Chapter 3

Interdependence and the Gains from Trade

1. The slope of the production possibilities frontier is determined by
a. the opportunity cost of producing one more unit of the good on the horizontal axis.
b. the market prices of the goods that the economy can produce.
c. the distribution of incomes in the economy.
d. whether production is performed using efficient or inefficient methods.

2. The production possibilities frontier is a downward-sloping straight line when the

a. opportunity cost of producing each good depends on the amount produced.
b. technology of production is constant.
c. opportunity cost of producing each good is independent of the amount of the good
produced.
d. economy is industrialized.

3. In voluntary exchange between two countries, if one country gains then

a. the other must lose, unless the exchange generates external costs.
b. the other country must lose under any circumstances.
c. the other country must lose an equal amount.
d. there is no reason to expect that the other country must lose.

4. International trade tends to occur whenever

a. labor is cheaper in one country than in another.
b. one of the trading nations is self sufficient and producing surplus goods.

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c. one nation can profit from trade at the expense of the other.
d. both nations can benefit from trade.

5. If Japan can produce each unit of steel using fewer resources than Canada does,
a. Canada has an absolute advantage in steel production.
b. Japan has an absolute advantage in steel production.
c. Japan has a comparative advantage in steel production.
d. Canada has a comparative advantage in steel production.

6. Which of the following statements is true?

a. Exports tend to decrease economic efficiency.
b. A nation should specialize in producing a good in which it has an absolute advantage.
c. A nation should specialize in producing a good only when it has both an absolute and a
comparative advantage.
d. A nation should specialize in producing a good in which it has a comparative advantage.

7. Suppose Russia has an absolute advantage in the production of all goods. In this instance, Russia
a. will have no incentive to engage in international trade.
b. should specialize in producing the goods for which it has a lower opportunity cost than
other countries.
c. also has a comparative advantage in the production of those goods.
d. is producing at a point on its production possibilities frontier.

8. What can be said regarding absolute advantage in production for the two countries shown in this
figure?
Number of workers needed to produce one unit of each of the following goods:
Korea Columbia
1 Radio 3 4
 Chapter 3/Interdependence and the Gains from Trade  15

1 Calculator 6 2
a. Colombia has an absolute advantage in producing both calculators and radios.
b. Korea only has an absolute advantage in producing calculators.
c. Korea has an absolute advantage in producing both radios and calculators.
d. Columbia only has an absolute advantage in producing calculators.

9. Which of the following will change a nation’s comparative advantage?

a. a technological advance in producing manufactured goods
b. a doubling of all wages
c. quotas on imports
d. a change in consumers’ preferences for imported goods

10. If a nation does not have an absolute advantage in producing anything, it

a. has no comparative advantage either.
b. could have a comparative advantage in something.
c. will try to get along without trade.
d. will export raw materials and import finished products.

11. In the marketplace, John voluntarily sells his last two loaves of bread to Mary for $2. We can infer
that this will benefit
a. both John and Mary.
b. Mary, but not John, since these are John’s last two loaves of bread.
c. Mary, while imposing a cost on John equal to the benefit Mary receives.
d. neither John nor Mary.

12. Trade based on each country’s comparative advantage is

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a. economically efficient because both countries are better off than they were before they
traded.
b. economically inefficient because the country with the absolute advantage is made worse off.
c. ineffective in improving efficiency, since one country’s gain will be offset by the other country’s
loss.
d. economically efficient only if each country also has the absolute advantage in producing their
good.

13. If Armenia can produce two rugs or 100 spy novels in an hour, and Turkey can produce one rug or
50 spy novels in an hour
a. Turkey should produce both rugs and spy novels.
b. Turkey should produce only rugs.
c. Armenia should produce only rugs.
d. there are no gains from trade between these two countries with these two goods.

14. Suppose these diagrams depict the production possibilities frontiers of wheat and corn for two
countries, the United States and Canada. What is the most wheat the U.S. would be willing to
trade for one unit of Canada’s corn?
a. 1/3
b. 1/4
c. 3
d. 4

15. Suppose these diagrams depict the production possibilities frontiers of wheat and corn for two
countries, the United States and Canada. What is the most corn the Canada would be willing to
trade for one unit of U.S. wheat?
a. 1/3
b. 1/4
c. 3
d. 4

16. A good produced in Japan and sold to Korea

a. is a Korean export and Japanese import.
 Chapter 3/Interdependence and the Gains from Trade  17

b. is a Korean import and Japanese export.

c. implies that Japan has an absolute advantage in the production of the good.
d. implies that Korea has a comparative advantage in the production of the good.

17. A nation should only import those goods for which it has
a. lower opportunity costs than its trading partner.
b. higher opportunity costs than its trading partner.
c. zero transactions costs.
d. lower costs of production than its trading partner.

Jill can sew a child’s dress in 3 hours and can knit a baby’s blanket in 2 hours. Sarah can sew a child’s
dress in 6 hours and can knit a baby’s blanket in 3 hours. Use this information to answer the following
questions.

18. We can infer that Jill has the comparative advantage in

a. sewing.
b. knitting.
c. both activities.
d. neither activities.

19. We know that Sarah has the comparative advantage in

a. sewing.
b. knitting.
c. both activities.
d. neither activities.

20. Jill should specialize in

18  Chapter 3/Interdependence and the Gains from Trade

a. sewing.
b. knitting.
c. both activities.
d. neither activities.

21. Sarah should specialize in

a. sewing.
b. knitting.
c. both activities.
d. neither activities.

22. Which of the following describes the production possibilities frontier for Jill and Sarah together if
each works for 12 hours? The intercept on the dress axis is __________ units and the intercept on
the blanket axis is __________ units.
a. 10; 6
b. 9;5
c. 4;4
d. 6;10

23. Given the above information, Jill would trade her dresses for Sarah’s blankets if the price of a dress
in terms of blankets was
a. less than 2/3 blankets for 1 dress.
b. more than 2 blankets for 1 dress.
c. at least 3/2 blankets for 1 dress.
d. Jill would never trade with Sarah.

24. Given the above information, Sarah would trade her blankets for Jill’s dresses if the price of a
blanket in terms of dresses was
a. more than 1/2 dress for one blanket.
b. less than 1/2 dress for one blanket.
c. more than 2/3 dress for 1 blanket.
d. Sarah would never trade with Jill.

25. Which of the following would be a mutually agreeable rate of exchange between Jill and Sarah for
dresses and blankets?
a. less than 1/2 dress for 1 blanket.
b. more than 2/3 dress for 1 blanket.
c. between 1/2 and 2/3 dress for 1 blanket.
d. between 2/3 and 2 dresses for 1 blanket.