CA Foundation Economics – International Trade Multiple Choice Questions

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Theories of International Trade Introduction

Question 1. Which theory suggests that a country should specialize in producing goods in which it has an absolute advantage?

  1. Comparative Advantage Theory
  2. Mercantilism Theory
  3. Absolute Advantage Theory
  4. Factor Proportions Theory

Answer: 3. Absolute Advantage Theory

Explanation:

The Absolute Advantage Theory, proposed by Adam Smith, suggests that a country should specialize in producing goods in which it has an absolute advantage over other countries. Absolute advantage refers to a country’s ability to produce a good more efficiently using fewer resources compared to other countries.

Question 2. According to the Comparative Advantage Theory, trade between two countries can be beneficial if

  1. Both countries have the same resources and technology.
  2. Both countries have a balanced trade.
  3. One country has an absolute advantage in all goods.
  4. Each country specializes in producing goods in which it has a lower opportunity cost.

Answer: 4. Each country specializes in producing goods in which it has a lower opportunity cost.

Explanation:

The Comparative Advantage Theory, introduced by David Ricardo, states that trade betv/een two countries can be mutually beneficial it each country specializes in producing goods in which it has a lower opportunity cost. Opportunity cost is the cost of forgoing the next best alternative v/hen making a decision.

Question 3. The theory that emphasizes the role of factor endowments as the basis for trade is known as

  1. Absolute Advantage Theory
  2. Heckscher-Ohlin Theory
  3. New Trade Theory
  4. Porter’s Diamond Model

Answer: 2. Heckscher-Ohlin Theory

Explanation:

The Heckscher-Ohlin Theory, developed by Eli Heckscher and Berta Ohlin, emphasizes that a country exports goods that utilize its abundant factors of production and imports goods that require factors of production that are scarce in the country. It is also known as the factor proportions theory.

Question 4. Which theory of international trade explains trade patterns based on economies of scale and product differentiation?

  1. Comparative Advantage Theory
  2. Mercantilism Theory
  3. New Trade Theory
  4. Absolute Advantage Theory

Answer: 23. New Trade Theory

Explanation:

The New Trade Theory, introduced by Paul Krugman, explains trade patterns based on economies of scale and product differentiation. It suggests that economies of scale can lead to lower production costs, which can result in increased exports and international trade.

Question 5. The theory that states a country should protect its domestic industries to build national wealth and power is called

  1. Absolute Advantage Theory
  2. Mercantilism Theory .
  3. Comparative Advantage Theory
  4. Factor Proportions Theory

Answer: 2. Mercantilism Theory

Explanation:

The Mercantilism Theory is an outdated economic theory that was prevalent in the 16th to 18th centuries. It suggests that a country should protect its domestic industries, maximize exports, and minimize imports to build national wealth and power.

Question 6. Which theory suggests that a country should specialize in producing goods and services in which it has an absolute advantage?

  1. Mercantilism
  2. Comparative advantage
  3. Absolute advantage
  4. Factor proportion theory

Answer: 3. Absolute advantage

Question 7. The theory of comparative advantage was developed by

  1. David Ricardo
  2. Adam Smith
  3. John Maynard Keynes
  4. Karl Marx

Answer: 1. David Ricardo

Question 8. According to the theory of comparative advantage, a country should specialize in producing goods and services in which it has a comparative advantage, which means

  1. It can produce more units of the good with the same amount of resources compared to another country
  2. It can produce the good using fewer resources compared to another country
  3. It has a higher income level than other countries
  4. It has a larger population than other countries

Answer: 2. It can produce the good using fewer resources compared to another country

Question 9. The Heckscher-Ohlin theory suggests that international trade occurs due to differences in

  1. Government policies and regulations
  2. Technological advancements
  3. Factor endowments (such as labor and capital)
  4. Exchange rates

Answer: 3. Factor endowments (such as labor and capital)

Question 10. According to the new trade theory, what is the role of economies of scale in international trade?

  1. Economies of scale have no impact on international trade.
  2. Countries with large economies of scale have a comparative advantage in all industries.
  3. Economies of scale allow firms to reduce production costs and gain a competitive advantage in international markets.
  4. Small economies are at a disadvantage in international trade due to the lack of economies of scale.

Answer: 3. Economies of scale allow firms to reduce production costs and gain a competitive advantage in international markets.

Important Theories Of International Trade

Question 1. The theory that suggests that a country should specialize in producing and exporting goods in which it has a comparative advantage, and import goods in which it has a comparative disadvantage, is known as

  1. The Mercantilist Theory
  2. The Theory of Absolute Advantage
  3. The Theory of Comparative Advantage
  4. The Heckscher-Ohlin Theory

Answer: 3. The Theory of Comparative Advantage

Explanation:

The Theory of Comparative Advantage, proposed by David Ricardo, suggests that a country should specialize in producing and exporting goods in which it has a lower opportunity cost (comparative advantage) and import goods in which it has a higher opportunity cost.

Question 2. According to the Theory of Absolute Advantage, trade between two countries can be mutually beneficial if

  1. Both countries have the same level of productivity.
  2. One country can produce all goods at a lower cost than the other.
  3. Both countries have the same resources and technology.
  4. Both countries impose high tariffs on imports.

Answer: 2. One country can produce all goods.a lower cost than the other.

Explanation: 

The Theory of Absolute Advantage, proposed by Adam Smith, suggests that trade between two countries can be mutually beneficial if one country can produce all goods at a lower cost (absolute advantage) than the other country.

Question 3. The Heckscher-Ohlin Theory of International Trade emphasizes that trade is influenced by differences in

  1. The absolute advantage between countries.
  2. Comparative advantage between countries.
  3. Factor endowments between countries.
  4. Monetary policies between countries.

Answer: 3. Factor endowments between countries.

Explanation:

The Heckscher-Ohlin Theory of International Trade emphasizes that trade is influenced by differences in factor endowments, such as labor, capital, and land, between countries. Countries tend to export goods that use their abundant factors more intensively and import goods that use their scarce factors more intensively. .

Question 4. The Mercantilist Theory of International Trade advocates that a country should

  1. Encourage imports to promote domestic industries.
  2. Export more than it imports to accumulate wealth in the form of precious metals.
  3. Adopt a policy of free trade to promote global cooperation.
  4. Reduce tariffs and barriers to trade.

Answer: 2. Export more than it imports to accumulate wealth in the form of precious metals.

Explanation:

The Mercantilist Theory of International Trade advocates that a country should try to export more than it imports to accumulate wealth, especially in the form of precious metals like gold and silver. This approach was prevalent during the mercantilist era but is not considered a viable trade policy in modern times.

Question 5. According to the Product Life Cycle Theory of International Trade, at which stage of a product’s life cycle is a country likely to export it?

  1. Introduction stage
  2. Growth stage
  3. Maturity stage
  4. Decline stage

Answer: 1. Introduction stage

Explanation:

The Product Life Cycle Theory of International Trade suggests that a country is likely to export a product during its introduction stage when it is a new and innovative product. As the product becomes widely adopted and enters the maturity stage, production may be shifted to other countries with lower production costs.

Question 6. The theory that suggests that a country should specialize in producing goods in which it has an absolute advantage and then trade with other countries to maximize overall efficiency is known as

  1. The Theory of Comparative Advantage
  2. The Theory of Absolute Advantage
  3. The Theory of Factor Proportions
  4. The Theory of International Product Life Cycle

Answer: 2. The Theory of Absolute Advantage

Explanation:

The Theory of Absolute Advantage, proposed by Adam Smith, suggests that a country should specialize in producing goods in which it has an absolute advantage over other countries (i.e., it can produce those goods more efficiently) and then trade with other countries to maximize overall efficiency and welfare.

Question 7. The theory that explains how countries benefit from trade by focusing on the opportunity cost of producing different goods is known as

  1. The Theory of Comparative Advantage
  2. The Theory of Absolute Advantage
  3. The Theory of Factor Proportions
  4. The Theory of International Product Life Cycle

Answer: 1. The Theory of Comparative Advantage

Explanation:

The Theory of Comparative Advantage, proposed by David Ricardo, explains that countries benefit from trade by focusing on the opportunity cost of producing different goods. A country should specialize in producing goods with lower opportunity costs and trade with other countries to gain from the efficiency gains.

Question 8. The theory that emphasizes the importance of factor endowments (such as labor and capital) in determining a country’s trade patterns is known – as

  1. The Theory of Comparative Advantage
  2. The Theory of Absolute Advantage
  3. The Theory of Factor Proportions
  4. The Theory of International Product Life Cycle

Answer: 3. The Theory of Factor Proportions

Explanation:

The Theory of Factor Proportions, also known as the Heckscher-Ohlin Theory, emphasizes the role of factor endowments (e.g., labor, capital) in determining a country’s trade patterns. It suggests that countries will export goods that use their abundant factors of production and import goods that use their scarce factors.

Question 9. The theory that explains how a product’s life cycle influences a country’s trade patterns and the direction of trade is known, as

  1. The Theory of Comparative Advantage
  2. The Theory of Absolute Advantage
  3. The Theory of Factor  Proportions
  4. The Theory of International Product Life Cycle

Answer: 4. The Theory of International Product Life Cycle

Explanation:

Theory of International Product Life Cycle, proposed by Raymond Vernon, explains how a product’s life cycle influences a country’s trade patterns and the direction of trade. It suggests that a product initially produced in a developed country may shift production to developing countries over time as the product matures.

Question 10. The theory that takes into account the economies of scale and imperfect competition in international trade is known as

  1. The Theory of Comparative Advantage
  2. The Theory of Absolute Advantage
  3. The Theory of Factor Proportions
  4. The Theory of New Trade

Answer: 4. The Theory of New Trade

Explanation:

The Theory of New Trade, developed by Paul Krugman, takes into account the economies of scale and imperfect competition in international trade. It suggests that firms’ ability to exploit economies of scale and product differentiation can lead to trade even in similar products.

Question 11. The theory that suggests countries should specialize in producing goods and services in which they have a comparative advantage is known as

  1. Absolute advantage theory
  2. Mercantilism
  3. Comparative advantage theory
  4. Factor proportion theory

Answer: 3. Comparative advantage theory

Question 12. The principle of comparative advantage was first proposed by

  1. Adam Smith
  2. David Ricardo
  3. John Maynard Keynes
  4. ‘ Karl Marx

Answer: 2. David Ricardo

Question 13. According to the theory of absolute advantage, a country should specialize in producing goods in which it can

  1. Produce the most units of goods with the same amount of resources
  2. Produce the highest-quality goods
  3. Produce goods that are in high demand internationally
  4. Produce goods that have the highest market value

Answer: 1. Produce the most units of good with the same amount of resources

Question 14. The Heckscher-Ohlin theory suggests that international trade occurs due to differences in: 

  1. Technology and innovation
  2. Government policies and regulations
  3. Factor endowments (such as labor and capital)
  4. Cultural preferences for certain products

Answer: 3. Factor endowments (such as labor and capital

Question 15. The new trade theory emphasizes the role of _________________ in explaining international trade patterns.

  1. Factor endowments
  2. Economies of scale
  3. Comparative advantage
  4. Tariffs and trade barriers

Answer: 2. Economies of scale

The Mercantilists’ View of International Trade

Question 1. The Mercantilists’ view of international trade primarily focused on:

  1. Promoting free trade and unrestricted movement of goods.
  2. Accumulating precious metals and maintaining a favorable balance of trade.
  3. Achieving absolute advantage in the production of all goods.
  4. Reducing tariffs and trade barriers between nations.

Answer: 2. Accumulating precious metals and maintaining a favorable balance of trade

Explanation:

The Mercantilist’s view of international trade emphasized the accumulation of precious metals, particularly gold and silver, as a measure of a country s wealth and power. They believed that a favorable balance of trade, achieved through exporting more than importing, would lead to the inflow of precious metals, contributing to a nation’s prosperity.

Question 2. According to the Mercantilists, the best way for a country to increase its wealth was to

  1. Encourage imports to meet domestic demand.
  2. Maintain a balanced trade with other nations.
  3. Export more goods than it imported.
  4. Focus on domestic production and self-sufficiency.

Answer: 3. Export more goods than it imported.

Explanation:

According to the Mercantilists, a country should strive to export more goods than it imports to generate a positive balance of trade. This positive trade balance would lead to an inflow of precious
metals, which they considered a measure of wealth.

Question 3. Mercantilists believed that colonies were essential for a country’s economic success because

  1. Colonies provided cheap labor for domestic industries. ,
  2. Colonies were a source of raw materials and markets for finished goods.
  3. Colonies ensured a steady supply of precious metals for the mother country.
  4. Colonies contributed to the development of free trade principles.

Answer: 2. Colonies were a source of raw materials and markets for finished goods.

Explanation:

Mercantilists believed that colonies played a crucial role in providing the mother country with access to abundant raw materials and serving as captive markets for finished goods. This allowed the mother country to increase its exports and strengthen its economic position.

Question 4. One of the main criticisms of the Mercantilist view of international trade was that it

  1. Promoted economic cooperation and mutual benefits among nations.
  2. Encouraged countries to focus on producing goods with comparative advantage.
  3. This led to excessive competition and conflicts over trade and resources.
  4. Ignored the importance of accumulating precious metals in trade.

Answer: 4. Ignored the importance of accumulating precious metals in trade.

Explanation:

One of the main criticisms of the Mercantilist view of international trade was that it overly focused on the accumulation of precious metals (bullionism) as the sole measure of a country’s wealth. Critics argued that economic prosperity should be based on productive capacities, efficient resource allocation, and mutual trade benefits rather than the accumulation of precious metals.

Question 5. Mercantilism was the dominant economic philosophy during which historical period?

  1. The 18th century
  2. The 19th century
  3. The 17th century
  4. The 20th century

Answer: 3. The 17th century

Explanation:

Mercantilism was the dominant economic philosophy during the 17th century and part of the 18th century. It was prevalent in European countries and influenced their economic policies related to International trade and colonization.

Question 6. The Mercantilists’ view of international trade primarily focused on

  1. Encouraging imports to promote domestic industries.
  2. Accumulating precious metals like gold and silver through exports.
  3. Promoting free trade and open markets.
  4. Reducing government intervention in trade.

Answer: 2. Accumulating precious metals like gold and silver through exports.

Explanation:

The Mercantilists’ view of international trade emphasizes) accumulation of precious metals like gold and silver through They believed that a country’s wealth and power could be increased: by maintaining a favorable balance of trade, where exports exceed leading to a net inflow of gold and silver.

Question 7. The Mercantilists believed that a positive balance of trade would 

  1. An increase in domestic production and employment.
  2. A decrease in the country’s foreign exchange reserves.
  3. A decrease in the country’s wealth and power.
  4. A decline in the country’s industrial development.

Answer: 1. An increase in domestic production and employment.

Explanation:

The Mercantilists believed that a positive balance of trade, a country exports more than it imports, would lead to an increase in domestic production and employment. They thought that e> goods would bring in precious metals, which would stimulate economic growth.

Question 8. The Mercantilists’ view on imports was that they should be

  1. Encouraged to promote international cooperation.
  2. Avoided as they can lead to a trade deficit.
  3. Limited to essential goods not produced domestically.
  4. Unrestricted to benefit consumers with more choices.

Answer: 2. Avoided as they can lead to a trade deficit.

Explanation:

The Mercantilists’ view on imports was that they should be avoided, as imports were believed to lead to a trade deficit. Th concerned that an excess of imports over exports could result in an outflow of precious metals, which would negatively impact the country’s wealth.

Question 9. The Mercantilists’ policy recommendations to achieve a positive balance of trade included

  1. Subsidizing exports and imposing tariffs on imports.
  2. Encouraging free trade agreements with other nations.
  3. Eliminating all trade barriers and restrictions.
  4. Adopting a laissez-faire approach to international trade.

Answer: Subsidizing exports and imposing tariffs on imports.

Explanation:

The mercantilist’s policy recommendations to achieve a positive balance of trade included subsidizing exports to make them more competitive in foreign markets and imposing tariffs or duties on imports to discourage their inflow.

Question 10. The Mercantilists’ view of international trade was prevalent during the

  1. 19th century
  2. 18 th century
  3. 17th century
  4. 20th century

Answer:  3. 17th century

Explanation:

The Mercantilists’ view of international trade was prevalent during the 17th century. It was the dominant economic theory during that period and influenced the trade policies of many European countries.

Question 11. The Mercantilists believed that the wealth and power of a nation were primarily determined by

  1. The level of technology and innovation
  2. The size of its population
  3. The amount of gold and silver it possessed
  4. The extent of its agricultural resources

Answer: 3. The amount of gold and silver it possessed

Question 12. According to Mercantilists, a favorable balance of trade can be achieved by

  1. Exporting more goods than importing.
  2. Importing more goods than exporting
  3. Maintaining an equal value of exports and imports
  4. Eliminating trade with other nations . ‘

Answer: 1. Exporting more goods than importing.

Question 13. Mercantilists believed that a country should

  1. Encourage free trade with other nations
  2. Focus on producing goods with the highest domestic demand
  3. Accumulate as much gold and silver as possible through trade
  4. Import more than it exports to stimulate economic growth

Answer:  3. Accumulate as much gold and silver as possible through trade

Question 14. Which of the following was a policy measure commonly advocated by Mercantilists to promote exports and discourage imports?

  1. Imposing tariffs and import restrictions.
  2. Eliminating all taxes and tariffs on trade
  3. Encouraging foreign investment in domestic industries
  4. Signing free trade agreements with other nations

Answer: 1. Imposing tariffs and import restrictions.

Question 15. The Mercantilists’ view of international trade dominated economic thinking during which historical period?

  1. The late 20th century
  2. The Renaissance and the early modern period
  3. The Industrial Revolution
  4. The post-World War II era

Answer: 2. The Renaissance and the early modern period

The Theory Of Absolute Advantage

Question 1. The Theory of Absolute Advantage, proposed by Adam Smith, states that a country has an absolute advantage in the production of a good when

  1. It can produce that good at a lower opportunity cost compared to other countries.
  2. It can produce that good using fewer resources compared to other countries.
  3. It can produce that good using the latest technology and machinery.
  4. It can produce that good and export it without any restrictions.

Answer: 2. It can produce that good using fewer resources compared to other countries.

Explanation:

According to the Theory of Absolute Advantage, a country has an absolute advantage in the production of a good when it can produce that good using fewer resources (inputs) compared to other countries. This means that the country is more efficient in producing the good and can potentially produce more of it using the same amount of resources.

Question 2. The Theory of Absolute Advantage suggests that countries should specialize in producing goods in which they have an absolute advantage and then engage in international trade to

  1. Reduce competition in the domestic market.
  2. Protect domestic industries from foreign competition.
  3. Maximize overall efficiency and welfare
  4. Decrease the employment rate in the country.

Answer: 3. Maximize overall efficiency and welfare.

Explanation:

The Theory of Absolute Advantage proposes that countries should specialize in producing goods in which they have an absolute advantage (i.e., they are more efficient in production) and then engage in international trade. By doing so, countries can maximize overall efficiency and welfare, as trade allows them to obtain goods they cannot produce efficiently themselves.

Question 3. Which of the following is an essential assumption of the Theory of Absolute Advantage? 

  1. The constant opportunity cost of production.
  2. The availability of perfect competition in the markets.
  3. Identical resources and technologies across all countries.
  4. The absence of trade barriers and restrictions.

Answer: 3. Identical resources and technologies across all countries.

Explanation:

An essential assumption of the Theory of Absolute Advantage is that there are identical resources and technologies across all countries. This assumption allows for a clear comparison of absolute advantages in the production of goods.

Question 4. The Theory of Absolute Advantage highlights that international trade can lead to mutual benefits for countries because

  1. Each country has a comparative advantage in producing all goods.
  2. Each country can import goods that it cannot produce efficiently.
  3. Each country can export goods that it produces at a higher opportunity cost.
  4. Each country can accumulate vast amounts of wealth through trade.

Answer: 2. Each country can import goods that it cannot produce efficiently.

Explanation:

The Theory of Absolute Advantage suggests that international trade can lead to mutual benefits for countries because each country can specialize in producing goods in which it has an absolute advantage and then import goods that it cannot produce efficiently. This allows countries to consume a broader range of goods and improve overall economic welfare. ‘

Question 5. The Theory of Absolute Advantage laid the foundation for understanding the gains from international trade and served as a basis for

  1. The development of the Theory of Comparative Advantage.
  2. The imposition of trade barriers and tariffs.
  3. The establishment of international trade organizations.
  4. The promotion of self-sufficiency and autarky.

Answer: 1. The development of the Theory of Comparative Advantage.

Explanation:

The Theory of Absolute Advantage laid the foundation for understanding the gains from international trade. It was later expanded and refined by David Ricardo into the Theory of Comparative Advantage, which provides a more nuanced explanation of the benefits of trade based on opportunity costs.

As an Al language model, I don’t have access to a specific database of s with solutions. However, I can provide you with some sample multiple-choice questions related to the Theory of Absolute Advantage, along with explanations:

Question 6. The Theory of Absolute Advantage, proposed by Adam Smith, states that a country has an absolute advantage in producing a good if it can

  1. Produce the good at a lower opportunity cost than in another country.
  2. Produce the goods using fewer resources than in another country.
  3. Produce the goods using advanced technology and machinery.
  4. Produce the goods in larger quantities than in another country.

Answer: 1. Produce the good using fewer resources than other countries.

Explanation:  

The Theory of Absolute Advantage suggests that a country has an absolute advantage in producing a good if it can produce that good using fewer resources (for example labor, and capital) compared to another country. This means the country can produce the same quantity of the good with less input or can produce more of the good with the same input.

Question 7. According to the Theory of Absolute Advantage, when two countries specialize in producing the goods in which they have an absolute advantage and then trade with each other

  1. Both countries will benefit from trade due to efficiency gains.
  2. One country will gain, and the other country will lose from trade.
  3. Both countries will lose as they become dependent on each other.
  4. The terms of trade will always favor one country over the other.

Answer: 1. Both countries will benefit from trade due to efficiency gains.

Explanation:

According to the Theory of Absolute Advantage, when two countries specialize in producing the goods in which they have an absolute advantage and then trade with each other, both countries will benefit from trade due to efficiency gains. Each country will produce and export. the goods in which it has an absolute advantage, and through trade, it can acquire goods from the other country at a lower opportunity – cost.

Question 8. The Theory of Absolute Advantage suggests that international trade allows countries to

  1. Increase government revenue through export tariffs.
  2. Accumulate precious metals like gold and silver through exports
  3. Achieve balanced trade with all trading partners.
  4. Specialize in producing goods efficiently and enjoy a wider range of consumption.

Answer: 4. Specialize in producing goods efficiently and enjoy a wider range of consumption.

Explanation:

The Theory of Absolute Advantage suggests that through international trade, countries can specialize in producing goods in which they have an absolute advantage. This specialization allows them to produce these goods more efficiently, leading to an increase in overall production and a wider range of consumption possibilities for both countries.

Question 9. The Theory of Absolute Advantage focuses on

  1. The impact of economies of scale in international trade.
  2. The importance of factor endowments in determining trade patterns.
  3. The opportunity cost of producing different goods.
  4. The comparative cost differences between countries.

Answer: 2. The importance of factor endowments in determining trade patterns.

Explanation: 

The Theory of Absolute Advantage focuses on the importance of factor endowments (for example, labor, and capital) in determining trade, patterns. It emphasizes that a country should specialize in producing goods in which it has an absolute advantage due to its more efficient use of resources.

Question 10. The Theory of Absolute Advantage is associated with the work of which economist? 

  1. David Ricardo
  2. John Maynard Keynes
  3. Adam Smith
  4. Paul Samuelson

Answer: 2. Adam Smith

Explanation:

The Theory of Absolute Advantage was proposed by the Scottish economist Adam Smith in his seminal work “The Wealth of Nations” published in 1776.

Question 11. The Theory of Absolute Advantage, proposed by Adam Smith, states that a country has an absolute advantage in producing a good if it can

  1. Produce the good at a lower opportunity cost than in another country.
  2. Produce the goods using fewer resources than in another country.
  3. Produce the goods using advanced technology and machinery.
  4. Produce the goods in larger quantities than in another country.

Answer: 2. Produce the good using fewer resources than other countries.

Explanation:

The Theory of Absolute Advantage suggests that a country has an absolute advantage in producing a good if it can produce that good ‘ using fewer resources (for example, labor, and capital) compared to another country. This means the country can produce the same quantity of the good with less input or can produce more of the good with the same input.

Question 12. According to the Theory of Absolute Advantage, when two countries specialize in producing the goods in which they have an absolute advantage and then trade with each other

  1. Both countries will benefit from trade due to efficiency gains.
  2. One country will gain, and the other country will lose from trade.
  3. Both countries will lose as they become dependent on each other.
  4. The terms of trade will always favor one country over the other.

Answer: 1. Both countries will benefit from trade due to efficiency gains.

Explanation:

According to the Theory of Absolute Advantage, when two countries specialize in producing the goods in which they have an absolute advantage and then trade with each other, both countries will benefit from trade due to efficiency gains. Each country will produce and export the goods in which it has an absolute advantage, and through trade, it can acquire goods from the other country at a lower opportunity cost.

Question 13. The Theory of Absolute Advantage suggests that international trade allows countries to

  1. Increase government revenue through export tariffs.
  2. Accumulate precious metals like gold and silver through exports.
  3. Achieve balanced trade with all trading partners.
  4. Specialize in producing goods efficiently and enjoy a wider range of consumption.

Answer: 4. Specialize in producing goods efficiently and enjoy a wider range of consumption.

Explanation:

The Theory of Absolute Advantage suggests that through international trade, countries can specialize in producing goods in which they have an absolute advantage. This specialization allows them to produce these goods more efficiently, leading to an increase in overall production and a wider range of consumption possibilities for both countries.

Question 14. The Theory of Absolute Advantage focuses on

  1. The impact of economies of scale in international trade.
  2. The importance of factor endowments in determining trade patterns.
  3. The opportunity cost of producing different goods.
  4. The comparative cost differences between countries.

Answer: 2. The importance of factor endowments in determining trade patterns.

Explanation:

The Theory of Absolute Advantage focuses on the importance of factor endowments (for example,  labor, and capital) in determining trade patterns. It emphasizes that a country should specialize in producing goods in which it has an absolute advantage due to its more efficient use of resources.

Question 15. The theory of absolute advantage was first introduced by

  1. Adam Smith
  2. David Ricardo
  3. John Maynard Keynes
  4. Karl Marx

Answer:  1. Adam Smith

Question 16. According to the theory of absolute advantage, a country should specialize in producing goods or services so that it can

  1. Produce the most units of goods with the same amount of resources
  2. Produce the highest-quality goods or services
  3. Produce goods or services that have the highest market demand
  4. Produce goods or services with the highest profit margins

Answer: 1. Produce the most units of good with the same amount of resources

Question 17. The theory of absolute advantage suggests that international trade is beneficial because it allows countries to

  1. Import goods and services they cannot produce domestically
  2. Eliminate competition in the global market
  3. Increase government revenue through tariffs and trade barriers
  4. Reduce their dependence on foreign resources

Answer: 1. Import goods and services they cannot produce domestically

Question 18. According to Adam Smith’s absolute advantage theory, trade between two countries can lead to mutual gains as long as

  1. One country has an absolute advantage in all goods and services
  2. Both countries have an absolute advantage in the same goods and services
  3. Each country has an absolute advantage in different goods and services
  4. Both countries have an equal level of economic development

Answer: 3. Each country has an absolute advantage in different goods and services

Question 19. The theory of absolute advantage is based on the idea that countries should engage in trade to

  1. Maximize government revenue
  2. Achieve a favorable balance of trade *
  3. Promote self-sufficiency and economic isolation
  4. Benefit from specialization and exchange of goods and services

Answer:  4. Benefit from specialization and exchange of goods and services

The Theory Of Comparative Advantage

Question 1. The Theory of Comparative Advantage, developed by David Ricardo, suggests that countries should specialize in producing goods in which they have a comparative advantage. What does “comparative advantage” mean in this context?

  1. The ability to produce a good at a lower opportunity cost than another country.
  2. The ability to produce a good using fewer resources than another country.
  3. The ability to produce a good at the same cost as another country.
  4. The ability to produce a good more efficiently than another country.

Answer: 1. The ability to produce a good at a lower opportunity cost than another country.

Explanation:

The Theory of Comparative Advantage states that countries should specialize in producing goods in which they have a comparative advantage, i.e., the ability to produce a good at a lower opportunity cost than another country, it implies that a country should focus on producing goods in which it is relatively more efficient compared to other goods it could produce.

Question 2. According to the Theory of Comparative Advantage, when countries specialize in producing goods based on their comparative advantages and then trade with each other

  1. Only one country will benefit, while the other will lose from trade.
  2. Both countries will benefit from trade due to efficiency gains.
  3. Both countries will experience a decrease in overall production.
  4. The terms of trade will always favor one country over the other.

Answer: 2. Both countries will benefit from trade due to efficiency gains.

Explanation:

The Theory of Comparative Advantage suggests that when countries specialize in producing goods based on their comparative advantages and then trade with each other, both countries will benefit from trade due to efficiency gains. Each country will produce and export the goods in which it has a comparative advantage, and through trade, they can acquire goods from the other country at a lower opportunity cost.

Question 3. The Theory of Comparative Advantage is based on the concept of

  1. Economies of scale in production.
  2. Factor endowments and resource availability.
  3. Opportunity cost and trade-offs.
  4. Absolute cost differences between countries.

Answer: 3. Opportunity cost and trade-offs.

Explanation:

The Theory of Comparative Advantage is based on the concept of opportunity cost and trade-offs. It emphasizes that countries should specialize in producing goods in which they have a lower opportunity cost compared to other goods. In doing so, they can allocate their resources more efficiently and maximize overall production.

Question 4. The Theory of Comparative Advantage suggests that even if one country is more efficient in producing all goods compared to another country, both countries can still benefit from trade if they

  1. Engage in barter trade instead of monetary transactions.
  2. Implement strict trade barriers and tariffs.
  3. Exchange goods based on their relative efficiency.
  4. Sign free trade agreements with each other.

Answer: 3. Exchange goods based on their relative efficiency.

Explanation:

The Theory of Comparative Advantage suggests that even if one country is more efficient in producing all goods compared to another country, both countries can still benefit from trade if they exchange goods based on their relative efficiency (comparative advantage). By specializing and trading based on their comparative advantages, both countries can improve their welfare and overall well-being.

Question 5. The Theory of Comparative Advantage is associated with the work of which economist?

  1. Adam Smith
  2. John Maynard Keynes.
  3. David Ricardo
  4. Paul Samuelson

Answer: 3. David Ricardo

Explanation: 

The Theory of Comparative Advantage was developed by the British economist David Ricardo and was first published in his book “Principles of Political Economy and Taxation” in 1817.

Question 6. The Theory of Comparative Advantage, developed by David Ricardo, „ suggests that a country should specialize in producing a good in which it has

  1. The highest absolute advantage.
  2. The lowest opportunity cost.
  3. The most advanced technology.
  4. The highest level of exports.

Answer: 2. The lowest opportunity cost.

Explanation:

The Theory of Comparative Advantage suggests that a country should specialize in producing a good in which it has the lowest opportunity cost. Opportunity cost refers to the value of the next best alternative foregone when making a choice. By specializing in producing goods with lower opportunity costs, a country can gain from trade with other countries.

Question 7. According to the Theory of Comparative Advantage, even if a country does not have an absolute advantage in producing any good, it can still benefit from trade if it

  1. Produces goods for which it has the lowest opportunity cost.
  2. Engages in international trade with multiple partners simultaneously
  3. Adopts protectionist trade policies to restrict imports.
  4. Promotes the domestic industry through subsidies and tariffs.

Answer: 1. Produces goods for which it has the lowest opportunity cost.

Explanation:

According to the Theory of Comparative Advantage, a country can still benefit from trade even if it does not have an absolute advantage in producing any good. It should produce and export goods for which it has the lowest opportunity cost, and through trade, it can acquire goods from other countries at a lower opportunity cost, than producing them domestically.

Question 8. The Theory of Comparative Advantage suggests that international trade allows countries to

  1. Maximize their exports to generate higher revenue.
  2. Reduce their dependence on imports and foreign goods.
  3. Focus on producing a limited range of goods.
  4. Benefit from mutual gains and specialization in production.

Answer: 4. Benefit from mutual gains and specialization in production.

Explanation:

The Theory of Comparative Advantage suggests that international trade allows countries to benefit from mutual gains and specialization in production. By specializing in producing goods with lower opportunity costs and engaging in trade, countries can collectively increase their overall production and consumption possibilities.

Question 9. The Theory of Comparative Advantage is based on the assumption that

  1. All countries have the same level of technological advancement.
  2. Labor is the only factor of production considered in trade.
  3. Opportunity costs are constant and do not change over time.
  4. International trade is always balanced with no trade deficits.

Answer: 3. Opportunity costs are constant and do not change over time.

Explanation:

The Theory of Comparative Advantage is based on the assumption that opportunity costs are constant and do not change over time. This assumption allows for a simplified analysis of trade patterns and outcomes.

Question 10. The concept of comparative advantage is often used to explain why countries engage in international trade and

  1. Focus on self-sufficiency and autarky.
  2. Form regional trade blocs to protect domestic industries.
  3. Seek to increase tariffs and trade restrictions.
  4. Specialize in producing goods based on relative efficiency.

Answer: 4. Specialize in producing goods based on relative efficiency.

Explanation:

The concept of comparative advantage is used to explain why countries engage in international trade and specialize in producing goods based on relative efficiency. Countries can produce goods in which they have a comparative advantage and trade with others to benefit from efficiency gains and a wider range of consumption possibilities.

Question 11. The theory of comparative advantage was formulated by

  1. Adam Smith
  2. David Ricardo
  3. John Maynard Keynes
  4. Karl Marx

Answer:  2. David Ricardo

Question 12. According to the theory of comparative advantage, a country should specialize in producing goods or services in which it has. a comparative advantage, which means

  1. It can produce more units of the good with the same amount of resources compared to another country
  2. It can produce the good using fewer resources compared to another country
  3. It has a higher income level than other countries
  4. It has a larger population than other countries

Answer: 2. It can produce the good using fewer resources compared to another country

Question 13. The theory of comparative advantage suggests that international trade is beneficial because it allows countries to

  1. Eliminate competition in the global market
  2. Increase government revenue through tariffs and trade barriers
  3. Import goods and services they cannot produce efficiently
  4. Reduce their dependence on foreign resources

Answer: 3. Import goods and services they cannot produce efficiently

Question 14. According to the theory of comparative advantage, trade between two countries can lead to mutual gains as long as

  1. One country has a comparative advantage in all goods and services
  2. Both countries have a comparative advantage in the same goods and services
  3. Each country has a comparative advantage in different goods and services
  4. Both countries have an equal level of economic development

Answer: 3. Each country has a comparative advantage in different goods and services

Question 15. The theory of comparative advantage is based on the idea that countries should engage in trade to

  1. Maximize government revenue
  2. Achieve a favorable balance of trade-
  3. Promote self-sufficiency and economic isolation
  4. Benefit from specialization and exchange of goods and services

Answer: 4. Benefit from specialization and exchange of goods and services

The Heckscher-Ohlin Theory f OTrade

Question 1. The Heckscher-Ohlin Theory of Trade suggests that a country will export the good that uses its abundant factor of production more intensively because

  1. The country wants to promote domestic industries.
  2. It wants to reduce its dependence on imports.
  3. The abundant factor of production is relatively cheaper
  4. The abundant factor of production is scarce.

Answer: 3. The abundant factor of production is relatively cheaper.

Explanation:

The Heckscher-Ohlin Theory of Trade suggests that a country will export the good that uses its abundant factor of production more intensively because the abundant factor of production is relatively cheaper in that country. As a result, the country can produce the export goods at a lower cost and be competitive in the international market.

Question 2. According to the Heckscher-Ohlin Theory, trade occurs between countries that have differences in their:

  1. Absolute advantage in production.
  2. Size of population.
  3. Factor endowments, such as labor and capital.
  4. Industrialization levels.

Answer: 3. Factor endowments, such as labor and capital.

Explanation:

According to the Heckscher-Ohlin Theory, trade occurs between countries that have differences in their factor endowments, such as labor and capital. Countries with abundant labor may export labor-intensive goods, while countries with abundant capital may export capital-intensive goods. .

Question 3. The Heckscher-Ohlin Theory predicts that a country with a relatively large endowment of skilled labor is likely to export

  1. Capital-intensive goods.
  2. Labor-intensive goods.
  3. Natural resources.
  4. Services.

Answer: 1. Capital-intensive goods.

Explanation:

The Heckscher-Ohlin Theory predicts that a country with a relatively large endowment of skilled labor is likely to export capital-intensive goods. Skilled labor is often associated with the use of advanced machinery and technology, which are typical characteristics of capital-intensive production.

Question 4. The Heckscher-Ohlin Theory of Trade assumes that factors of production are

  1. Mobile and can move freely between countries.
  2. Immobile and cannot move between countries.
  3. Equally distributed among all countries.
  4. Constantly changing due to technological advancements.

Answer: 1. Mobile and can move freely between countries.

Explanation:

The Heckscher-Ohlin Theory of Trade assumes that factors of production, such as labor and capital, are mobile and can move freely between countries in response to changes in demand and supply conditions. This assumption allows factors to be allocated efficiently across industries and countries.

Question 5. The Heckscher-Ohlin Theory of Trade is also known as the theory of

  1. Absolute Advantage
  2. Comparative Advantage
  3. Factor Proportions
  4. International Product Life Cycle

Answer: 3. Factor Proportions

Explanation:

The Heckscher-Ohlin Theory of Trade is also known as the theory of Factor Proportions. It emphasizes the role of factor endowments (labor and capital) in determining a country’s trade patterns.

Question 6. The Heckscher-Ohlin Theory of Trade emphasizes the importance of which factor(s) in determining a country’s trade patterns?

  1. Differences in technology and innovation.
  2. Differences in consumer preferences.
  3. Differences in factor endowments, such as labor and capital.
  4. Differences in government trade policies.

Answer: 3. Differences in factor endowments, such as labor and capital.

Explanation:

The Heckscher-Ohlin Theory of Trade emphasizes the role of differences in factor endowments, such as labor, capital, and land, in determining a . country’s trade patterns. It suggests that a country will export goods that use its abundant factors of production and import goods that use its scarce factors.

Question 7. According to the Heckscher-Ohlin Theory, a country with an abundance of capital relative to labor is likely to

  1. Import capital-intensive goods and export labor-intensive goods.
  2. Import labor-intensive goods and export capital-intensive goods.
  3. Import goods that use equal amounts of labor and capital.
  4. Not engage in international trade due to balanced factor endowments.

Answer: 2. Import labor-intensive goods and export capital-intensive goods.

Explanation:

According to the Heckscher-Ohlin Theory, a country with an abundance of capital relative to labor is likely to. export capital-intensive goods because it can efficiently use its abundant capital. On the other hand, it will import labor-intensive goods because they are relatively more labor-intensive and the country may have a scarcity of labor.

Question 8. The Heckscher-Ohlin Theory of Trade predicts that trade will lead to

  1. Convergence in factor endowments between trading partners.
  2. Divergence in factor endowments between trading partners.
  3. A decrease in specialization and comparative advantage.
  4. Complete self-sufficiency in all goods.

Answer: 1. Convergence in factor endowments between trading partners.

Explanation:

The Heckscher-Ohlin Theory predicts that trade will lead to a convergence in factor endowments between trading partners. As countries specialize in producing goods that use their abundant factors of production, trade can lead to the transfer of factors between countries, reducing the initial differences in factor endowments.

Question 9. The Heckscher-Ohlin Theory assumes that factors of production are

  1. Perfectly mobile between industries within a country.
  2. Perfectly immobile between industries within a country.
  3. Perfectly mobile between countries.
  4. Perfectly immobile between countries.

Answer: 1. Perfectly mobile between industries within a country.

Explanation:

The Heckscher-Ohlin Theory assumes that factors of production (e.g., labor, capital) are perfectly mobile between industries within a country. This assumption allows for the efficient allocation of factors to industries based on their factor requirements.

Question 10. The Heckscher-Ohlin Theory of Trade is an extension of which earlier trade theory?

  1. The Theory of Absolute Advantage
  2. The Theory of Comparative Advantage
  3. The Theory of Factor Proportions
  4. The Theory of International Product-Life Cycle

Answer: 2. The Theory of Comparative Advantage

Explanation: 

The Heckscher-Ohlin Theory of Trade is an extension of the Theory of Comparative Advantage. It builds upon the concept of comparative advantage and introduces factor endowments as a key determinant of trade patterns.

Question 11. The Heckscher-Ohlin theory of trade suggests that international trade occurs due to differences in

  1. Technology and innovation
  2. Government policies and regulations
  3. Factor endowments (such as labor and capital)
  4. Cultural preferences for certain products

Answer: 3. Factor endowments (such as labor and capital)

Question 12. According to the Heckscher-Ohlin theory, a country will export goods that use relatively

  1. Abundant factors of production
  2. Scarce factors of production
  3. Expensive factors of production
  4. Labor-intensive factors of production

Answer: 1. Abundant factors of production

Question 13. The Heckscher-Ohlin theory predicts that a labor-abundant country will export goods that are

  1. Labor-intensive
  2. Capital-intensive
  3. High-tech and innovative
  4. Raw materials and commodities

Answer: 1. Labor-intensive

Question 14. The Heckscher-Ohlin theory suggests that international trade can lead to

  1. Income equality between countries
  2. Factor price equalization
  3. A decrease in factor mobility
  4. Increased trade barriers and protectionism

Answer: 2. Factor price equalization

Question 15. The Heckscher-Ohlin theory assumes that factors of production are

  1. Immobile between industries within a country
  2. Perfectly mobile between industries within a country
  3. Mobile between countries but immobile within a country
  4. Immobile between countries and industries

Answer: 2. Perfectly mobile between industries within a country

Globalization And New International Trade Theory

Question 1. Globalization is characterized by

  1. The increased integration and interdependence of economies and cultures worldwide.
  2. A focus on promoting self-sufficiency and domestic industries.
  3. A decrease in international trade and cross-border transactions.
  4. A shift towards protectionist trade policies.

Answer: 1. The increased integration and interdependence of economies and cultures worldwide. .

Explanation:

Globalization refers to the increased integration and interdependence of economies and cultures worldwide. It involves the free flow of goods, services, capital, and information across national borders, leading to increased economic and cultural interconnectedness.

Question 2. The New International Trade Theory emphasizes the role of

  1. Factor endowments and comparative advantage.
  2. Economies of scale and product differentiation.
  3. Changes in consumer preferences and tastes.
  4. Tariffs and trade barriers.

Answer: 2. Economies of scale and product differentiation.

Explanation:

The New International Trade Theory emphasizes the role of economies of scale and product differentiation in international trade. It suggests that firms’ ability to achieve economies of scale and produce differentiated products can lead to international trade, even in similar products.

Question 3. Globalization has led to an increase in international trade due to

  1. Reduced barriers to trade and investment.
  2. A decline in the importance of multinational corporations.
  3. A decrease in cross-border communication and technology.
  4. An increase in self-sufficiency and closed economies.

Answer: 1. Reduced barriers to trade and investment.

Explanation:

Globalization has led to an increase in international trade due to reduced barriers to trade and investment. Trade agreements, lowering of tariffs, and improved transportation and communication technologies have facilitated international trade.

Question 4. The New International Trade Theory suggests that in certain industries with significant economies of scale, the world market can support

  1. Only a limited number of firms.
  2. A large number of small firms.
  3. Only domestic firms and not foreign firms.
  4. A single monopolistic firm.

Answer: 1. Only a limited number of firms.

Explanation:

The New International Trade Theory suggests that in certain industries with significant economies of scale, the world market. can support only a limited number of firms. These industries may be dominated by a few large firms that can exploit economies of scale to reduce costs and gain a competitive advantage in the global market.

Question 5. Globalization has led to increased cross-border movement of

  1. Labor and capital.
  2. Trade barriers and restrictions.
  3. Domestic industries and subsidies.
  4. Agricultural products and raw materials.

Answer: 1. Labor and capital.

Explanation:

Globalization has led to increased cross-border movement of labor and capital. The free flow of labor and capital across national borders has facilitated international business activities and investment.

Question 6. The New International Trade Theory suggests that firms can gain a competitive advantage and achieve economies of scale through

  1. Expanding their domestic market share.
  2. Limiting their product range to specialized niche markets.
  3. Engaging in international trade and global operations.
  4. Reducing their production output to maintain high quality. standards.

Answer: 3. Engaging in international trade and global operations.

Explanation:

The New International Trade Theory suggests that firms can gain a competitive advantage and achieve economies of scale by engaging in international trade and global operations. By expanding into international markets, firms can access a larger customer base and reduce costs through increased production and distribution.

Question 7. Globalization refers to the

  1. Process of increasing trade barriers and protectionist measures.
  2. Integration and interdependence of economies and cultures worldwide
  3. Concentration of economic power in the hands of a few multinational corporations.
  4. Isolation of countries from international markets and trade.

Answer: 2. Integration and interdependence of economies and cultures worldwide.

Explanation:

Globalization refers to the integration and interdependence of economies and cultures worldwide. It involves the flow of goods, services, capital, and ideas across national borders, leading to increased interconnectedness and interdependence between countries.

Question 8. Which of the following factors has contributed to the growth of globalization in recent decades?

  1. A decline in international trade and investment.
  2. A shift towards protectionist trade policies.
  3. Advancements in technology and communication.
  4. An increase in trade barriers and tariffs.

Answer: 3. Advancements in technology and communication.

Explanation:

Advancements in technology and communication, such as the Internet, improved transportation, and faster communication networks, have played a significant role in facilitating globalization. These advancements have made it easier for businesses to engage in international trade and connect with global markets.

Question 9. The New International Trade Theory emphasizes the importance of which factor in explaining international trade patterns?

  1. Factor endowments, such as labor and capital.
  2. Differences in consumer preferences and tastes.
  3. The absolute advantage of countries in specific industries.
  4. Historical trade patterns and colonial legacies.

Answer: 2. Differences in consumer preferences and tastes.

Explanation:

The New International Trade Theory emphasizes the importance of differences in consumer preferences and tastes in explaining international trade patterns. It suggests that firms can differentiate their products to meet the preferences of consumers in different markets, allowing them to gain a competitive advantage.

Question 10. Globalization has led to increased

  1. Economic self-sufficiency and reliance on domestic resources.
  2. Isolationism and reduced international cooperation.
  3. Income inequality and poverty in developing countries.
  4. Interconnectedness and cross-border flows of goods, services, and capital.

Answer: 4. Interconnectedness and cross-border flows of goods, services, and capital.

Explanation:

Globalization has led to increased interconnectedness and cross-border flows of goods, services, and capital. It has facilitated international trade, foreign direct investment, and the exchange of ideas, contributing to economic integration on a global scale.

Question 11. Globalization refers to the

  1. Isolation of countries from the global economy
  2. Integration and interdependence of countries in the global economy
  3. Adoption of protectionist trade policies
  4. Establishment of regional trade blocs

Answer: 2. Integration and interdependence of countries in the global economy

Question 12. The new international trade theory emphasizes the role of in explaining trade patterns and advantages

  1. Comparative advantage
  2. Factor endowments
  3. Economies of scale and product differentiation
  4. Tariffs and trade barriers

Answer: 3. Economies of scale and product differentiation

Question 13. According to the new trade theory, firms that produce unique products with advanced technology and innovation can gain a competitive advantage due to

  1. Comparative advantage
  2. Lower production costs
  3. Economies of scale and first-mover advantage
  4. Government subsidies

Answer: 3. Economies of scale and first-mover advantage

Question 14. The new international trade theory suggests that free trade can lead to

  1. Decreased competition and monopolistic behavior
  2. Inefficiency in resource allocation
  3. Stagnation of economic growth
  4. Increased global prosperity through specialization and economies of scale

Answer: 4. Increased global prosperity through specialization and economies of scale

Question 15. Which of the following is a potential drawback of globalization in terms of income distribution? ‘

  1. Increased income inequality between countries
  2. Decreased income inequality within countries
  3. A shift in manufacturing jobs from developed to developing countries
  4. The equal distribution of wealth among all countries

Answer: 3. S shift in manufacturing jobs from developed to developing countries.

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