Chapter 3 Labor Productivity and Comparative Advantage The Ricardian Model Multiple Choice Questions 1. Countries trade with each other because they are _ and because of _. (a) different, costs (b) similar, scale economies (c) different, scale economies (d) similar, costs (e) None of the above. Answer: C 2. Trade between two countries can benefit both countries if (a) each country exports that good in which it has a comparative advantage. (b) each country enjoys superior terms of trade. (c) each country has a more elastic demand for the imported goods. (d) each country has a more elastic supply for the supplied goods. (e) Both (c) and (d). Answer: A 3. The Ricardian theory of comparative advantage states that a country has a comparative advantage in widgets if (a) output per worker of widgets is higher in that country. (b) that countrys exchange rate is low.(c) wage rates in that country are high. (d) the output per worker of widgets as compared to the output of some other product is higher in that country. (e) Both (b) and (c). Answer: D 4. In order to know whether a country has a comparative advantage in the production of one particular product we need information on at least _unit labor requirements (a) one (b) two (c) three (d) four (e) five Answer: D Chapter 3 Labor Productivity and Comparative Advantage The Ricardian Model 19 5. A country engaging in trade according to the principles of comparative advantage gains from trade because it (a) is producing exports indirectly more efficiently than it could alternatively. (b) is producing imports indirectly more efficiently than it could domestically. (c) is producing exports using fewer labor units. (d) is producing imports indirectly using fewer labor units. (e) None of the above. Answer: B 6. Given the following information: Unit Labor Requirements Cloth Widgets Home 10 20 Foreign 60 30 (a) Neither country has a comparative advantage. (b) Home has a comparative advantage in cloth. (c) Foreign has a comparative advantage in cloth. (d) Home has a comparative advantage in widgets. (e) Home has a comparative advantage in both products. Answer: B 7. If it is ascertained that Foreign uses prison-slave labor to produce its exports, then home should (a) export cloth. (b) export widgets. (c) export both and import nothing. (d) export and import nothing. (e) All of the above. Answer: A 8. If the Home economy suffered a meltdown, and the Unit Labor Requirements in each of the products quadrupled (that is, doubled to 30 for cloth and 60 for widgets) then home should (a) export cloth. (b) export widgets. (c) export both and import nothing. (d) export and import nothing. (e) All of the above. Answer: A 9. If wages were to double in Home, then Home should: (a) export cloth. (b) export widgets. (c) export both and import nothing. (d) export and import nothing. (e) All of the above. 20 Krugman/Obstfeld ? Seventh Edition Answer: A 10. If the world equilibrium price of widgets were 4 Cloths, then (a) both countries could benefit from trade with each other. (b) neither country could benefit from trade with each other. (c) each country will want to export the good in which it enjoys comparative advantage. (d) neither country will want to export the good in which it enjoys comparative advantage. (e) both countries will want to specialize in cloth. Answer: A 11. Given the following information: Number of Units Produced by one Unit of Labor Cloth Widgets Home 10 20 Foreign 60 30 (a) Neither country has a comparative advantage. (b) Home has a comparative advantage in cloth. (c) Foreign has a comparative advantage in cloth. (d) Foreign has a comparative advantage in widgets. (e) Home has a comparative advantage in both products. Answer: C 12. The opportunity cost of cloth in terms of widgets in Foreign is if it is ascertained that Foreign uses prison-slave labor to produce its exports, then home should (a) export cloth. (b) export widgets. (c) export both and import nothing. (d) export and import nothing. (e) All of the above. Answer: B 13. If wages were to double in Home, then Home should (a) export cloth. (b) export widgets. (c) export both and import nothing. (d) export and import nothing. (e) All of the above. Answer: B 14. If the world equilibrium price of widgets were 4 Cloths, then (a) both countries could benefit from trade with each other. (b) neither country could benefit from trade with each other. (c) each country will want to export the good in which it enjoys comparative advantage. (d) neither country will want to export the good in which it enjoys comparative advantage. (e) both countries will want to specialize in cloth. Chapter 3 Labor Productivity and Comparative Advantage The Ricardian Model 21 Answer: A 15. If the world equilibrium price of widgets were 40 cloths, then (a) both countries could benefit from trade with each other. (b) neither country could benefit from trade with each ot