Chapter 2: 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 . !rade between two countries can benefit both countries if A. each country e"#orts that $ood in which it has a com#arative advanta$e. B. each country en%oys su#erior terms of trade. C. each country has a more elastic demand for the im#orted $oods. D. each country has a more elastic su##ly for the su##lied $oods. E. Both C and D. Answer: A &. !he 'icardian theory of com#arative advanta$e states that a country has a com#arative advanta$e in wid$ets if A. out#ut #er wor(er of wid$ets is hi$her in that country. B. that country)s e"chan$e rate is low. C. wa$e rates in that country are hi$h. D. the out#ut #er wor(er of wid$ets as com#ared to the out#ut of some other #roduct is hi$her in that country. E. Both B and C. Answer: D *. +n order to (now whether a country has a com#arative advanta$e in the #roduction of one #articular #roduct we need information on at least ____unit labor re,uirements A. B. C. D. E. one two three four five

Answer: D

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A country en$a$in$ in trade accordin$ to the #rinci#les of com#arative advanta$e $ains from trade because it A. is #roducin$ e"#orts indirectly more efficiently than it could alternatively. B. is #roducin$ im#orts indirectly more efficiently than it could domestically. C. is #roducin$ e"#orts usin$ fewer labor units. D. is #roducin$ im#orts indirectly usin$ fewer labor units. E. None of the above. Answer: B

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/iven the followin$ information: 0nit 1abor 'e,uirements Cloth 2id$ets 14 4 .4 &4 Neither country has a com#arative advanta$e. 3ome has a com#arative advanta$e in cloth. 5orei$n has a com#arative advanta$e in cloth. 3ome has a com#arative advanta$e in wid$ets. 3ome has a com#arative advanta$e in both #roducts.

3ome 5orei$n A. B. C. D. E.

Answer: B 6. +f it is ascertained that 5orei$n uses #rison7slave labor to #roduce its e"#orts, then home should A. e"#ort cloth. B. e"#ort wid$ets. C. e"#ort both and im#ort nothin$. D. e"#ort and im#ort nothin$. E. All of the above. Answer: A

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+f the 3ome economy suffered a meltdown, and the 0nit 1abor 'e,uirements in each of the #roducts ,uadru#led 9that is, doubled to &4 for cloth and .4 for wid$ets: then home should A. e"#ort cloth. B. e"#ort wid$ets. C. e"#ort both and im#ort nothin$. D. e"#ort and im#ort nothin$. E. All of the above.

Answer: A ;. +f wa$es were to double in 3ome, then 3ome should: A. e"#ort cloth. B. e"#ort wid$ets. C. e"#ort both and im#ort nothin$. D. e"#ort and im#ort nothin$. E. All of the above. Answer: A 14. +f the world e,uilibrium #rice of wid$ets were * 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 e"#ort the $ood in which it en%oys com#arative advanta$e. D. neither country will want to e"#ort the $ood in which it en%oys com#arative advanta$e. E. both countries will want to s#eciali<e in cloth. Answer: A

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/iven the followin$ information: Number of 0nits =roduced by one 0nit of 1abor Cloth 2id$ets 14 4 .4 &4

3ome 5orei$n A. B. C. D. E.

Neither country has a com#arative advanta$e. 3ome has a com#arative advanta$e in cloth. 5orei$n has a com#arative advanta$e in cloth. 5orei$n has a com#arative advanta$e in wid$ets. 3ome has a com#arative advanta$e in both #roducts.

Answer: C 1 . !he o##ortunity cost of cloth in terms of wid$ets in 5orei$n is if it is ascertained that 5orei$n uses #rison7slave labor to #roduce its e"#orts, then home should A. e"#ort cloth. B. e"#ort wid$ets. C. e"#ort both and im#ort nothin$. D. e"#ort and im#ort nothin$. E. All of the above. Answer: B 1&. +f wa$es were to double in 3ome ,then 3ome should A. e"#ort cloth. B. e"#ort wid$ets. C. e"#ort both and im#ort nothin$. D. e"#ort and im#ort nothin$. E. All of the above. Answer: B 1*. +f the world e,uilibrium #rice of wid$ets were * 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 e"#ort the $ood in which it en%oys com#arative advanta$e. D. neither country will want to e"#ort the $ood in which it en%oys com#arative advanta$e. E. both countries will want to s#eciali<e in cloth. Answer: A

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+f the world e,uilibrium #rice of wid$ets 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 e"#ort the $ood in which it en%oys com#arative advanta$e. D. neither country will want to e"#ort the $ood in which it en%oys com#arative advanta$e. E. both countries will want to s#eciali<e in cloth. Answer: A

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+n a two #roduct two country world, international trade can lead to increases in A. consumer welfare only if out#ut of both #roducts is increased. B. out#ut of both #roducts and consumer welfare in both countries. C. total #roduction of both #roducts but not consumer welfare in both countries D. consumer welfare in both countries but not total #roduction of both #roducts. E. None of the above. Answer: B

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As a result of trade, s#eciali<ation in the 'icardian model tends to be A. com#lete with constant costs and with increasin$ costs. B. com#lete with constant costs and incom#lete with increasin$ costs. C. incom#lete with constant costs and com#lete with increasin$ costs. D. incom#lete with constant costs and incom#lete with increasin$ costs. E. None of the above. Answer: B

18.

A nation en$a$in$ in trade accordin$ to the 'icardian model will find its consum#tion bundle A. inside its #roduction #ossibilities frontier. B. on its #roduction #ossibilities frontier. C. outside its #roduction #ossibilities frontier. D. inside its trade7#artner)s #roduction #ossibilities frontier. E. on its trade7#artner)s #roduction #ossibilities frontier. Answer: C

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+n the 'icardian model, if a country)s trade is restricted, this will cause all e"ce#t which> A. 1imit s#eciali<ation and the division of labor. B. 'educe the volume of trade and the $ains from trade C. Cause nations to #roduce inside their #roduction #ossibilities curves D. ?ay result in a country #roducin$ some of the #roduct of its com#arative disadvanta$e E. None of the above. Answer: C

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+f a very small country trades with a very lar$e country accordin$ to the 'icardian model, then A. the small country will suffer a decrease in economic welfare. B. the lar$e country will suffer a decrease in economic welfare. C. the small country will en%oy $ains from trade. D. the lar$e country will en%oy $ains from trade. E. None of the above. Answer: C

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+f the world terms of trade for a country are somewhere between the domestic cost ratio of 3 and that of 5, then A. country 3 but not country 5 will $ain from trade. B. country 3 and country 5 will both $ain from trade. C. neither country 3 nor 5 will $ain from trade. D. only the country whose $overnment subsidi<es its e"#orts will $ain. E. None of the above. Answer: B

+f the world terms of trade e,ual those of country 5, then A. country 3 but not country 5 will $ain from trade. B. country 3 and country 5 will both $ain from trade. C. neither country 3 nor 5 will $ain from trade. D. only the country whose $overnment subsidi<es its e"#orts will $ain. E. None of the above. Answer: A

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+f the world terms of trade e,ual those of country ,5 then A. country 3 but not country 5 will $ain from trade. B. country 3 and country 5 will both $ain from trade. C. neither country 3 nor 5 will $ain from trade. D. only the country whose $overnment subsidi<es its e"#orts will $ain. E. None of the above. Answer: E

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+f a #roduction #ossibilities frontier is bowed out 9concave to the ori$in:, then #roduction occurs under conditions of A. constant o##ortunity costs. B. increasin$ o##ortunity costs. C. decreasin$ o##ortunity costs. D. infinite o##ortunity costs. E. None of the above. Answer: B

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+f two countries have identical #roduction #ossibility frontiers, then trade between them is not li(ely if A. their su##ly curves are identical. B. their cost functions are identical. C. their demand conditions identical. D. their incomes are identical. E. None of the above. Answer: E

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+f two countries have identical #roduction #ossibility frontiers, then trade between them is not li(ely if A. their su##ly curves are identical. B. their cost functions are identical. C. their demand functions differ. D. their incomes are identical. E. None of the above. Answer: C

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!he earliest statement of the #rinci#le of com#arative advanta$e is associated with A. David 3ume. B. David 'icardo. C. Adam @mith. D. Eli 3ec(scher. E. Bertil Ahlin. Answer: B

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+f one country)s wa$e level is very hi$h relative to the other)s 9the relative wa$e e"ceedin$ the relative #roductivity ratios:, then if they both use the same currency A. neither country has a com#arative advanta$e. B. only the low wa$e country has a com#arative advanta$e. C. only the hi$h wa$e country has a com#arative advanta$e. D. consumers will still find trade worth while from their #ers#ective. E. None of the above. Answer: E

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+f one country)s wa$e level is very hi$h relative to the other)s 9the relative wa$e e"ceedin$ the relative #roductivity ratios:, then A. it is not #ossible that #roducers in each will find e"#ort mar(ets #rofitable. B. it is not #ossible that consumers in both countries will enhance their res#ective welfares throu$h im#orts. C. it is not #ossible that both countries will find $ains from trade. D. it is #ossible that both will en%oy the conventional $ains from trade. E. None of the above. Answer: D

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!he 'icardian model is based on all of the followin$ e"ce#t A. only two nations and two #roducts. B. no diminishin$ returns. C. labor is the only factor of #roduction. D. #roduct ,uality varies amon$ nations. E. None of the above. Answer: D

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'icardo)s ori$inal theory of com#arative advanta$e seemed of limited real7world value because it was founded on the A. labor theory of value. B. ca#ital theory of value. C. land theory of value. D. entre#reneur theory of value. E. None of the above. Answer: A

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Accordin$ to 'icardo, a country will have a com#arative advanta$e in the #roduct in which its A. labor #roductivity is relatively low. B. labor #roductivity is relatively hi$h. C. labor mobility is relatively low. D. labor mobility is relatively hi$h. E. None of the above. Answer: B

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+n a two7country, two7#roduct world, the statement B/ermany en%oys a com#arative advanta$e over 5rance in autos relative to shi#sB is e,uivalent to A. 5rance havin$ a com#arative advanta$e over /ermany in shi#s. B. 5rance havin$ a com#arative disadvanta$e com#ared to /ermany in autos and shi#s. C. /ermany havin$ a com#arative advanta$e over 5rance in autos and shi#s. D. 5rance havin$ no com#arative advanta$e over /ermany. E. None of the above. Answer: A

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Assume that labor is the only factor of #roduction and that wa$es in the 0nited @tates e,ual C 4 #er hour while wa$es in Da#an are C14 #er hour. =roduction costs would be lower in the 0nited @tates as com#ared to Da#an if A. 0.@. labor #roductivity e,ualed *4 units #er hour and Da#an)s 1- units #er hour. B. 0.@. #roductivity e,ualed &4 units #er hour whereas Da#an)s was 4. C. 0.@. labor #roductivity e,ualed 4 and Da#an)s &4. D. 0.@. labor #roductivity e,ualed 1- and Da#an)s - units #er hour. E. None of the above. Answer: A

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+f the 0nited @tatesE #roduction #ossibility frontier was flatter to the wid$et a"is, whereas /ermany)s was flatter to the butter a"is, we (now that A. the 0nited @tates has no com#arative advanta$e B. /ermany has a com#arative advanta$e in butter. C. the 0.@. has a com#arative advanta$e in butter. D. Not enou$h information is $iven. E. None of the above. Answer: B

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@u##ose the 0nited @tates) #roduction #ossibility frontier was flatter to the wid$et a"is, whereas /ermany)s was flatter to the butter a"is. 2e now learn that the /erman mar( is shar#ly de#reciated a$ainst the 0.@. dollar. 2e now (now that A. the 0nited @tates has no com#arative advanta$e B. /ermany has a com#arative advanta$e in butter. C. the 0nited @tates has a com#arative advanta$e in butter. D. Not enou$h information is $iven. E. None of the above. Answer: B

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@u##ose the 0nited @tates) #roduction #ossibility frontier was flatter to the wid$et a"is, whereas /ermany)s was flatter to the butter a"is. 2e now learn that the /erman wa$e doubles, but 0.@. wa$es do not chan$e at all. 2e now (now that A. the 0nited @tates has no com#arative advanta$e. B. /ermany has a com#arative advanta$e in butter. C. the 0nited @tates has a com#arative advanta$e in butter. D. Not enou$h information is $iven. E. None of the above. Answer: B

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ssay Questions 1. ?any countries in @ub7@aharan Africa have very low labor #roductivities in many sectors, in manufacturin$ and a$riculture. !hey often des#air of even tryin$ to attem#t to build their industries unless it is done in an autar(ic conte"t, behind #rotectionist walls because they do not believe they can com#ete with more #roductive industries abroad. Discuss this issue in the conte"t of the 'icardian model of com#arative advanta$e. Answer: !he 'icardian model of com#arative advanta$e ar$ues that every country must have a com#arative advanta$e in some #roduct 9assumin$ there are more #roducts than countries. . +n 1;6-, wa$e levels in @outh Forea were rou$hly -G of those in the 0nited @tates. +t is obvious that if the 0nited @tates had allowed Forean $oods to be freely im#orted into the 0nited @tates at that time, this would have caused devastation to the standard of livin$ in the 0nited @tates.,because no #roducer in this country could #ossibly com#ete with such low wa$es. Discuss this assertion in the conte"t of the 'icardian model of com#arative advanta$e. Answer: 'e$ardless of relative wa$e levels, the 0nited @tates would be able to #rovide its #o#ulace with a hi$her standard of livin$ than would be #ossible without trade. Also, low wa$es tend to be associated with low #roductivities. &. !he evidence cited in the cha#ter usin$ the e"am#les of the East Asia New +ndustriali<in$ Countries su$$ests that as international #roductivities conver$e, so do international wa$e levels. 2hy do you su##ose this ha##ened for the East Asian N+Cs> +n li$ht of your answer, what do you thin( is li(ely to ha##en to the relative wa$es 9relative to those in the 0nited @tates: of China in the comin$ decade> E"#lain your reasonin$. Answer: 5ollowin$ the lo$ic of the 'icardian model of com#arative advanta$e, the East Asian countries #layed to their res#ective com#arative advanta$es. !his allowed the world demand to #rovide e"cess demands for their relatively abundant labor, which in turn tended to raise these wa$es. +f China follows the same #attern, their wa$es levels should also be e"#ected over time to conver$e to those in their industriali<ed country mar(ets. *. 2hen we e"amine the /ood Country version of the 'icardian model of com#arative advanta$e, we note that com#arative advanta$e is totally determined by #hysical #roductivity ratios. Chan$es in wa$e rates in either country cannot affect these #hysically determined com#arative advanta$es, and hence cannot affect, which #roduct will be e"#orted by which country. 3owever, when more than $oods are added to the model 9still with countries:, chan$es in wa$e rates in one or the other country can in fact determine which $ood or $oods each of the countries will e"#ort. 3ow can you e"#lain this anomaly>

Answer: !his is not really an anomaly. As lon$ as only two $oods e"ist, then as lon$ as trade ta(es #lace, each country must have a com#arative advanta$e in one of them 9or none:. 3owever, if there are more $oods than countries, then the #hysical #roductivity definition of com#arative advanta$e becomes ambi$uous. Chan$es in relative wa$e rates will shift the international com#etitiveness alon$ the Bchain of com#arative advanta$e.B -. An e"amination of the 'icardian model of com#arative advanta$e yields the clear result that trade is 9#otentially: beneficial for each of the two tradin$ #artners since it allows for an e"#anded consum#tion choice for each. 3owever, for the world as a whole the e"#ansion of #roduction of one #roduct must involve a decrease in the availability of the other, so that it is not clear that trade is better for the world as a whole as com#ared to an initial situation of non7trade 9but efficient #roduction in each country:. Are there in fact $ains from trade for the world as a whole> E"#lain. Answer: +f we were to combine the #roduction #ossibility frontiers of the two countries to create a sin$le world #roduction #ossibility frontier, then it is true that any chan$e in #roduction #oints 9from autar(y to s#eciali<ation with trade: would involve a tradeoff of one $ood for another from the world)s #ers#ective. +n other words, the new solution cannot #ossibly involve the #roduction of more of both $oods. 3owever, since we (now that each country is better off at the new solution, it must be true that the ori$inal #oints were not on the trade contract curve between the two countries, and it was in fact #ossible to ma(e some #eo#le better off without ma(in$ others worse off, so that the new solution does indeed re#resent a welfare im#rovement from the world)s #ers#ective.

Quantitative!"raphing Problems 1. /iven the followin$ information: 0nit 1abor 'e,uirements Cloth 2id$ets 144 44 .4 &4

3ome 5orei$n

2hat is the o##ortunity cost of Cloth in terms of 2id$ets in 5orei$n> Answer: Ane half a wid$et. . /iven the followin$ information: 0nit 1abor 'e,uirements Cloth 2id$ets 144 44 .4 &4

3ome 5orei$n

+f these two countries trade these two $oods in the conte"t of the 'icardian model of com#arative advanta$e, then what is the lower limit of the world e,uilibrium #rice of wid$ets> Answer: &. Cloths.

/iven the followin$ information: 0nit 1abor 'e,uirements Cloth 2id$ets 144 44 .4 &4

3ome 5orei$n

+f these two countries trade these two $oods with each other in accordin$ to the 'icardian model of com#arative advanta$e, what is the lower limit for the #rice of cloth> Answer: Ane half a wid$et.

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/iven the followin$ information: 0nits =roduced by Ane 2or(erH3our Cloth 2id$ets 144 44 .4 &4

3ome 5orei$n

2hat is the o##ortunity cost of cloth in terms of 2wd$ets in 5orei$n> Answer: -. wid$ets.

/iven the followin$ information: 0nits =roduced by Ane 2or(erH3our Cloth 2id$ets 144 44 .4 &4

3ome 5orei$n

+f these two countries trade these two $oods with each other in the followin$ the 'icardian model of com#arative advanta$e, then what is the lower limit for the world e,uilibrium #rice of cloth> Answer: wid$ets.