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					CHAPTER THREE
Sources of Comparative Advantage

True/False
1. The passage of NAFTA increased both U.S. textile exports to Mexico and textile imports to the
   U.S. from Mexico.
   Ans: True
   Dif: E

2. The Heckscher-Ohlin model extends the theory of competitive advantage by comparing the
   availability and use of production factors in two nations.
   Ans: True
   Dif: E

3. Country A has 700 units of capital and 700 units of labor. Country B has 1000 units of capital
   and 1000 units of labor. Country B is relatively more capital abundant than Country A.
   Ans: False
   Dif: M

4. The production of 100 gallons of milk in a country requires 10 units of labor and 5 units of
   capital. The production of 100 pounds of beef requires 2 units of labor and 5 units of capital.
   Beef is the more capital intensive product.
   Ans: True
   Dif: E

5. Country C has 500 units of capital and 600 units of labor. Country D has 1100 units of capital
   and 1400 units of labor. Country D is relatively more capital abundant than Country C.
   Ans: False
   Dif: M

6. A capital intensive good or service is one that requires more labor units to produce than capital
   units.
   Ans: False
   Dif: E

7. Under the Heckscher-Ohlin theorem a good may be capital intensive in one country and labor
   intensive in another country, resulting in a motivation for international trade.
   Ans: False
   Dif: M

8. Residents of a nation that is labor abundant will pay a higher price for capital intensive goods
   than for labor intensive goods under autarky than residents of another country that is labor
   intensive.
   Ans: True
   Dif: D
                                                    190
                                                         Sources of Comparative Advantage                   191


9. Under the Heckscher-Ohlin model, residents of a capital intensive country will have a
   comparative advantage over a labor intensive country because of the use of better technology in
   the capital intensive country.
   Ans: False
   Dif: M

10. A labor abundant nation will generally export capital intensive goods.
    Ans: False
    Dif: M

11. Generally speaking, advanced economies would be expected to be net exporters of capital
    intensive goods and services and net importers of labor intensive goods and services.
    Ans: True
    Dif: M

12. Leontief’s paradox refers to his findings that U.S. imports were relatively more capital intensive
    than U.S. exports.
    Ans: True
    Dif: E

13. Adrian Wood’s findings concerning exports of relatively skilled labor intensive goods versus
    unskilled labor intensive goods support the basic premise underlying the Heckscher-Ohlin model.
    Ans: True
    Dif: M

14. In factor proportion models uninterrupted trade leads to both equalization of commodity prices
    and factor prices across all nations.
    Ans: True
    Dif: M

15. In factor proportion models uninterrupted trade will lead to equalization of factor prices across all
    nations because otherwise capital and labor will migrate to areas that pay higher rents and wages
    respectively.
    Ans: False
    Dif: M

16. In factor proportion models the conclusion that uninterrupted trade will lead to equalization of
    factor prices across all nations depends critically upon the assumption that all countries have
    identical production technologies and markets are perfect.
    Ans: True
    Dif: E

17. Owners of a nation’s relatively scarce factor of production are likely to be supporters of free
    trade.
    Ans: False
    Dif: E
192         Chapter 3 — Test Bank


18. In advanced economies we would expect owners of capital to be supporters of free trade and
    workers will oppose free trade.
    Ans: True
    Dif: M

19. Outsourcing is a strategy where one organization hires another organization to complete one part
    of the production process.
    Ans: True
    Dif: E

20. Revenue minus the cost of the intermediate good produced or purchased is called the value added
    for that stage of production.
    Ans: True
    Dif: E

21. The propensity for comparative advantage to change suddenly from one country to another is
    called evolutionary comparative advantage.
    Ans: False
    Dif: E

22. In the H-O model growth in a given factor favors the good or service that uses that factor
    intensively in its production process.
    Ans: True
    Dif: E

23. In the H-O model a nation’s trade pattern is determined solely by relative factor endowments.
    Ans: False
    Dif: M

24. An increase in an endowment of the predominant factor in a country increases international trade.
    Ans: True
    Dif: M

25. According to the Stolper-Samuelson theorem, if a nation has an increase in the amount of a
    resource, it will produce more of the good that uses the resource relatively intensively in its
    production process and produce less of the other good.
    Ans: False
    Dif: M

26. The magnification principle indicates that the change in the price of a factor will be less than the
    change in the price of the good that uses the factor relatively intensively in its production process.
    Ans: False
    Dif: M
                                                        Sources of Comparative Advantage                 193



Multiple Choice
1. Gondor has 500 units of labor resources and 900 units of capital. Rohan has 300 units of labor
   endowments and 400 units of capital. Gondor is relatively __________ and Rohan is relatively
   __________.
   A) labor abundant; capital abundant
   B) capital abundant; labor abundant
   C) capital abundant; capital abundant
   D) labor abundant; labor abundant
   E) capital neutral; labor abundant
   Ans: B
   Dif: E

2. Gondor has 500 units of labor resources and 900 units of capital. Rohan has 300 units of labor
   endowments and 400 units of capital. Food requires 2 units of labor and 1 unit of capital to
   produce. Clothing requires 3 units of capital and 2 units of labor to produce. Under free trade
   Gondor will export __________ and Rohan will export __________.
   A) food; capital
   B) food; clothing
   C) clothing; food
   D) capital; labor
   E) labor; capital
   Ans: C
   Dif: M

3. Furniture requires 2 units of labor and 4 units of capital to produce. Electronics products require
   7 units of capital and 3 units of labor to produce. A __________ abundant country will have a
   comparative advantage in the production of __________.
   A) labor; electronics
   B) capital; furniture
   C) labor; furniture
   D) landmass; electronics
   E) capital; labor
   Ans: C
   Dif: M

4. Narnia has 300 units of labor resources and 500 units of capital. Harad has 700 units of labor
   endowments and 400 units of capital. The production of wheat requires 3 units of labor and 5
   units of capital. The production of equipment requires 4 units of labor and 9 units of capital.
   Under autarky which country has the higher wage rate and in which country is the price of
   equipment greater relative to wheat?
   A) Harad; Narnia
   B) Harad; Harad
   C) Narnia; Harad
   D) Narnia; Narnia
   Ans: C
   Dif: D
194         Chapter 3 — Test Bank


5. The term autarky means that
   A) no international trade takes place between two countries.
   B) two countries initially have the same factor proportions.
   C) one country has an absolute advantage in capital and labor over the other country.
   D) free trade will increase the welfare of both countries.
   E) free trade will not result in gains for either country.
   Ans: A
   Dif: E

6. Country E currently has a higher wage rate and a lower rental rate on capital than Country F.
   Neither country trades with the other. If the countries begin to trade with each other, it is likely
   that
   A) wages will fall in Country E and rise in Country F.
   B) rental rates on capital will rise in Country E and fall in Country F.
   C) both wages and rental rates will fall in Country E and rise in Country F.
   D) both wages and rental rates will rise in Country E and rise in Country F.
   E) Both A and B will occur.
   Ans: E
   Dif: M

7. Country E currently has a higher wage rate and a lower rental rate on capital than Country F.
   Neither country trades with the other. It is likely that __________ will oppose allowing free
   trade.
   A) workers in Country E and owners of capital in Country F
   B) workers in Country F and owners of capital in Country E
   C) workers in Country E and owners of capital in Country E
   D) workers in Country F and owners of capital in Country F
   E) workers in both countries
   Ans: A
   Dif: M

8. The basic factor proportions model assumes that labor and capital
   A) can move freely between industries but not between countries.
   B) can move freely between industries and between countries.
   C) cannot move freely between industries or countries.
   D) are endowed in equal proportions in both countries under consideration.
   E) are used in equal intensities in both goods produced.
   Ans: A
   Dif: E

9. The idea that a relatively labor abundant country will export labor intensive goods and a capital
   abundant country will export capital intensive goods is known as the
   A) Leontief paradox.
   B) Heckscher-Ohlin theorem.
   C) Rybczynski theorem.
   D) Stolper-Samuelson theorem.
   E) magnification principle.
   Ans: B
   Dif: E
                                                          Sources of Comparative Advantage               195


10. The findings, based on input-output analysis that U.S. imports were relatively more capital
    intensive than U.S. exports is referred to as the
    A) Leontief paradox.
    B) Heckscher-Ohlin theorem.
    C) Rybczynski theorem.
    D) Stolper-Samuelson theorem.
    E) magnification principle.
    Ans: A
    Dif: E

11. The idea that uninterrupted trade will result in equalization of goods prices and factor prices
    across countries is the
    A) Leontief paradox.
    B) Rybczynski theorem.
    C) Stolper-Samuelson theorem.
    D) magnification principle.
    E) none of the above
    Ans: E
    Dif: E

12. The conclusion that free trade raises the earnings of the nation’s relatively abundant factor is
    known as the
    A) Leontief paradox.
    B) Heckscher-Ohlin theorem.
    C) Rybczynski theorem.
    D) Stolper-Samuelson theorem.
    E) none of the above
    Ans: D
    Dif: E

13. The result that the change in the price of a factor is greater than the change in the price of the
    good that uses the factor relatively intensively in its production process is termed the
    A) Leontief paradox.
    B) Heckscher-Ohlin theorem.
    C) Rybczynski theorem.
    D) magnification principle.
    E) Adrian Wood result.
    Ans: D
    Dif: E

14. The idea that if a nation experiences growth in a given resource, the country will produce more of
    the good that uses the resource relatively intensively and less of the other good is known as the
    A) Leontief paradox.
    B) Heckscher-Ohlin theorem.
    C) Rybczynski theorem.
    D) Stolper-Samuelson theorem.
    E) magnification principle.
    Ans: C
    Dif: E
196         Chapter 3 — Test Bank


15. A relatively labor abundant nation will have a __________ than a relatively capital abundant
    nation.
    A) higher capital to labor endowment ratio
    B) lower capital to labor endowment ratio
    C) higher labor intensity ratio
    D) lower labor intensity ratio
    E) lower production possibilities curve
    Ans: B
    Dif: M

16. In two countries, food is the more labor intensive product and machinery is the more capital
    intensive. The country that has a greater abundance of capital will have a
    A) production possibilities curve skewed toward food.
    B) greater production possibilities curve.
    C) straight line production possibilities curve.
    D) production possibilities curve skewed toward capital.
    E) lower production possibilities curve.
    Ans: D
    Dif: E

17. The Heckscher-Ohlin theorem indicates that a nation will export goods and services that use
    relatively __________ the nation’s relatively __________ factor.
    A) more of; scarce
    B) less intensively; abundant
    C) less intensively; expensive
    D) intensively; scarce
    E) intensively; abundant
    Ans: E
    Dif: M

18. Under the Heckscher-Ohlin theorem we would expect the U.S. to export products such as
    A) clothing.
    B) toys.
    C) precision instruments.
    D) sporting goods.
    E) commodities.
    Ans: C
    Dif: M
                                                         Sources of Comparative Advantage               197


19. Leontief’s data set had problems because

            I.     He had to infer capital to labor ratios for other countries.
            II.    He had to exclude industries in which there was no U.S. production.
            III.   His data was only for a short time period.
            IV.    He could only examine data for about 50 industries.

    A) I only
    B) I and II only
    C) I, II and III only
    D) I, II and IV only
    E) I, II, III and IV
    Ans: C
    Dif: M

20. The basic factor proportions approach does not allow:

            I. different tastes for goods and services in different countries.
            II. different production technologies in different countries.
            III. differences in the quantity and quality of skilled and unskilled labor in different
                 countries.
            IV. mobility of factors of production between countries.

    A) I only
    B) I and II only
    C) I, II and III only
    D) II, III and IV only
    E) I, II, III and IV
    Ans: E
    Dif: M

21. Machinery is capital intensive and food production is labor intensive. The country of Longview
    is capital abundant and its neighbor, Shortsight, is labor intensive. As they begin to trade with
    each other for the first time
    A) Longview will reduce its production of machinery and Shortsight will increase its production
         of food.
    B) Longview will reduce its production of machinery and Shortsight will reduce its production
         of food.
    C) Longview will increase its production of machinery and Shortsight will increase its
         production of food.
    D) Longview will increase its production of machinery and Shortsight will reduce its production
         of food.
    E) Longview and Shortsight will keep their production levels of each good the same.
    Ans: C
    Dif: M
198           Chapter 3 — Test Bank


22. In two countries the production of autos is capital intensive and clothing production is labor
    intensive. The country of Uno is capital abundant and its neighbor, Dos, is labor intensive. As
    they begin to trade with each other for the first time under the Heckscher-Ohlin model the
    A) opportunity cost of autos will decline in Uno.
    B) opportunity cost of autos will decline in Dos.
    C) opportunity cost of food will rise in Uno.
    D) rental rate on capital will decline in Uno.
    E) wage rate will decrease in Dos.
    Ans: B
    Dif: D

23. Jeffrey Williamson’s work indicated that more extensive factor price convergence tends to occur

              I. during time periods when international trade and labor migration was allowed.
              II. in more open economies.
              III. in more labor abundant economies.

      A) I only
      B) II only
      C) I and II only
      D) II and III only
      E) I, II and III
      Ans: C
      Dif: M

24. According to the factor price equalization theorem convergence of __________ with __________
    causes factor prices to equalize.
    A) commodity prices; free trade
    B) commodity prices; autarky
    C) consumer tastes; free trade
    D) production technologies; autarky
    E) consumer tastes; factor mobility
    Ans: A
    Dif: M

25. Empirical evidence indicates that international trade is causing factor prices to __________ in
    both labor abundant and in capital abundant countries.
    A) increase
    B) decrease
    C) stay the same
    D) become more similar
    E) equalize
    Ans: D
    Dif: M
                                                         Sources of Comparative Advantage                 199


26. As two countries begin to trade with each other for the first time, the price of chemicals rises by
    5% and the price of bread falls by 3% in Country A. The production of chemicals is relatively
    more capital intensive than the production of bread. In Country A the rental rate on capital must
    __________ and the wage rate for workers must __________.
    A) increase by more than 5%; increase by more than 3%
    B) increase by less than 5%; increase by less than 3%
    C) increase by more than 5%; decrease by less than 3%
    D) increase by more than 5%; decrease by more than 3%
    E) decrease by more than 5%; decrease by more than 3%
    Ans: D
    Dif: M

27. Free trade __________ the earnings accruing to the nation’s relatively abundant factor and
    __________ the earnings accruing to the relatively scarce factor.
    A) increases; increases
    B) decreases; decreases
    C) increases; decreases
    D) decreases; increases
    E) maintains; increases
    Ans: C
    Dif: M

28. A product has five stages of production:

            I.     Design
            II.    Manufacture
            III.   Assembly
            IV.    Marketing
            V.     Delivery

    An advanced economy is likely to have comparative advantages in which stage(s) of production?
    A) I, II and III only
    B) I, III and V only
    C) I, IV and V only
    D) II, II and IV only
    E) I, II, III, IV and V
    Ans: C
    Dif: D

29. A production strategy in which one company hires another to manufacture a good under the
    hiring firm’s name using the hiring firm’s specifications is called
    A) a production internationalization decision.
    B) contract manufacturing.
    C) value added transfer pricing.
    D) kaleidoscopic advantage.
    E) factor proportions management.
    Ans: B
    Dif: E
200         Chapter 3 — Test Bank


30. The propensity for comparative advantage to shift between countries for a particular stage of
    production has been termed
    A) political hegemony.
    B) kaleidoscopic comparative advantage.
    C) outsourcing.
    D) evolutionary advantage.
    E) fast track trade management.
    Ans: B
    Dif: E

31. A country has two industries: the production of steel and wool. Steel is capital intensive, wool
    production is labor intensive. Technological progress occurs in both industries, but saves on
    capital. As a result, the country’s PPF will
    A) increase proportionately.
    B) decrease proportionately.
    C) increase and skew towards steel production.
    D) increase and skew towards wool production.
    E) not change.
    Ans: C
    Dif: D

31. A labor abundant nation experiences immigration. At a given opportunity cost, this will cause the
    country to
    A) increase exports of its labor intensive output and increase imports of its capital intensive
        output.
    B) increase exports of its capital intensive output and increase imports of its labor intensive
        output.
    C) decrease exports of its labor intensive output and decrease imports of its capital intensive
        output.
    D) decrease exports of its capital intensive output and decrease imports of its labor intensive
        output.
    E) increase imports of its labor intensive output but would leave exports unchanged.
    Ans: A
    Dif: D

32. A capital abundant nation experiences immigration. At a given opportunity cost, this will cause
    the country to
    A) increase exports of its labor intensive output and increase imports of its capital intensive
        output.
    B) increase exports of its capital intensive output and increase imports of its labor intensive
        output.
    C) decrease exports of its labor intensive output and decrease imports of its capital intensive
        output.
    D) decrease exports of its capital intensive output and decrease imports of its labor intensive
        output.
    E) decrease imports of its labor intensive output but would leave exports unchanged.
    Ans: D
    Dif: D
                                                        Sources of Comparative Advantage              201


33. The U.S. continues to receive large capital inflows and engage in international trade.
    Accordingly we might expect

            I.   the U.S. to continue to expand in high-technology industries and contract in labor
                 intensive industries.
            II. gains in real incomes to owners of capital and losses in real incomes to workers.
            III. workers to oppose free trade and capital owners to support free trade.
            IV. growing exports of capital intensive goods and services and imports of labor
                 intensive goods and services.

    A) I only
    B) I and II only
    C) II and IV only
    D) I, II and III only
    E) I, II, III and IV
    Ans: E
    Dif: M

				
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