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Practice Questions - Set A (With Answers)

This document contains 8 questions about the concepts of absolute advantage and comparative advantage from classical trade theory. It provides tables with labor input or output data for two countries and two goods and asks which country has an absolute or comparative advantage. The key ideas assessed are: - Identifying which country has a lower opportunity cost of production based on labor input data, indicating comparative advantage. - Recognizing that even if a country has an absolute advantage in both goods, comparative advantage drives specialization and trade. - Calculating gains from trade based on production possibilities and reciprocal exchange between two countries. - Determining the range of mutually beneficial trade based on opportunity costs.

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191 views3 pages

Practice Questions - Set A (With Answers)

This document contains 8 questions about the concepts of absolute advantage and comparative advantage from classical trade theory. It provides tables with labor input or output data for two countries and two goods and asks which country has an absolute or comparative advantage. The key ideas assessed are: - Identifying which country has a lower opportunity cost of production based on labor input data, indicating comparative advantage. - Recognizing that even if a country has an absolute advantage in both goods, comparative advantage drives specialization and trade. - Calculating gains from trade based on production possibilities and reciprocal exchange between two countries. - Determining the range of mutually beneficial trade based on opportunity costs.

Uploaded by

Lad D
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Exercises: The Law of Comparative Advantage

1. In considering the following Ricardo-type table showing the labour input required per unit of output
in each of the two industries in each of the two countries,
Shirts Brandy
United States 4 days 12 days
France 6 days 12 days
which of following statements is correct?
a. France’s pretrade price ratio is 1 brandy = 2 shirts
b. The U.S. pretrade price ratio is 1 shirt = 3 brandy
c. The U.S. has an absolute advantage in both goods
d. France will export shirts after trade begins
e. Both b and d

2.
In the following Classical-type table showing the output per 10-days of labour input in each of the two
commodities in each of the two countries,
Cameras Wine
France 100 units 40 units
Germany 150 units 50 units
a. Germany has a comparative advantage in both goods
b. France has an absolute advantage in both goods
c. France has a comparative advantage in cameras
d. The pre-trade price ratio in France is 1 wine = 2.5 cameras

3.
Given the following Ricardo-type table showing the labour input required per unit of output in each of
the two goods in each of the two countries,
Steel Cloth
United Kingdom 4 days 8 days
Germany 6 days 9 days
a. The UK has an absolute advantage in both goods and a comparative advantage in cloth
b. The pre-trade price ratio in the UK is 1 steel: 2 cloth
c. The UK has an absolute advantage in neither good but a comparative advantage in steel
d. The pre-trade price ratio in Germany is 1 cloth: 1.5 steel

4. If with one hour of labour time nation A can produce either 3X or 3Y while nation B can produce
either 1X or 3Y (and labour is the only input):
a. nation A has a comparative disadvantage in commodity X
b. nation B has a comparative disadvantage in commodity Y
c. nation A has a comparative advantage in commodity X
d. nation A has a comparative advantage in neither commodity

5. With reference to the statement in Question 4, if 3X is exchanged for 3Y:


a. nation A gains 2X
b. nation B gains 6Y
c. nation A gains 3Y
d. nation B gains 3Y
1
6. With reference to the statement of Question 4, the range of mutually beneficial trade between nation
A and B is:
a. 3Y < 3X < 5Y
b. 5Y < 3X < 9Y
c. 3Y < 3X < 9Y
d. 1Y < 3X < 3Y

7. If nation A can produce 5 units of good X or 10 units of good Y and nation B can produce 4 units
of good X or 12 units of good Y we can conclude that nation A has a
a. Comparative advantage in X and an absolute advantage in Y
b. Comparative advantage in X and an absolute advantage in X
c. Comparative advantage in Y and an absolute advantage in X
d. Comparative advantage in Y and an absolute advantage in Y

8. What proportion of international trade is based on absolute advantage?


a. All
b. most
c. some
d. none

2
Answers
1. A
2. D
3. D
4. C
5. B
6. C
7. B
8. C

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