)

Refer to the figure above. Exports for this country equal

A)

OA units of Z.
B)

AB units of Z.
C)

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AC units of Y.
D)

AD units of Y.
Answer:

12
 19)

Refer to the figure above. Imports for this country equal

A)

OA units of Z.
B)

AB units of Z.
C)

AC units of Y.
D)

AD units of Y.
Answer:

20)

The classical theory predicts that

A)

countries will completely specialize in the production of export goods.

B)

considerable trade will occur between countries with different levels of technology.
C)

small countries could obtain all of the gains from trade when trading with large countries.
D)

All of the above.

Answer:

21)

The gains from international trade are closely related to

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 A)

the labor theory of value.

B)

how much the autarky price differs from the international price (i.e. the terms of trade).
C)

the fact that one country must lose from trade.

D)

All of the above.

Answer:

22)

According to the classical theory of international trade

A)

only countries with low wages will export.

B)

only countries with high wages will import.

C)

countries with high wages will have higher relative prices of all goods.
D)

All the above are false.

Answer:

23)

In the classical model, the direction of trade is determined by

A)

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absolute advantage.
B)

comparative advantage.
C)

physical advantage.
D)

which way the wind blows.

Answer:

24)

Absolute advantage is determined by

A)

actual differences in labor productivity between countries.

B)

relative differences in labor productivity between countries.

C)

Both A and B.
D)

Neither A nor B.
Answer:

25)

Comparative advantage is determined by

A)

actual differences in labor productivity between countries.

B)

15
relative differences in labor productivity between countries.
C)

Both A and B.
D)

Neither A nor B.
Answer:

Answer the question(s) below based on the information in the following table, where the numbers
represent the number of labor hours it will take to produce a unit of the given good

Spain France
Grapes 3 9
Textiles 1 2

The numbers represent the number of labor hours it will take to produce a unit of the given good.

26)

Refer to the table above. Spain has comparative advantage in

A)

grapes.
B)

textiles.
C)

both grapes and textiles.

D)

neither grapes nor textiles.

Answer:

27)

Refer to the table above. France has absolute advantage in

16
 A)

grapes.
B)

textiles.
C)

both grapes and textiles.

D)

neither grapes nor textiles.

Answer:

28)

Refer to the table above. Once trade begins, a possible international price (i.e. terms of trade) for textiles
in terms of grapes is
A)

$5.
B)

2/5.
C)

2.
D)

4/5.
Answer:

29)

Refer to the table above. If complete specialization occurs, and France has a labor force of 30,000 hours of
labor, then after trade begins it will produce
A)

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2000 units of grapes.
B)

6000 units of textiles.

C)

2000 units of grapes and 6000 units of textiles.

D)

None of the above.

Answer:

30)

Refer to the table above. France will gain from trade so long as the international price of grapes measured
in terms of textiles is below
A)

$15.
B)

3.
C)

5.
D)

8.
Answer:

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True or False Questions
1)

An international division of labor will have no effect on total world output because resources are limited.
Answer:

False
Explanation:

None Given

2)

Comparative advantage is determined by the relative levels of autarky prices.

Answer:

True

Explanation:

None Given

3)

A country must have absolute advantage in a good in order to have comparative advantage in that good.
Answer:

False
Explanation:

None Given

4)

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A country must have comparative advantage in a good in order to have absolute advantage in that good.
Answer:

False
Explanation:

None Given

5)

Countries with high wages cannot export to low wage countries.

Answer:

False
Explanation:

Wages can be higher so long as productivity is at least as much higher.

6)

Countries with low wages will always be able to export to countries with high wages.
Answer:

False
Explanation:

Low wages might be too high relative to differences in labor productivity.

7)

If country A has a larger trade triangle than country B, reciprocal demand will lead to an increase in the

20
relative price of A's imports.
Answer:

True

Explanation:

The terms of trade must turn in favor of B for equilibrium.

8)

In a two country world, at least one country must lose from trade.
Answer:

False
Explanation:

None Given

9)

Once trade begins, a country will tend to specialize completely in the production of its export good.
Answer:

True

Explanation:

None Given

10)

A country gains more from international trade the more its terms of trade differ from its autarky price.
Answer:

21
True

Explanation:

None Given

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Essay Questions
1)

Given the input-output relationships in the table below:

Countries
A B
Goods
X 8 4
Y 4 1

(a) Which country has absolute advantage in which good and why?
(b) Which country has comparative advantage in which good and why?
(c) If A is endowed with 8000 hours of labor, how much X will it produce after trade begins? How
much Y? Explain.
(d) What is the allowable range on A's wages relative to B's if trade is flowing between these two
countries according to comparative advantage?
Answer:

(a) B (A) has absolute advantage in both (neither).

(b) A (B) has comparative advantage in X (Y).
(c) 1000 units of X; 0 units of Y (i.e. complete specialization)
(d) A's wage must range between 1/4 and 1/2 B's wage.

2)

Explain how trade will tend to emerge along the lines of comparative advantage if markets are allowed to
work freely.
Answer:

Comparative advantage is determined by autarky prices. Foreign demand will tend to drive up (down)
the autarky price of a country's comparative advantage (disadvantage) good, raising short term profits
and attracting resources to that industry. These resources come from the import competing comparative
disadvantage sector.

3)

Starting from a situation where country A which exports good S and imports good T has a larger trade
triangle than country B, explain how the process of reciprocal demand leads to international trade
equilibrium.
Answer:

If A has a larger trade triangle than B it wants to trade more than B. Consider the S market. A's desired
exports exceed B's desired imports. The price of S must fall. As this occurs, the two trade triangles move
toward congruency.

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 4)

Suppose that workers in A can produce 1 unit of S in 3 hours and 1 unit of T in 9 hours. Suppose further
that the relative price of S in B is 2. Graph the PPF for country A. Indicate the exact slope of the PPF.
Show how the autarky equilibrium is determined. Illustrate a hypothetical international trade
equilibrium, including production and consumption points, and trade volumes for a given (your
assumption-be explicit) but permissible value of the international terms of trade.
Answer:

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The autarky price of S in A is 1/3, so that must be the slope of its PPF. A has comparative
advantage in S, so once trade begins it must completely specialize in S. The international terms
of trade must lie between 1/3 and 2.

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