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This Document Contains Chapters 19 to 20 Chapter 19 Income Distribution, Poverty and Government Policy MULTIPLE CHOICE 1. In a market system, incomes are distributed according to the: A. principle of equality. B. directions of a central authority. C. needs of the people. D. ownership of resources. E. objectives of a planning commission. Answer: D 2. The diagram that represents how income is distributed among members of a population is known as a(n): A. Indifference curve. B. Laffer curve. C. Edgeworth box. D. Lorenz curve. E. Phillips curve Answer: D 3. Which of the following results from the market system of resource allocation? A. Equitable distribution of resources B. High opportunity cost of production C. Excess supply of goods and services resulting in decreased profits D. Unequal distribution of income and wealth E. Allocation of the goods and services to them who need them the most Answer: D 4. The horizontal and vertical axes of the Lorenz curve respectively measure: A. total income and total expenditure as cumulative percentages. B. total income and total population as cumulative percentages. C. total population and total expenditure as cumulative percentages. D. total expenditure and total income as cumulative percentages. E. total population and total income as cumulative percentages. Answer: E 5. The 45-degree line splitting the distance between the axes in a Lorenz Curve is the: A. line of equal share of expenditure. B. line of equivalent income. C. line of income equality. D. line of average income. E. line of absolute inequality. Answer: C 6. If everyone had the same income, then the Lorenz curve would: A. be the line of income equality. B. bow down below the line of income equality. C. be a parallel line lying below the line of income equality. D. bow up above the line of income equality. E. be a curve that intersects the line of income equality at its mid-point. Answer: A 7. Assume that any given percentage of the population earns an equal percentage of real GDP. This percentage of population will be represented by: A. a point below the line of income equality. B. a line lying below the line of income equality. C. a point on the line of income equality. D. a line lying above the line of income equality. E. a point above the line of income equality. Answer: C 8. If 50 percent of the population receives 20 percent of the total income it can be represented by: A. a point below the line of equality. B. a line below the line of equality. C. a point on the line of equality. D. a line intersecting the line of equality from below. E. a point above the line of equality. Answer: A 9. Income inequality is indicated by a Lorenz curve that: A. bows up, away from the line of income equality. B. bows down, away from the line of income equality. C. lies parallel to the line of income equality. D. coincides with the line of income equality. E. approaches the vertical axis. Answer: B 10. Gini co-efficient is the: A. area between the Lorenz curve and the vertical axis divided by the area under the Lorenz curve. B. area between the Lorenz curve and the horizontal axis divided by the area above the Lorenz curve. C. area between the Lorenz curve and the line of perfect equality divided by the area under the line of income equality. D. area between the Lorenz curve and the line of perfect equality divided by the area above the line of perfect equality. E. area between the line of perfect equality and the horizontal axis divided by the area between the Lorenz curve and the horizontal axis. Answer: C 11. A Gini of 0 implies: A. every family has equal amount of income. B. top 10% of the families appropriate almost 100% of the total income. C. bottom 90% of the families have only 10% of the total income. D. bottom 20% of the families have 80% of the total income. E. only 1 family appropriates the entire national income. Answer: A 12. The greater the value of the Gini co-efficient: A. the greater will be the GDP of the economy. B. the greater will be the income inequality. C. the greater will be the revenue of the government from direct taxes. D. the greater will be the equality in the distribution of income and wealth. E. the lesser will be the expenditure on the part of the government. Answer: B 13. In Country X, the highest 10 percent of families account for 70 percent of income. In Country Y, the highest 10 percent of families account for 20 percent of income. In this example: A. Country Y would be located on the line of perfect inequality. B. income is more equally distributed in Country Y. C. income is more equally distributed in Country X. D. Country X would be located on the line of perfect equality. E. the degree of income inequality is equal in both the countries. Answer: B 14. If the Gini co-efficient for any economy is 0. 85, which of the following statements is true? A. The national income of this economy is more or less equally distributed. B. The Lorenz curve for the economy will bow above the line of perfect equality. C. The Lorenz curve for the economy will coincide with the line of perfect equality. D. The Lorenz curve for the economy will bow down below the line of perfect equality. E. The Lorenz curve for the economy will be a rectangle. Answer: D 15. Empirical observations validate that the Gini co-efficient for the U. S. economy was between 0. 35 and 0. 37 until the 1990s, after which it has increased and reached 0. 469. Which of the following can be inferred from this? A. The distribution of national income in the U. S. has become slightly more equal since the 1990s. B. The government spending on poverty alleviation has increased since 1990. C. More jobs have been created in the U. S. since 1990. D. The distribution of national income in the U. S. has become slightly more unequal since the 1990s. E. The government has replaced the existing regressive tax structure with a progressive tax structure. Answer: D 16. If the Gini coefficient for the United States is 0. 47 and that for India is 0. 36, which of the following statements is true? A. The U. S. being an industrialized nation has a lower income inequality than India. B. The Lorenz curve for the U. S. lies above the Lorenz curve for India. C. India in spite of being a developing nation has a lesser income inequality than the U. S. D. The Lorenz curve for India would coincide with the line of perfect equality. E. The distribution of income in both the economies are equal. Answer: C NARRBEGIN: Table: 19. 1 The table below shows the distribution of income in the U. S. in the year 1978. 17. Refer to Table 19. 1. What percentage of income is received by the bottom 20% of the households? A. 10. 3% B. 43. 9% C. 24. 7% D. 4. 3% E. 16. 9% Answer: D 18. According to Table 19. 1, what percentage of income is received by the top 40% of the population? A. 41. 6% B. 51. 9% C. 60. 8% D. 56. 2% E. 68. 6% Answer: E 19. If a Lorenz curve is drawn using the data in Table 19. 1, it will: A. coincide with the line of perfect equality. B. be a L-shaped curve. C. bow above the line of perfect equality. D. bow down below the line of perfect equality. E. be a rectangular shaped curve. Answer: D 20. Refer to Table 19. 1. What percentage of households earn 31. 5% of the income? A. Bottom 20% B. Top 20% C. Bottom 60% D. Top 40% E. Top 10% Answer: C NARRBEGIN: Figure 19. 1 The figure below shows two Lorenz curves, Y and Z. Figure 19. 1 NARREND 21. According to Figure 19. 1, which of the following is true? A. Line OXB is the line of perfect income inequality. B. Curve OYB represents a less equal distribution of income than curve OZB. C. Line AB represents a society in which wealth is shared equally among individuals. D. Line OXB is the line of perfect income equality. E. Line AB represents a society in which 50 percent of the population receives all the income. Answer: D 22. In Figure 19. 1, which of the following could occur in the short run given the introduction of a regressive income tax? A. The Lorenz curve OZB would shift to OYB. B. The Lorenz curve OYB would coincide with the line OXB. C. The Lorenz curve OZB would coincide with the line OXB. D. The Lorenz curve OYB would coincide with the horizontal axis. E. The Lorenz curve would shift from OYB to OZB. Answer: E NARRBEGIN: Figure 19. 2 The figure given below shows the Lorenz curves of two countries (Country A and Country B). Figure 19. 2 Total income (cumulative percentage) Total population (cumuative percentage) NARREND 23. Refer to Figure 19. 2. The richest 20 percent of the population in Country A receive: A. 10 percent of the national income. B. 20 percent of the national income. C. 30 percent of the national income. D. 40 percent of the national income. E. 50 percent of the national income. Answer: D 24. In Figure 19. 2, the poorest 60 percent of the population in Country B receive: A. 30 percent of the national income. B. 40 percent of the national income. C. 60 percent of the national income. D. 20 percent of the national income. E. 10 percent of the national income. Answer: D 25. In Figure 19. 2, the richest 20 percent of the population in Country B receive: A. 20 percent of the national income. B. 60 percent of the national income. C. 50 percent of the national income. D. 40 percent of the national income. E. 80 percent of the national income. Answer: B 26. Refer to Figure 19. 2 and identify the correct statement. A. The top 10 percent of the population in Country B receive 20 percent of the national income. B. The top 10 percent of the population in Country A receive 70 percent of the national income. C. Country A has a greater degree of income inequality than Country B. D. The bottom 90 percent of the population in Country B receive 90 percent of the national income. E. The poorest 20 percent of the population in Country A receive 10 percent of the national income. Answer: E 27. A major problem with household data is that: A. the income of the households vary greatly. B. the households usually vary in their consumption patterns. C. the households usually comprise of only one individual. D. collecting data from the households is highly inconvenient. E. the number of persons per household varies greatly. Answer: E 28. Why does the census data overstate inequality? A. They overestimate the non cash transfers received by the people from the government. B. They take into account the after-tax incomes. C. They take into account the gifts and transfer receipts from friends and relatives staying abroad. D. They do not consider the in-kind transfers received by the people from the government. E. They overestimate the medical benefits received by the people from the government. Answer: D 29. Which of the following is a cash transfer received from the government? A. Medicaid B. Earned Income Tax Credit C. Food stamps D. Housing assistance E. Free education Answer: B 30. The allocations of goods and services from one group in a society to another are called: A. mutually voluntary exchanges. B. in-kind transfers. C. grants. D. economic rents. E. transfer earnings. Answer: B 31. Which of the following is an example of in-kind transfer? A. Social security benefits B. Food stamps C. Disability pensions D. Unemployment compensations E. Earned income tax credit Answer: B 32. According to the Bureau of Labor Statistics, the distribution of consumption expenditures had a HiLo ratio of 3. 8 in 2008 in contrast to the income ratio of 14. 1. What can be inferred from the above statement? A. The distribution of consumption expenditures across the households are unequal but the incomes are relatively equal. B. Low income households have substantially less consumption expenditures. C. The distribution of consumption expenditures is quite a bit more equal than is the distribution of income. D. Poorest lot of the households consume much less than their before-tax incomes. E. The rich people earn more and consequently consume much more than their poorer counterparts. Answer: C 33. The extent to which people move from one income quintile to another over time is called _____. A. migrancy B. moveability C. mobility D. exchangeability E. transferability Answer: C 34. Which of the following is an absolute measure of poverty? A. Gini co-efficient B. Per capita income C. HiLo ratio D. Hoover index E. Theil index Answer: B 35. Which of the following refers to per capita income? A. National income divided by number of households B. National income divided by number of people C. Number of households divided by national income D. Number of people divided by national income E. Number of people divided by domestic income Answer: B 36. The measures of absolute poverty: A. are inversely related to the degree of income equality in a country. B. are directly related to the degree of income equality in a country. C. depend on the prosperity of the poorest 50 percent of population. D. determine the degree of income inequality. E. are completely independent of the degree of income inequality. Answer: E 37. The official poverty-line income is adjusted annually for _____. A. income taxes B. unemployment compensation benefits C. house rents D. inflation E. increases in health-care costs Answer: D 38. Following are the controversies over how poverty should be measured, except: A. government transfers and other programs are not properly taken into account in the measures of poverty. B. the poverty measures do not distinguish among the needs of different individuals. C. the concept of poverty line does not draw any distinction between income and purchasing power. D. the concept of poverty line does not take into account the expenditure on food by each family. E. the income generated in the underground economy are not taken into account. Answer: D 39. If those who are poor at any one time are poor only temporarily, then their plight is only temporary. This statement is based on which of the following assumptions? A. Many spells of poverty are relatively short-lived. B. Government spending in the economy is inadequate. C. All phases of the business cycle are temporary. D. Education infrastructure in the economy is poor. E. Once people fall below the poverty line, it is almost impossible for them to rise above it. Answer: A 40. _____ are the primary population group with poverty-level incomes in the USA. A. Single-income households B. Households headed by males C. College graduates D. People who do not have high school education E. Retired individuals Answer: D 41. Which of the following statements in the context of poverty in the U. S. is true? A. Families headed by males are likely to be poor. B. Caucasian Americans carry a much heavier burden of poverty compared to the native Americans. C. Education and technical skills do not affect employment in the United States of America. D. Females tend to have a greater literacy rate than males in the United States of America. E. Minorities, young and disabled have a higher likelihood to fall into poverty Answer: E 42. In a progressive tax structure: A. both the tax rate and absolute tax amount increases with increase in income. B. the tax rate remains constant, but the absolute tax amount increases with increase in income. C. both the tax rate and absolute tax amount declines with increase in income. D. the tax rate falls, but the absolute tax amount increases with increase in income. E. the tax rate increases, but the absolute tax amount decreases with increase in income. Answer: A 43. Which of the following tax structures helps in reducing income inequality? A. Proportional tax structure B. Regressive tax structure C. Indirect tax structure D. Progressive tax structure E. A combination of proportional and regressive tax structure. Answer: D 44. If an individual who earns $20,000 pays $2,000 in taxes and another individual who earns $100,000 pays $10,000 in taxes, then these individuals are being taxed under a _______ tax system. A. toll B. regressive C. progressive D. proportional E. negative income Answer: D NARRBEGIN: Table 19. 2 The table given below shows the absolute tax amounts under five different tax policies for respective income levels. 45. Refer to Table 19. 2. Which of the following tax policies is regressive by nature? A. Alpha B. Beta C. Gamma D. Delta E. Eta Answer: C 46. Refer to Table 19. 2. Which of the tax policies is an example of a proportional tax? A. Alpha B. Gamma C. Eta D. Beta E. Delta Answer: A 47. Refer to Table 19. 2. The example of a progressive tax is the: A. tax policy Eta. B. tax policy Delta. C. tax policy Alpha. D. tax policy Beta. E. tax policy Gamma. Answer: D 48. Refer to Table 19. 2. The tax structure which leads to maximum income inequality is: A. Beta. B. Alpha. C. Eta. D. Gamma. E. Delta. Answer: C 49. Unemployment insurance provided by the U. S. government is usually funded by: A. the excise duties imposed on the import of foreign goods. B. the national tax on payrolls levied on firms. C. external borrowing by the U. S. government. D. printing new money. E. selling off government bonds. Answer: B 50. The largest in-kind transfer received by the poor households in the U. S. is: A. Old-Age, Survivors, and Disability Insurance. B. the Head Start special education program for poor children. C. Medicaid, which provides long-term medical care for the poor. D. the food stamp program, which distributes food coupons to poor households. E. Temporary Assistance for Needy Families Answer: C 51. Supplementary Security Incomes are provided to those by the U. S. government who: A. regularly pay a social security tax. B. are below 65 years of age. C. lack the required education to be absorbed in the job market. D. earn less than $4,500 per year. E. are temporarily unemployed. Answer: D 52. Transfer programs are so named because they transfer: A. the burden of poverty alleviation from the church to the state. B. the poverty from the country side to the city. C. the responsibility for maintaining minimum standards of living from the federal government to state governments. D. income from the relatively high-income people to relatively low-income people. E. the incidence of poverty from predominantly ethnic groups to the majority white population. Answer: D 53. The main transfer programs of the U. S. government include each of the following, except: A. social insurance. B. cash welfare or public assistance. C. in-kind transfers. D. veterans’ benefits. E. employment programs. Answer: D 54. Taxes are one method of funding the poverty alleviation programs by the government. Which of the following is an important impact of taxes? A. Taxes increase workers’ incentives to work for longer hours. B. Taxes raise the disposable income of the workers. C. Imposition of taxes make the government popular among the people. D. Taxes reduce the opportunity cost of leisure. E. Taxes reduce the demand for labor. Answer: D 55. An imposition of tax by the government for funding welfare programs raises the cost of labor to firms as: A. the demand for labor increases. B. the demand for labor decreases. C. the supply of labor decreases. D. the supply of labor increases. E. the opportunity cost of leisure increases. Answer: C 56. Which of the following tax structures creates a disincentive to earn more? A. Proportional tax structure B. Regressive tax structure C. Digressive tax structure D. Progressive tax structure E. A combination of proportional and regressive tax structure Answer: D 57. Which of the following transfer programs in the U. S. is funded by a national tax but administered by state governments? A. Social security B. Veterans’ Administration Benefit program C. Unemployment insurance D. Food stamps E. National Guard activities Answer: C 58. A proportional tax tends to: A. reduce income inequality. B. increase overall income inequality. C. leave the income distribution essentially unchanged. D. increase income inequality among the rich. E. generate additional tax revenues for the government. Answer: C 59. Those who argue that welfare programs are a drag on the economy are of the view that welfare programs funded by taxes: A. reduce the opportunity cost of labor. B. raise the incidence of poverty and income inequality. C. raise the incentive to work. D. reduce the tax-liability of the tax-payers. E. reduce the demand for labor. Answer: B 60. A negative income tax implies that: A. higher the income of an individual, higher will be the tax. B. higher the income of an individual, lower will be the tax. C. lower the income of an individual, lower will be the transfer income. D. lower the income of an individual, higher will be the transfer income. E. the transfer income received by all will be equal irrespective of the income level. Answer: D 61. At the break-even income level: A. the tax levied on an individual is equal to zero. B. the transfer income received by an individual is equal to zero. C. the tax taken from an individual is greater than the transfer income received by him. D. the tax taken from an individual is equal to the transfer income received by him. E. the tax taken from an individual is less than the transfer income received by him. Answer: D 62. The guaranteed transfer income of Angela’s family, which consists of her parents and her sister, is $15,000. This implies, if the family earns nothing it will receive a transfer of $15,000. If a negative tax rate of 50 percent is levied, the family’s break-even income is: A. $20,000. B. $22,500. C. $7,500. D. $15,000. E. $30,000. Answer: E 63. Identify the correct statement. A. The break-even income is directly related to the negative income tax. B. The break-even income is inversely related to the income floor. C. The break-even income is inversely related to the negative income tax. D. The break-even income is less than the guaranteed income. E. The break-even income is always equal to the guaranteed income. Answer: C 64. If the income floor is set at $6,000 and the negative income tax rate is 20 percent, a family which earns nothing will have a total income (including the income tax transfer) of _____. A. $1,500 B. $7,500 C. $4,500 D. $6,000 E. $1,200 Answer: D 65. If the income floor for a family of four is $25,000 and the negative income tax rate is 20 percent, the break-even income should be: A. $125,000. B. $250,000. C. $100,000. D. $200,000. E. $225,000. Answer: A 66. If the negative income tax rate is 25 percent and the break-even income of a family of four is $50,000, the guaranteed income floor is: A. $10,000. B. $15,000. C. $10,500. D. $12,500. E. $15,500. Answer: D 67. For the negative income tax to eradicate poverty: A. the guaranteed level of income has to be equal to the poverty line. B. the break-even income has to be equal to the poverty line. C. the negative income tax rate has to equal 50 percent. D. the guaranteed level of income has to be equal to the break-even income. E. the guaranteed level of income has to be equal to the tax paid. Answer: A 68. Suppose all families of four, who earn nothing, are guaranteed a transfer payment of $20,000 and the government levies a negative tax rate of 20 percent. Calculate the income level below which all such families will receive some income benefits. A. $100,000 B. $50,000 C. $150,000 D. $40,000 E. $80,000 Answer: A NARRBEGIN: Table 19. 3 The table given below shows the annual incomes of a family of four and the corresponding transfer incomes. 69. Refer to Table 19. 3. What is the guaranteed income floor? A. $20,000 B. $7,000 C. $1,000 D. $5,000 E. $8,750 Answer: D 70. Refer to Table 19. 3. Suppose the family’s annual earnings increases from $1,000 to $5,000. What is the resulting reduction in income transfer? A. $5,000 B. $1,000 C. $4,750 D. $3,750 E. $2,000 Answer: B 71. Refer to Table 19. 3. Suppose the government changes the guaranteed income floor to $3,000. What is the new break-even level of income if the negative income tax rate is changed to 20 percent? A. $3,000 B. $15,000 C. $6,000 D. $5,000 E. $30,000 Answer: B NARRBEGIN: Table 19. 4 The table below shows the monthly income of a family and the fuel assistance received from the government. 72. Refer to Table 19. 4. What is the marginal penalty on working (in terms of reduced fuel assistance) borne by the family when its income rises from $200 to $300? A. $40 B. $50 C. $80 D. $60 E. $100 Answer: B 73. Refer to Table 19. 4. If the family’s monthly income rises from $300 to $400, the marginal penalty on working (in terms of reduced fuel assistance) is: A. $80 B. $40 C. $50 D. $90 E. $100 Answer: A 74. Refer to Table 19. 4. The greatest disincentive to work for this family occurs between the income levels of _____ and _____. A. $0; $100 B. $100; $200 C. $400; $500 D. $200; $300 E. $300; $400 Answer: C 75. The negative income tax had not gained political acceptability because: A. the politicians favor transfer of dollars rather than in-kind benefits. B. it increases the opportunity cost of leisure. C. the break-even income level is high. D. it raises the labor cost borne by the producers. E. it redistributes income from the poor to the rich. Answer: C 76. The "Robin Hood" tax policy, which taxes the rich to give to the poor, is best described by economists as: A. a proportional tax policy. B. a regressive tax policy. C. a poll tax policy. D. a progressive tax policy. E. a capital tax policy. Answer: D 77. Which of the following statements concerning income distribution among nations is true? A. A country with unequal distribution of income has a high standard of living. B. The richest countries have only 10 percent of the world’s population but receive 80 percent of total world income. C. The distribution of total world income among nations is equal. D. One-quarter of the world’s population lives in the developing countries. E. Per capita income between countries is generally the same. Answer: B 78. The rule which is used to compare economic growth among the nations is: A. the per se rule. B. the rule of 72. C. the rule of thumb. D. the rule of thirds. E. the rule of 70. Answer: B 79. The programs which transfer income from the richer nations to the poorer nations are referred to as: A. transfer payments. B. foreign aid. C. foreign portfolio investment. D. outsourcing and offshoring. E. external borrowing. Answer: B 80. One of the major causes of economic backwardness in the poor countries is: A. the absence of public goods. B. the absence of private property rights. C. a lack of government intervention in the market. D. the absence of commonly owned resources. E. a lack of foreign aid. Answer: B TRUE/FALSE 1. The farther the Lorenz curve from the line of perfect equality the lower is the income inequality. Answer: False 2. At each point on the line of income equality, the percentage of total population and the percentage of total income are equal. Answer: True 3. If everyone in an economy had equal income, the Lorenz curve would be a curve that intersects the line of income equality at the point at which 50 percent of the population earns 50 percent of the income. Answer: False 4. The higher the HiLo ratio, the more the top income quintile earns relative to the bottom quintile. Answer: True 5. The size of a family or household does not affect the data used to measure income inequality. Answer: False 6. Consumer expenditures do not reflect the standard of people as efficiently as income inequality does. Answer: False 7. It is often found that there is a sufficient mobility within the income distribution such that a person in the lowest quintile of income can move to the higher ones and vice versa. Answer: True 8. Experiences of Russia and China prove that, greater the governmental intervention in the market, more equal will be the income distribution in the economy. Answer: False 9. The poverty threshold is often determined in terms of the expenditure on meals that meet a predetermined nutritional standard. Answer: True 10. Economic stagnation and recession result in unemployment and poverty. Answer: True 11. Someone who has the desire to work but has no exceptional abilities and has not acquired the skills necessary for a well-paying job is likely to escape poverty completely. Answer: False 12. A proportional tax is a tax whose rate increases as the tax base widens. Answer: False 13. Government policies designed to change the distribution of income to one that is more equal involve taking from the rich and giving to the poor. Answer: True 14. Unemployment insurance programs provide benefits to permanently unemployed people. Answer: False 15. The income tax structure in the United States is regressive in nature. Answer: False 16. The welfare programs undertaken by the U. S. government has been universally successful in reducing poverty and fostering economic growth. Answer: False 17. When a low-income individual receives a transfer payment, that individual has less of an incentive to forgo leisure time for work time. Answer: True 18. A negative income tax system transfers increasing amounts of income to households earning incomes below some specified level as their income declines. Answer: True 19. The greater the negative income tax imposed on a family, greater is the family’s incentive to earn more. Answer: False 20. Individuals have a tradeoff between leisure and work. When income from working is taxed, the cost of leisure is reduced in relative terms. Answer: False 21. If for each dollar earned, $0. 50 is taken out of the transfer received by a family of four, the negative income tax rate is 50 percent. Answer: True 22. Under the negative income tax program, a family will always receive some amount of transfer from the government, irrespective of its income level. Answer: False 23. If the guaranteed income floor for a family of four is $14,000 and the tax rate is 50 percent, then the break-even income for this family will be $28,000. Answer: True 24. If the negative income tax rate is less than 100 percent, the break-even income level will be lower than the poverty level, and families who are officially considered poor will not receive the benefits. Answer: False 25. For people who are too well off to receive welfare benefits but who would become eligible for negative income tax payments, the negative income tax might create work disincentives. Answer: True 26. Measures which aim at eliminating the income disparity between the rich and the poor affect incentives to work, innovate, take risks, acquire education, and so on. Answer: True 27. The world Lorenz curve coincides with the line of income equality because the average income of the different countries are more or less equal. Answer: False 28. Income distribution across the world is highly uneven, hence the corresponding Gini coefficient is very small. Answer: False 29. The incentives created by foreign aid are analogous to the incentives created by the welfare systems and so might not be conducive to economic growth. Answer: True 30. It has been observed that the most prosperous nations are those which have enjoyed stable democratic governments. This implies there is a link between a history of stable democracy and national well-being. Answer: True 31. The income variation across the countries is the result of differential rates of economic growth being experienced by them. Answer: True 32. Foreign aid should be given to all poor countries without considering if the aid reaches the poor and the needy. Answer: False 33. Foreign aid at times actually hinders economic growth by creating wrong incentives. Answer: True 34. In order to ensure that the poor countries experience higher levels of economic growth, private property rights and title to property have to be created. Answer: True 35. Even when legal title is established in the developing countries, it is often difficult to use that title because of the failure of countries to enforce people’s ownership of property. Answer: True 36. Markets can function efficiently only when the private property rights are completely suspended and every resource in the economy is a commonly owned resource. Answer: False Chapter 20 World Trade Equilibrium MULTIPLE CHOICE 1. Nations trade what they produce in excess of their own consumption to: A. generate jobs for the domestic economy. B. earn “good will” from the World Bank. C. prevent chronic surpluses from driving down domestic prices. D. acquire other things they want to consume. E. reduce the size of their foreign trade deficit. Answer: D 2. The theory of comparative advantage is based on: A. absolute opportunity costs. B. relative opportunity costs. C. total costs of production. D. total costs, including transportation costs. E. a comparison of marginal cost with average variable costs. Answer: B 3. Whether exchange is between individuals, firms, or countries, voluntary trade occurs because: A. only one party is made better off. B. both parties are made better off. C. financial agents devote resources to arranging such trades. D. these trades create employment for the economy. E. of mandates from the government. Answer: B 4. Which of the following countries receives the largest share of U. S. exports? A. Mexico B. Germany C. Japan D. Canada E. United Kingdom Answer: D 5. Which of the following counties are largely dependent on trade with the United States? A. China and Japan B. U. K. and Germany C. Canada and Mexico D. France and Belgium E. Canada and U. K Answer: C 6. Countries tend to export different goods and services because of: A. differences in their comparative advantages. B. differences in tastes and technological needs. C. differences in income. D. similarities in resource endowment. E. differences in the exchange rates. Answer: A 7. The most heavily traded category of goods in the world is: A. office and telecom equipment. B. chemicals. C. iron and steel. D. textiles. E. crude petroleum. Answer: E 8. Which of the following factors are least likely to affect what countries end up trading in the international market? A. International trade tariffs B. Government debt levels C. Comparative advantages D. Differences in tastes E. Different technological needs Answer: B 9. Which of the following lists gives world exports in the order of their value, from highest to lowest? A. Aircraft, motor vehicle parts, crude petroleum B. Aircraft, crude petroleum, motor vehicle parts C. Crude petroleum, office and telecom equipments, automotive parts D. Motor vehicle parts, aircraft, crude petroleum E. Motor vehicle parts, crude petroleum, aircraft Answer: C 10. "Most textiles worn by American consumers are produced in Asian and South American countries where the opportunity costs of production are lower. " This observation refers to the: A. law of supply. B. income elasticity of demand. C. principle of beneficial tariffs. D. principle of comparative advantage. E. law of decreasing returns to scale. Answer: D NARRBEGIN: Table 20. 1 The table below shows units of wheat and cloth produced by each worker per day in both the countries. Table 20. 1 NARREND 11. Refer to Table 20. 1. Which of the following assumptions holds true for the example? A. The goods are produced by using different factors of production B. Labor productivity alone determines the comparative advantage C. Each of the countries will produce and export wheat and cloth D. Both the countries have identical factor endowments E. The taste and preference of the consumers are dissimilar in the two countries Answer: B 12. Refer to Table 20. 1. Which of the following statements is true? A. India has an absolute advantage in the production of cloth. B. India has an absolute advantage in the production of both wheat and cloth. C. The U. S. has an absolute advantage in the production of wheat but not cloth. D. The U. S. has an absolute advantage the production of cloth but not wheat. E. The U. S. has an absolute advantage in the production of both wheat and cloth. Answer: E 13. According to Table 20. 1, the opportunity cost of producing wheat in India equals: A. half a unit of cloth. B. one-third of a unit of cloth. C. 2 units of cloth. D. 4 units of cloth. E. one-fourth of a unit of cloth. Answer: A 14. Which of the following can be inferred from the information provided in Table 20. 1? A. India has a comparative advantage in the production of wheat. B. India has a comparative advantage in the production of both wheat and cloth. C. It will be beneficial for the U. S. to produce and export wheat. D. India will be better off by producing and exporting cloth. E. The U. S. has a comparative advantage in the production of both wheat and cloth. Answer: D 15. Refer to Table 20. 1. Assume that the U. S. has only two workers and the terms of trade are 2 bushels of wheat per rack of clothing. What would be the gains from trade for the U. S. if it is producing according to its comparative advantage? A. 2 racks of clothing B. 2. 5 racks of clothing C. 1. 5 racks of clothing D. 3 racks of clothing E. 1 rack of clothing Answer: C 16. According to Table 20. 1, the opportunity cost of producing wheat in the U. S. equals: A. half a unit of cloth. B. one-third of a unit of cloth. C. one-fourth of a unit of cloth. D. 4 units of cloth. E. 8 units of cloth Answer: B 17. According to Table 20. 1, the opportunity cost of producing cloth in the U. S. equals: A. 2 units of wheat. B. half a unit of wheat. C. 3 units of wheat. D. one-third of a unit of wheat. E. 6 units of wheat. Answer: C 18. A country can benefit by indulging in international trade when: A. it produces a good in which it has absolute disadvantage. B. it produces a good in which its trading partner has an absolute advantage. C. it produces a good in which it has comparative advantage. D. it produces all the goods which are supported by its resources. E. it produces nothing and merely depends on foreign imports. Answer: C 19. A country has a comparative advantage when the opportunity cost of producing a good in terms of: A. the monetary value of other forgone goods is lower than that of other nations. B. the monetary value of other forgone goods is greater than that of other nations. C. forgone output of other goods is higher than that of other nations. D. forgone output of other goods is lower than that of other nations. E. forgone output of other goods is equal to that of other nations. Answer: D 20. Between two countries, comparative advantage is found by comparing the: A. relative costs of production in each country. B. absolute costs of production in each country after accounting for inflation. C. labor hours required to produce a bundle of products in each country. D. level of interest rates in each country. E. shipping and transportation costs of each country. Answer: A 21. For purposes of determining comparative advantage, the cost of producing a good in each of two countries is measured in terms of: A. metric units only. B. opportunity costs. C. total costs. D. the currency of the importing country. E. the currency of the exporting country. Answer: B 22. The difference between absolute and comparative advantage is that: A. absolute advantage refers to input cost, while comparative advantage refers to opportunity cost. B. absolute advantage refers to opportunity cost, while comparative advantage refers to input cost. C. absolute advantage refers to individuals, and comparative advantage refers to countries. D. absolute advantage refers to countries, and comparative advantage refers to individuals. E. absolute advantage is applicable to intranational trade, while comparative advantage applies to international trade. Answer: A 23. Countries import goods in which they have: A. an absolute advantage. B. a comparative advantage. C. a reputation for good product quality. D. a comparative disadvantage. E. a surplus domestic production. Answer: D 24. We benefit from trade if we are able to obtain a good from a foreign country: A. that has a very low domestic demand. B. the production of which requires a steady supply of unskilled labor. C. by giving up less of other goods than we would have to give up to obtain the good at home. D. by giving up more of other goods than we would have to give up to obtain the good at home. E. that has a substantial number of substitutes in the domestic market. Answer: C 25. If Japan has a comparative advantage over Canada in the production of computers, which of the following must be true? A. Supply of unskilled labor in Japan is higher than that in Canada. B. Japan incurs a lower input cost in the production of computers. C. Japan incurs a higher input cost in the production of computers. D. Japan has a lower opportunity cost in the production of computers. E. Japan has a higher opportunity cost in the production of computers. Answer: D NARRBEGIN: Scenario 20. 1 Scenario 20. 1 Suppose labor productivity differences are the only determinants of comparative advantage, and Brazil and Chile both produce only coffee and sugar. In Chile, either 5 units of coffee or 2 units of sugar can be produced in one day. In Brazil, a day of labor produces either 2 units of coffee or 1 unit of sugar. NARREND 26. Refer to Scenario 20. 1. Which of the following statements is true? A. Brazil has an absolute advantage in producing only coffee. B. Brazil has an absolute advantage in producing only sugar. C. Chile has an absolute advantage in the production of both coffee and sugar. D. Chile has an absolute advantage in producing only coffee. E. Brazil has an absolute advantage in the production of both coffee and sugar. Answer: C 27. Refer to Scenario 20. 1. Which of the following statements is true? A. Brazil has a comparative advantage in producing coffee. B. Brazil has a comparative advantage in producing both coffee and sugar. C. Chile has a comparative advantage in producing both coffee and sugar. D. Neither Chile nor Brazil has a comparative advantage in producing coffee. E. Brazil has a comparative advantage in producing sugar. Answer: E 28. Refer to Scenario 20. 1. Calculate the opportunity cost of producing sugar in Brazil. A. Half a pound of coffee B. 4 pounds of coffee C. 1 pound of coffee D. 2 pounds of coffee E. One and a half pounds of coffee Answer: D 29. Refer to Scenario 20. 1. What is the opportunity cost of producing coffee in Chile? A. Half a pound of sugar B. Two-fifth of a pound of sugar C. 2 pounds of sugar D. One-third of a pound of sugar E. 4 pounds of sugar Answer: B NARRBEGIN: Table 20. 2 The data in the table below assumes that with the same quantity of resources, both Australia and Philippines produces food and computers. Australia can make 1,000 computers or 2,000 units of food in a day, and the Philippines can make 200 computers or 1,200 units of food in a day. Table 20. 2 NARREND 30. According to Table 20. 2, Australia has an: A. absolute advantage in the production of only food. B. absolute advantage in the production of both food and computers. C. absolute disadvantage in the production of both food and computers. D. absolute advantage in the production of only computers. E. absolute disadvantage in the production of food. Answer: B 31. According to Table 20. 2, Philippines has an: A. absolute advantage in the production of both food and computers. B. absolute advantage in the production of only food. C. absolute advantage in the production of only computers. D. absolute disadvantage in the production of only food. E. absolute disadvantage in the production of both food and computers. Answer: E 32. According to Table 20. 2, what is the opportunity cost of 1 computer in Australia? A. half a unit of food B. one-sixth of a unit of food C. 1 unit of food D. 6 units of food E. 2 units of food Answer: E 33. According to Table 20. 2, what is the opportunity cost of 1 unit of food in Australia? A. Half a unit of computer B. 6 computers C. 2 computers D. One-sixth of a unit of computers E. 1 computer Answer: A 34. According to Table 20. 2, what is the opportunity cost of 1 computer in the Philippines? A. 6 units of food B. Three-fifths of a unit of food C. One-sixth of a unit of food D. 2 units of food E. 1 unit of food Answer: A 35. According to Table 20. 2, Australia has: A. a comparative disadvantage in the production of both food and computers. B. a comparative advantage in the production of computers. C. a comparative disadvantage in the production of computers. D. a comparative advantage in the production of food. E. a comparative advantage in the production of both food and computers. Answer: B NARRBEGIN: Table 20. 3 The following table shows the units of calculators and rice produced by a laborer in a day in Japan and Korea. Table 20. 3 NARREND 36. Refer to Table 20. 3. What is the least amount Japan is willing to accept for 1 calculator? A. 1 pound of rice B. 5 pounds of rice C. 2 pounds of rice D. 2. 5 pounds of rice E. Half a pound of rice Answer: D 37. According to Table 20. 3, what is the greatest amount Korea is willing to pay for 1 calculator? A. 1 pound of rice B. 5 pounds of rice C. 2 pounds of rice D. 2. 5 pounds of rice E. Half a pound of rice Answer: A 38. Refer to Table 20. 3. Determine the limits on the terms of trade for 1 pound of rice. A. Between 5 calculators and 10 calculators B. Between 1 calculator and 5 calculators C. Between 1 calculator and 10 calculators D. Between 1 calculator and 2 calculators E. Between two-fifths of a calculator and 1 calculator Answer: E 39. The terms of trade is defined as: A. the quantity of inputs sacrificed to produce each unit of a good. B. the quantity of one good that is exchanged for a quantity of another good. C. the ratio of the total cost of production of individual traders. D. the marginal cost of producing one good as a percentage of the marginal cost of another good. E. the ratio of total exports of a nation to its total production. Answer: B 40. The limits of the terms of trade are determined by the: A. distribution costs in each country. B. stock of foreign exchange in each country. C. average total costs of producing the commodities in each country. D. opportunity costs in each country. E. currency exchange rate between the trading partners. Answer: D NARRBEGIN: Table 20. 4 The following table shows that in one day poultry farmers in Arkansas can produce 3 cartons of eggs, while poultry farmers in Idaho can produce 2 cartons of eggs. It takes Arkansas potato farmers one day to produce 30 tons of potatoes, while Idaho potato farmers produce 10 tons of potatoes in that same time. Table 20. 4 NARREND 41. According to Table 20. 4, what is the opportunity cost of 1 crate of eggs in Idaho? A. 2 tons of potatoes B. One-fifth of a ton of potatoes C. 10 tons of potatoes D. 5 tons of potatoes E. One-tenth of a ton of potatoes Answer: D 42. Refer to Table 20. 4. Producing 1 more crate of eggs would require Arkansas to: A. give up one-fifth of a ton of potatoes. B. give up 10 tons of potatoes. C. give up 5 tons of potatoes. D. give up one-tenth of a ton of potatoes. E. 2 tons of potatoes. Answer: B 43. According to Table 20. 4, the limits to the terms of trade in eggs are 1 carton of eggs in exchange for: A. between 5 and 10 tons of potatoes. B. between 2 tons and 10 tons of potatoes. C. between 10 tons and 30 tons of potatoes. D. between one-fifth and one-tenth of a ton of potatoes. E. between 1 and 10 tons of potatoes. Answer: A 44. According to Table 20. 4, the limits to the terms of trade in potatoes are 1 ton of potatoes in exchange for: A. between 5 and 10 cartons of eggs. B. between 1 and 10 cartons of eggs. C. between one-tenth and one-fifth of a carton of eggs. D. between one-fourth and half a carton of eggs. E. between 2 and 10 cartons of eggs. Answer: C NARRBEGIN: Scenario 20. 2 Scenario 20. 2 Suppose labor productivity differences are the only determinants of comparative advantage, and both Egypt and produce only corn and cocoa. In Egypt, 10 bushels of corn or 15 pounds of cocoa can be produced in a day. In Ghana, one day of labor can be used to produce either 2 bushels of corn or 8 pounds of cocoa. NARREND 45. Based on Scenario 20. 2, which of the following terms of trade would benefit both countries? A. 1 pound of cocoa is equal to 0. 10 bushels of corn B. 1 pound of cocoa is equal to 2 bushels of corn C. 1 pound of cocoa is equal to 1 bushels of corn D. 1 pound of cocoa is equal to 0. 5 bushels of corn E. 1 pound of cocoa is equal to 1. 5 bushels of corn Answer: D 46. Refer to Scenario 20. 2. Egypt will be willing to trade corn for cocoa if in the international market 1 bushel of corn can be exchanged for: A. more than 1 pound of cocoa. B. less than 1 pound of cocoa. C. more than 1. 5 pounds of cocoa. D. less than two-third of a pound of cocoa. E. more than half a pound of cocoa. Answer: C 47. Refer to Scenario 20. 2. Ghana will be willing to trade cocoa for Egyptian corn if in the international market, 1 pound of cocoa can be exchanged for: A. more than one-eighth of a bushel of corn. B. less than one-sixth of a bushel of corn. C. more than one-fourth of a bushel of corn. D. less than one-fifth of a bushel of corn. E. more than one-tenth of a bushel of corn. Answer: C 48. Suppose France can produce 9,000 potatoes or 3,000 lemons per day, and that Italy can produce 3,000 potatoes or 3,000 lemons per day. Which of the following statements in this context is true? A. France has an absolute advantage in producing lemons. B. Italy has a comparative advantage in producing potatoes. C. Italy would be willing to trade one lemon for anything greater than one potato. D. Both countries would be willing to trade at a rate of one lemon for one potato. E. France has a comparative advantage in producing lemons. Answer: C 49. What is known as the Dutch disease? A. The problem that arises when a government cannot meet its foreign debts B. The phenomenon of a boom in one industry causing declines in the rest of the economy C. A sudden and unexpected devaluation of a currency as a consequence of policy controls D. The problem that arises when high imports force an economy to borrow from external sources E. A deficit in the balance of payments of the economy that arises due to a sudden appreciation of the domestic currency. Answer: B 50. The Dutch Disease had occurred in Netherlands because: A. the Netherlands government had borrowed heavily from the World Bank to meet its Balance of Payment deficits. B. the price of the primary commodities declined in the international market. C. the demand for natural gas exports from Netherlands increased substantially. D. the currency of Netherlands depreciated in the international market. E. the price of the commodities manufactured by Netherlands declined in the international market. Answer: C 51. The proportion of domestic demand for a good that is satisfied by domestic production relative to that supplied by imports is determined by: A. the interplay of domestic demand and supply curves and the domestic equilibrium price of the good. B. the interplay of demand and supply curves in the international market and the international equilibrium price of a good. C. domestic supply and demand curves and the international equilibrium price of a good. D. the different trade restrictions like tariffs and quotas created by the domestic government. E. the interplay of demand and supply curves in the international market and the domestic price of the good Answer: C NARRBEGIN: Figure 20. 1 The first panel in the following figure shows the domestic demand (D) and supply (S) curves of Columbian coffee and the second panel shows the import demand and export supply of Columbian coffee in the international market. Figure 20. 1 NARREND 52. Refer to Figure 20. 1. The autarky equilibrium price of coffee in Columbia is: A. $16. B. $8. C. $10. D. $12. E. $14. Answer: C 53. Refer to Figure 20. 1. If the price of Columbian coffee in the international market is $10, Columbia will export _____ pound(s) of coffee. A. two B. zero C. six D. eight E. ten Answer: B 54. Refer to Figure 20. 1. If the price of coffee in the international market is $14: A. there will be an excess demand of 10 pounds in Columbia’s domestic market. B. Columbia’s domestic market for coffee will be in equilibrium. C. there will be an excess demand for Columbian coffee in the international market. D. the international market for coffee will be in equilibrium. E. Columbia will export 4 pounds of coffee. Answer: E 55. Refer to Figure 20. 1. If the price of Columbian coffee falls to $6 in the international market: A. there will be an excess supply of 8 pounds of Columbian coffee in the international market. B. the Columbian domestic market for coffee will be in equilibrium. C. the international market for coffee will be in equilibrium. D. there will be an excess demand of 4 pounds for coffee in Columbia’s domestic market. E. there will be an excess supply of coffee in Columbia’s domestic market. Answer: D 56. If the world price of steel is greater than the U. S. “no-trade” domestic equilibrium price of steel, the United States: A. will not produce steel. B. will demand steel from the rest of the world. C. will supply steel to the rest of the world. D. will not trade steel. E. will have a shortage of steel in the domestic market. Answer: C 57. If the world price is below the domestic “no-trade” equilibrium price, then with international trade: A. the domestic shortage can be eliminated by rationing. B. the domestic surplus can be consumed at home. C. the domestic surplus can be exported to the rest of the world. D. the domestic quantity demanded is equal to that supplied by the world. E. the domestic shortage can be met by foreign imports. Answer: E 58. The import demand curve shows the amount of the home country’s: A. surplus at various prices below the “no-trade” equilibrium. B. shortage at various prices below the “no-trade” equilibrium. C. equilibrium “no-trade” quantity demanded. D. surplus at various prices above the “no-trade” equilibrium. E. shortage at various prices above the “no-trade” equilibrium. Answer: B 59. The export supply curve shows a country’s: A. domestic surplus at various prices below the “no-trade” equilibrium price. B. domestic shortage at various prices below the “no-trade” equilibrium price. C. domestic supply at the “no-trade” equilibrium price. D. domestic surplus at various prices above the “no-trade” equilibrium price. E. domestic shortage at various prices above the “no-trade” equilibrium price. Answer: D 60. The international equilibrium price is the point at which: A. the domestic supply curve of one country intersects the domestic demand curve of another. B. the domestic demand and supply curves of a country intersects each other. C. the export supply curve of one country intersects the import demand curve of another. D. the domestic demand of the trading partners become identical. E. the domestic supply of the trading partners become identical. Answer: C NARRBEGIN: Figure 20. 2 The figure given below shows the import demand and export supply curves of corn of the U. S. and Mexico. Figure 20. 2 NARREND 61. According to Figure 20. 2, the international equilibrium price of corn is: A. $2. B. $4. C. $6. D. $8. E. $10. Answer: C 62. Refer to Figure 20. 2. The no-trade equilibrium price of corn in the U. S. is: A. $2. B. $4. C. $6. D. $8. E. $10. Answer: D 63. Refer to Figure 20. 2. The no-trade equilibrium price of a bushel of corn in Mexico is: A. $2. B. $4. C. $6. D. $8. E. $10. Answer: B NARRBEGIN: Table 20. 5 The table below shows the quantity demanded (in thousands) and quantity supplied (in thousands) of computers in the U. S. and Canada at different prices. 64. According to Table 20. 5, the international equilibrium price of computers is: A. $2,000. B. $1,600. C. $1,800. D. $1,400. E. $1,200. Answer: B 65. According to Table 20. 5, the equilibrium quantity of computers traded in the world market is: A. 20,000 computers. B. 30,000 computers. C. 10,000 computers. D. 15,000 computers. E. 40,000 computers. Answer: C 66. The oldest theory of comparative advantage is based on: A. factor abundance. B. productivity differences. C. product life cycles. D. preferences. E. human skills. Answer: B 67. Differences in the productivity of labor account for comparative advantage if: A. the minimum wage varies across the countries. B. the size of the domestic market varies across the countries. C. different countries have differences in labor hours required to produce each good. D. the strength of workforce varies across countries. E. the laborers are paid different wages in different countries. Answer: C 68. According to the Ricardian model, the source of comparative advantage is: A. differences in labor productivity in the different countries. B. differences in foreign trade policies followed by the governments of the various countries. C. differences in resource endowments of the economies. D. differences in the fields of research and development in the countries. E. differences in the taste and preferences of the consumers in the different countries. Answer: A 69. According to the Heckscher-Ohlin model: A. a relatively labor scarce country produces labor intensive goods. B. the labor productivity varies across different countries. C. the technological advancement varies across countries. D. the taste and preference patterns of the consumers are not similar across the countries. E. a capital abundant country exports sophisticated, manufactured products. Answer: E 70. According to the Heckscher-Ohlin theory, comparative advantage is based on: A. labor productivity differences. B. product life cycles. C. the availability of skilled resources. D. consumer tastes and preferences. E. the relative abundance of the factors of production. Answer: E 71. The original comparative advantage model that used the relative abundance of factors of production to explain comparative advantage assumed that countries: A. employed all four factors of production; land, labor, capital, and entrepreneurship. B. employed only two factors of production; labor and capital. C. employed only two factors of production; land and entrepreneurial ability. D. worked with a fixed capital stock. E. were free to vary their employment of only one factor of production; labor. Answer: B 72. Workers in industrial countries earn much higher wages than workers in developing countries because: A. the industrial countries are labor rich and capital poor economies. B. the industrial countries lack a steady supply of unskilled laborers. C. the industrial countries produce labor intensive goods. D. the marginal productivity of labor is low in the industrial economies. E. the marginal productivity of labor is high in the industrial economies. Answer: E 73. Which of the following statements in the context of U. S. exports is true? A. The U. S. exports products produced in the low wage industries. B. Primary products account for the largest share of U. S. exports to developed nations. C. The U. S. mainly exports labor intensive goods. D. Most U. S. exports are produced in high-wage industries. E. A bulk of U. S. exports to developing nations comprise of perishable commodities. Answer: D 74. The product life cycle theory of comparative advantage predicts that a new product will be first produced and exported by: A. the nation that first demanded the new product. B. the first firm to successfully copy the technology. C. the nation in which it was invented. D. the countries with the most stable economies and the fewest restrictions on foreign trade. E. the company with the most extensive network of international distributors for the product. Answer: C 75. The product life cycle theory predicts that comparative advantage shifts away from the country of origin if: A. the product is introduced in many countries simultaneously. B. the product is highly demanded in international markets. C. the demand for the product drastically declines in the domestic market of the country where it was invented. D. other countries have lower manufacturing costs using the now-standardized technology. E. other countries develop highly skilled labor forces to improve product quality. Answer: D 76. The theory that explains the shift of color TV sets production from the United States to Japan and Taiwan is called the _____ theory. A. productivity difference B. factor abundance C. product life cycle D. preference E. human skills Answer: C 77. Which of the following looks at the demand side of the market to explain some of the observed international trade patterns? A. The theory of consumer preferences B. The factor abundance theory C. The product life cycle theory D. The Ricardian model E. The human skills approach Answer: A 78. The fact that the United States exports Budweiser beer and imports Heineken beer can be explained by: A. the differences in labor productivity in the U. S. and other countries. B. the differences in factor endowments in the U. S. and its trading partners. C. the world price of Budweiser beer is lower than Heineken beer. D. the fact that production of Budweiser beer in the U. S. is inadequate compared to its demand. E. the preference for foreign brands of beer by a part of the U. S. population. Answer: E 79. Firms in industrial countries find a larger market for their goods in other industrial countries than in developing countries because: A. the consumption patterns in the industrial countries are highly heterogeneous. B. the trade policies of the industrial nations are more favorable than the developing countries. C. the industrial countries tend to have a higher population than the developing countries. D. the industrial countries are capital intensive countries. E. the consumption patterns in the industrial countries are more or less similar. Answer: E 80. We know that industrial countries tend to trade with other industrial countries. This pattern counters the: A. preference theory of comparative advantage. B. factor abundance theory of comparative advantage. C. concept of intraindustry trade. D. product life cycle theory of comparative advantage. E. human skills theory of comparative advantage. Answer: B TRUE/FALSE 1. The principle of comparative advantage states that a country should specialize in the production of those goods that have the highest opportunity costs. Answer: False 2. Trade between industrial countries account for the majority of international trade. Answer: True 3. Absolute advantage is determined by comparing the opportunity costs of producing each good in different countries. Answer: False 4. If a laborer in Mexico can produce 2 bushels of wheat or 4 bushels of corn in a day, the opportunity cost of producing wheat is 4 bushels of corn. Answer: False 5. International trade permits greater consumption than would be possible from the domestic production alone. Answer: True 6. Countries should specialize and import goods in which they have a comparative disadvantage. Answer: True 7. If Brazil can produce 5 shirts or 4 pounds of beef in a day, and Uruguay can produce 10 shirts or 2 pounds of beef in a day, then Brazil has a comparative advantage in the production of beef. Answer: True 8. No country can have an absolute advantage in the production of more than one good. Answer: False 9. Absolute advantage is irrelevant, because knowing the absolute number of labor hours required to produce a good does not tell us if we can benefit from trade. Answer: True 10. We benefit from trade if we are able to obtain a good from a foreign country by giving up more of other goods than we would have to give up to obtain the good at home. Answer: False 11. Any terms of trade within the limits set by domestic opportunity costs will be mutually harmful, because each country tries to push the other as close to the limits of the terms of trade as possible. Answer: False 12. If Bolivia can produce 6 calculators or 3 televisions in a day, and Argentina can produce 4 calculators or 12 televisions in a day, then Bolivia would be willing to trade 1 calculator for 1 television with Argentina. Answer: True 13. A country with a strong bargaining power is likely to direct the terms of trade in its favor. Answer: True 14. Dutch Disease is associated with a dramatic decline in the demand for a primary commodity produced by a country. Answer: False 15. A sudden appreciation in the exchange rate of a country deteriorates the terms of trade of the country. Answer: True 16. Though the countries can benefit by completely specializing in the production of the good in which they have comparative advantage, in real world however, they do not completely specialize. Answer: True 17. The export supply curve is the portion of the domestic supply curve below the no-trade equilibrium price. Answer: False 18. If the world price of a good is equal to its no-trade equilibrium price, the country will import more of the good from other nations. Answer: False 19. The higher the world price above the domestic no-trade equilibrium, the lesser the quantity of a good exported by a country. Answer: False 20. The export supply and import demand curves measure the domestic shortage and surplus, respectively, at different world prices. Answer: False 21. If the export supply curve of tomatoes and the import demand curve of tomatoes of Luxembourg intersect at the international price level of tomatoes, then Luxembourg will suspend trading tomatoes in the international market. Answer: False 22. If the world price is above the domestic “no-trade” equilibrium price, then with international trade, the shortage caused in the domestic market can be met by foreign imports. Answer: False 23. If the international price of oranges is less than the domestic price of oranges in Spain, then Spain will export oranges to other countries. Answer: False 24. International equilibrium occurs if the quantity of imports demanded by one country is equal to the quantity of exports supplied by the other country. Answer: True 25. The standard interpretation of the Ricardian model is that differences in factor endowments between countries account for differences in labor productivity. Answer: False 26. It seems self evident that countries would have an advantage in producing those goods that use relatively large amounts of their most abundant factor of production. Answer: True 27. The Heckscher-Olin model uses differences in factor abundance to determine whether any nation has a comparative advantage in any good. Answer: True 28. Countries with a relatively high stock of skilled labor will have a comparative advantage in producing goods that require relatively larger quantities of skilled labor. Answer: True 29. Developing countries can be expected to have a comparative advantage in industries requiring a relatively large amount of skilled labor. Answer: False 30. The human skills theory is similar to the factor abundance theory of explaining the source of comparative advantage, except that the former concentrates only on different aspects of labor. Answer: True 31. The comparative advantage in a specific good can shift over time from one country to another, as the other countries can produce it at a cheaper cost after imitating the technology. Answer: True 32. The simultaneous import and export of goods in the same industry by a particular country is known as interindustry trade. Answer: False Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154

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