4.1.2 Specialisation and trade Quiz: Pearson Edexcel Economics A, Unit 4

The 20 questions

1. Country A can produce 12 units of cloth or 4 units of wine from the same resources. What is A's opportunity cost of producing 1 unit of cloth?

   • 12 units of wine, because wine output is the maximum possible
   • 3 units of wine, because 12 cloth are needed to produce 4 wine
   • 1/3 unit of wine, because 4 wine are given up for 12 cloth
   • 1/12 unit of wine, because cloth is the only good that is produced

2. Country B can produce 10 units of cloth or 10 units of wine from the same resources. What is B's opportunity cost of 1 unit of wine?

   • 10 units of cloth, because the total output of cloth is the cost of wine
   • 2 units of cloth, because two cloth must be given up for each wine made
   • 1 unit of cloth, because 10 cloth are given up for 10 wine
   • 0.5 units of cloth, because wine is half as costly to produce as cloth

3. Using the same figures as Country A (12 cloth or 4 wine) and Country B (10 cloth or 10 wine), which country has a comparative advantage in cloth?

   • Country B, because it can produce more wine than Country A from the same resources
   • Country A, because its opportunity cost of cloth (1/3 wine) is lower than Country B's (1 wine)
   • Both countries, because each can produce a larger total output of cloth than the other
   • Neither country, because absolute advantage is always needed before comparative advantage applies

4. Using the same figures, which country has an absolute advantage in producing cloth?

   • Both countries, because they can each make exactly the same number of units of cloth in total
   • Country A, because it can produce 12 units of cloth compared with 10 units from Country B
   • Neither country, because absolute advantage only exists when a country produces both goods at lower cost
   • Country B, because it produces the same number of wine units from the same resources as Country A

5. Which is an assumption of the basic theory of comparative advantage?

   • Transport costs are significant and must be added to the cost of every traded good
   • Factors of production are perfectly mobile between countries, so labour can move freely across borders
   • Opportunity costs rise steadily as a country produces more of one good
   • Factors of production are immobile between countries but mobile within each country

6. Which is a limitation of comparative advantage theory when applied to the real world?

   • It proves that a country with an absolute advantage in every good should never trade with other countries
   • It assumes zero transport costs and constant opportunity costs, and ignores economies of scale and dynamic effects
   • It assumes that every country produces exactly the same range of goods and services in all periods
   • It shows that specialisation always lowers total world output because resources are used less efficiently

7. Which is a benefit of specialisation and trade between countries?

   • World output can rise because resources are used where their opportunity cost is lowest
   • Every country becomes self-sufficient, so it no longer needs to import any goods from abroad
   • Prices of all goods rise, which protects producers from competition from low-cost foreign firms
   • Each country produces a balanced range of goods so that no sector is exposed to foreign competition

8. Which is a disadvantage of specialisation for a country whose exports depend heavily on one product?

   • Vulnerability to falls in world demand or price for that product, which can cut export revenue sharply
   • Lower average costs of production, because all resources are used in a single industry at full capacity
   • Greater diversity of skills in the labour force, which makes adjustment to shocks easier for the economy
   • A guaranteed rise in the terms of trade whatever happens to world prices of the product

9. Why might free trade based on comparative advantage still leave some workers worse off in the importing country?

   • Comparative advantage implies that the importing country will lose all its exports, which reduces employment
   • Import competition can cause job losses in sectors facing lower-cost foreign rivals, even though total welfare rises
   • Free trade always lowers the real wages of every worker in the importing country, regardless of the sector
   • Imports make domestic goods more expensive, so consumers face higher prices and lower living standards overall

10. Country A specialises fully in cloth (12 units) and trades at 2 units of cloth per 1 unit of wine. How many units of wine can A obtain by trading 6 units of cloth?

    • 6 units of wine, because one unit of cloth is always exchanged for one unit of wine
    • 2 units of wine, because the trade ratio is applied to the number of wine it could produce
    • 3 units of wine, since 6 cloth divided by 2 cloth per wine gives 3
    • 12 units of wine, because all cloth output is exchanged for wine at a ratio of one to one

11. At what trade ratio would both Country A (1 wine = 3 cloth opportunity) and Country B (1 wine = 1 cloth opportunity) gain from trading cloth for wine?

    • Exactly 2 units of cloth per unit of wine, which is the only ratio that can ever benefit both countries
    • Above 3 units of cloth per unit of wine, because A would then gain the whole of the trade surplus
    • Between 1 and 3 units of cloth per unit of wine, so each country pays less than its own domestic opportunity cost
    • Less than 1 unit of cloth per unit of wine, because B would then gain most of the trade benefit

12. Which situation shows that comparative advantage, not absolute advantage, determines the gains from trade?

    • A country with an absolute advantage in both goods never gains from trade because it has no need of imports
    • Two countries with identical opportunity costs gain a large amount from trading with each other every year
    • A country with no absolute advantage in any good always loses from trade because its output falls
    • A country with an absolute advantage in both goods still gains by specialising where its opportunity cost is lowest

13. Which change would most likely make the assumption of constant opportunity costs break down in practice?

    • A country expanding cloth output faces rising costs as it moves workers and land into less suitable industries
    • A country's transport costs fall to zero, so the cost of moving goods between markets disappears
    • Exchange rates are fixed, so the price of imported goods is known with certainty by all buyers
    • A country has only two trading partners, so trade is limited to two countries in the model

14. Which feature of the simple two-good model is a major simplification when describing modern world trade?

    • Only two goods and two countries are considered, ignoring the many goods traded and the role of multinational firms
    • Each country is assumed to export every product it makes, so that no domestic output is ever consumed locally
    • Opportunity costs are assumed to be calculated in money terms, which ignores the role of barter in trade
    • Trade is assumed to take place only between the largest economies in the world, which is always unrealistic

15. A country gains from trade, but domestic consumers do not all gain equally. Which is the most accurate explanation?

    • Gains are equal for every household because prices and wages adjust instantly and fully after any trade change
    • Consumers gain only if producers are protected by tariffs, since trade reduces the real income of all households
    • Income is redistributed between groups, so some producers lose sales even as the overall national gain rises
    • Trade lowers the total national income so that only foreign consumers gain from the lower prices of imports

16. What does the principle of absolute advantage mean?

    • A country can produce a good using fewer resources per unit than another country can
    • A country has a larger total workforce than any other country, so it can produce more of every good
    • A country can sell a good at a higher price than any other country in the same world market
    • A country can export a good without paying any tariffs on it in any foreign market at all

17. Comparative advantage theory predicts that a country should specialise in the good for which it has which feature?

    • The highest price in the world market
    • The lowest opportunity cost of production
    • The largest number of firms producing it
    • The highest absolute output from its workforce

18. Country A can produce 12 units of cloth or 4 units of wine. If it gives up 6 units of cloth, how many extra units of wine can it produce?

    • 3 units of wine, since each unit of cloth is worth half a unit of wine in production
    • 2 units of wine, since 12 cloth equals 4 wine, so 6 cloth equals 2 wine
    • 6 units of wine, since one unit of cloth is always exchanged for one unit of wine in production
    • 1 unit of wine, since 6 cloth divided by 6 gives the exchange rate of cloth for wine

19. Why is opportunity cost a more useful basis than absolute output for deciding specialisation?

    • It counts only the money spent on each good, which shows the total output produced by the economy in a year
    • It ignores what is given up, so it shows which country has the most workers in the economy at any time
    • It measures only the price of each good in the world market, which is always fixed by government policy
    • It compares what must be given up to produce each good, which determines relative cost and so the gains from trade

20. Which real-world factor makes specialisation less complete than the simple theory predicts?

    • Perfect information for all firms, which means that every firm chooses the same product and never produces a range
    • Constant opportunity costs in every industry, which mean that output always moves in a straight line with trade
    • Zero transport costs and perfectly mobile labour between countries, which allow full specialisation in every industry
    • Transport costs, tariffs and consumer preferences for variety, which keep countries producing a range of goods

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