CHAPTER THREE

Sources of Comparative Advantage

True/False
1. The passage of NAFTA increased both U.S. textile exports to Mexico and textile imports to the U.S.
from Mexico.
Ans: True
Dif: E

2. The Heckscher-Ohlin model extends the theory of competitive advantage by comparing the
availability and use of production factors in two nations.
Ans: True
Dif: E

3. Country A has 700 units of capital and 700 units of labor. Country B has 1000 units of capital and
1000 units of labor. Country B is relatively more capital abundant than Country A.
Ans: False
Dif: M

4. The production of 100 gallons of milk in a country requires 10 units of labor and 5 units of capital.
The production of 100 pounds of beef requires 2 units of labor and 5 units of capital. Beef is the
more capital intensive product.
Ans: True
Dif: E

5. Country C has 500 units of capital and 600 units of labor. Country D has 1100 units of capital and
1400 units of labor. Country D is relatively more capital abundant than Country C.
Ans: False
Dif: M

6. A capital intensive good or service is one that requires more labor units to produce than capital units.
Ans: False
Dif: E

7. Under the Heckscher-Ohlin theorem a good may be capital intensive in one country and labor
intensive in another country, resulting in a motivation for international trade.
Ans: False
Dif: M

8. Residents of a nation that is labor abundant will pay a higher price for capital intensive goods than for
labor intensive goods under autarky than residents of another country that is labor intensive.
Ans: True
Dif: D

190
 Sources of Comparative Advantage 191

9. Under the Heckscher-Ohlin model, residents of a capital intensive country will have a comparative
advantage over a labor intensive country because of the use of better technology in the capital
intensive country.
Ans: False
Dif: M

10. A labor abundant nation will generally export capital intensive goods.
Ans: False
Dif: M

11. Generally speaking, advanced economies would be expected to be net exporters of capital intensive
goods and services and net importers of labor intensive goods and services.
Ans: True
Dif: M

12. Leontief’s paradox refers to his findings that U.S. imports were relatively more capital intensive than
U.S. exports.
Ans: True
Dif: E

13. Adrian Wood’s findings concerning exports of relatively skilled labor intensive goods versus
unskilled labor intensive goods support the basic premise underlying the Heckscher-Ohlin model.
Ans: True
Dif: M

14. In factor proportion models uninterrupted trade leads to both equalization of commodity prices and
factor prices across all nations.
Ans: True
Dif: M

15. In factor proportion models uninterrupted trade will lead to equalization of factor prices across all
nations because otherwise capital and labor will migrate to areas that pay higher rents and wages
respectively.
Ans: False
Dif: M

16. In factor proportion models the conclusion that uninterrupted trade will lead to equalization of factor
prices across all nations depends critically upon the assumption that all countries have identical
production technologies and markets are perfect.
Ans: True
Dif: E

17. Owners of a nation’s relatively scarce factor of production are likely to be supporters of free trade.
Ans: False
Dif: E
192 Chapter 3 — Test Bank

18. In advanced economies we would expect owners of capital to be supporters of free trade and workers
will oppose free trade.
Ans: True
Dif: M

19. Outsourcing is a strategy where one organization hires another organization to complete one part of
the production process.
Ans: True
Dif: E

20. Revenue minus the cost of the intermediate good produced or purchased is called the value added for
that stage of production.
Ans: True
Dif: E

21. The propensity for comparative advantage to change suddenly from one country to another is called
evolutionary comparative advantage.
Ans: False
Dif: E

22. In the H-O model growth in a given factor favors the good or service that uses that factor intensively
in its production process.
Ans: True
Dif: E

23. In the H-O model a nation’s trade pattern is determined solely by relative factor endowments.
Ans: False
Dif: M

24. An increase in an endowment of the predominant factor in a country increases international trade.
Ans: True
Dif: M

25. According to the Stolper-Samuelson theorem, if a nation has an increase in the amount of a resource,
it will produce more of the good that uses the resource relatively intensively in its production process
and produce less of the other good.
Ans: False
Dif: M

26. The magnification principle indicates that the change in the price of a factor will be less than the
change in the price of the good that uses the factor relatively intensively in its production process.
Ans: False
Dif: M
 Sources of Comparative Advantage 193

Multiple Choice
1. Gondor has 500 units of labor resources and 900 units of capital. Rohan has 300 units of labor
endowments and 400 units of capital. Gondor is relatively __________ and Rohan is relatively
__________.
A) labor abundant; capital abundant
B) capital abundant; labor abundant
C) capital abundant; capital abundant
D) labor abundant; labor abundant
E) capital neutral; labor abundant
Ans: B
Dif: E

2. Gondor has 500 units of labor resources and 900 units of capital. Rohan has 300 units of labor
endowments and 400 units of capital. Food requires 2 units of labor and 1 unit of capital to produce.
Clothing requires 3 units of capital and 2 units of labor to produce. Under free trade Gondor will
export __________ and Rohan will export __________.
A) food; capital
B) food; clothing
C) clothing; food
D) capital; labor
E) labor; capital
Ans: C
Dif: M

3. Furniture requires 2 units of labor and 4 units of capital to produce. Electronics products require 7
units of capital and 3 units of labor to produce. A __________ abundant country will have a
comparative advantage in the production of __________.
A) labor; electronics
B) capital; furniture
C) labor; furniture
D) landmass; electronics
E) capital; labor
Ans: C
Dif: M

4. Narnia has 300 units of labor resources and 500 units of capital. Harad has 700 units of labor
endowments and 400 units of capital. The production of wheat requires 3 units of labor and 5 units of
capital. The production of equipment requires 4 units of labor and 9 units of capital. Under autarky
which country has the higher wage rate and in which country is the price of equipment greater
relative to wheat?
A) Harad; Narnia
B) Harad; Harad
C) Narnia; Harad
D) Narnia; Narnia
Ans: C
Dif: D
194 Chapter 3 — Test Bank

5. The term autarky means that

A) no international trade takes place between two countries.
B) two countries initially have the same factor proportions.
C) one country has an absolute advantage in capital and labor over the other country.
D) free trade will increase the welfare of both countries.
E) free trade will not result in gains for either country.
Ans: A
Dif: E

6. Country E currently has a higher wage rate and a lower rental rate on capital than Country F. Neither
country trades with the other. If the countries begin to trade with each other, it is likely that
A) wages will fall in Country E and rise in Country F.
B) rental rates on capital will rise in Country E and fall in Country F.
C) both wages and rental rates will fall in Country E and rise in Country F.
D) both wages and rental rates will rise in Country E and rise in Country F.
E) Both A and B will occur.
Ans: E
Dif: M

7. Country E currently has a higher wage rate and a lower rental rate on capital than Country F. Neither
country trades with the other. It is likely that __________ will oppose allowing free trade.
A) workers in Country E and owners of capital in Country F
B) workers in Country F and owners of capital in Country E
C) workers in Country E and owners of capital in Country E
D) workers in Country F and owners of capital in Country F
E) workers in both countries
Ans: A
Dif: M

8. The basic factor proportions model assumes that labor and capital
A) can move freely between industries but not between countries.
B) can move freely between industries and between countries.
C) cannot move freely between industries or countries.
D) are endowed in equal proportions in both countries under consideration.
E) are used in equal intensities in both goods produced.
Ans: A
Dif: E

9. The idea that a relatively labor abundant country will export labor intensive goods and a capital
abundant country will export capital intensive goods is known as the
A) Leontief paradox.
B) Heckscher-Ohlin theorem.
C) Rybczynski theorem.
D) Stolper-Samuelson theorem.
E) magnification principle.
Ans: B
Dif: E
 Sources of Comparative Advantage 195

10. The findings, based on input-output analysis that U.S. imports were relatively more capital intensive
than U.S. exports is referred to as the
A) Leontief paradox.
B) Heckscher-Ohlin theorem.
C) Rybczynski theorem.
D) Stolper-Samuelson theorem.
E) magnification principle.
Ans: A
Dif: E

11. The idea that uninterrupted trade will result in equalization of goods prices and factor prices across
countries is the
A) Leontief paradox.
B) Rybczynski theorem.
C) Stolper-Samuelson theorem.
D) magnification principle.
E) none of the above
Ans: E
Dif: E

12. The conclusion that free trade raises the earnings of the nation’s relatively abundant factor is known
as the
A) Leontief paradox.
B) Heckscher-Ohlin theorem.
C) Rybczynski theorem.
D) Stolper-Samuelson theorem.
E) none of the above
Ans: D
Dif: E

13. The result that the change in the price of a factor is greater than the change in the price of the good
that uses the factor relatively intensively in its production process is termed the
A) Leontief paradox.
B) Heckscher-Ohlin theorem.
C) Rybczynski theorem.
D) magnification principle.
E) Adrian Wood result.
Ans: D
Dif: E

14. The idea that if a nation experiences growth in a given resource, the country will produce more of the
good that uses the resource relatively intensively and less of the other good is known as the
A) Leontief paradox.
B) Heckscher-Ohlin theorem.
C) Rybczynski theorem.
D) Stolper-Samuelson theorem.
E) magnification principle.
Ans: C
Dif: E
196 Chapter 3 — Test Bank

15. A relatively labor abundant nation will have a __________ than a relatively capital abundant nation.
A) higher capital to labor endowment ratio
B) lower capital to labor endowment ratio
C) higher labor intensity ratio
D) lower labor intensity ratio
E) lower production possibilities curve
Ans: B
Dif: M

16. In two countries, food is the more labor intensive product and machinery is the more capital intensive.
The country that has a greater abundance of capital will have a
A) production possibilities curve skewed toward food.
B) greater production possibilities curve.
C) straight line production possibilities curve.
D) production possibilities curve skewed toward capital.
E) lower production possibilities curve.
Ans: D
Dif: E

17. The Heckscher-Ohlin theorem indicates that a nation will export goods and services that use
relatively __________ the nation’s relatively __________ factor.
A) more of; scarce
B) less intensively; abundant
C) less intensively; expensive
D) intensively; scarce
E) intensively; abundant
Ans: E
Dif: M

18. Under the Heckscher-Ohlin theorem we would expect the U.S. to export products such as
A) clothing.
B) toys.
C) precision instruments.
D) sporting goods.
E) commodities.
Ans: C
Dif: M
 Sources of Comparative Advantage 197

19. Leontief’s data set had problems because

I. He had to infer capital to labor ratios for other countries.

II. He had to exclude industries in which there was no U.S. production.
III. His data was only for a short time period.
IV. He could only examine data for about 50 industries.

A) I only
B) I and II only
C) I, II and III only
D) I, II and IV only
E) I, II, III and IV
Ans: C
Dif: M

20. The basic factor proportions approach does not allow:

I. different tastes for goods and services in different countries.

II. different production technologies in different countries.
III. differences in the quantity and quality of skilled and unskilled labor in different countries.
IV. mobility of factors of production between countries.

A) I only
B) I and II only
C) I, II and III only
D) II, III and IV only
E) I, II, III and IV
Ans: E
Dif: M

21. Machinery is capital intensive and food production is labor intensive. The country of Longview is
capital abundant and its neighbor, Shortsight, is labor intensive. As they begin to trade with each
other for the first time
A) Longview will reduce its production of machinery and Shortsight will increase its production of
food.
B) Longview will reduce its production of machinery and Shortsight will reduce its production of
food.
C) Longview will increase its production of machinery and Shortsight will increase its production of
food.
D) Longview will increase its production of machinery and Shortsight will reduce its production of
food.
E) Longview and Shortsight will keep their production levels of each good the same.
Ans: C
Dif: M
198 Chapter 3 — Test Bank

22. In two countries the production of autos is capital intensive and clothing production is labor intensive.
The country of Uno is capital abundant and its neighbor, Dos, is labor intensive. As they begin to
trade with each other for the first time under the Heckscher-Ohlin model the
A) opportunity cost of autos will decline in Uno.
B) opportunity cost of autos will decline in Dos.
C) opportunity cost of food will rise in Uno.
D) rental rate on capital will decline in Uno.
E) wage rate will decrease in Dos.
Ans: B
Dif: D

23. Jeffrey Williamson’s work indicated that more extensive factor price convergence tends to occur

I. during time periods when international trade and labor migration was allowed.
II. in more open economies.
III. in more labor abundant economies.

A) I only
B) II only
C) I and II only
D) II and III only
E) I, II and III
Ans: C
Dif: M

24. According to the factor price equalization theorem convergence of __________ with __________
causes factor prices to equalize.
A) commodity prices; free trade
B) commodity prices; autarky
C) consumer tastes; free trade
D) production technologies; autarky
E) consumer tastes; factor mobility
Ans: A
Dif: M

25. Empirical evidence indicates that international trade is causing factor prices to __________ in both
labor abundant and in capital abundant countries.
A) increase
B) decrease
C) stay the same
D) become more similar
E) equalize
Ans: D
Dif: M
 Sources of Comparative Advantage 199

26. As two countries begin to trade with each other for the first time, the price of chemicals rises by 5%
and the price of bread falls by 3% in Country A. The production of chemicals is relatively more
capital intensive than the production of bread. In Country A the rental rate on capital must
__________ and the wage rate for workers must __________.
A) increase by more than 5%; increase by more than 3%
B) increase by less than 5%; increase by less than 3%
C) increase by more than 5%; decrease by less than 3%
D) increase by more than 5%; decrease by more than 3%
E) decrease by more than 5%; decrease by more than 3%
Ans: D
Dif: M

27. Free trade __________ the earnings accruing to the nation’s relatively abundant factor and
__________ the earnings accruing to the relatively scarce factor.
A) increases; increases
B) decreases; decreases
C) increases; decreases
D) decreases; increases
E) maintains; increases
Ans: C
Dif: M

28. A product has five stages of production:

I. Design
II. Manufacture
III. Assembly
IV. Marketing
V. Delivery

An advanced economy is likely to have comparative advantages in which stage(s) of production?

A) I, II and III only
B) I, III and V only
C) I, IV and V only
D) II, II and IV only
E) I, II, III, IV and V
Ans: C
Dif: D

29. A production strategy in which one company hires another to manufacture a good under the hiring
firm’s name using the hiring firm’s specifications is called
A) a production internationalization decision.
B) contract manufacturing.
C) value added transfer pricing.
D) kaleidoscopic advantage.
E) factor proportions management.
Ans: B
Dif: E
200 Chapter 3 — Test Bank

30. The propensity for comparative advantage to shift between countries for a particular stage of
production has been termed
A) political hegemony.
B) kaleidoscopic comparative advantage.
C) outsourcing.
D) evolutionary advantage.
E) fast track trade management.
Ans: B
Dif: E

31. A country has two industries: the production of steel and wool. Steel is capital intensive, wool
production is labor intensive. Technological progress occurs in both industries, but saves on capital.
As a result, the country’s PPF will
A) increase proportionately.
B) decrease proportionately.
C) increase and skew towards steel production.
D) increase and skew towards wool production.
E) not change.
Ans: C
Dif: D

31. A labor abundant nation experiences immigration. At a given opportunity cost, this will cause the
country to
A) increase exports of its labor intensive output and increase imports of its capital intensive output.
B) increase exports of its capital intensive output and increase imports of its labor intensive output.
C) decrease exports of its labor intensive output and decrease imports of its capital intensive output.
D) decrease exports of its capital intensive output and decrease imports of its labor intensive output.
E) increase imports of its labor intensive output but would leave exports unchanged.
Ans: A
Dif: D

32. A capital abundant nation experiences immigration. At a given opportunity cost, this will cause the
country to
A) increase exports of its labor intensive output and increase imports of its capital intensive output.
B) increase exports of its capital intensive output and increase imports of its labor intensive output.
C) decrease exports of its labor intensive output and decrease imports of its capital intensive output.
D) decrease exports of its capital intensive output and decrease imports of its labor intensive output.
E) decrease imports of its labor intensive output but would leave exports unchanged.
Ans: D
Dif: D
 Sources of Comparative Advantage 201

33. The U.S. continues to receive large capital inflows and engage in international trade. Accordingly we
might expect

I. the U.S. to continue to expand in high-technology industries and contract in labor

intensive industries.
II. gains in real incomes to owners of capital and losses in real incomes to workers.
III. workers to oppose free trade and capital owners to support free trade.
IV. growing exports of capital intensive goods and services and imports of labor intensive
goods and services.

A) I only
B) I and II only
C) II and IV only
D) I, II and III only
E) I, II, III and IV
Ans: E
Dif: M