#1
What does the principle of comparative advantage in trade suggest?
Countries should produce only what they are most efficient at producing.
ExplanationSpecializing in production based on efficiency enhances overall global output.
#2
Who introduced the concept of comparative advantage?
David Ricardo
ExplanationDavid Ricardo is credited with introducing the concept of comparative advantage in trade.
#3
Which economist is associated with the concept of 'opportunity cost'?
David Ricardo
ExplanationDavid Ricardo is associated with introducing the concept of opportunity cost.
#4
Which term describes the situation where a country can produce a good at a lower opportunity cost compared to another country?
Comparative advantage
ExplanationComparative advantage signifies a country's ability to produce a good with lower opportunity costs than another.
#5
What is the term for the value of goods and services a country exports minus the value of what it imports?
Trade balance
ExplanationThe trade balance represents the net value of a country's exports minus its imports in goods and services.
#6
What is the opportunity cost in the context of comparative advantage?
The value of the next best alternative forgone.
ExplanationOpportunity cost refers to the value sacrificed when choosing one option over another.
#7
In the theory of comparative advantage, what happens when two countries specialize and trade with each other?
Both countries benefit from increased production and consumption.
ExplanationMutual specialization and trade lead to enhanced production and consumption for both countries.
#8
Which of the following is NOT a condition for comparative advantage to hold?
Fixed exchange rates
ExplanationFixed exchange rates are not a condition for comparative advantage; it depends on relative opportunity costs.
#9
What is the main difference between absolute advantage and comparative advantage?
Comparative advantage considers opportunity costs.
ExplanationWhile absolute advantage focuses on overall efficiency, comparative advantage factors in the opportunity cost of producing specific goods.
#10
How does specialization according to comparative advantage affect global output?
It increases global output.
ExplanationSpecializing based on comparative advantage leads to higher overall global output.
#11
What is the law of comparative advantage?
A country should produce a good if its opportunity cost is lower than that of another country.
ExplanationThe law of comparative advantage dictates that production decisions should be based on lower opportunity costs compared to other nations.
#12
What factor can cause a country's comparative advantage to change over time?
Changes in technology
ExplanationTechnological advancements can alter a country's comparative advantage in the production of goods.
#13
What are some limitations of the principle of comparative advantage?
All of the above.
ExplanationVarious factors, including unrealistic assumptions and externalities, limit the applicability of comparative advantage.
#14
How can a country still benefit from trade even if it has an absolute advantage in all goods?
By specializing in goods it has a comparative advantage in.
ExplanationEven with absolute advantage, a country gains by specializing in goods where its comparative advantage is pronounced.
#15
What effect does free trade have on the principle of comparative advantage?
It strengthens the principle by allowing countries to specialize according to their advantages.
ExplanationFree trade reinforces comparative advantage by enabling nations to specialize in areas where they have a relative efficiency.
#16
What role do tariffs and quotas play in the context of comparative advantage?
They distort international trade by interfering with comparative advantage.
ExplanationTariffs and quotas disrupt international trade patterns by impeding the natural flow based on comparative advantage.