Name: / ( ) / Class: / Date:

1.1Production possibilities frontier and trade theory

A.Foundation Training

I.Fill in the Blanks: Fill in each blank with a suitable word. (1 mark each)

  1. The production possibilities frontier (PPF) shows the locus of the of two goods given the existing and

.

  1. The slope of the PPF measures the of the good on the x-axis.
  2. If there is no international trade, the is the production possibilities frontier.
  3. The slope of the PPF shows the .
  4. In the two-country model, the country with a flatter PPF has a in producing the good on the x-axis.
  5. If a country with external trade specializes according to the principle of comparative advantage, its will further expand.

II.True / False Questions: The following statements are about production possibilities frontier and trade theory. For each one of them, if it is correct, put a  in the box; if it is wrong, put a  in the box and explain why it is wrong on the lines provided. (2 marks each)

1. / Since the marginal cost will finally rise, the PPF may not be downward sloping.
2. / An increase in resources will increase the intercept of the PPF.
3. / If the PPF of a country is flatter than the trade line, then it has a comparative advantage in
producing the good on the x-axis.
4. / Trade expands a country’s consumption possibilities.

B.Reinforcement Training

I.Multiple Choice Questions (1 mark each)

1. /

Referring to the diagram above, which of the following conditions may shift the production possibilities frontier from PPF1 toPPF2?

(1)An increase in resources, but production technology is unchanged.

(2)Advancement in the production technologies of the two goods, but the quantity of resources is unchanged.

(3)Advancement in the production technology of computers, but the quantity of resources and production technology of mobile phones are unchanged.

A.(1) only

B.(1) and (2) only

C.(2) and (3) only

D.(1), (2) and (3)

2. /

Referring to the diagram above, which of the following conditions may shift the production possibilities frontier from PPF1 to PPF2?

(1)An increase in resources, but the production technology is unchanged.

(2)Advancement in the production technologies of the two goods, but the quantity of resources is unchanged.

(3)Advancement in the production technology of mobile phones, but the quantity of resources and production technology of computers are unchanged.

A.(3) only

B.(1) and (2) only

C.(2) and (3) only

D.(1), (2) and (3)

3. /

Referring to the diagram above, the production possibilities frontier of an economy shifts from PPF1 to PPF2. This implies

(1)consumption possibilities have expanded.

(2)the production technology has improved.

(3)the quantity of resources has increased.

A.(1) only

B.(1) and (2) only

C.(2) and (3) only

D.(1), (2) and (3)

4. /

PPFA and PPFB in the diagram above are the production possibilities frontiers of Countries A and B respectively. Which of the following are true?

(1)The opportunity cost of producing cars is lower for Country A.

(2)Country A has an absolute advantage in producing cars.

(3)Country B has a comparative advantage in producing food.

A.(1) and (2) only

B.(1) and (3) only

C.(2) and (3) only

D.(1), (2) and (3)

5. /

PPFA in the diagram above is the production possibilities frontier of Country A. If the terms of trade are 1X = 2Y, which of the following is incorrect?

A.Country A’s consumption possibilities will expand.

B.Country A will completely specialize in one good.

C.Country A has a comparative advantage in producing Good X.

D.The slope of PPFA is greater than that of the trade line.

6.PPFA, PPFB and PPFW in the diagram below are the production possibilities frontiers of Country A, Country B and the world respectively. If the production point is X, which of the following is correct?

A.Both countries completely specialize.

B.Country A produces both goods, so does Country B.

C.Country A produces both goods, but Country B completely specializes.

D.Country B produces both goods, but Country A completely specializes.

7.In the diagram below, Country A produces and consumes at point A when the production possibilities frontier is at PPFA. When it shifts to PPFB, which of the following statements about Country A is correct?

A.Country A will not consume at point B.

B.Country A will not consume at point C.

C.Country A may consume at point B or point C.

D.The productivity of Country A has risen.

8.In the diagram below, curve PPF is the production possibilities frontier of Country A. Under autarky, point A is the point of production and consumption of Country A. After trade, curve TT is the trade line after specialization. Which of the following about Country A is correct?

A.Country A has a comparative advantage in producing Good X.

B.Country A has a higher cost in producing Good X than Good Y.

C.Country A will consume more Good X and Good Y.

D.Based on the principle of comparative advantage, Country A should export Good Y and import Good X.

II.Short Questions

1.What is the production possibilities frontier? (2 marks)

III.Structured Questions

Level 1

1.Country A only produces and consumes Good X and Good Y. To produce 1X, a trade-off of 2Y is needed. With no trade, Country A consumes 10X and 10Y. Suppose now Country A can trade at the terms of trade of 1X for 1Y, and after complete specialization and trade, Country A still consumes an equal amount of Good X and Good Y.

(a)Draw Country A’s production possibilities frontier and trade line. Mark its production point after trade. (4 marks)

(b)Mark in the diagram in (a) the consumption point of Country A after trade, and calculate its gains from trade. (2 marks)

2.Suppose there are only two goods: X and Y. Economy A has 10 units of resources, and each unit can produce 4X or 1Y.

(a)Draw the production possibilities frontier of the economy. (2 marks)

(b)What are the marginal costs of Good X and Good Y respectively? (2 marks)

(c)With the aid of a diagram, explain how the following conditions affect the PPF of the economy.

(i)The quantity of resources increases from 10 to 15 units. (2 marks)

(ii)With an advancement in the technology of Good Y, each unit of resources can produce 2Y. (2 marks)

Level 2

3.The diagram below shows the production possibilities frontiers (PPF) of Country A and Country B.

Answer the following questions according to the diagram above.

(a)Which country has an absolute advantage in the production of Good X? Explain.

(2 marks)

(b)Which country has a comparative advantage in the production of Good X? Explain. (4 marks)

(c)Draw the production possibilities frontier of the world (PPFW) in the diagram above. (3 marks)

4.Country A has 50 units of resources and each unit can produce 1X or 4Y. Suppose Country A is a price taker in the international market, and the terms of trade are 1X = 1Y. Before and after trade, Country A consumes an equal amount of X and Y.

(a)Calculate the outputs of X and Y before trade. (2 marks)

(b)Calculate the quantity of X and Y consumed before trade. (2 marks)

(c)After trade, which good will Country A specialize in? Explain. (2 marks)

(d)Calculate the quantities of imports and exports. Explain. (2 marks)

(e)Calculate the gains from trade (in terms of goods) after trade. (2 marks)

(f)(i)Draw the production possibilities frontier of Country A. (2 marks)

(ii)Draw the consumption possibilities frontier of Country A after trade. (2 marks)

1.2Comparative advantage and its relationship with globalization

A.Foundation Training

I.Fill in the Blanks: Fill in each blank with a suitable word. (1 mark each)

  1. Economic refers to the process of which international trade and production activities across countries or regions become more frequent.
  2. We can examine economic globalization from the ,

and international economic cooperation.

  1. Globalization of production activities includes , which means the rapid shifting of the comparative advantage of a good or a component part from one region to another along with changes in economic development.
  2. For international economic cooperation, besides the active promotion of globalization by the , the and the World Bank, regional economic arrangements have also been set up.
  3. is favourable to global economic growth, but it also brings higher financial risks.
  4. Rapid economic development leads to faster consumption of . In case of lenient government policies in environmental conservation, pollution will worsen, which is unfavourable to development.

II.True / False Questions: The following statements are about comparative advantage and its relationship with globalization. For each one of them, if it is correct, put a  in the box; if it is wrong, put a  in the box and explain why it is wrong on the lines provided. (2 marks each)

1. / The integration of worldwide markets affects goods markets, financial and investment
markets and labour market.
2. / The globalization of production activities means that different countries’ specializing
in producing goods that they have a comparative advantage.
3. / Globalization enhances economic growth and gives more choice to consumers.
4. / Globalization leads to a higher income for labour worldwide. This benefits everyone.

B.Reinforcement Training

I.Multiple Choice Questions (1 mark each)

1.Which of the following is not an international body which promotes economic globalization?

A.The World Bank

B.Friends of the Earth

C.The World Trade Organization

D.The International Monetary Fund

2.Which of the following are the causes of globalization?

(1)The widespread use of the Internet.

(2)Lower communications and transportation costs.

(3)Fewer barriers on trade and capital flow in all countries.

A.(1) and (2) only

B.(1) and (3) only

C.(2) and (3) only

D.(1), (2) and (3)

II.Short Questions

1.(a)What is economic globalization? (2 marks)

(b)What are the features of the economic globalization of the goods markets and financial markets? Give one example for each. (4 marks)

2.(a)What is dynamic comparative advantage? (2 marks)

(b)Explain the relationship between globalization and dynamic comparative advantage. (3 marks)

3.Briefly explain how the International Monetary Fund (IMF) and the World Trade Organization (WTO) promote economic globalization. (4 marks)

III.Structured Questions

Level 1

1.During recent years, many multinational enterprises have expanded their businesses to emerging markets such as China, India, Vietnam, the Middle East and Russia. Explain the effects of the above phenomenon on the following people.

(a)Local firms in the emerging markets running similar businesses to the multinational enterprises. (3 marks)

(b)Consumers in the emerging markets. (3 marks)

(c)Workers in the emerging markets. (3 marks)

2.During recent years, many multinational enterprises have relocated their production lines from developed countries to developing countries such as China, India, Central America and South America where costs of wages and rent are lower. Will the above phenomenon bring gain or loss to the following people? Explain.

(a)Workers in developing countries. (3 marks)

(b)Workers in developed countries. (4 marks)

(c)Consumers in developed countries. (3 marks)

News Commentary Questions

Study the following report on anti-WTO demonstrations and answer the questions.

A01 Local newsDaily News16 December 2005
Korean farmers protest against developed countries subsidizing agricultural products
During the WTO Ministerial Conference yesterday, two groups of South Korean farmers marched separately to the US Consulate General. They protested against developed countries’ huge agricultural subsidies, which lead to the dumping of agricultural products overseas at low prices, threatening the livelihood of farmers worldwide. The protestors demanded that the European Union and the US stop subsidizing agricultural products as soon as possible. More than 100 members of local and overseas bodies on
women’s interests also staged a demonstration. They criticized developed countries for exploiting women’s interests in the name of free trade, and the multinational enterprises for looting the resources of poor countries.

(a)What is dumping? (2 marks)

(b)Developed countries dump agricultural products in poor countries. What are its effects on the farmers and consumers of poor countries? Explain. (4 marks)

(c)Based on your own knowledge, give two reasons for the opposition to economic globalization. (6 marks)

1

Chapter 1 Extension of Trade Theory / ©Hong Kong Educational Publishing Co.
Name: / ( ) / Class: / Date:

1.1Production possibilities frontier and trade theory

A.Foundation Training

I.Fill in the Blanks: Fill in each blank with a suitable word. (1 mark each)

  1. The production possibilities frontier (PPF) shows the locus of the maximum output combinations of two goods given the existing resources endowment and

technological level .

  1. The slope of the PPF measures the opportunity cost of the good on the x-axis.
  2. If there is no international trade, the consumption possibilities frontier is the production possibilities frontier.
  3. The slope of the PPF shows the comparative advantage .
  4. In the two-country model, the country with a flatter PPF has a comparative advantage in producing the good on the x-axis.
  5. If a country with external trade specializes according to the principle of comparative advantage, its consumption possibilities will further expand.

II.True / False Questions: The following statements are about production possibilities frontier and trade theory. For each one of them, if it is correct, put a  in the box; if it is wrong, put a  in the box and explain why it is wrong on the lines provided. (2 marks each)

1. / Since the marginal cost will finally rise, the PPF may not be downward sloping.
 / PPF must slope downward, but since the marginal cost will finally rise, the PPF is
generally concave to the origin.
2. / An increase in resources will increase the intercept of the PPF.
 / An increase in resources will lead to a parallel outward shift of the PPF. / Advancement
in technology will increase the intercept of the PPF.
3. / If the PPF of a country is flatter than the trade line, then it has a comparative advantage in
producing the good on the x-axis.

4. / Trade expands a country’s consumption possibilities.
 / External trade expands a country’s consumption possibilities.

B.Reinforcement Training

I.Multiple Choice Questions (1 mark each)

1. /

Referring to the diagram above, which of the following conditions may shift the production possibilities frontier from PPF1 toPPF2?

(1)An increase in resources, but production technology is unchanged.

(2)Advancement in the production technologies of the two goods, but the quantity of resources is unchanged.

(3)Advancement in the production technology of computers, but the quantity of resources and production technology of mobile phones are unchanged.

A.(1) only

B.(1) and (2) only

C.(2) and (3) only

D.(1), (2) and (3)

2. /

Referring to the diagram above, which of the following conditions may shift the production possibilities frontier from PPF1 to PPF2?

(1)An increase in resources, but the production technology is unchanged.

(2)Advancement in the production technologies of the two goods, but the quantity of resources is unchanged.

(3)Advancement in the production technology of mobile phones, but the quantity of resources and production technology of computers are unchanged.

A.(3) only

B.(1) and (2) only

C.(2) and (3) only

D.(1), (2) and (3)

3. /

Referring to the diagram above, the production possibilities frontier of an economy shifts from PPF1 to PPF2. This implies

(1)consumption possibilities have expanded.

(2)the production technology has improved.

(3)the quantity of resources has increased.

A.(1) only

B.(1) and (2) only

C.(2) and (3) only

D.(1), (2) and (3)

4. /

PPFA and PPFB in the diagram above are the production possibilities frontiers of Countries A and B respectively. Which of the following are true?

(1)The opportunity cost of producing cars is lower for Country A.

(2)Country A has an absolute advantage in producing cars.

(3)Country B has a comparative advantage in producing food.

A.(1) and (2) only

B.(1) and (3) only

C.(2) and (3) only

D.(1), (2) and (3)

5. /

PPFA in the diagram above is the production possibilities frontier of Country A. If the terms of trade are 1X = 2Y, which of the following is incorrect?

A.Country A’s consumption possibilities will expand.

B.Country A will completely specialize in one good.

C.Country A has a comparative advantage in producing Good X.

D.The slope of PPFA is greater than that of the trade line.

6.PPFA, PPFB and PPFW in the diagram below are the production possibilities frontiers of Country A, Country B and the world respectively. If the production point is X, which of the following is correct?

A.Both countries completely specialize.

B.Country A produces both goods, so does Country B.

C.Country A produces both goods, but Country B completely specializes.

D.Country B produces both goods, but Country A completely specializes.

7.In the diagram below, Country A produces and consumes at point A when the production possibilities frontier is at PPFA. When it shifts to PPFB, which of the following statements about Country A is correct?

A.Country A will not consume at point B.

B.Country A will not consume at point C.

C.Country A may consume at point B or point C.

D.The productivity of Country A has risen.

8.In the diagram below, curve PPF is the production possibilities frontier of Country A. Under autarky, point A is the point of production and consumption of Country A. After trade, curve TT is the trade line after specialization. Which of the following about Country A is correct?

A.Country A has a comparative advantage in producing Good X.

B.Country A has a higher cost in producing Good X than Good Y.

C.Country A will consume more Good X and Good Y.

D.Based on the principle of comparative advantage, Country A should export Good Y and import Good X.

II.Short Questions

1.What is the production possibilities frontier? (2 marks)

PPF shows the locus of the maximum output combination of two goods given the resources
endowment and technological level. (2)

III.Structured Questions

Level 1

1.Country A only produces and consumes Good X and Good Y. To produce 1X, a trade-off of 2Y is needed. With no trade, Country A consumes 10X and 10Y. Suppose now Country A can trade at the terms of trade of 1X for 1Y, and after complete specialization and trade, Country A still consumes an equal amount of Good X and Good Y.

(a)Draw Country A’s production possibilities frontier and trade line. Mark its production point after trade. (4 marks)