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Module 5 Glossary & Practice Exam
Module 5 Glossary Term
Absolute advantage
Adam Smith
Arguments to ban trade
Arguments to ban trade: Consumer
Confidence
Arguments to ban trade: Domestic Businesses
Arguments to ban trade: Domestic jobs
Arguments to ban trade: National Security
Arguments to ban trade: Price
Balance of trade
Barriers to Trade
Command Economy
Comparative advantage
Consumer Price Index - CPI
Deflation
Economic Freedom of the World Index
Efficiency
Embargo
Definition
The ability of an individual, firm, or country to produce more of a
good or service than competitors, using the same amount of
resources.
As a supporter of Smith’s theories you are most likely to feel the
government should not drastically change its policies when
faced with an economic crisis and that, eventually, the problems
will resolve themselves through market forces (supply and
demand).
National Security, prices, domestic businesses, domestic jobs,
and consumer confidence.
Avoid drops in market demand because of quality, safety, or
ethical concerns arising from foreign products.
Avoid competition of low pay for foreign workers or recognition
of a foreign brand.
Avoid sweatshops, child labor, forced labor, and other
undesirable working conditions that attract companies to
employ foreign workers.
Avoid dependence on imports for items critical to defense.
Avoid oversupply of cheap foreign products forcing domestic
producers to lower prices.
A country’s exports value minus imports value.
Quotas, Tariffs, Embargos, Regulation, & Impact.
Economy revolves around government decisions. The
government chooses the goods and services to produce,
production quantities, and prices to charge. Leaders also
determine training, education, employment opportunities, and
wages. Most closely aligned to Karl Marx.
When a country has a lower opportunity cost than another
country to produce a particular good or service.
Total price for a sample of consumer goods; changes in the CPI
month to month indicate the rate of inflation.
If the inflation rate is a negative number, that means overall
prices are falling. Though you might think this is a positive for
the consumer, falling prices means businesses are losing profits
and they may reduce worker pay. Rather than growing, the
economy is shrinking.
Several attempts to measure economic freedom objectively,
EFW index based on 42 components and has member research
institutes contributing from around the world.
Maximizing the use of resources in a society’s production.
An embargo is the complete refusal to import a good or even all
goods from a particular country. It can create a black market for
Exchange Rates
those goods and hurts the political relationship with the country
that has been banned. It could also potentially hurt the economy
of one or both countries.
Extent to which citizens of a society have equal opportunities to
share in the country’s overall wealth.
Rate at which people may trade one currency for another.
Fluctuations in rates
Changes in housing or motor vehicle sales.
Free Market Economy
Economy revolves around individuals and business firms, who
determine the goods and services to provide. Individuals and
business firms seek to earn profits. In a true market economy,
the government would not involve itself in the economy in any
way. Most closely aligned with Adam Smith.
Extents of personal choice, extent of ability to enter, compete,
and exchange in markets, protection of personal property.
The geographic features of a country can affect its ability to
trade globally.
Refers to the way that the individual nations of the world are
becoming more connected to each other and in the process,
interdependent. It makes it more likely that inflation in one
country will affect another country.
A monetary value based on production of goods and services
within a country’s borders.
Increasing overall output of the country’s economic goods over
time and increasing standard of living.
High human development countries have an HDI of 0.8 or above.
These countries have an average life expectancy of 77 years and
a GDP per capita of just over $23,000 U.S. Dollars.
The United Nations divides countries into 3 groups based on
their human development index: High human development,
Medium human development, Low human development
countries.
The rate of inflation rises quickly and faster than a rise in
income.
Impact limits consumer access to goods that are considered to
be of poor quality or do not meet social expectations.
Difference in income between rich and poor.
Equity
Freedom
Geographic Features in Trade
Globalization
Gross Domestic Product - GDP
Growth
High human development
Human development index
Hyperinflation
Impact
Income gap
Inflation
Jobless claims
John Maynard Keynes
General rise in prices over time. American economists view
yearly inflation rates between two and four percent as
acceptable.
Number of weekly applications for unemployment benefits.
As a supporter of Keynes’ theories you are most likely to support
the government borrowing money and spending tax dollars on
programs that will help put people to work and keep businesses
Karl Marx
Low human development countries
Medium human development
Mixed Economy
National Goals
Outsourcing
Per Capita
Poverty rate
Quotas
Regulation
Representation statistics
Security
Specialization
in operation. Likely, you would also support government policies
that put some restrictions on banks and other businesses to
prevent major swings in the economy.
As a supporter of Marx’s theories you are most likely to feel it is
the government’s job to make all the economic decisions to
promote stability. You would likely think it unfair for the owners
of a corporation to share the profits of their business without
sharing them with everyone who works for the company.
Low human development countries have HDIs lower than 0.5.
Their average life expectancy is 49 years and their average GDP
per capita is about $1,200 U.S. Dollars. 30 out of the 34 low
development countries are in sub-Saharan Africa.
Medium human development countries have a Human
Development Index of 0.5 and 0.8. Their average life expectancy
is 67 years and their average GDP per capita is about $4,000 U.S.
Dollars.
The majority of the world’s countries are mixed economies—
somewhere between command and free market. These
countries’ leaders seek to combine individual initiative and
progress with the protection of government intervention. Most
closely aligned to John Maynard Keynes.
Countries organize their economies in different ways but most
seek the goals of efficiency, security, freedom, growth, and
equity.
Purchasing the labor of another company to cut costs, typically
referring to foreign companies.
Per person.
Percentage of families earning less than the official poverty
level.
A quota sets a maximum amount of a product for import. With
less product available, quantity supplied decreases and price
increases.
A regulation is a safety and quality standard. It may result in the
ban of specific ingredients proven to be hazardous. If a product
includes these ingredients, it is not allowed to enter the country.
A regulation also serves as a standard for environmental or
ethical impact.
Statistics showing similar representation proportions among
various age, gender, or ethnic groups, like in higher education or
career fields.
Extent to which citizens of a society are able to provide their
own material well-being even in time of crisis.
Focusing on specific products for production in higher quantities.
Allows a country to produce higher quality products and
potentially enter into trade agreements with other countries.
Those countries, in turn, specialize in their own goods and
Tariff
Traditional Economy
Types of Economies
Unemployment rate
services. Each country specializes in certain products and trade
to obtain other products.
A tariff is a tax on imported goods. It is added onto the selling
price when it enters the country and increases the price of
import goods, thus decreasing the quantity demanded. In
addition, it provides more tax revenue to the government.
Economy revolves around individual and family unit activity,
usually agriculture or a trade like shoemaking. Local leaders are
most significant in the village or town life. Another name for this
is a subsistence economy.
The types covered in the lesson are Command, Traditional, Free
Market, and Mixed.
Percentage of workers over age 16 unable to find work.
MODULE 5 PRACTICE EXAM QUESTIONS
1. Karl Marx would most likely agree with a plan for
a. reducing taxes on the largest corporations
b. government bailouts for failing corporations
c. eliminating barriers to trade with other countries
d. decreased government involvement in wages
2. Who is most closely associated with this quote?
“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better
buy it of them with some part of the produce of our own industry employed in a way in which we have
some advantage.”
a.
b.
c.
d.
Adam Smith
John Maynard Keynes
Karl Marx
Milton Friedman
3. Income taxes based on the ability to pay would be most closely associated with what economist?
a. Adam Smith
b. David Ricardo
c. John Maynard Keynes
d. Karl Marx
4. What factor below is not an indicator of a developed country?
a. High per capita income
b. Low unemployment
c. Elevated GDP
d. Large income gap
5. Which of the following does not describes a developing nation?
a. A command economy with a low Human Development Index
b. A high gross domestic product and a low per capita income
c. A low gross domestic product and a high standard of living
d. A market economy with a high GDP
e. A traditional economy with a low standard of living
6. New Zealand has a GDP of $122.2 billion and a per capita GDP of $27,668. Life expectancy is 80.9
years. Which of these additional factors would most support the conclusion that New Zealand has a
developed rather than an emerging economy?
a. New Zealand exports more than it imports.
b. New Zealand has a free-market economy.
c. New Zealand has a low population density.
d. New Zealand's unemployment rate is 9.6 percent.
7. The United States is a mixed economy with free-market leanings. Cuba has an absolute command
economy. Both want to increase gold exports. What could Country A do that that Country B would
most likely not?
a. Artificially lower the price of gold
b. Legislate higher production quotas
c. Lower taxes on gold mining
d. Impose stricter divisions of labor
8. Which of the following economic goals focuses on equal opportunities for women?
a. Equity
b. Freedom
c. Growth
d. Security
9. The government institutes a new job-training program to prepare citizens for higher-paying,
technologically advanced jobs in computer coding. If successful, this action benefits the goal of
security by
a. decreasing unemployment
b. helping minimize the education gap
c. raising government spending
d. reducing the income gap
Use the chart to answer the following two questions.
Hours to Produce One Unit
Worker hours to
Worker hours to
Additional worker hours to
produce coffee
produce sugar
produce coffee instead of sugar
Developed
36
40
?
Country A
Developing
36
43
?
Country B
10. Given the data in the chart above, which of the following statement is true?
a. Developing Country B has an absolute advantage in producing sugar
b. Developing Country B has an absolute advantage in producing coffee
c. Developed Country A has an absolute advantage in producing sugar
d. Developed Country A has an absolute advantage in producing coffee
11. Which of the follow is true of the trade relationship between Developed Country A and Developing
Country B?
a. Developed Country A has a comparative advantage to Developing Country B in producing
coffee
b. Developed Country A has an absolute advantage in producing sugar and coffee
c. Developing Country B has a comparative advantage to Developed Country A in producing
coffee
d. Developing Country B has an absolute advantage in producing sugar and coffee
Worker hours to produce one
unit of natural gas
Worker hours to produce one unit of oil
Columbia
4
9
Chile
2
10
Honduras
3
7
United States
1
6
12. According to the chart above, which country has an absolute advantage in natural gas?
a. Chile
b. Columbia
c. Honduras
d. United States
13. According to the chart above, which country has the comparative advantage in oil production?
a. Chile
b. Columbia
c. Honduras
d. United States
14. Two countries produce wheat and dairy products efficiently. Neither has an absolute advantage.
However, India exports wheat to Russia, and India imports cotton from Russia. Which of the following
can be deduced?
a. The opportunity cost of producing wheat is lower for India.
b. The opportunity cost of producing cotton is higher for Russia.
c. Russia has a natural resource advantage in wheat.
d. India has a natural resource advantage in cotton.
15. The United States enjoys certain economic advantages. Which is not one of those economic
advantages?
a. Expansive territory
b. Fertile farmland
c. Highly educated population
d. Inexpensive labor force
16. What kind of trade barrier would be used by a country if it raises taxes on imported machinery items?
a. Embargo
b. License
c. Quota
d. Tariff
17. Canada, Mexico and the United States belong to NAFTA. How can this affect the United States?
a. Cost of trade increases
b. Exports decrease
c. Imports decrease
d. Trade increases
18. Because the United States has an embargo on North Korea,
a. the United States regularly increases the taxes on North Korea imports
b. North Korea exports the majority of North Korea products to American companies
c. virtually no North Korea products are legally available in the United States
d. North Korea must sell products directly to state governments in the United States
19. How would a strong Saudi riyal ($) impact the trade of oil produced in Saudi Arabia?
a. Saudi Arabia oil exports decrease
b. Saudi Arabia oil exports increase
c. Saudi Arabia oil imports decrease
d. Saudi Arabia oil imports stagnate
20. High inflation in one country does not
a. create a significant rise in the price of goods
b. haves a negative impact on that countries currency exchange rate
c. reduce the demand for the countries goods in global trade
d. result in an individuals income increasing
ANSWERS
1. B - government bailouts for failing corporations; This is in line with a command economy of
government control
2. A – Adam Smith; Free Market
3. C - John Maynard Keynes; Mixed Market
4. D – Large income gap
5. D - A market economy with a high GDP
6. B - New Zealand has a free-market economy.
7. C - Lower taxes on gold mining; Cuba being command would not lesson government control
8. A – Equity; women are a representative statistic (gender) that is on the 5.03 economic indicator chart
9. A - decreasing unemployment
10. C - Developed Country A has an absolute advantage in producing sugar; Lowest cost of the worker
which is 40 (less than the 43). You are only looking at one product with all countries.
11. A - Developed Country A has a comparative advantage to Developing Country B in producing coffee;
If you figure the additional worker hours to produce coffee instead of cotton you would see Country A
takes 4 hours and Country B takes 9 hours. 4 hours in comparison of the two products shows
comparative advantage.
12. D- United States; The US has the lowest number of worker units based only on natural gas with 1 unit
per worker hour
13. C – Honduras; Even though the chart does not give you a column for “Number of additional worker
hours to produce one unit of oil instead of one unit of natural gas” you need to figure this out. Once
you do you would see that Honduras has the lowest cost at 4 units.
14. A - The opportunity cost of producing wheat is lower for India.
15. D - Inexpensive labor force; all other factors are benefits of the US economy
16. D - Tarriff - a tax on imported goods (5.05 Trade Barriers)
17. D - Trade increases
18. C - Virtually no North Korea products are legally available in the United States
19. A - Saudi Arabia oil exports decrease – as the countries money value increases (strong) then it is
harder for countries to purchase because their money may be worth less and it would take more
money in exchange for the same amount of oil
20. D - result in an individuals income increasing; this may actually make an income lower with higher
inflation your salary/money is not worth as much