Have You Conquered Comparative Advantage?

Here is your opportunity to check whether you are a world-class expert in comparative advantage and some of the concepts of foreign trade. Pick the BEST - the BEST - answers from the following questions, then press the button and I'll tell you the level of your expertise.

1. Foreign trade:

a) Can only be good for one party to the trade.
b) Always hurts one of the trading partners.
c) May be beneficial to both trading partners.
d) Usually hurts both parties.

2. Foreign trade:

a) Always involves a Northern partner and a Southern.
b) Always involves a trading partner in the temperate zone and another in the tropics.
c) Depends upon an Eastern partner and a Western.
d) Can be between East and West and between North and South and between temperate zones and tropics.

3. Wages in Country A are lower than those in B.

a) A will have an absolute advantage over B for all products requiring labor.
b) B will have a comparative advantage for all labor-intensive products.
c) B will have an absolute advantage over A.
d) Not necessarilty any of the above.

4. A country can derive a comparative advantage in a particular product because of:

a) Technology.
b) Skill and specialization in its labor force.
c) Climate.
d) Any one or more of the above and other factors too.

STATEWHEATSOYBEANS
Illinois6040
Iowa5025

Suppose these numbers indicate the yield in bushels per acre of wheat and soybeans in Illinois and Iowa. (These numbers, chosen for computational ease, are purely hypothetical. The U.S. Department of Agriculture publishes various "real" crop yield figures.) Assume that labor, capital, technology, and other factors are the same per acre in both states.

5. Which of the following statements is true about "absolute advantage"?

a) Neither state has an absolute advantage in either product.
b) Iowa has an absolute advantage in both products.
c) Iowa has an absolute advantage in wheat.
d) Illinois has an absolute advantage in both.

6. Which of the following is true of "comparative advantage"?

a) Illionois has a comparative advantage in both.
b) Iowa has a comparative advantage in both.
c) Iowa has a comparative advantage in wheat.
d) Illinois has a comparative advantage in wheat.

7. Suppose in Illinois 50 acres are used to produce wheat and 50 to produce soybeans. Similarly suppose in Iowa that 50 acres are devoted to wheat production and 50 to soybeans. What is the total production of wheat and soybeans of the 200 acres?

a) 5,500 bushels of wheat and 3,250 of soybeans.
b) 5,500 bushels of wheat and 4,000 bushels of soybeans.
c) 5,000 bushels of wheat and 4,000 bushels of soybeans.
c) Some other set of numbers.

8. Suppose in Illinois 10 acres are used to produce wheat and 90 to produce soybeans. In Iowa 100 acres are devoted to the production of wheat. What is the total production of the 200 acres?

a) 5,600 bushels of wheat and 3600 of soybeans.
b) 5,600 bushels of wheat and 4,000 of soybeans.
c) 6,000 bushels of wheat and 2,500 of soybeans.
d) Some other pair of numbers.

COUNTRYAUTOSCOMPUTERS
Big100,000800,000
Little10,000200,000

Big Country is much larger than Little and, if its residents are to have enough of these two products, it will have to produce some of both. Nevertheless, there may be some potential advantages to be gained from trade between the two countries. As in the prior table, these production possibilities are "either/or" propositions. Big, for examle, can produce 100,000 cars or it can produce 800,000 computers (and related software and components). It can also produce various linear combinations of these two products. For example, it it devotes 20 percent of its resources to autos and 80 percent to computers it can produce 20,000 autos and 640,000 computers.

9. Suppose both countries attempt to be self sufficient and devote half their resources to producing each product. What will be the total production of the two products by the two countries?

a) 110,000 cars and 1,000,000 computers.
b) 55,000 cars and 500,000 computers.
c) 60,000 cars and 520,000 computers
d) Some other set of numbers.

10. Suppose Big Country uses 60 percent of its resources to produce autos and the other 40 to produce computers and further suppose Little produces only computers. What will be the total production of the two countries.

a) 110,000 cars and 1,000,000 computers.
b) 55,000 cars and 500,000 computers.
c) 60,000 cars and 520,000 computers
d) Some other set of numbers.

11. To obtain another car by transferring resources from the production of computers to the production of cars, Big must relinquish or give up the production of 8 computers (800,000/100,000). Similarly, to get another car by a transfer of resources from computers to cars, Little must sacrifice or give up the production of:

a) one computer. b) ten computers.
c) 20 computers. c) eight computers.

12. Which of the following statements is correct?

a) Big has a comparative advantage in the production of both.
b) Big has a comparative advantage in the production of computers.
c) Little has a comparative advantage in the production of computers.
d) Neither country has a comparative advantage in the production of either product.

PRICES OF WINE AND WHEAT
COUNTRYWine(bottle)Wheat(bu)
Romanland30frs30frs
Slavland100rbs25rbs

Trade barriers have prevented any cross-border trade for Romanland and Slavland. The prices of a bottle of wine and of a bushel of wheat in Romanland expressed in fr, that country's currency, are about the same. Assume these prices reflect the costs of the resources used in that country in the production of the two commodities. Make similar assumptions about the prices of the two products in Slavland, expressed in rb, the currency of Slavland.

13. Based only on these prices, which country has a comparative advantage in the production of wine?

a) Insufficient information is given to infer the answer.
b) Romanland.
c) Slavland.
d) Neither country.

14. Which has a comparative advantage in the production of wheat?

a) Insufficient information is given to infer the answer.
b) Romanland.
c) Slavland.
d) Neither country.

15. Suppose both countries eliminate their trade barriers and that the initial exchange rate is that five fcs trades for one rb (5fcs~1rb).

a) The residents of both countries will buy the two products exclusively from domestic sources.
b) The residents of both coutnries will buy their wheat from Slavland.
c) The residents of both countries will buy both products from Romanland.
d) The residents of both coutnries will buy both products from Slavland.

16. Same situation as in (15) and now further assume there is no other cross-border trade for either country. Over an extended period of time what should happen to the exchange rate?

a) The exchange rate should remain unchanged.
b) The fr should increase in value relative to the rb.
c) The rb should increase in value.
d) Insufficient data is given to make an inference.

17. Contrary to questions (15) and (16), assume the initial exchange rate is one fr trades for ten rbs.

a) The residents of both countries will buy the two products exclusively from domestic sources.
b) The residents of both coutnries will buy their wheat from Romanland.
c) The residents of both countries will buy both products from Romanland.
d) The residents of both coutnries will buy both products from Slavland.

18. With an initial exchange rate of 1fc~10rbs as in 17, what will tend to be the long-run effect on the exchange rate?

a) The exchange rate should remain unchanged.
b) The fr should increase in value relative to the rb.
c) The rb should increase in value relative to the fr.
d) Insufficient data is given to make an inference.

19. Exchange rates compatible with trade between these two countries involving wine and wheat:

a) Cannot be inferred from the data given.
b) Would be expected to be somewhere between 0.833 rbs and 3.333 rbs per fr.
c) Would be expected to be somewhere between 1 rb and 4 rbs per fr.
d) Require that one fr is worth more than 3.33 rbs.

20. Consider the slopes of the production possibilities curves (Figures 1 and 3 in the tutorial) and the potential for gain from international trade:

a) The slopes are irrelevant to the possibility of gain from trade.
b) The maximum potential for gain from trade occurs if the slopes are the same.
c) To gain from trade, it is important that the slopes of the production possibilities curves are different but only slightly so.
d) Vive la difference!