Multiple-Choice Questions for International Economics

by

Dr. Bob Carbaugh

Department of Economics
Central Washington University

Chapter 3: Sources of Comparative Advantage

1. The Heckscher-Ohlin theory explains comparative advantage as the result of differences in

countries’:
a. Economies of large-scale production.
*b. Relative abundance of various resources.
c. Relative costs of labor.
d. Research and development expenditures.

2. The factor endowment model of international trade was developed by

a. Adam Smith b. David Ricardo
c. John Stuart Mill * d. Eli Heckscher and Bertil Ohlin

3. Boeing aircraft company was able to cover its production costs of the first ―jumbo jet‖ in
the seventies because Boeing could market it to several foreign airlines in addition to
domestic airlines. This illustrates:
*a. How economies of scale make possible a larger variety of products in international trade.
b. A transfer of wealth from domestic consumers to domestic producers as the result of
trade
c. How a natural monopoly is forced to behave more competitively with international trade.
d. How a natural monopoly is forced to behave less competitively with international trade.

4. Which trade theory contends that a country that initially develops and exports a new product
may eventually become an importer of it, and may no longer manufacture the product:
a. Theory of factor endowments
b. Theory of overlapping demands
c. Economies of scale theory
*d. Product life cycle theory

5. The theory of overlapping demands predicts that trade in manufactured goods is unimportant
for countries with very different:
a. Tastes and preferences
b. Expectations of future interest rate levels
*c. Per-capita income levels
d. Labor productivities

6. The trade model of the Swedish economists Heckscher and Ohlin maintains that:
a. Absolute advantage determines the distribution of the gains from trade.
b. Comparative advantage determines the distribution of the gains from trade.
c. The division of labor is limited by the size of the world market.
*d. A country exports goods for which its resource endowments are most suited.

7. According to the factor endowment model of Heckscher and Ohlin, countries heavily endowed
with land will:
a. Devote excessive amounts of resources to agricultural production.
b. Devote insufficient amounts of resources to agricultural production.
*c. Export products that are land-intensive.
d. Import products that are land-intensive.

8. Should international transportation costs decrease, the effect on international trade would
include a (an):
*a. Increase in the volume of trade
b. Smaller gain from trade
c. Decline in the income of home producers.
d. Decrease in the level of specialization in production.

9. That the division of labor is limited by the size of the market best applies to which explanation
of trade:
a. Factor endowment theory
b. Product life cycle theory
*c. Economies of scale theory
d. Overlapping demand theory

10. Intra-industry trade theory

a. explains why the United States might export autos and import clothing
*b. explains why the United States might export and import differentiated versions of the
same product, such as different types of autos
c. assumes that transport costs are very low or do not exist
d. ignores seasonal considerations for agricultural goods

11. Dynamic comparative advantage theory

*a. helps explain why some nations use industrial policy to support potentially competitive
new firms
b. cannot explain strategic competition between firms such as Boeing and Airbus
c. is another name for Ricardo’s comparative advantage theory

12. Differences in environmental standards or other government regulations among nations

a. have no impact on patterns of international trade
b. have tended to make U.S. steel companies more competitive internationally
*c. can affect production costs and thus alter comparative advantages and trade patterns
d. have been eliminated by the nations participating in NAFTA

13. Declining costs per unit of output results from international trade especially if:
a. International trade affords producers monopoly power.
b. National governments levy import tariffs and quotas.
c. Producing goods entails increasing costs.
*d. economies of scale exist for producers.

14. According to the Heckscher-Ohlin model, the source of comparative advantage is a country’s:
a. technology
b. advertising
*c. factor endowments
d. both (a) and (c)

15. The Heckscher-Ohlin model rules out the classical model’s basis for trade by assuming that
is (are) identical between countries.
a. factor endowments
b. factor intensities
*c. technology
d. opportunity costs

16. The comparative advantage model of Ricardo was based on

a. intraindustry specialization and trade
*b. interindustry specialization and trade
c. demand conditions underlying specialization and trade
d. income conditions underlying specialization and trade

17. The analyzes the income distribution effects of trade in the short run, when resources
are immobile among industries.
a. Stolpher-Samuelson theory b. factor endowment theory
*c. specific factors theory d. overlapping demand theory

18. Industrial policies intended to foster comparative advantage for domestic industries could
result in the implementation of
a. research and development subsidies
b. loan guarantees
c. low interest rate loans
*d. all of the above

19. By reducing the volume of trade, transportation costs tend to

*a. stop the process of product price equalization and factor price equalization before they
are complete
b. ensure that the process of product price equalization and factor price equalization are
complete
c. eliminate all of the feasible gains from international trade
d. maximize all of the feasible gains from international trade

20. If tastes are identical between countries, then comparative advantage is determined by:
*a. supply conditions only.
b. demand conditions only.
c. supply and demand conditions.
d. can’t tell without more information.

21. The Heckscher-Ohlin theorem states that a country will have comparative advantage in the
good whose production is relatively intensive in the with which the country is relatively
abundant.
a. tastes b. technology
*c. factor/resource d. opportunity cost

22. One of the predictions of the Heckscher-Ohlin model is that:

a. countries with different factor endowments but similar technologies and preferences will
have a strong basis for trade with each other.
b. countries will tend to specialize, but not completely, in their comparative
advantage good.
c. reciprocal demand leads to an equilibrium terms of trade by inducing changes in both
demand and supply.
*d. all of the above.
23. The Heckscher-Ohlin assumes that are identical between countries.
a. tastes and preferences b. technology levels
c. factor endowments *d. both (a) and (b)

24. According to the Heckscher-Ohlin model

a. everyone automatically gains from trade
*b. the gainers from trade outnumber the losers from trade
c. the scarce factor necessarily gains from trade
d. none of the above

25. Advocates of industrial policy maintain that government should

a. pursue free trade as a policy that leads to maximum global efficiency
*b. grant subsidies to firms offering potential comparative advantage
c. provide loans to domestic workers in exporting industries
d. increase interest rates on loans made to firms in import-competing industries

26. By adjusting the model of comparative advantage to include transportation costs along
with production costs, we would expect
a. the prices of traded goods to be lower than when there are no transportation costs
b. specialization to stop when the production costs of the trading partners equalize
*c. the volume of trade to be less than when there are no transportation costs
d. the gains from trade to be greater than when there are no transportation costs

27. Assume that Country A is relatively abundant in labor and Country B is relatively abundant
in land. Note that wages are the returns to labor and rents are the returns to land. According to
the factor price equalization theorem, once Country A begins specializing according to
comparative advantage and trading with Country B
a. wages and rents should fall in Country A
b. wages and rents should rise in Country A
*c. wages should rise and rents should fall in Country A
d. wages should fall and rents should rise in Country A

28. According to the factor price equalization theorem, the factor should oppose free
trade policies in any given country,
a. abundant
*b. scarce
c. neither
d. can’t tell without more information

29. A product will be traded only if the pretrade price difference between the two countries
a. is less than the cost of transporting it between them
*b. is greater than the cost of transporting it between them
c. equals the cost of transporting it between them
d. more information is needed to answer this question

30. Intraindustry trade can be explained by all of the following except

a. high transportation costs as a proportion of product value
b. different growing seasons of the year for agricultural products
c. product differentiation for goods such as automobiles
*d. high per capita incomes in exporting countries