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Module 5 Practice Exam and Glossary V14 Term Absolute advantage 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. Adam Smith 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). Arguments to ban trade National Security, prices, domestic businesses, domestic jobs, and consumer confidence. Arguments to ban trade: Consumer Confidence Avoid drops in market demand because of quality, safety, or ethical concerns arising from foreign products. Arguments to ban trade: Domestic Businesses Arguments to ban trade: Domestic jobs Arguments to ban trade: National Security Arguments to ban trade: Price 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. Balance of trade Barriers to Trade A country’s exports value minus imports value. Quotas, Tariffs, Embargos, Regulation, & Impact. Command Economy 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. Comparative advantage When a country has a lower opportunity cost than another country to produce a particular good or service. Consumer Price Index CPI Total price for a sample of consumer goods; changes in the CPI month to month indicate the rate of inflation. Deflation 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. Economic Freedom of the World Index Several attempts to measure economic freedom objectively, EFW index based on 42 components and has member research institutes contributing from around the world. Efficiency Maximizing the use of resources in a society’s production. Embargo 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 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. Equity Extent to which citizens of a society have equal opportunities to share in the country’s overall wealth. Exchange Rates Fluctuations in rates Rate at which people may trade one currency for another. 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. Freedom Extents of personal choice, extent of ability to enter, compete, and exchange in markets, protection of personal property. Geographic Features in Trade The geographic features of a country can affect its ability to trade globally. Globalization 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. Gross Domestic Product GDP A monetary value based on production of goods and services within a country’s borders. Growth Increasing overall output of the country’s economic goods over time and increasing standard of living. High human development 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. Human development index The United Nations divides countries into 3 groups based on their human development index: High human development, Medium human development, Low human development countries. Hyperinflation Impact Income gap Inflation Jobless claims 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. 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. John Maynard Keynes 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 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. Karl Marx 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 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 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. Mixed Economy 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. National Goals Outsourcing 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 Capita Poverty rate Per person. Percentage of families earning less than the official poverty level. Quotas A quota sets a maximum amount of a product for import. With less product available, quantity supplied decreases and price increases. Regulation 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. Representation statistics Security 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. Specialization 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 services. Each country specializes in certain products and trade to obtain other products. Tariff 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. Traditional Economy 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. Types of Economies The types covered in the lesson are Command, Traditional, Free Market, and Mixed. Unemployment rate Percentage of workers over age 16 unable to find work. Module 5 Practice Exam V14 1. Keynes would most likely oppose a plan for A. defining safety standards for all new American-built automobiles B. government control of all the manufacturing companies C. increasing government spending to support economic growth D. a corporate tax for all private schools that charge tuition for their students 2. How is a command economy different from a mixed economy? A. A command economy depends largely on the government, whereas a mixed economy involves individuals and businesses, too. B. A command economy depends on a combination of government and businesses, whereas a mixed economy involves individuals, too. C. A command economy depends on individuals and businesses, whereas a mixed economy involves the government, too. D. A command economy depends on individuals and family units, whereas a mixed economy involves only the government. 3. In a traditional economy, who determines what to produce? A. Government B. Special interests C. Community D. Stockowners 4. What factor may contribute to Saudi Arabia having a low UN Human Development ranking? A. Population size B. Per capita income C. GDP D. Type of economy 5. Country X can cut, prepare, and export lumber using fewer worker hours than Country Y. Country Y can produce lumber but produces cars more efficiently than it produces lumber. It also produces cars more efficiently than Country X. Which of these statements is accurate? A. Country X will import Country Y's lumber due to absolute advantage B. Country X will import Country Y's lumber due to comparative advantage C. Country Y will import Country X's lumber due to comparative advantage D. Country Y will import Country Y's lumber due to absolute advantage 6. U.S. companies have made fewer manufacturing contracts with China in the last few years, preferring other countries in the region. Which of the following is a potential reason? A. China's standard of living has increased, and workers are requesting more pay. B. China has most-favored-nation trade status with the United States. C. China has large reserves of cheap labor and can produce inexpensive goods. D. Shipping costs from China over the Pacific Ocean have decreased. 7. Which of the following best completes the table? A. Food shipments from radiation-affected areas in Japan B. Inexpensive sugar grown in the Caribbean C. Customs duties paid on jewelry made in Mexico D. Raw materials from communist North Korea 8. Which of these results from inflation in the United States? A. Foreign currency values remain unchanged B. Investors buy products in other countries C. The price of goods in the United States falls D. The value of the U.S. dollar increases 9. Workers and businesses together benefit from inflation when A. increased profits lead to increased wages B. increased profits lead to decreased production C. decreased profits lead to increased prices D. decreased profits lead to increased purchasing power 10. Karl Marx would most likely agree with a plan for a. b. c. d. reducing taxes on the largest corporations government bailouts for failing corporations eliminating barriers to trade with other countries decreased government involvement in wages 11. 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 12. Income taxes based on the ability to pay would be most closely associated with what economist? a. b. c. d. Adam Smith David Ricardo John Maynard Keynes Karl Marx 13. 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 14. 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 15. 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. 16. 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 17. Which of the following economic goals focuses on equal opportunities for women? a. Equity b. Freedom c. Growth d. Security 18. 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 19. 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 20. 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 21. According to the chart above, which country has an absolute advantage in natural gas? a. Chile b. Columbia c. Honduras d. United States 22. According to the chart above, which country has the comparative advantage in oil production? a. Chile b. Columbia c. Honduras d. United States 23. 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. 24. 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 25. 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 26. Canada, Mexico and the United States belong to NAFTA. How can this affect the United States? a. b. c. d. Cost of trade increases Exports decrease Imports decrease Trade increases 27. 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 28. 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 29. 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 30. Which economist would most likely support the government announcing plans to open twenty Federally-Run grocery stores? A. John Keynes B. Adam Smith C. Karl Marx D. Henry George 31. If the inflation rate increases faster then your income, you will most likely A. stop spending money. B. get more goods and services for less money. C. spend a higher percentage of your income on basic needs. D. spend a lower percentage of your income on basic needs. 32. Which of the following reason would describe why Brazil is a developing country? A. A market economy with a high Human Development Index B. A market economy with a high per capita income C. A mixed economy with a low Human Development Index D. A market economy with a high GDP 33. Draw conclusions as to why some US companies pay oversees labor to make products instead of paying labor here in the US. A. B. C. D. High unemployment rate in the US Low unemployment in outside country Lower labor costs in outside country Lower labor costs in the US 34. Which economist believes that the 3 economic questions should be answered by the individuals and not the government? a. John Maynard Keynes b. Adam Smith c. Karl Marx 35. How can comparative advantage help a country become more efficient with the resources that they have available? a. Comparative advantage will allow the country to focus on the product that they have the lowest opportunity cost to produce. b. Comparative advantage will allow the country to focus on the product that they have the highest opportunity cost to produce c. Comparative advantage will allow the country to produce items at a much slower rate which in return workers will make less mistakes. In the end this country will have absolute advantage. d. Comparative advantage will allow the country to explore the possibility of having absolute advantage. 36. John Maynard Keynes would favor which type of economic system? a. Traditional b. Market c. Command d. Mixed 37. A nation has a high Human Development Index and a per capita income. Which of the following factors might also fortify your conclusion that this country is a developed nation and not a developing one? a) A command economy b) A high per capita income c) Low productivity d) Standard of living ranked 120th out of 150 countries China Canada Japan United States Hours to produce one compact car Hours to produce one computer 4 2 3 1 9 10 7 6 Additional hours needed to produce computers instead of cars 38. According to the chart, which country has a comparative advantage in producing computers? (Hint, fill in the last column before making a determination.) a) China b) Canada c) Japan d) United States 39. Are the areas highlighted in green on the map a) Mostly developing b) Mostly developed c) Command economies d) Trade partners of China Module 5 Practice Exam V14 Answer Key 1. B: Keynes believes the government can intervene with regulations to provide safety etc., but not exhibit total control over parts of the market 2. A: 3. C: The economy revolves around the family until or the community deciding what and how to produce. (See chart above) 4. D: Command economies will always have a lower Human Development Ranking. 5. C: Country Y has a comparative advantage in producing cars. They should use their resources to produce cars rather than lumber. They would then get their needed lumber from X. 6. A: Manufacturing contracts might decrease if the cost of production increases. They will find cheaper countries to work with. 7. B: A quota sets a maximum amount of a product for import. We would most likely embargo A and D. C is a tarriff. 8. B: It becomes cheaper to buy goods in other countries rather than the US if we have high inflation. 9. A: An increased profit might mean an increased wage. If inflation is higher than the increase in wages, the opposite effect would take place. 10. B - government bailouts for failing corporations; This is in line with a command economy of government control 11. A – Adam Smith; Free Market 12. C - John Maynard Keynes; Mixed Market 13. D – Large income gap 14. D - A market economy with a high GDP 15. B - New Zealand has a free-market economy. 16. C - Lower taxes on gold mining; Cuba being command would not lesson government control 17. A – Equity; women are a representative statistic (gender) that is on the 5.03 economic indicator chart 18. A - decreasing unemployment 19. 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. 20. 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. 21. D- United States; The US has the lowest number of worker units based only on natural gas with 1 unit per worker hour 22. 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. 23. A - The opportunity cost of producing wheat is lower for India. 24. D - Inexpensive labor force; all other factors are benefits of the US economy 25. D - Tariff - a tax on imported goods (5.05 Trade Barriers) 26. D - Trade increases 27. C - Virtually no North Korea products are legally available in the United States 28. 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 29. D - result in an individual’s income increasing; this may actually make an income lower with higher inflation your salary/money is not worth as much 30. C: Karl Marx is the only economist listed in the answer choices that believed in a strong government control economy. 31. C: In this case, you will not be able to stop spending money however, you will spend more of your money on basic items that you need to survive such as food and water. 32. C: Mixed economies and low HDIs will categorize a country as developing. 33. C: because it saves the company money in their budget to pay much cheaper labor in an outside country than to pay more expensive labor here in the US. The company has more profits by choosing to do this. 34. B (Adam Smith believed to let the people be and they would produce what is needed. Government intervention should not happen in a market economy). 35. A (trade happens because of comparative advantage. Countries will produce what they can most efficiently with the lowest opportunity cost). 36. D (Keynes believed in capitalism, but also felt that a capitalist system could be protected by the government) 37. B: A developed nation generally has higher GDP per capita, high Human Development Index score, high productivity and standard of living, and a mixed or free market economy. Choices a, c, and d are characteristic of a developing nation. 38. C: After filling in the additional hours column, you will find that the figures are 5, 8, 4, and 5 respectively. This leaves Japan with the advantage, taking less hours to produce a computer than a car 39. A: Most of the countries on the map in green are in areas of the world that have two or more of the indicators for a developing country. A developed economy will have a relatively high per capita income, standard of living, productivity, and GDP. Emerging and developing economies may score high on several factors but relatively low on others. Choice d is excluded because many developing countries are mixed or market but have other indicators that they are developing. China is not highlighted at all on the map so it cannot be d.