International Economics 9th Edition Appleyard Test Bank

International Economics 9th Edition
Appleyard Test Bank

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CHAPTER 6
GAINS FROM TRADE IN NEOCLASSICAL THEORY
A. Essay Questions
1. In the equilibrium trading position in a two-country model of trade, why must the trade
triangles of the two countries be congruent (identical)? What role does the slope of the
world price line play in making the triangles congruent?
Answer: In a two-country model of trade, the trade triangles of the two countries must be
congruent since one country’s exports are the other’s imports. The slope of the price line
determines each country’s post-trade production and consumption bundles and hence its
exports and imports.
Difficulty: 02 Medium
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
2. The text has demonstrated that, even if a country’s production does not change with the
opening of the country to trade, a gain (the “consumption gain”) can still occur even
though there is no “production gain.” Is the reverse situation possible – that is, can there
be a “production gain” without there being a “consumption gain” for the country? Why
or why not?
Answer: It is possible if the indifference curves are shaped in a more angular fashion.
Blooms: Understand
3. “In a situation of increasing opportunity costs, trade can be beneficial to both

countries if they have identical PPFs or if they have identical tastes. However,
trade cannot be beneficial to either country if the countries have identical PPFs
and identical tastes.”
Is this statement correct or incorrect? Illustrate and explain.
Answer: If the countries have identical PPFs and identical tastes, then their autarky price rations
will be the same and there will be no basis for trade.
Difficulty: 01 Easy
1
Topic: Minimum Conditions for Trade
Blooms: Remember
4. (This question pertains to material in the appendix.) Explain the economist’s distinction,
in discussion of the compensation principle, between “potential” gains from trade and
“actual” gains from trade. Why are the gains only “potential” when that word is used?
Answer: “Potential” means that the winners could (but actually do not) compensate the losers and
still be better off.
Topic: Some Important Assumptions in the Analysis
Blooms: Understand
5. Suppose that the trade pattern of a country is that it exports foodstuffs and imports fancy
sports equipment. Can you make a case that trade acts like a regressive tax in its impact
on the distribution of real income and welfare within the country? Explain.
Answer: The price of foodstuffs rises after trade commences, and this increase disproportionately
harms those who spend the majority of their income on food.
Difficulty: 01 Easy
Blooms: Remember
6. Explain, using the PPF-indifference curve diagram, how a change in tastes can cause a
country to shift from being an exporter of a good to being an importer of that same good.
(Assume that world prices are constant.)
Answer: The community indifference curve map needs to be repositioned in the diagram.
Blooms: Understand
7. (a) Using the neoclassical model, build the case why it is beneficial for a country to move
from a situation of autarky to a situation of free trade.
(b) Briefly, why can the neoclassical model of trade be regarded as “better” in some
2
respects than the Classical model of trade?
Answer: (a) A country unambiguously gains from trade if its autarkic price ratio differs from the
international TOT. (b) The neoclassical model incorporates demand considerations into
the analysis.
Blooms: Understand
8. Illustrate and explain, for each statement below, why the statement is either TRUE or
FALSE. Assume a two-commodity world in each case.
(a) “If a country has an absolutely fixed production pattern, i.e., resources used
in each industry are completely specific to their respective industry, then this
country cannot experience any welfare gain when moving from autarky to free
trade.”
(b) “It is possible that, even if two countries have identical production-
possibilities frontiers, trade between the countries can enhance the well-being
of each country, in comparison with well-being under autarky.”
Answer: (a) False – it can still experience a consumption gain from trade. (b) True – If tastes are
different between the two countries, then the autarkic price ratios will be different, and
trade can thus be mutually beneficial.
Blooms: Understand
9. (a) Suppose that two countries have identical increasing-opportunity-costs production-

possibilities frontiers (PPFs). Illustrate and carefully explain why, under certain
conditions, the two countries can have an incentive to trade with each other. In addition,
illustrate and explain how they can therefore both gain from trade.
(b) Suppose that two countries, in a situation where they each have an increasing-
3
opportunity-costs production-possibilities frontier (PPF), have identical tastes and
preferences (demands). Illustrate and carefully explain why, under certain conditions, the
two countries can have an incentive to trade with each other. Why can they gain from
trade?
Answer: (a) If tastes are different between the two countries, then the autarkic price ratios will be
different, and trade can thus be mutually beneficial. (b) If the PPFs are different, then as
long as tastes are different, the autarkic price ratios will be different, and trade can thus be
mutually beneficial.
Blooms: Understand
10. (a) Using the neoclassical production-possibilities frontier/indifference curve approach,

build the case that free trade is preferable to autarky for a country. Then explain how an
economist could still say that trade can be beneficial to the country even if trade causes
the community indifference curve map to change such that the country appears to lose
welfare on the basis of the original autarky income distribution.
(b) It has often been pointed out in this course that, within a country, a movement to freer
trade, while helping some people, can hurt other people. Thinking over various parts of
this course, indicate two groups of people within a country who can have their well-being
reduced because of the opening of the country to trade and very briefly explain why their
welfare can be reduced.
Answer: (a) An economist could still say that trade can be beneficial based on the compensation
principle. We say that potential gains from trade exist in the sense that, within the country,
the people who gain from trade can compensate the losers and still be better off.
Difficulty: 03 Hard
AACSB: Analytical Thinking
Blooms: Analyze
B. Multiple-Choice Questions
11. Which of the following does not contribute to a basis for trade between two countries?
a. different tastes and preferences

b. different technologies
c. different relative factor endowments
d. different absolute factor endowments, but the same relative endowments
4
Answer: d
Difficulty: 01 Easy
Blooms: Remember
12. If country A’s (PX/PY) in autarky is greater than the (PX/PY) on the world market, then, as
the country moves from autarky to trade, the relative price of good X facing A’s
producers will __________, and A’s producers will hence want to shift their production
toward producing __________.
a. decrease; more of good X and less of good Y

b. decrease; more of good Y and less of good X
c. increase; more of good X and less of good Y
d. increase; more of good Y and less of good X
Answer: b
Difficulty: 01 Easy
Blooms: Remember
13. Given the following graph showing production-possibilities frontiers for country A and
country B in a situation where both countries are on the same community indifference
curve S1 in autarky:
Prior to trade, PX/PY in country A is __________ PX/PY in country B, and, when trade
begins, country A will import good __________.
a. greater than; X
b. greater than; Y
c. less than; X
d. less than; Y
Answer: a
Difficulty: 01 Easy
5
Blooms: Remember
14. Given the production-possibilities-frontier/community-indifference-curve diagram below,

where P is the autarky production point, C is the free trade consumption point, P1
represents autarky prices, and P2 represents free-trade prices, the free-trade production
point is __________ and the autarky consumption point is __________.
a. R; G
b. R; P
c. P; G
d. G; P
Answer: b
Difficulty: 01 Easy
Blooms: Remember
15. In the diagram in Question #14 above, as the country moves from autarky to free trade,
the difference between the S0 and S1 satisfaction levels is called the
a. “consumption gain” (or “gains from exchange”).

b. “production gain” (or “gains from specialization”).
c. “total gains from trade (both “consumption gain” and “production gain”).
d. “lost tariff revenue effect” from removing protective tariffs.
Answer: a
Difficulty: 01 Easy
Blooms: Remember
16. In the following graph showing indifference curves for country A (a1) and for country B
6
(b1) in a situation where both countries have the same production-possibilities frontier, in
autarky, PX/PY in country A is __________ PX/PY in country B, and, if trade begins,
country A will export good __________.
a. less than; X
b. less than; Y
c. greater than; X
d. greater than; Y
Answer: a
Difficulty: 01 Easy
Blooms: Remember
17. Given the following diagram showing a fixed-quantity production-possibilities frontier, a

community indifference curve, and the associated autarky price line, if this country is
opened to trade through exposure to different relative prices, the country can attain
a. both a “production gain” (“gains from specialization”) and a “consumption gain”

(“gains from exchange”).
b. neither a “production gain” (“gains from specialization”) nor a “consumption gain”
c. a “consumption gain” (“gains from exchange”) but not a “production gain” (“gains
from specialization”).
d. a “production gain” (“gains from specialization”) but not a “consumption gain”
Answer: c
7
Blooms: Understand
18. In the diagram in Question #17 above, suppose that this country is opened to trade from
this initial situation where the dashed line indicates autarky prices [(PX/PY)autarky]. With
this opening to trade,
a. the country can gain from trade if PX/PY on the world market is less than (PX/PY)autarky
but cannot gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky.
b. the country can gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky but cannot gain from trade if PX/PY on the world market is less than
(PX/PY)autarky.
c. the country can gain from trade if PX/PY on the world market is less than (PX/PY)autarky
and also can gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky.
d. the country cannot gain from trade if PX/PY on the world market is less than
(PX/PY)autarky and also cannot gain from trade if PX/PY on the world market is
greater than (PX/PY)autarky.
Answer: c
Blooms: Understand
19. If two countries with increasing opportunity costs have identical PPFs but different tastes,
a. the countries will have identical relative commodity prices under autarky, and
therefore there is no incentive to trade.
b. the countries will have different relative commodity prices under autarky, but there
will still be no incentive for them to trade.
c. the countries will have different relative commodity prices under autarky, and each
country can gain by exporting the good for which its consumers have the higher
relative preference.
d. the countries will have different relative commodity prices under autarky, and each
country can gain by exporting the good for which its consumers have the lower
relative preference.
Answer: d
Difficulty: 01 Easy
8
Blooms: Remember
20. If a country’s PX/PY in autarky is less than the PX/PY on the world market, then this
country has a comparative advantage in the __________ good, and, if the country now
engages in international trade and moves along its production-possibilities frontier, its
production of the X good will __________.
a. Y; increase
b. Y; decrease
c. X; decrease
d. X; increase
Answer: d
Blooms: Understand
21. Given the diagram below, which shows country A in its autarky position at point E
[where the price line labeled p0 is tangent to both country A’s production-possibilities
frontier (PPF) and country A’s indifference curve S0]:
If country A now is opened to international trade in a situation where the price of bread
relative to the price of meat is lower on the world market than it is in A’s autarky
9
position, then __________; with international trade, country A will be __________.
a. country A will face a steeper price line than p0 and will change production to a
point on the PPF that is downward and to the right from point E; exporting meat and
importing bread
b. country A will face a steeper price line than p0 and will change production to a point
on the PPF that is downward and to the right from point E; exporting bread and
importing meat
c. country A will face a flatter price line than p0 and will change production to a point on
the PPF that is upward and to the left from point E; exporting meat and importing
bread
d. country A will face a flatter price line than p0 and will change production to a point on
the PPF that is upward and to the left from point E; exporting bread and
importing meat
Answer: c
Difficulty: 01 Easy
Blooms: Remember
22. In the neoclassical model of trade, the movement of a country from autarky to free trade
generally results in __________ specialization in production, __________ the situation in
the Classical model.
a. complete; unlike
b. complete; as was also
c. partial; unlike
d. partial; as was also
Answer: c
Difficulty: 01 Easy
Blooms: Remember
23. If a country’s PX/PY in autarky is less than the PX/PY on the world market, then, as the
country moves from autarky to trade, the relative price of good Y will __________ for
home consumers. Thus, consumers with a strong relative preference for good
__________ would tend to oppose the movement to trade.
a. increase; Y
b. increase; X
10
c. decrease; Y
d. decrease; X
Answer: d
Blooms: Understand
24. If two countries have identical production-possibilities frontiers but different tastes, it is
possible for each country to gain from trade with the other country
a. in the Classical model but not in the neoclassical model.

b. in the neoclassical model but not in the Classical model.
c. in both the Classical model and the neoclassical model.
d. in neither the Classical model nor the neoclassical model.
Answer: b
Difficulty: 01 Easy
Blooms: Remember
25. In the neoclassical (or modern) theory, two countries with identical production-
possibilities frontiers (PPFs)
a. can gain from trade with each other if demand conditions (tastes) differ in the two
countries and the identical PPFs demonstrate increasing opportunity costs.
b. can gain from trade with each other if demand conditions (tastes) differ in the two
countries and the identical PPFs demonstrate constant opportunity costs.
c. can gain from trade with each other even if demand conditions (tastes) are identical in
the two countries as long as the identical PPFs demonstrate constant opportunity costs.
d. cannot gain from trade with each other under any circumstances.
Answer: a
Difficulty: 01 Easy
Blooms: Remember
26. As a country moves from autarky to trade, the relative price of the country’s export good
will __________ for home consumers, and the relative price of the country’s import good
__________ for home consumers.
11
a. fall; will rise
b. fall; also will fall
c. rise; also will rise
d. rise; will fall
Answer: d
Difficulty: 001 Easy
Blooms: Remember
27. In the following graph, at point W (and ignoring the negative signs), the marginal rate of
transformation (MRT) in production __________ the marginal rate of substitution (MRS)
in consumption.
a. is greater than
b. is equal to
c. is less than
d. has no determinate relationship to
Answer: c
Difficulty: 01 Easy
Topic: Autarky Equilibrium
Blooms: Remember
28. Given the diagram below, in which country A is producing at point P and consuming at
point C:
12
Country A is __________, and the ratio of the price of food relative to the price of books
[i.e., (Pfood/Pbooks)] reflected by price line P0 is __________ than the (Pfood/Pbooks) ratio that
existed when country A was in autarky.
a. exporting food and importing books; lower

b. exporting food and importing books; higher
c. exporting books and importing food; lower
d. exporting books and importing food; higher
Answer: b
Difficulty: 01 Easy
Blooms: Remember
29. Suppose that a country’s factors of production are “completely specific” to the industries
in which they are located (i.e., factors in the X industry would contribute nothing to Y
output if they were employed in the Y industry and factors in the Y industry would
contribute nothing to X output if they were employed in the X industry). In addition,
suppose that the country has an autarky PX/PY that is greater than the world PX/PY. In this
situation, if the country is opened to international trade, it will
a. export good X and will obtain “gains from specialization” (a “production gain”) but
not “gains from exchange” (a “consumption gain”).
b. export good X and will obtain “gains from exchange” (a “consumption gain”) but not
“gains from specialization” (a “production gain”).
c. export good Y and will obtain “gains from specialization” (a “production gain”) but
not “gains from exchange” (a “consumption gain”).
d. export good Y and will obtain “gains from exchange” (a “consumption gain”) but not
“gains from specialization” (a “production gain”).
13
Answer: d
Blooms: Understand
14

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International Economics 9th Edition Appleyard Test Bank

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International Economics 9th Edition

Appleyard Test Bank

3. “In a situation of increasing opportunity costs, trade can be beneficial to both

Is this statement correct or incorrect? Illustrate and explain.

9. (a) Suppose that two countries have identical increasing-opportunity-costs production-

10. (a) Using the neoclassical production-possibilities frontier/indifference curve approach,

a. different tastes and preferences

a. decrease; more of good X and less of good Y

14. Given the production-possibilities-frontier/community-indifference-curve diagram below,

a. “consumption gain” (or “gains from exchange”).

17. Given the following diagram showing a fixed-quantity production-possibilities frontier, a

a. both a “production gain” (“gains from specialization”) and a “consumption gain”

a. in the Classical model but not in the neoclassical model.

a. exporting food and importing books; lower

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