Question

1) Ricardo's theory of trade is based on______________________

(productivity of labor; opportunity cost; capital labor ratio).

2) Country A imports $40 of shirts and exports $40 of under wears. Its balance of trade is__________

(-20; -10; 0; +10; -20).

3) given goods A and B and a budget , if the relative price of A were to increase, the budget line would:

		A) Shift out in parallel fashion.
		B) Shift in a relative fashion.
		C) Become steeper.
		D) Become flatter

Answer 1

1) Ricardo's theory of trade is based on opportunity cost and also known as the theory of comparative advantage which one country has over the other when it can produce a good at lower opportunity cost compared to others.

2) balance of trade is exports minus imports and here will be 40-40 equals zero means balanced trade.

3) if given goods and price of A increases then given good A is in the horizontal axis, the slope of the budget line is pa/pb implies budget line becomes steeper and more of the cheaper good .i.e. B will be consumed.

the correct option is (C)