CHAPTER 3SOURCES OF COMPARATIVE ADVANTAGE

MULTIPLE CHOICE
1. Which of the following suggests that a nation will export the commodity in the production of which a
great deal of its relatively abundant and cheap factor is used?
a
.
The Linder theory
b
.
The product life cycle theory
c
.
The MacDougall theory
d
.
The ec!scher"#hlin theory
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). $ccording to &taffan Linder* trade between two countries tends to be most pronounced when the
countries'
a
.
+ind their tastes and preferences to be ,uite harmonious
b
.
-xperience economies of large"scale production over large output levels
c
.
+ace dissimilar relative abundances of the factors of production
d
.
+ind their per capita income levels to be approximately the same
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.. Which of the following is a long"run theory* emphasi/ing changes in the trading position of a nation
over a number of years?
a
.
Theory of factor endowments
b
.
0omparative advantage theory
c
.
Theory of the product cycle
d
.
#verlapping demand theory
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1. The Leontief paradox ,uestioned the validity of the theory of'
a
.
0omparative advantage
b
.
+actor endowments
c #verlapping demands
.
d
.
$bsolute advantage
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3. Which of the following would least li!ely apply to the product life cycle theory?
a
.
0alculators and computers
b
.
0oal and crude oil
c
.
ome movie cameras
d
.
#ffice machinery
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4. 0lassical trade theory emphasi/ed which of the following as an underlying explanation of the basis for
trade?
a
.
(roductivities of labor inputs
b
.
Tastes and preferences among nations
c
.
0hanges in technologies over time
d
.
5uantities of economic resources
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6. 0oncerning the influence that transportation costs have on the location of industry* which of the
following industries has generally attempted to locate production facilities close to resource supplies?
a
.
$utos
b
.
&teel
c
.
&oft drin!s
d
.
7aluable electronics goods
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8. $ssume that 0ountry $* in the absence of trade* finds itself relatively abundant in labor and relatively
scarce in land. The factor endowment theory reasons that with free trade* the internal distribution of
national income in 0ountry $ will change in favor of'
a Labor
.
b
.
Land
c
.
2oth labor and land
d
.
%either labor nor land
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9. When considering the effects of transportation costs* the conclusions of our trade model must be
modified. This is because transportation costs result in'
a
.
Lower trade volume* higher import prices* smaller gains from trade
b
.
Lower trade volume* lower import prices* smaller gains from trade
c
.
igher trade volume* higher import prices* smaller gains from trade
d
.
igher trade volume* lower import prices* greater gains from trade
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1:. Most economists maintain that the ma;or factor underlying wage stagnation in the <nited &tates in the
199:s has been'
a
.
=mport competition
b
.
Technological change
c
.
>ising real value of the minimum wage
d
.
=ncreasing union membership
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11. $ssume the cost of transporting autos from ?apan to 0anada exceeds the pretrade price difference for
autos between ?apan and 0anada. Trade in autos is'
a
.
=mpossible
b
.
(ossible
c
.
ighly profitable
d
.
Moderately profitable
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1). -li ec!scher and 2ertil #hlin are associated with the theory of comparative advantage that stresses
differences in'
a
.
=ncome levels among countries
b
.
Tastes and preferences among countries
c
.
>esource endowments among countries
d
.
Labor productivities among countries
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1.. ong @ong is relatively abundant in labor* while 0anada is relatively abundant in capital. =n both
countries the production of shirts is relatively more labor intensive than the production of computers.
$ccording to the factor endowment theory* ong @ong will have aAnB'
a
.
$bsolute advantage in the production of shirts and computers
b
.
$bsolute advantage in the production of computers
c
.
0omparative advantage in the production of shirts
d
.
0omparative advantage in the production of computers
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11. =f ?apanese wor!ers receive lower wages in the production of autos than do $merican wor!ers'
a
.
?apan will have a comparative advantage in the production of autos
b
.
?apan will have an absolute advantage in the production of autos
c
.
(roduction costs will be lower in ?apan than in the <.&.
d
.
(roduction costs could be lower in the <.&. if $merican labor productivity is higher than
the ?apanese
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13. Which trade theory suggests that a newly produced good* once exported* could ultimately end up being
imported as the technology is transferred to lower" cost nations?
a
.
+actor endowment theory
b
.
(roduct life cycle theory
c
.
#verlapping demand theory
d
.
0omparative advantage theory
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14. $ firm is said to en;oy economies of scale over the range of output for which the long"run average cost
is'
a
.
=ncreasing
b
.
0onstant
c
.
Decreasing
d
.
%one of the above
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16. $ product will be internationally traded as long as the pretrade price differential between the trading
partners is'
a
.
Creater than the cost of transporting it between them
b
.
-,ual to the cost of transporting it between them
c
.
Less than the cost of transporting it between them
d
.
%one of the above
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18. Which of the following suggests that by widening the mar!etDs si/e* international trade can permit
longer production runs for manufacturers* which leads to increasing efficiency?
a
.
-conomies of scale
b
.
Diseconomies of scale
c
.
0omparative cost theory
d
.
$bsolute cost theory
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19. The Leontief paradox'
a
.
Was applied to the product life cycle theory
b
.
&uggested that the <.&. exports labor"intensive goods
c +ound that national income differences underlie world trade patterns
.
d
.
=mplied that diseconomies of scale occur at low output levels
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):. Which of the following best applies to the theory of overlapping demands?
a
.
Manufactured goods
b
.
&ervices
c
.
(rimary products
d
.
%one of the above
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)1. The ec!scher"#hlin theory explains comparative advantage as the result of differences in countriesD'
a
.
-conomies of large"scale production
b
.
>elative abundance of various resources
c
.
>elative costs of labor
d
.
>esearch and development
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)). 2oeing aircraft company was able to cover its production costs of the first E;umbo ;etE in the 196:s
because 2oeing could mar!et it to several foreign airlines in addition to domestic airlines. This
illustrates'
a
.
ow economies of scale ma!e possible a larger variety of products in international trade
b
.
$ transfer of wealth from domestic consumers to domestic producers as the result of
trade
c
.
ow a natural monopoly is forced to behave more competitively with international trade
d
.
ow a natural monopoly is forced to behave less competitively with international trade
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).. Which trade theory contends that a country that initially develops and exports a new product may
eventually become an importer of it and may no longer manufacture the product?
a
.
Theory of factor endowments
b
.
Theory of overlapping demands
c
.
-conomies of scale theory
d
.
(roduct life cycle theory
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)1. The theory of overlapping demands predicts that trade in manufactured goods is unimportant for
countries with very different'
a
.
Tastes and preferences
b
.
-xpectations of future interest rate levels
c
.
(er"capita income levels
d
.
Labor productivities
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)3. The trade model of the &wedish economists ec!scher and #hlin maintains that'
a
.
$bsolute advantage determines the distribution of the gains from trade
b
.
0omparative advantage determines the distribution of the gains from trade
c
.
The division of labor is limited by the si/e of the world mar!et
d
.
$ country exports goods for which its resource endowments are most suited
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)4. $ccording to the factor endowment model* countries heavily endowed with land will'
a
.
Devote excessive amounts of resources to agricultural production
b
.
Devote insufficient amounts of resources to agricultural production
c
.
-xport products that are land"intensive
d
.
=mport products that are land"intensive
$%&' 0 (T&' 1
)6. +or the <nited &tates* empirical studies indicate that over the past two decades the cost of international
transportation relative to the value of <.&. imports has'
a
.
=ncreased
b
.
Decreased
c
.
%ot changed
d
.
%one of the above
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)8. &hould international transportation costs decrease* the effect on international trade would include'
a
.
$n increase in the volume of trade
b
.
$ smaller gain from trade
c
.
$ decline in the income of home producers
d
.
$ decrease in the level of speciali/ation in production.
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)9. That the division of labor is limited by the si/e of the mar!et best applies to which explanation of
trade?
a
.
+actor endowment theory
b
.
(roduct life cycle theory
c
.
-conomies of scale theory
d
.
#verlapping demand theory
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.:. $ larger variety of products results from international trade especially if'
a
.
=nternational trade affords producers monopoly power
b
.
%ational governments levy import tariffs and ,uotas
c
.
(roducing goods entails increasing costs
d
.
-conomies of scale exist for producers
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.1. With economies of scale and decreasing unit costs* a country has the incentive to'
a
.
&peciali/e completely in the product of its comparative advantage
b
.
&peciali/e partially in the product of its comparative advantage
c
.
&peciali/e completely in the product of its comparative disadvantage
d
.
&peciali/e partially in the product of its comparative disadvantage
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.). (roponents of FFFF maintain that government should enact policies that encourage the development of
emerging* EsunriseE industries.
a
.
(roduct life cycle policy
b
.
&tatic comparative advantage policy
c
.
=ntraindustry trade policy
d
.
=ndustrial policy
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... Legislation re,uiring domestic manufacturers to install pollution abatement e,uipment tends to
promote'
a
.
igher production costs and an increase in output
b
.
igher production costs and a decrease in output
c
.
Lower production costs and an increase in output
d
.
Lower production costs and a decrease in output
$%&' 2 (T&' 1
.1. &tringent governmental regulations Ae.g.* air ,uality standardsB imposed on domestic steel
manufacturers tend to'
a
.
-nhance their competitiveness in the international mar!et
b
.
Detract from their competitiveness in the international mar!et
c
.
=ncrease the profitability and productivity of domestic manufacturers
d
.
>educe the mar!et share of foreign firms selling steel in the domestic mar!et
$%&' 2 (T&' 1
.3. $mong the determinants underlying a countryDs international competitiveness in business services
Ae.g.* constructionB are'
a
.
The potential scale economies afforded by a mar!etDs si/e
b
.
$bundance of e,uipment including data processing facilities and computers
c
.
&!ills and capabilities of employees and their wage rates
d
.
$ll of the above
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.4. The simultaneous import and export of computers by Cermany is an example of'
a
.
=ntraindustry trade
b
.
=nterindustry trade
c
.
(erfect competition
d
.
=mperfect competition
$%&' $ (T&' 1
.6. LinderDs theory of overlapping demand provides an explanation of'
a
.
(roduct life cycle theory
b
.
+actor endowment model
c
.
-conomies of large"scale production
d
.
=ntraindustry trade
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.8. =ntraindustry trade can be explained in part by'
a
.
$dam &mithDs principle of absolute advantage
b
.
(erfect competition in product mar!ets
c
.
Diseconomies of large scale production
d
.
Transportation costs between and within nations
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.9. The Leontief paradox provided'
a
.
&upport for the principle of absolute advantage
b
.
&upport for the factor endowment model
c
.
-vidence against the factor endowment model
d
.
-vidence against the principle of absolute advantage
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1:. Which trade theory suggests that comparative advantage tends to shift from one nation to another as a
product matures?
a
.
=nterindustry trade theory
b
.
=ntraindustry trade theory
c
.
(roduct life cycle theory
d
.
#verlapping demand theory
$%&' 0 (T&' 1
11. Which trade theory is tantamount to a short"run version of the factor price e,uali/ation theory?
a
.
&pecific factors theory
b
.
(roduct life cycle theory
c
.
-conomies of scale theory
d
.
#verlapping demand theory
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1). $ccording to the specific factors trade theory'
a
.
#wners of factors specific to export industries suffer from trade* while owners of factors
specific to import"competing industries gain
b
.
#wners of factors specific to export industries gain from trade* while owners of factors
specific to import"competing industries suffer
c
.
2oth owners of factors specific to export industries and owners of factors specific to
import"competing industries gain from trade
d
.
2oth owners of factors specific to export industries and owners of factors specific to
import"competing industries suffer from trade
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1.. Which nation has sometimes been characteri/ed as being a Epollution havenE due to its lenient
environmental standards that encourage the production of pollution"intensive goods?
a
.
?apan
b
.
0anada
c
.
Cermany
d
.
Mexico
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11. 2oeing =nc. has critici/ed The $irbus 0ompanyDs competitiveness on the grounds that $irbus benefits
from'
a
.
=mport tariffs protecting $irbus in the -uropean mar!et
b
.
=mport ,uotas protecting $irbus in the -uropean mar!et
c
.
Lenient environmental standards of -uropean governments
d
.
(roduction subsidies supplied by -uropean governments
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13. To ;ustify the subsidies it has received from -uropean governments* The $irbus 0ompany has used all
of the following arguments except'
a
.
=ts subsidies have prevented <.&. aircraft firms from holding a world"wide monopoly
b
.
<.&. aircraft firms have benefited from military"sponsored programs of the <.&.
government
c
.
$irbusD subsidies were totally repaid as the firm reali/ed profits on its aircraft sales
d
.
Without subsidies to $irbus* -urope would be dependent on the <nited &tates as a
supplier of aircraft
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14. -xpanding trade or technological improvements
a
.
=ncreases the demand for s!illed wor!ers in the <.&.
b
.
Decreases the demand for uns!illed wor!ers in the <.&.
c =ncreases the demand for uns!illed wor!ers in the <.&.
.
d
.
2oth a and b.
$%&' D (T&' 1
16. -conomists agree that wages of uns!illed wor!ers are being held down by
a
.
=nternational trade
b
.
Technology improvements
c
.
Lac! of education
d
.
$ combination of a* b* and c
$%&' D (T&' 1
18. The factor endowment theory states that comparative advantage is explained
a
.
-xclusively by differences in relative supply conditions
b
.
-xclusively by differences in relative national demand conditions
c
.
2oth supply and demand conditions
d
.
%one of the above
$%&' $ (T&' 1
19. The factor endowment theory assumes
a
.
&ame tastes and preferences
b
.
+actor inputs of uniform ,uality
c
.
&ame technology
d
.
$ll of the above
$%&' D (T&' 1
3:. =n explaining international trade* the product life cycle theory focuses on
a
.
Tastes and preferences
b
.
The role of technological innovation
c (er"capita income levels of nations
.
d
.
2oth b and c
$%&' 2 (T&' 1
TRUE/FALSE
1. $ccording to >icardian theory* comparative advantage depends on relative differences in labor
productivity.
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). The ec!scher"#hlin theory asserts that relative differences in labor productivity underlie comparative
advantage.
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.. The factor"endowment theory highlights the relative abundance of a nationDs resources as the !ey
factor underlying comparative advantage.
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1. $ccording to the factor"endowment theory* a nation will export that good for which a large amount of
the relatively scarce resource is used.
$%&' + (T&' 1
3. $ccording to the factor"endowment theory* a nation will import that good for which a large amount of
the relatively abundant resource is used.
$%&' + (T&' 1
4. The ec!scher"#hlin theory suggests that land"abundant nations will export land"intensive goods
while labor"abundant nations will export labor"intensive goods.
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6. The ec!scher"#hlin theory contends that over a period of years a country that initially is an exporter
of a product will become an importer of that product.
$%&' + (T&' 1
8. The ec!scher"#hlin theory emphasi/es the role that demand plays in the creation of comparative
advantage.
$%&' + (T&' 1
9. The factor"endowment theory asserts that with speciali/ation and trade there tends to occur an
e,uali/ation in the relative resource prices of trading partners.
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1:. $ccording to the factor"endowment theory* international speciali/ation and trade cause a nationDs
cheap resource to become cheaper and a nationDs expensive resource to become more expensive.
$%&' + (T&' 1
11. +ears about the downward pressure that cheap foreign wor!ers place on <.&. wages have led <.&.
labor unions to lobby for import restrictions such as tariffs and ,uotas.
$%&' T (T&' 1
1). $ccording to the factor"price"e,uali/ation theory* international trade results in the relative differences
in resource prices between nations being eliminated.
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1.. -mpirical testing by Wassily Leontief gave support to the ec!scher"#hlin theory of trade.
$%&' + (T&' 1
11. The Leontief (aradox was the first ma;or challenge to the product"life"cycle theory of trade.
$%&' + (T&' 1
13. The Leontief (aradox suggested that* in contrast to the predictions of the factor"endowment theory*
<.&. exports were less capital"intensive than <.&. import"competing goods.
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14. The specific"factors theory analy/es the income distribution effects of trade in the short run when
resources are immobile among industries.
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16. #wners of resources specific to export industries tend to lose from international trade* while owners of
factors specific to import"competing industries tend to gain.
$%&' + (T&' 1
18. The factor"price"e,uali/ation theory is a short"run version of the specific"factors theory.
$%&' + (T&' 1
19. With economies of scale* speciali/ation in a few products allows a manufacturer to benefit from longer
production runs which lead to decreasing average cost.
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):. With decreasing costs* a country has an incentive to partially speciali/e in the product of its
comparative advantage.
$%&' + (T&' 1
)1. 2y widening the si/e of the domestic mar!et* international trade permits companies to ta!e advantage
of longer production runs and increasing efficiencies such as mass production.
$%&' T (T&' 1
)). The theory of overlapping demands applies best to trade in manufactured goods.
$%&' T (T&' 1
).. Decreasing cost conditions lead to complete speciali/ation in the production of the commodity of
comparative advantage.
$%&' T (T&' 1
)1. $ccording to &taffan Linder* the factor endowment theory is useful in explaining trade patterns in
manufactured goods* but not primary products.
$%&' + (T&' 1
)3. The theory of overlapping demands asserts that trade in manufactured goods is stronger the less similar
the demand structures of two countries.
$%&' + (T&' 1
)4. The theory of overlapping demands contends that international trade in manufactured products is
strongest among nations with similar income levels.
$%&' T (T&' 1
)6. $ccording to the theory of overlapping demands* trade in manufactured goods would be greater among
two wealthy countries than among a wealthy country and a poor country.
$%&' T (T&' 1
)8. >ecent studies of <.&. resource endowments indicate that the <nited &tates is most abundant in
uns!illed labor* followed by semi"s!illed labor and s!illed labor.
$%&' + (T&' 1
)9. =ntraindustry trade would occur if computers manufactured in the <nited &tates by =2M are exported
to ?apan while the <nited &tates imports computers manufactured by itachi of ?apan.
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.:. 2ecause seasons in the &outhern emisphere are opposite those in the %orthern emisphere* one
would expect intraindustry trade to occur in agricultural products.
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.1. =ntraindustry trade can be explained by product differentiation* economies of scale* seasons of the year*
and transportation costs.
$%&' T (T&' 1
.). $ccording to the theory of intraindustry trade* many manufactured goods undergo a trade cycle in
which the home country initially is an exporter and eventually becomes an importer of a product.
$%&' + (T&' 1
... The product"life"cycle theory applies best to trade in primary products in the short run.
$%&' + (T&' 1
.1. $ccording to the product"life"cycle theory* the first stage of a productDs trade cycle is when it is
introduced to the home mar!et.
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.3. $ccording to the product life cycle theory* the last stage of a productDs trade cycle is when it becomes
an import"competing good.
$%&' T (T&' 1
.4. >icardoDs theory of comparative advantage is a static theory that does not consider changes in
international competitiveness over the long run.
$%&' T (T&' 1
.6. Dynamic comparative advantage refers to the creation of comparative advantage through the
mobili/ation of s!illed labor* technology* and capital.
$%&' T (T&' 1
.8. =ndustrial policy see!s to direct resources to declining industries in which productivity is low* lin!ages
to the rest of the economy are wea!* and future competitiveness is remote.
$%&' + (T&' 1
.9. -uropeDs ;umbo";et manufacturer* $irbus* has ;ustified receiving governmental subsidies on the
grounds that the subsidies prevent the <nited &tates from becoming a monopoly in the ;umbo";et
mar!et.
$%&' T (T&' 1
1:. The imposition of pollution"control regulations on domestic steel manufacturers leads to decreases in
production costs and an improvement in the steel manufacturersD competitiveness.
$%&' + (T&' 1
11. -mpirical studies conclude that <.&. environmental policies are a more important determinant of trade
performance than capital* raw materials* labor s!ills* and wages.
$%&' + (T&' 1
1). Most developing countries have pollution"control laws and enforcement policies that are more
stringent than those of the ma;or industrial countries.
$%&' + (T&' 1
1.. $lthough the theory of comparative advantage explains trade in manufactured goods* it has no
explanatory value for trade in business services.
$%&' + (T&' 1
11. When transportation costs are added to our trade model* the low"cost exporting country produces less*
consumes more* and exports less than that which occurs in the absence of transportation costs.
$%&' T (T&' 1
13. When transportation costs are added to our trade model* the degree of speciali/ation in production
between two countries increases as do the gains from trade.
$%&' + (T&' 1
14. =n the absence of transportation costs* free trade results in the e,uali/ation of the prices of traded
goods* as well as resource prices* in the trading nations.
$%&' T (T&' 1
16. =n industries where the final product is much less weighty or bul!y than the materials from which it is
made* firms tend to locate production near resource supplies.
$%&' T (T&' 1
18. =ndustrial processes that add weight or bul! to a commodity are li!ely to be located near the resource
mar!et to minimi/e transportation costs.
$%&' + (T&' 1
19. $ product will be traded only if the cost of transporting it between nations is less than the pretrade
difference between their relative product prices.
$%&' T (T&' 1
3:. Cenerally spea!ing* transportation costs are more important than production costs as a source of
comparative advantage.
$%&' + (T&' 1
31. The product"life"cycle model contends that when a new product is introduced to the home mar!et* it
generally re,uires low"s!illed labor to produce it.
$%&' + (T&' 1
3). $ccording to the product life cycle model* comparative advantage shifts from cheap"labor countries to
high"technology countries after a manufactured good becomes standardi/ed.
$%&' + (T&' 1
SHORT ANSWER
1. Does factor price e,uali/ation occur in the real world?
$%&'
=n the real world* differences in factor prices tend to exist. Different technologies* imperfect mar!ets*
transportation costs* and trade barriers may prevent factor prices from e,uali/ing among nations.
(T&' 1
). What is the focus of the product life cycle theory* and where is it applicable?
$%&'
The product life cycle theory focuses on the role of technological innovation as a !ey determinant of
trade patterns. =t applies to manufactured goods.
(T&' 1
ESSAY
1. -xplain how immigration and trade may worsen wage ine,uality* and how college education may
mitigate against that.
$%&'
Trade tends to increase the demand for s!illed wor!ers relative to uns!illed wor!ers* thus worsening
wage ine,uality. =mmigration of uns!illed wor!ers decreases the supply of s!illed wor!ers relative to
uns!illed wor!ers* thus worsening wage ine,uality. $lternatively* college education increases the
supply of s!illed wor!ers relative to uns!illed wor!ers* thus reducing wage ine,uality.
(T&' 1
). ow does &taffan Linder explain world trade patterns?
$%&'
Linder offers two explanations of world trade patterns. Trade in primary products conforms well to the
factor"endowment theory. owever* trade in manufactured goods is best explained by overlapping
demand structures among nations. +or manufactured goods* the basis for trade is stronger when the
structure of demand in two nations is more similar* due to similar per"capita incomes.
(T&' 1