Question

Answer the following questions in this section using True, False or Uncertain and EXPLAIN your answers.

Question 1. The best interpretation for the slope of the production possibility frontier is the degree of specialization.

Question 2. Trade is not beneficial to countries if there are minor differences between them.

Question 3. In the Ricardian model, differences in productivity of labor across countries result in comparative advantage.

Question 4. Gains from trade are likely to occur because of differences in opportunity costs across countries.

Question 5. Service offshoring decreases the productivity of a firm.

Question 6

a). Distinguish between outsourcing and offshoring.

b). What is the implication of the perfect competition assumption in the Ricardian one-factor model?

c). Distinguish between absolute advantage and comparative advantage. Which of the two concepts is more relevant for trade between two countries?

d). What determines comparative advantage in the Ricardian model?

e). Why is the overall cost of living in China lower than in Europe, the United States and Canada?

Answer 1

Answer 1. False. The PPF actually shows the points of maximum possible output combinations of the two goods being produced in a country.

Answer 2. Uncertain. If the differences are just minor, the advantages that a country hopes to achieve might be overshadowed by the import/export costs.

Answer 3. True. The Ricardian model is actually the theory of comparative advantage, where-in one country is "relatively" better than the other country, from where the comparative advantage results.

Answer 4. True. If a country is able to trade(import) a certain good at a lower opportunity cost than what it costs to them to produce it, then it certainly achieves gains from trade.