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Assignment 1CHAPTER 2EARLY TRADE THEORIES:Mercantilism and the Transition to the Classical World of David RicardoPart 1. Multiple-Choice Questions (only one answer is right)1. In the price-specie-flow doctrine, a deficit country will __________ gold, and this goldflow will ultimately lead to __________ in the deficit country’s exports.a. lose; a decreaseb. lose; an increasec. gain; a decreased. gain; an increase2. In the Mercantilist view of international trade (in a two-country world),a. both countries could gain from trade at the same time, but the distribution of the gainsdepended upon the terms of trade.b. both countries could gain from trade at the same time, and the terms of trade were ofno consequence for the distribution of the gains.c. neither country could ever gain from trade.d. one country’s gain from trade was associated with a loss for the other country.3. According to the labor theory of value,a. the value of labor is determined by its value in production.b. the value of a good is determined by the amount of labor with which each unit ofcapital in an industry works.c. the price of a good A compared to the price of good B bears the same relationship asthe relative amounts of labor used in producing each good.d. the values of two minerals such as coal and gold with similar production costs may bevery different.4. If the demand for traded goods is price-inelastic, the price-specie-flow mechanism will1result ina. gold movements between countries that remove trade deficits and surpluses.b. gold movements between countries that worsen trade deficits and surpluses.c. negligible movements of gold between countries and hence little or no adjustment oftrade deficits and surpluses.d. a removal of the basis for trade between countries.5. In Adam Smith’s view, international tradea. benefited both trading countries.b. was based on absolute cost differences.c. reflected the resource base of the countries in question.d. all of the above.6. Which of the following policies would NOT be consistent with the Mercantilist balance-of-trade doctrine?a. payment of high wages to laborb. import duties on final productsc. export subsidiesd. prohibition of imports of manufactured goods7. During the price-specie-flow adjustment process to a trade imbalance, if demands forgoods are inelastic, then, when the price level __________ in the country with the trade deficit, the value of that country’s exports will __________ as the price-specie-flowprocess takes place.a. falls; increaseb. falls; decreasec. rises; increased. rises; decrease8. David Hume’s price-specie-flow mechanisma. reinforced the Mercantilist notion that a country could maintain a permanent“favorable” balance of trade where exports exceeded imports.b. works more effectively if demands for traded goods are “price-elastic” rather than“price-inelastic.”c. assumed that the countries involved have substantial unemployment.d. works equa lly effectively whether demands for traded goods are “price-elastic” or“price-inelastic.”29. The price-specie-flow mechanism suggested thata. a country could easily maintain a balance-of-payments surplus for a long period oftime.b. a deficit country would experience an increase in its money supply and its price level.c. a surplus country would experience an increase in its money supply and its price level.d. a country’s internal price level has no relation to the country’s foreign trade activities.10. The policy of minimum government interference in or regulation of economic activity,advocated by Adam Smith and the Classical economists, was known asa. the law of comparative advantage.b. laissez-faire.c. the labor theory of value.d. Mercantilism.11. A Mercantilist policymaker would be in favor of which of the following policies orevents pertaining to his/her country?a. a decrease in the size of the populationb. a minimum wage bill to protect the standard of living of workersc. a prohibition on the export of manufactured goodsd. an increase in the percentage of factors of production devoted to adding value toimported raw materials in order to later export the resulting manufactured goods. 12. In the context of David Hume’s price-specie-flow mechanism that challenged thefeasibility of the Mercantilist ideas regarding a trade surplus, which one of the following statements is NOT correct?a. There is a decrease in the money supply in the deficit country.b. There is an increase in the price level in the surplus country.c. There is an increase in real income in the surplus country.d. Price changes in the surplus country cause that country’s exports to decrease.13. In David Hume’s price-specie-flow doctrine or adjustment mechanism, the assumption ismade that changes in the money supply have an impact on __________. Further, thedemand for traded goods is assumed to be __________ with respect to price.a. prices rather than on output; elasticb. prices rather than on output; inelasticc. output rather than on prices; elasticd. output rather than on prices; inelastic14. The “paradox of Mercantilism” reflected that fact that3a. trade surpluses were fostered by protective tariffs.b. rich countries were comprised of large numbers of poor people.c. gold inflows led to higher prices and reduced exports.d. gold could not be hoarded and provide money for the economy at the same time.15. Given the following Classical-type table showing the number of days of labor inputrequired to obtain one unit of output of each of the two commodities in each of the twocountries:bicycles computersUnited States 4 days 3 daysUnited Kingdom 5 days 6 daysThe United States has an absolute advantage in the production of __________.a. bicycles (only)b. computers (only)c. both bicycles and computersd. neither bicycles nor computers16. With M S = supply of money, V = velocity of money, P = price level, and Y = real output,which one of the following indicates the quantity theory of money expression?a. M S Y = PVb. M S P = VYc. M S = PY - Vd. M S V = PY17. In the price-specie-flow mechanism, there is a gold __________ a country with a balance-of-trade surplus, and this gold flow ultimately leads to __________ in the surpluscountry’s exp orts.a. inflow into; an increaseb. inflow into; a decreasec. outflow from; an increased. outflow from; a decrease18. In the price-specie-flow adjustment mechanism, a country with a balance-of-trade surplusexperiencesa. a gold inflow and a decrease in the price level.4b. a gold outflow and an increase in the money supply.c. an increase in the money supply and a decrease in exports.d. a decrease in the money supply and a decrease in imports.19. Suppose that country A’s total exports are 10,000 units of good X at a price of $20 perunit, meaning that country A’s export earnings or receipts are $200,000. Suppose alsothat the foreign price elasticity of demand for country A’s exports of good X is (-) 0.6. If country A’s prices for all goods, including its exports, now rise by 10% because of a gold inflow such as in the Mercantilist model, then, other things equal, country A’s exports of good X will fall by __________ and country A’s export earni ngs or receipts will become __________.a. 600 units; less than $200,000b. 600 units; greater than $200,000c. 1,000 units; less than $200,000d. 1,000 units; greater than $200,000Part 2 DefinitionMercantilismCHAPTER 3THE CLASSICAL WORLD OF DAVID RICARDO AND COMPARATIVE ADVANTAGEPart 1. Multiple-Choice Questions1. In the following Classical-type table showing the output per 10-days of labor input in eachof the two commodities in each of the two countries,Cameras Wine5France 100 units 40 unitsGermany 150 units 50 unitsa. Germany has a comparative advantage in both goods.b. France has an absolute advantage in both goods.c. France has a comparative advantage in cameras.d. the pretrade price ratio in France is 1 wine = 2.5 cameras.2. Given the following Ricardo-type table shows the labor input required per unit of outputin each of the two industries in each of the two countries:Shirts BrandyUnited States 4 days 12 daysFrance 6 days 12 daysWhich one of the following statements is correct?a. France’s pretrade price ratio is 1 brandy = 2 shirts.b. The U.S. pretrade price ratio is 1 shirt = 3 brandy.c. The United States has an absolute advantage in both goods.d. France will export shirts after trade begins.3. In the situation in Question #2 above, if the countries engage in trade at posttrade prices(terms of trade) of 1 shirt = 0.5 brandy, thena. France gets all the gains from trade.b. the United States gets all the gains from trade.c. neither country gains from trade.d. the two countries share equally in the gains from trade.4. The assumption of constant costs of production in the Classical model results in a__________ production possibilities frontier, and, in the case of a “small” country,__________ specialization in production when trade takes place.a. linear; incompleteb. concave-to-the-origin; completec. convex-to-the-origin; incompleted. linear; complete5. In the Classical (Ricardo) analysis,6a. if a country has an absolute advantage in a good, it also has a comparative advantagein the good.b. if a country has a comparative advantage in a good, it cannot have an absoluteadvantage in the good.c. a country can have a comparative advantage in a good at the same time that it has anabsolute advantage in that good.d. a country with an absolute advantage in all goods cannot gain from trade.6. Given the following Ricardo-type table shows the labor input required per unit of output ineach of the two industries in each of the two countries:Steel ClothUnited Kingdom 4 days 8 daysGermany 6 days 9 daysWhich one of the following statements is true?a. The United Kingdom has an absolute advantage in both goods and a comparativeadvantage in cloth.b. The pretrade price ratio in the United Kingdom is 1 steel:2 cloth.c. The United Kingdom has an absolute advantage in neither good but a comparativeadvantage in steel.d. The pretrade price ratio in Germany is 1 cloth:1.5 steel.7. Given the information in Question #6 above, suppose that Germany is a much larger country in terms of production and income than is the United Kingdom. In this situation, other things equal, when the countries engage in trade, the posttrade price ratio (terms of trade) would tend to settle __________, and __________ would therefore tend to have relatively large gains from trade.a. toward a value of 1 cloth:2 steel; the United Kingdomb. toward a value of 1 cloth:2 steel; Germanyc. toward a value of 1 cloth:1.5 steel; the United Kingdomd. toward a value of 1 cloth:1.5 steel; Germany8. Given the following Ricardo-type table showing the amount of labor input needed to get one unit of output in each industry in each country:Wheat Chairs7Malaysia 3 days 2 daysIndia 10 days 8 daysa. Terms of trade of 1 wheat:1.25 chairs is not a feasible equilibrium terms of trade.b. Terms of trade of 1 wheat:1.5 chairs would give all the gains from trade to India.c. Malaysia has an absolute advantage in both goods and a comparative advantage inwheat.d. India has an absolute advantage in both goods and a comparative advantage in wheat.9. If a country’s relative price of X (compared to Y) in autarky is greater than the s ame relativeprices on the world market, then the country has a comparative advantage in good__________, and it will __________.a. X; export Y and import Xb. X; export X and import Yc. Y; export Y and import Xd. Y; export X and import Y10. As a country moves from autarky to trade, the relative price of the country’s import good will __________ for home consumers, and the relative price of the country’s export good __________ for home consumers.a. fall; will riseb. fall; also will fallc. rise; also will rised. rise; will fall11. Suppose that, in a Classical constant-opportunity-costs framework, country I can produce15 units of wheat if it devotes all of its resources to wheat production and 45 units ofclothing if it devotes all of its resources to clothing production. In a trading situation for this country, if the world price ratio is P wheat/P clothing= ⅓ (or P clothing/P wheat = 3), country Iwoulda. export wheat and import clothing.b. export clothing and import wheat.c. be indifferent to trade.d. export either clothing or wheat and import either wheat or clothing – cannot bedetermined without more information.12. Suppose that, with constant opportunity costs, Spain can produce 2,000 units of clothing ifit devotes all of its resources to clothing production and 8,000 units of wheat if it devotes all of its resources to wheat production. If Spain is opened to trade at a world price ratio of1 wheat:0.4 clothing (or 1 clothing:2.5 wheat), Spain will export __________; if the worldprice ratio were 1 wheat:4 clothing (or 1 clothing:2.5 wheat), Spain would __________.89a. wheat; also export wheatb. wheat; would export clothingc. clothing; also would export clothingd. clothing; would be indifferent to trade13.Given the following constant-cost production-possibilities frontiers for Pakistan and India:Pakistan has an autarky relative price of __________; if trade begins with India, then Pakistan would produce at point __________, assuming complete specialization.a. 1 cloth:0.5 wheat (i.e., P cloth /P wheat = 0.5); Ab. 1 cloth:0.5 wheat (i.e., P cloth /P wheat = 0.5); Bc. 1 cloth:2 wheat (i.e., P cloth /P wheat = 2); Ad. 1 cloth:2 wheat (i.e., P cloth /P wheat = 2); B14. Country A has the following constant-opportunity-costs production-possibilities frontier(PPF):Suppose that this country in autarky is located at point R on its PPF, where it is producing 300 units of good Y and __________ of good X. Suppose that country A is now opened to trade and can trade at a terms of trade of 1X:3Y. Assuming complete specialization inproduction, the country will now produce at __________.a. 50 units; point N and will export good X and import good Yb. 150 units; point N and will export good X and import good Yc. 50 units; point M and will export good Y and import good Xd. 150 units; point M and will export good Y and import good X15. If, in a two-commodity, two-country Classical world, Sweden can make a unit of furniturewith 10 days of labor and a unit of steel with 15 days labor, while Germany can make a unit of furniture with 12 days of labor and a unit of steel with 12 days labor, thena. Sweden has an absolute advantage in steel and Germany has an absolute advantage infurniture.b. Sweden has a comparative advantage in steel and Germany has a comparativeadvantage in furniture.c. the pretrade price ratios indicate that Germany will export steel if trade takes place.d. the pretrade price ratio in Sweden is 1 furniture:1.5 steel.16. Given the following Ricardo-type table showing the amount of labor input required toproduce one unit of output of each of the two goods in each of the two countries:Wheat ClothingUnited Kingdom 6 days 5 daysUnited States 4 days 3 daysa. The United Kingdom has an absolute advantage in neither good.b. The United States has a comparative advantage in wheat.c. The United States has a comparative advantage in both goods.d. A post-trade price ratio (terms of trade) of 1 wheat:1.5 clothing is a feasibleequilibrium post-trade price ratio.17. In Question #16 above,a. if the United Kingdom were a much larger country than the United States, then, otherthings equal, the terms of trade would tend to be located more toward the U.S.pre-trade price ratio than toward the U.K. pre-trade price ratio.b. if world demand (the sum of U.S. demand and U.K. demand) were directed more10toward clothing than toward wheat, other things equal, then the terms of tradewould tend to be located more toward the U.K. price ratio than toward the U.S.pre-trade price ratio.c. a post-trade price ratio (terms of trade) of 1 clothing:0.75 wheat would mean that theUnited Kingdom did not gain from trade.d. a post-trade price ratio (terms of trade) of 1 wheat:1.2 clothing would give all the gainsfrom trade to the United States.18. Which one of the following is NOT an assumption contained in the Classical/Ricardo trademodel?a. Factors of production (labor) are completely mobile within a country.b. Factors of production (labor) are completely mobile between countries.c. Marginal costs are constant as production increases for a firm/industry.d. Transportation costs of goods between countries are zero.19. Suppose that a country in the Classical model has the following production-possibilities frontier (PPF):If, in autarky, the country is producing 700 computers and is located at point Mon the PPF, the country would be producing __________ autos. If the country isnow opened to trade at a terms of trade of 1 auto: 2 computers (or 1 computer: 0.5auto), it would export __________.a. 120; autos;b. 120; computers;c. 280; autos;d. 280; computers20. In Question #19 above, suppose that the country, when it is opened to trade, did not11change its production combination from the production combination at point M. In this situation, how many units of its import good could the country obtain if it exported all of the export good that it produced?a. 240 units;b. 350 units;c. 500 units;d. 800 units;Part 2 DefinitionProduction-possibility frontier (PPF)CHAPTER 4EXTENSIONS AND TESTS OF THE CLASSICAL MODEL OF TRADE Part 1. Multiple-Choice Questions1. Suppose that, in a Classical model with two goods, Germany can produce 50 units of steelwith one day of labor and 30 units of textiles with one day of labor; Switzerland canproduce 45 units of steel with one day of labor and 45 units of textiles with one day of labor.If the exchange rate is fixed at 1 Swiss franc = 1 euro and if the Swiss wage rate is 10francs per day, then, in trading equilibrium, German wagesa. must be greater than 10 euros per day.b. must be less than 10 euros per day.c. must be equal to 10 euros per day.d. can be above, below, or equal to 10 euros per day – cannot be determined withoutmore information.2. You are given the following Classical-type table indicating the number of days of laborinput needed to make one unit of output of each of the five commodities in each of thetwo countries. Assume that the wage rate in England is £20 per day, that the wage rate in Portugal is 40 euros per day, and that the fixed exchange rate is £1 = 3 euros.Good A Good B Good C Good D Good E12England 1 day 5 days 2 days 1 day 4 daysPortugal 4 days 4 days 1 day 2 days 5 daysWith the given information, what will be the trade pattern if the two countries engage in trade?a. England will export good A and import goods B, C, D, and E.b. England will export goods A and D and import goods B, C, and E.c. England will export goods A, B, and E and import goods C and D.d. England will export goods A, B, D, and E and import good C.3. In Question #2 above, suppose that one-half day of labor must be used to transport agood internationally, no matter which good is considered and which country is doing the exporting. With this addition of transportation costs, England will export good(s)__________ and will import good(s) __________.a. A; B, C, D, and Eb. A and D; B, C, and Ec. A; B, C, and Ed. A; B and C4. You are given the following Classical-type table showing the output of 10 days labor in theproduction of each of the two commodities in each of the two countries. Assume thatthe U.K. worker’s wage is £30 per day and that the fixed exchange rate is $2 = £1.Food ClothingUnited States 30 units 30 unitsUnited Kingdom 20 units 15 units. If trade is taking place between the two countries, what is the “upper limit” to the U.S.worker’s wage per day?a. $30;b. $40;c. $90;d. $1205. In the situation in Question #4 above, if trade is taking place, what is the lower limit” tothe U.S. worker’s wage per day?a. $30;b. $40 ;c. $90;d. $1206. Given the following Classical-type table shows the number of days of labor inputrequired to obtain one unit of output of each of the three commodities in each of the two countries:13good T good X good YUnited Kingdom 4 days 5 days 3 daysUnited States 4 days 4 days 2 daysSuppose that the wage rate in the United Kingdom is £30 per day, the wage rate in theUnited States is $40 per day, and the exchange rate is £1 = $1. In this situation, theUnited Kingdom willa. export good T and import goods X and Y.b. export good Y and import goods T and X.c. export goods T and X and import good Y.d. export goods X and Y and import good T.7. In Question #6 above, if the U.S. wage rate is $40 per day and the exchange rate is £1 =$1, what is the upper limit to the wage rate in the United Kingdom that is consistent with two-way trade between the countries?a. £26⅔ per day;b. £30 per day;c. £32 per day;d. £40 per day8. In a Ricardo-type model, if Portuguese workers can produce three times as much wine perday as English workers but only twice as much cloth per day as English workers, then, if Portuguese wages are 30 euros per day, the upper limit to English wages per day is__________. (Assume 1 euro = £1.)a. £10 ;b. £15 ;c. £60;d. £909. The following Classical-type table shows the number of days of labor input required toobtain one unit of output of each of the two commodities in each of the three countries:clothing wheatSpain 3 days 6 daysUnited States 2 days 5 daysEngland 4 days 6 daysGiven this information, the United States has an absolute advantage over Spain ina. both goods, and the United States also has an absolute advantage over England inboth goods.b. both goods, but the United States has an absolute advantage over England in neithergood.c. neither good, but the United States has an absolute advantage over England in bothgoods.14d. neither good, and the United States also has an absolute advantage over England inneither good.10. In the three-country world in Question #9, which one of the following statements is TRUE?a. Posttrade prices (terms of trade) of 1 wheat:2.5 clothing (or 1 clothing:0.4 wheat)would give all the gains from trade to the United States.b. Posttrade prices (terms of trade) of 1 wheat:3 clothing (or 1 clothing:⅓ wheat) arepossible.c. At posttrade prices (terms of trade) of 1 wheat:1.6 clothing (or 1 clothing:0.625wheat), England would export wheat and Spain and the United States would exportclothing.d. At posttrade prices (terms of trade) of 1 wheat:2.25 clothing (or 1 clothing:0.44wheat), Spain would export clothing and import wheat.11. In the table in Question #9 above, when trade is taking place among the three countries,__________ will always be exporting wheat and __________ will always be exportingclothing.a. the United States; Englandb. England; the United Statesc. England; Spaind. Spain; the United States12. Given the following Classical-type table showing the fixed money prices of each good ineach of the two countries:Shoes WineUnited States $20/pair $10/bottleSwitzerland 100 francs/pair 40 francs/bottle If the exchange rate is flexible, the upper limit to the price of the dollar (i.e., the number of Swiss francs per dollar above which there is export of both goods by Switzerland) isa. 5 francs = $1;b. 4 francs = $1;c. 0.25 francs = $1;d. 0.20 francs = $1.13. Suppose that the labor requirements per unit of output in each of the two industries ineach of three countries are as follows:Wheat Cloth15Spain 2 days 3 daysFrance 2 days 2 daysUnited States 1 day 3 daysIn this situation, with an international terms of trade of 1 cloth:2 wheat (or 1 wheat:½ cloth), __________ would export cloth and import wheat; if the terms of trade were, instead, 1wheat:¾ cloth (or 1 cloth:1⅓ wheat), __________ would export cloth and import wheat.a. France and the United States; Spainb. Spain and France; Francec. France and the United States; Spain and the United Statesd. Spain and France; Spain and the United States14. Given the following Classical-type table showing the number of days of labor inputrequired to obtain one unit of output of each of the two commodities in each of the threecountries:wine clothingDenmark 4 days 6 daysGermany 3 days 3 daysPortugal 5 days 9 daysWhich one of the following statements is correct?a. If trade is taking place, Germany will always be exporting wine.b. If trade is taking place, Denmark will always be exporting clothing.c. If trade is taking place, Portugal will always be importing clothing.d. If trade is taking place and the terms of trade are 1 clothing:1.6 wine, Germany will beexporting clothing and Denmark and Portugal will be importing clothing.15. Suppose that the wage rate in country A is three times the wage rate in country B. In thissituation, in the context of the Classical/Ricardo trade model, country A would be able to export goods to country B in industries wherea. A’s workers were less than one-third as productive as B’s workers.b. A’s workers were equally as productive as B’s workers.c. A’s workers were less than three times as productive as B’s workers.d. B’s workers were less than one-third as productive as A’s workers.Part 2 Simple Questions1.Suppose the unit production conditions in Spain and UK are as follows:16Please determine which kinds of commodities these two countries should export and import (Suppose the exchange rate is 0.8 pound/euro)2.Suppose the labor requirements in Sweden, Germany and France are as follows:Please tell me which kinds of commodities these three countries should produce and export.17。