Exercise Chapter 7

Part A
1) A country has a trade surplus when
A) its exports exceed its imports.
B) its exports equal its imports.
C) its government spending exceeds its tax revenues.
D) its exports are less than its imports.

2) A country's trade is balanced when

A) its imports exceeds its exports.
B) its government expenditures are equal to its tax revenues.
C) its net exports equal to zero.
D) its net exports are greater than zero.

3) A country has a trade deficit when

A) its exports exceed its imports.
B) its exports equal its imports.
C) its exports are less than its imports.
D) government spending is greater than tax receipts.

4) If a country has a trade surplus of $40 billion, which of the following can be true?
A) The country's exports are $160 billion, and its imports are $120 billion.
B) The country's exports are $110 billion, and its imports are $150 billion.
C) The country's exports are $120 billion, and its imports are $140 billion.
D) The country's exports are $140 billion, and its imports are $40 billion.

5) If a country has a trade deficit of $30 billion, which of the following can be true?
A) The country's exports are $150 billion, and its imports are $120 billion.
B) The country's exports are $110 billion, and its imports are $140 billion.
C) The country's exports are $120 billion, and its imports are $140 billion.
D) The country's exports are $140 billion, and its imports are $40 billion.

6) When a nation's exports are less than its imports, it has a

A) trade surplus.
B) balanced trade.
C) trade shortage.
D) trade embargo.

7) If a country has a trade deficit of $50 billion, which of the following can be true?
A) The country's exports are $150 billion, and its imports are $100 billion.
B) The country's exports are $110 billion, and its imports are $160 billion.
C) The country's exports are $100 billion, and its imports are $50 billion.
D) The country's exports are $150 billion, and its imports are $60 billion.

8) The theory of comparative advantage is credited to

A) Adam Smith.
B) David Ricardo.
C) John Maynard Keynes.
D) Milton Friedman.
9) Country A would have an absolute advantage compared to Country B in the production of corn if
A) corn can be produced at lower cost in terms of other goods than it could be in Country B.
B) Country A uses fewer resources to produce corn than Country B does.
C) the demand for corn is higher in Country A than in Country B.
D) corn sells for a higher price in Country A than in Country B.

10) The advantage in the production of a product enjoyed by one country over another when it uses
fewer resources to produce that product than the other country does is
A) an absolute advantage.
B) a comparative advantage.
C) a relative advantage.
D) a productive advantage.

11) According to the theory of comparative advantage, a country

A) exports the goods in which its has a comparative advantage.
B) imposes tariffs on goods in which it does not have comparative advantage.
C) imports the goods in which it has a comparative advantage.
D) exports goods in which it has absolute advantage.
Part B

1. Define trade surplus and trade deficit.

- Trade surplus is the situation when country exports more than it imports, while trade deficit is
the situation when a country imports more than it exports.

2. Explain absolute advantage.

- Absolute advantage is the advantage in the production of a good enjoyed by one country
over another when it uses fewer resources to produce that good than the other country does.

3. Explain comparative advantage.

- Comparative advantage is the advantage in the production of a good enjoyed by one country
over another when that good can be produced at a lower opportunity cost ( in terms of other
goods that must be forgone) than it could be in the other country.

4. Compare and contrast absolute advantage and comparative advantage.

ABSOLUTE ADVANTAGE COMPARATIVE ADVANTAGE

DEFINITION The ability of a country to The ability of the country to

produce more goods with produce good better than
the same amount of another country with the
resources than another same amount of resources.
country.

BENEFITS . Trade is not mutually . Trade is mutually beneficial

beneficial
. Benefits of both the
. Benefits the country with countries
absolute advantage

COST . The absolute cost of . The opportunity cost of

producing goods producing goods impact the
impact if the country country’s comparative
has an absolute advantage
advantage

ECONOMIC NATURE . It is not mutual and . It is mutual and reciprocal

reciprocal