Chapter 2: Foundations of Modern Trade Theory CHAPTER 2 FOUNDATIONS OF MODERN TRADE THEORY MULTIPLE-CHOICE QUESTIONS 1. The mercantilists would have objected to: a. Export promotion policies initiated by the government b. The use of tariffs or quotas to restrict imports c. Trade policies designed to accumulate gold and other precious metals d. International trade based on open markets 2. Unlike the mercantilists, Adam Smith maintained that: a. Trade benefits one nation only at the expense of another nation b. Government control of trade leads to maximum economic welfare c. All nations can gain from free international trade d. The world’s output of goods must remain constant over time 3. The trading principle formulated by Adam Smith maintained that: a. International prices are determined from the demand side of the market b. Differences in resource endowments determine comparative advantage c. Differences in income levels govern world trade patterns d. Absolute cost differences determine the immediate basis for trade 4. Unlike Adam Smith, David Ricardo’s trading principle emphasizes the: a. Demand side of the market b. Supply side of the market c. Role of comparative costs d. Role of absolute costs 5. When a nation requires fewer resources than another nation to produce a product, the nation is said to have a (an): a. Absolute advantage in the production of the product b. Comparative advantage in the production of the product c. Lower marginal rate of transformation for the product d. Lower opportunity cost of producing the product 1
Chapter 2: Foundations of Modern Trade Theory 6. According to the principle of comparative advantage, specialization and trade increase a nation’s total output since: a. Resources are directed to their highest productivity b. The output of the nation’s trading partner declines c. The nation can produce outside of its production possibilities curve d. The problem of unemployment is eliminated 7. In a two-product, two-country world, international trade can lead to increases in: a. Consumer welfare only if output of both products is increased b. Output of both products and consumer welfare in both countries c. Total production of both products, but not consumer welfare in both countries d. Consumer welfare in both countries, but not total production of both products 8. As a result of international trade, specialization in production tends to be: a. Complete with constant costs—complete with increasing costs b. Complete with constant costs—incomplete with increasing costs c. Incomplete with constant costs—complete with increasing costs d. Incomplete with constant costs—incomplete with increasing costs 9. A nation that gains from trade will find its consumption point being located: a. Inside its production possibilities curve b. Along its production possibilities curve c. Outside its production possibilities curve d. None of the above Using the data of Table 2.1, answer Questions 10 through 15.
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