1. What is international trade?
A) Exchange of goods and services within a country
B) Exchange of goods, services, and resources between countries
C) Only trade of manufactured goods between nations
D) Trade restricted to economic unions
Answer: B
2. Which of the following is NOT a benefit of international trade?
A) Economic efficiency
B) Trade cycles
C) Access to new markets
D) Rising incomes
Answer: B
3. According to the chapter, international trade can reduce the likelihood of:
A) Innovation in production
B) Environmental degradation
C) Domestic monopolies
D) Political sovereignty issues
Answer: C
4. What is the Mercantilist view of international trade?
A) Trade is a zero-sum game
B) Trade is based on comparative advantage
C) Nations should produce goods using their abundant resources
D) Trade cycles benefit all participating nations
Answer: A
5. Adam Smith’s theory of absolute advantage states:
A) Countries benefit by producing goods they are best at, relative to others
B) Trade occurs only when nations produce identical goods
C) Exports must always exceed imports for wealth accumulation
D) Countries should avoid specialization
Answer: A
6. According to Adam Smith, trade is NOT a:
A) Zero-sum game
B) Beneficial activity for nations
C) Process involving absolute cost advantage
D) Way to increase global efficiency
Answer: A
7. Which of the following assumptions is made in the Absolute Advantage Theory?
A) Transportation costs are included in trade analysis
B) Labour is mobile between countries
C) Costs are computed using the amount of labour required
D) Trade involves multiple countries and commodities
Answer: C
8. What is the key insight of David Ricardo’s Theory of Comparative Advantage?
A) Trade depends solely on absolute cost advantages
B) A country benefits from trade based on its most significant absolute advantage
C) Trade is possible even if one country is more productive in all goods
D) Trade creates economic dependence that harms nations
Answer: C
9. Comparative advantage explains trade in terms of:
A) Opportunity costs
B) Physical resources only
C) Equal productivity between countries
D) Maximizing imports over exports
Answer: A
10. What is the main idea of the Heckscher-Ohlin theory?
A) Trade is based on the distribution of natural resources
B) Countries export goods requiring factors they have in abundance
C) Comparative advantage relies solely on labour productivity
D) Economies of scale determine trade patterns
Answer: B
11. In the Heckscher-Ohlin theory, capital-abundant countries are likely to:
A) Export labour-intensive goods
B) Import capital-intensive goods
C) Export capital-intensive goods
D) Export only services
Answer: C
12. The concept of economies of scale refers to:
A) A decrease in per-unit cost as production increases
B) Equal production costs across countries
C) Specialization in goods with higher production costs
D) Increasing labour input to meet demand
Answer: A
13. Network effects in international trade involve:
A) Reducing consumer choices
B) Increasing utility as more people use a product or service
C) Limiting global access to specific goods
D) Encouraging smaller production units
Answer: B
14. According to the chapter, one limitation of international trade is:
A) Stimulus to economic growth
B) Potential environmental degradation
C) Increase in foreign exchange reserves
D) Access to competitive prices
Answer: B
15. The Mercantilist belief about wealth accumulation focused on:
A) Acquiring gold and silver
B) Importing raw materials
C) Free trade without tariffs
D) Specialization based on opportunity cost
Answer: A
16. Adam Smith’s principle of absolute advantage is based on:
A) Accumulation of precious metals
B) Labour as the sole input in production
C) Exporting goods with lower domestic demand
D) Avoiding specialization in production
Answer: B
17. In Ricardo’s example, Country A benefits from specializing in steel if:
A) It is more productive in steel and shirts than Country B
B) Its absolute advantage in steel is greater than in shirts
C) Country B has no comparative advantage
D) Shirts have higher demand in Country A
Answer: B
18. A major limitation of trade openness is:
A) Decrease in economic efficiency
B) Risky dependence on foreign nations
C) Lack of access to new materials
D) Reduced human resource development
Answer: B
19. Which economist proposed the New Trade Theory?
A) Adam Smith
B) David Ricardo
C) Eli Heckscher
D) Paul Krugman
Answer: D
20. What aspect of international trade did Paul Krugman’s work challenge?
A) The importance of absolute advantage
B) The predictive accuracy of the Heckscher-Ohlin model
C) The benefits of specialization
D) The role of comparative costs
Answer: B
21. According to the New Trade Theory, firms benefit from:
A) Producing at smaller scales to meet local demand
B) Exporting only labour-intensive goods
C) Economies of scale and network effects
D) Eliminating competition through monopolies
Answer: C
22. Which of the following is NOT an assumption of Absolute Advantage Theory?
A) Trade involves two countries and two commodities
B) Labour is immobile between countries
C) Trade benefits all participating nations equally
D) Transportation costs are ignored
Answer: C
23. Mercantilists viewed trade as:
A) A win-win situation
B) A process to balance imports and exports
C) A zero-sum game
D) An opportunity to reduce tariffs
Answer: C
24. What is one benefit of international trade highlighted in the chapter?
A) Concentration of wealth in specific sectors
B) Reduction in trade cycles
C) Enhanced human resource development
D) Elimination of trade barriers
Answer: C
25. Comparative advantage encourages countries to:
A) Avoid importing goods
B) Export goods with the highest absolute cost advantage
C) Specialize in goods with the lowest opportunity cost
D) Compete for similar markets
Answer: C
26. The Heckscher-Ohlin model assumes that:
A) Capital is equally distributed across countries
B) Nations specialize based on their labour and capital endowments
C) Absolute advantage determines trade
D) Environmental factors influence production
Answer: B
27. The network effects described in the New Trade Theory emphasize:
A) Reducing consumer demand for popular goods
B) Increasing the value of products as more people use them
C) Eliminating competition through advanced technologies
D) Focusing only on high-value products
Answer: B
28. One risk of international trade for underdeveloped nations is:
A) Improved labour standards
B) Economic exploitation
C) Increased foreign reserves
D) Diversified production
Answer: B
29. The example of steel and shirts in Ricardo’s theory demonstrates:
A) The impossibility of mutual gains from trade
B) A country benefiting even without an absolute advantage
C) Labour mobility between nations
D) The importance of tariffs in trade
Answer: B
30. Paul Krugman’s New Trade Theory introduced the concept of:
A) Labour mobility as a key determinant
B) Comparative advantage based on labour input
C) Trade among nations with similar factor endowments
D) Tariff reductions to encourage exports
Answer: C
31. International trade helps developed countries by:
A) Restricting new market opportunities
B) Promoting export diversification
C) Increasing dependence on imports
D) Limiting the scope of innovation
Answer: B
32. What key issue did the Heckscher-Ohlin model fail to address?
A) Trade patterns among similar economies
B) The role of tariffs in international trade
C) Labour mobility within countries
D) Environmental impacts of trade
Answer: A
33. According to the chapter, excessive export orientation may:
A) Increase economic independence
B) Distort domestic investment priorities
C) Boost environmental standards
D) Create trade surpluses
Answer: B
34. What is an example of a network effect?
A) Increased production due to capital investment
B) High utility from a widely adopted technology
C) Reducing the cost of international shipping
D) Eliminating tariffs to enhance trade
Answer: B
35. The concept of opportunity cost is central to:
A) Mercantilism
B) Comparative advantage
C) Absolute advantage
D) The Heckscher-Ohlin model
Answer: B
36. Trade cycles in international trade may lead to:
A) Rapid recovery in all trading nations
B) Transmission of economic crises globally
C) Elimination of market imbalances
D) Stability in global trade policies
Answer: B
37. Absolute advantage occurs when a country:
A) Can produce a good at a lower opportunity cost
B) Produces more of a good with the same resources
C) Trades goods with similar costs across countries
D) Has equal efficiency in producing all goods
Answer: B
38. A limitation of international trade is:
A) Reduction in innovation and efficiency
B) Unequal market access
C) Improved consumer choices
D) Increased human capital development
Answer: B
39. Which economist emphasized the role of economies of scale in trade?
A) Adam Smith
B) David Ricardo
C) Paul Krugman
D) Eli Heckscher
Answer: C
40. What do countries gain through trade according to Ricardo?
A) Reduced production costs in all goods
B) Specialization based on opportunity costs
C) Wealth accumulation via exports
D) Protection of domestic industries
Answer: B
41. In the Heckscher-Ohlin model, labour-abundant countries export:
A) Capital-intensive goods
B) Labour-intensive goods
C) High-tech goods
D) Goods with low demand
Answer: B
42. What was a key focus of Mercantilist policies?
A) Free trade and minimal tariffs
B) Accumulation of precious metals
C) Opportunity cost-driven specialization
D) Protection of cultural identity
Answer: B
43. A country with a comparative advantage in a good:
A) Has the lowest production cost in the world for that good
B) Produces the good at a lower opportunity cost than others
C) Does not benefit from specialization
D) Has no need for imports
Answer: B
44. The New Trade Theory highlights:
A) The importance of tariffs for economic growth
B) Trade based on economies of scale and similar endowments
C) Specialization due to labour differences
D) Restriction of trade to protect sovereignty
Answer: B
45. What is a potential disadvantage of trade for underdeveloped nations?
A) Improved global relations
B) Loss of cultural identity
C) Reduction in resource exploitation
D) Higher transparency in trade policies
Answer: B
46. What concept challenges the idea that trade depends only on absolute advantage?
A) Economies of scale
B) Comparative advantage
C) Network effects
D) Factor endowments
Answer: B
47. Which theory emphasizes factor endowments like labour and capital?
A) Mercantilism
B) Heckscher-Ohlin theory
C) Comparative advantage theory
D) New Trade Theory
Answer: B
48. One of the limitations of Mercantilist views was:
A) Emphasis on wealth accumulation
B) Focus on opportunity costs
C) Treating trade as a zero-sum game
D) Ignoring trade benefits for monopolies
Answer: C
49. Which example reflects the principle of economies of scale?
A) A factory reducing costs by increasing production
B) A country exporting only raw materials
C) Consumers reducing demand for high-cost goods
D) Restriction of trade to domestic markets
Answer: A
50. The purpose of international trade, according to most economists, is to:
A) Increase wealth disparities between nations
B) Ensure political sovereignty
C) Make the world better off
D) Restrict competition in domestic markets
Answer: C
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