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The diagram below shows two countries and two goods. For each country, a Production Possibility Frontier is drawn. What is the msot fundamental reason as to why the PPFs are different for each country?
Differences in factor endownments
Differences in government policy
The economies are at different stages of the trade cycle
They chose not to trade

Based on the two country-two good model and data on factor endownments, the following PPFs are drawn for the UK and US economies. Determine from the calculation of domestic opportunity costs which country has a comparative advantage in producing chicken meat compared to beef and, conversly, beef compared to chicken meat.Clue: draw a 2 by 2 matrix with a pencil and calculate opportunity cost for each country for each good by using the formula: opposite/adjacent.
Both have a comparative advantage in beef
UK has a comparative advantage in producing beef and US in chicken meat
Both have a comparative advantage in beef
UK has a comparative advantage in producing chicken meat and US in beef.

Free trade based on specialisation leads to higher world incomes for all where:
Terms of trade lie in between domestic opportunity cost ratios
Countries all follow absolute advantage
Transport costs are high

What is a necessary and sufficient condition for free trade to benefit all countries? Assume two goods and two countries.
Both countries produce different goods
Countries have similar resources
Terms of trade lie in between the two countries’ opportunity cost ratios.

If the price of exports rise, which one must be true?
BoP must improve
Terms of trade must worsen.
BoP must worsen
Terms of trade must improve

When does a country gain from trade?
When the terms of trade are more favourable than the domestic opportunity cost.
When the government subsidises production
When they have an absolute advantage in something

Based on the two country-two good model and data on factor endownments, the following PPFs are drawn for the UK and US economies. Identify from the following answers a terms of trade for beef in terms of chicken meat that will allow both the US and UK to gain from trade.Clue: first calculate the opportunity costs ofbeefin both countries and then select a terms of trade that lies in the range of opportunity costs for one unit of beef.
1.8 units of chicken meat
2 units of chicken meat
1.6 units of chicken meat
1.4 units of chicken meat

A country produces cheese and flowers only. It faces a PPF as given in the diagram below and cannot change this. However consumers are able to consume at point A. How can this happen?
The government spends extra on supply-side policies
The coiuntry trades and enjoys favourable terms of trade
Their Balance of Payments is favourable
Their currency depreciates

What will be the immediate effect of the removal of tariffs on imported consumer goods?
a decrease in the cost of living
a decrease in free trade
an increase in customs revenues received by the government
an increase in the level of domestic employment

If the exhange rate depreciates, the terms of trade
must worsen
must improve
may worsen
may improve

A country entering a Customs Union causes
Trade diversion away from goods consumed from countries traded with before ONLY
Trade creation with members of the union ONLY
Both of the above

Economists generally argue that protectionism leads to an inefficient allocation of resources. However protectionism can always be justified where:
The protectionist measures are envisaged as short term only
Countries want to create jobs at home
There are historical relations between countries

A country's government imposes a tariff (import tax) on imported goods as in the diagram below.Which of the following statements is correct?
Domestic output will increase by AB and imports rise by (AD - BC)
Domestic output will fall by AB and imports rise by (AD - BC)
Domestic output will fall by AB and imports fall by (AD - BC)
Domestic output will increase by AB and imports fall by (AD - BC)

The government imposes an import tax as shown in the diagram below. What impact will the tariff have on welfare on society?
Loss of welfare = B only
Loss of wefare = B + D
Loss of welfare = A + B + C + D
Loss of welfare = B + C + D

The government of a country decides unilaterally to reduce all forms of protectionism and therefore abolishes tariffs. In the diagram below, what will be the impact in the short-term?I A fall in employmentII Improvement in the Balance of PaymentsIII Fall in the cost of livingIV Fall in the value of national incomeV Rise in exports
All of the above
I, III and IV
I, III and V
Answers I - IV
Answers II - V

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