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Chapter 06 - Gains from Trade in Neoclassical Theory
International Economics 8th

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CHAPTER 6
GAINS FROM TRADE IN NEOCLASSICAL THEORY
A. Essay Questions
1. In the equilibrium trading position in a two-country model of trade, why must the trade
triangles of the two countries be congruent (identical)? What role does the slope of the world
price line play in making the triangles congruent?
2. The text has demonstrated that, even if a country’s production does not change with the
opening of the country to trade, a gain (the “consumption gain”) can still occur even though there
is no “production gain.” Is the reverse situation possible – that is, can there be a “production
gain” without there being a “consumption gain” for the country? Why or why not?
3. “In a situation of increasing opportunity costs, trade can be beneficial to both

countries if they have identical PPFs or if they have identical tastes. However,
trade cannot be beneficial to either country if the countries have identical PPFs
and identical tastes.”
Is this statement correct or incorrect? Illustrate and explain.
4. (This question pertains to material in the appendix.) Explain the economist’s distinction,
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in discussion of the compensation principle, between “potential” gains from trade and “actual”
gains from trade. Why are the gains only “potential” when that word is used?
5. Suppose that the trade pattern of a country is that it exports foodstuffs and imports fancy
sports equipment. Can you make a case that trade acts like a regressive tax in its impact on the
distribution of real income and welfare within the country? Explain.
6. Explain, using the PPF-indifference curve diagram, how a change in tastes can cause a
country to shift from being an exporter of a good to being an importer of that same good.
(Assume that world prices are constant.)
7. (a) Using the neoclassical model, build the case why it is beneficial for a country to
move
from a situation of autarky to a situation of free trade.
(b) Briefly, why can the neoclassical model of trade be regarded as “better” in some
respects than the Classical model of trade?
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8. (a) Using the neoclassical production-possibilities frontier/indifference curve approach,

build the case that free trade is preferable to autarky for a country. Then explain how an
economist could still say that trade can be beneficial to the country even if trade causes
the community indifference curve map to change such that the country appears to lose
welfare on the basis of the original autarky income distribution.
(b) It has often been pointed out in this course that, within a country, a movement to
freer trade, while helping some people, can hurt other people. Thinking over various
parts of this course, indicate two groups of people within a country who can have their
well-being reduced because of the opening of the country to trade and very briefly explain
why their welfare can be reduced.
9. Illustrate and explain, for each statement below, why the statement is either TRUE or
FALSE. Assume a two-commodity world in each case.
(a) “If a country has an absolutely fixed production pattern, i.e., resources used
in each industry are completely specific to their respective industry, then this
country cannot experience any welfare gain when moving from autarky to free
trade.”
(b) “It is possible that, even if two countries have identical production-
possibilities frontiers, trade between the countries can enhance the well-being
of each country, in comparison with well-being under autarky.”
10. (a) Suppose that two countries have identical increasing-opportunity-costs production-
possibilities frontiers (PPFs). Illustrate and carefully explain why, under certain
conditions, the two countries can have an incentive to trade with each other. In addition,
illustrate and explain how they can therefore both gain from trade.
(b) Suppose that two countries, in a situation where they each have an increasing-
opportunity-costs production-possibilities frontier (PPF), have identical tastes and
preferences (demands). Illustrate and carefully explain why, under certain conditions, the
two countries can have an incentive to trade with each other. Why can they gain from
trade?
B. Multiple-Choice Questions
11. Which of the following does not contribute to a basis for trade between two countries?
a. different tastes and preferences

b. different technologies
c. different relative factor endowments
* d. different absolute factor endowments, but the same relative endowments
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12. Given the following graph showing production-possibilities frontiers for country A and
country B in a situation where both countries are on the same community indifference
curve S1 in autarky:
Prior to trade, PX/PY in country A is __________ PX/PY in country B, and, when trade
begins, country A will import good __________.
* a. greater than; X
b. greater than; Y
c. less than; X
d. less than; Y
13. Given the production-possibilities-frontier/community-indifference-curve diagram below,

where P is the autarky production point, C is the free trade consumption point, P1
represents autarky prices, and P2 represents free-trade prices, the free-trade production
point is __________ and the autarky consumption point is __________.
a. R; G
* b. R; P
c. P; G
d. G; P
14 In the diagram in Question #13 above, as the country moves from autarky to free trade,
the difference between the S0 and S1 satisfaction levels is called the
* a. “consumption gain” (or “gains from exchange”).

b. “production gain” (or “gains from specialization”).
c. “total gains from trade (both “consumption gain” and “production gain”).
d. “lost tariff revenue effect” from removing protective tariffs.
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15. In the following graph showing indifference curves for country A (a1) and for country B
(b1) in a situation where both countries have the same production-possibilities frontier, in
autarky, PX/PY in country A is __________ PX/PY in country B, and, if trade begins,
country A will export good __________.
* a. less than; X
b. less than; Y
c. greater than; X
d. greater than; Y
16. Given the following diagram showing a fixed-quantity production-possibilities frontier, a

community indifference curve, and the associated autarky price line, if this country is
opened to trade through exposure to different relative prices, the country can attain
a. both a “production gain” (“gains from specialization”) and a “consumption gain”

(“gains from exchange”).
b. neither a “production gain” (“gains from specialization”) nor a “consumption gain”
* c. a “consumption gain” (“gains from exchange”) but not a “production gain” (“gains
from specialization”).
d. a “production gain” (“gains from specialization”) but not a “consumption gain”
17. In the diagram in Question #16 above, suppose that this country is opened to trade from
this initial situation where the dashed line indicates autarky prices [(PX/PY)autarky]. With
this opening to trade,
a. the country can gain from trade if PX/PY on the world market is less than (PX/PY)autarky
but cannot gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky.
b. the country can gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky but cannot gain from trade if PX/PY on the world market is less than
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(PX/PY)autarky.
* c. the country can gain from trade if PX/PY on the world market is less than (PX/PY)autarky
and also can gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky.
d. the country cannot gain from trade if PX/PY on the world market is less than
(PX/PY)autarky and also cannot gain from trade if PX/PY on the world market is
greater than (PX/PY)autarky.
18. If two countries with increasing opportunity costs have identical PPFs but different tastes,
a. the countries will have identical relative commodity prices under autarky, and
therefore there is no incentive to trade.
b. the countries will have different relative commodity prices under autarky, but there
will still be no incentive for them to trade.
c. the countries will have different relative commodity prices under autarky, and each
country can gain by exporting the good for which its consumers have the higher relative
preference.
* d. the countries will have different relative commodity prices under autarky, and each
country can gain by exporting the good for which its consumers have the lower
relative preference.
19. In the neoclassical model of trade, the movement of a country from autarky to free trade
generally results in __________ specialization in production, __________ the situation in
the Classical model.
a. complete; unlike
b. complete; as was also
* c. partial; unlike
d. partial; as was also
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20. Given the diagram below, which shows country A in its autarky position at point E
[where the price line labeled p0 is tangent to both country A’s production-possibilities
frontier (PPF) and country A’s indifference curve S0]:
If country A now is opened to international trade in a situation where the price of bread
relative to the price of meat is lower on the world market than it is in A’s autarky
position, then __________; with international trade, country A will be __________.
a. country A will face a steeper price line than p0 and will change production to a point
on the PPF that is downward and to the right from point E; exporting meat and
importing bread
b. country A will face a steeper price line than p0 and will change production to a point
on the PPF that is downward and to the right from point E; exporting bread and
importing meat
* c. country A will face a flatter price line than p0 and will change production to a point on
the PPF that is upward and to the left from point E; exporting meat and importing
bread
d. country A will face a flatter price line than p0 and will change production to a point on
the PPF that is upward and to the left from point E; exporting bread and
importing meat
21. If two countries have identical production-possibilities frontiers but different tastes, it is
possible for each country to gain from trade with the other country
a. in the Classical model but not in the neoclassical model.

* b. in the neoclassical model but not in the Classical model.
c. in both the Classical model and the neoclassical model.
d. in neither the Classical model nor the neoclassical model.
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22. In the neoclassical (or modern) theory, two countries with identical production-
possibilities frontiers (PPFs)
* a. can gain from trade with each other if demand conditions (tastes) differ in the two
countries and the identical PPFs demonstrate increasing opportunity costs.
b. can gain from trade with each other if demand conditions (tastes) differ in the two
countries and the identical PPFs demonstrate constant opportunity costs.
c. can gain from trade with each other even if demand conditions (tastes) are identical in
the two countries as long as the identical PPFs demonstrate constant opportunity
costs.
d. cannot gain from trade with each other under any circumstances.
23. If a country’s PX/PY in autarky is less than the PX/PY on the world market, then, as the
country moves from autarky to trade, the relative price of good Y will __________ for
home consumers. Thus, consumers with a strong relative preference for good
__________ would tend to oppose the movement to trade.
a. increase; Y
b. increase; X
c. decrease; Y
* d. decrease; X
24. If country A’s (PX/PY) in autarky is greater than the (PX/PY) on the world market, then, as
the country moves from autarky to trade, the relative price of good X facing A’s
producers will __________, and A’s producers will hence want to shift their production
toward producing __________.
a. decrease; more of good X and less of good Y
* b. decrease; more of good Y and less of good X

c. increase; more of good X and less of good Y
d. increase; more of good Y and less of good X
25. As a country moves from autarky to trade, the relative price of the country’s export good
will __________ for home consumers, and the relative price of the country’s import good
__________ for home consumers.
a. fall; will rise

b. fall; also will fall
c. rise; also will rise
* d. rise; will fall
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26. In the following graph, at point W (and ignoring the negative signs), the marginal rate of
transformation (MRT) in production __________ the marginal rate of substitution (MRS)
in consumption.
a. is greater than
b. is equal to
* c. is less than
d. has no determinate relationship to
27. Suppose that a country’s factors of production are “completely specific” to the industries
in which they are located (i.e., factors in the X industry would contribute nothing to Y
output if they were employed in the Y industry and factors in the Y industry would
contribute nothing to X output if they were employed in the X industry). In addition,
suppose that the country has an autarky PX/PY that is greater than the world PX/PY. In this
situation, if the country is opened to international trade, it will
a. export good X and will obtain “gains from specialization” (a “production gain”) but
not “gains from exchange” (a “consumption gain”).
b. export good X and will obtain “gains from exchange” (a “consumption gain”) but not
“gains from specialization” (a “production gain”).
c. export good Y and will obtain “gains from specialization” (a “production gain”) but
not “gains from exchange” (a “consumption gain”).
* d. export good Y and will obtain “gains from exchange” (a “consumption gain”) but not
“gains from specialization” (a “production gain”).
28. If a country’s PX/PY in autarky is less than the PX/PY on the world market, then this
country has a comparative advantage in the __________ good, and, if the country now
engages in international trade and moves along its production-possibilities frontier, its
production of the X good will __________.
a. Y; increase
b. Y; decrease
c. X; decrease
* d. X; increase
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29. Given the diagram below, in which country A is producing at point P and consuming at
point C:
Country A is __________, and the ratio of the price of food relative to the price of books
[i.e., (Pfood/Pbooks)] reflected by price line P0 is __________ than the (Pfood/Pbooks) ratio that
existed when country A was in autarky.
a. exporting food and importing books; lower

* b. exporting food and importing books; higher
c. exporting books and importing food; lower
d. exporting books and importing food; higher
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Chapter 06 - Gains from Trade in Neoclassical Theory

International Economics 8th

Solution Manual: https://testbankpack.com/p/solution-manual-for-

Test Bank: https://testbankpack.com/p/test-bank-for-international-

3. “In a situation of increasing opportunity costs, trade can be beneficial to both

Is this statement correct or incorrect? Illustrate and explain.

8. (a) Using the neoclassical production-possibilities frontier/indifference curve approach,

a. different tastes and preferences

13. Given the production-possibilities-frontier/community-indifference-curve diagram below,

* a. “consumption gain” (or “gains from exchange”).

16. Given the following diagram showing a fixed-quantity production-possibilities frontier, a

a. both a “production gain” (“gains from specialization”) and a “consumption gain”

a. in the Classical model but not in the neoclassical model.

a. decrease; more of good X and less of good Y

* b. decrease; more of good Y and less of good X

a. fall; will rise

a. exporting food and importing books; lower

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