Module 5 Practice Exam and Glossary V14

Term

Definition

Absolute advantage

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

Adam Smith

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:

Avoid drops in market demand because of quality, safety, or ethical concerns arising from

Consumer Confidence

foreign products.

Arguments to ban trade:

Avoid competition of low pay for foreign workers or recognition of a foreign brand.

Domestic Businesses

Arguments to ban trade:

Avoid sweatshops, child labor, forced labor, and other undesirable working conditions that

Domestic jobs

attract companies to employ foreign workers.

Arguments to ban trade:

Avoid dependence on imports for items critical to defense.

National Security

Arguments to ban trade:

Avoid oversupply of cheap foreign products forcing domestic producers to lower prices.

Price

Balance of trade

A country’s exports value minus imports value.

Barriers to Trade

Quotas, Tariffs, Embargos, Regulation, & Impact.

Economy revolves around government decisions. The government chooses the goods and

Command Economy

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 -

Total price for a sample of consumer goods; changes in the CPI month to month indicate

CPI

the rate of inflation.

If the inflation rate is a negative number, that means overall prices are falling. Though you

Deflation

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

Several attempts to measure economic freedom objectively, EFW index based on 42

World Index

components and has member research institutes contributing from around the world.

Efficiency

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

Embargo

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

Rate at which people may trade one currency for another.

Fluctuations in rates

Changes in housing or motor vehicle sales.

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

Free Market Economy

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

The geographic features of a country can affect its ability to trade globally.

Trade

Refers to the way that the individual nations of the world are becoming more connected to

Globalization

each other and in the process, interdependent. It makes it more likely that inflation in one

country will affect another country.

Gross Domestic Product -

A monetary value based on production of goods and services within a country’s borders.

GDP

Growth

Increasing overall output of the country’s economic goods over time and increasing

standard of living.

High human

High human development countries have an HDI of 0.8 or above. These countries have an

development

average life expectancy of 77 years and a GDP per capita of just over $23,000 U.S. Dollars.

Human development

The United Nations divides countries into 3 groups based on their human development

index: High human development, Medium human development, Low human development

index

countries.

Hyperinflation

The rate of inflation rises quickly and faster than a rise in income.

Impact

Impact limits consumer access to goods that are considered to be of poor quality or do not

meet social expectations.

Income gap

Difference in income between rich and poor.

Inflation

General rise in prices over time. American economists view yearly inflation rates between

two and four percent as acceptable.

Jobless claims

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

John Maynard Keynes

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.

As a supporter of Marx’s theories you are most likely to feel it is the government’s job to

Karl Marx

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

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

countries

out of the 34 low development countries are in sub-Saharan Africa.

Medium human

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

development

U.S. Dollars.

The majority of the world’s countries are mixed economies—somewhere between

Mixed Economy

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

Countries organize their economies in different ways but most seek the goals of efficiency,

security, freedom, growth, and equity.

Outsourcing

Purchasing the labor of another company to cut costs, typically referring to foreign

companies.

Per Capita

Per person.

Poverty rate

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.

A regulation is a safety and quality standard. It may result in the ban of specific ingredients

Regulation

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

Statistics showing similar representation proportions among various age, gender, or ethnic

groups, like in higher education or career fields.

Security

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

Specialization

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.

A tariff is a tax on imported goods. It is added onto the selling price when it enters the

Tariff

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

Traditional Economy

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

Keynes would most likely oppose a plan for

defining safety standards for all new American-built automobiles

government control of all the manufacturing companies

increasing government spending to support economic growth

a corporate tax for all private schools that charge tuition for their students

How is a command economy different from a mixed economy?

A command economy depends largely on the government, whereas a mixed economy involves individuals and businesses, too.

A command economy depends on a combination of government and businesses, whereas a mixed economy involves individuals, too.

A command economy depends on individuals and businesses, whereas a mixed economy involves the government, too.

A command economy depends on individuals and family units, whereas a mixed economy involves only the government.

In a traditional economy, who determines what to produce?

Government

Special interests

Community

Stockowners

4.

What factor may contribute to Saudi Arabia having a low UN Human Development ranking?

Population size

Per capita income

GDP

Type of economy

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?

Country X will import Country Y's lumber due to absolute advantage

Country X will import Country Y's lumber due to comparative advantage

Country Y will import Country X's lumber due to comparative advantage

Country Y will import Country Y's lumber due to absolute advantage

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?

China's standard of living has increased, and workers are requesting more pay.

China has most-favored-nation trade status with the United States.

China has large reserves of cheap labor and can produce inexpensive goods.

Shipping costs from China over the Pacific Ocean have decreased.

7.

Which of the following best completes the table?

Food shipments from radiation-affected areas in Japan

Inexpensive sugar grown in the Caribbean

Customs duties paid on jewelry made in Mexico

Raw materials from communist North Korea

Which of these results from inflation in the United States?

Foreign currency values remain unchanged

Investors buy products in other countries

The price of goods in the United States falls

The value of the U.S. dollar increases

Workers and businesses together benefit from inflation when

increased profits lead to increased wages

increased profits lead to decreased production

decreased profits lead to increased prices

decreased profits lead to increased purchasing power

Karl Marx would most likely agree with a plan for

reducing taxes on the largest corporations

government bailouts for failing corporations

eliminating barriers to trade with other countries

decreased government involvement in wages

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.”

Adam Smith

John Maynard Keynes

Karl Marx

Milton Friedman

Income taxes based on the ability to pay would be most closely associated with what economist?

Adam Smith

David Ricardo

John Maynard Keynes

Karl Marx

What factor below is not an indicator of a developed country?

High per capita income

Low unemployment

Elevated GDP

Large income gap

Which of the following does not describes a developing nation?

A command economy with a low Human Development Index

A high gross domestic product and a low per capita income

A low gross domestic product and a high standard of living

A market economy with a high GDP

A traditional economy with a low standard of living

New Zealand has a GDP of $122.2 billion and a per capita GDP of $27,668. Life expectancy is

years. Which of these additional factors would most support the conclusion that New Zealand has a developed rather than an emerging economy?

New Zealand exports more than it imports.

New Zealand has a free-market economy.

New Zealand has a low population density.

New Zealand's unemployment rate is 9.6 percent.

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?

Artificially lower the price of gold

Legislate higher production quotas

Lower taxes on gold mining

Impose stricter divisions of labor

Which of the following economic goals focuses on equal opportunities for women?

Equity

Freedom

Growth

Security

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

decreasing unemployment

helping minimize the education gap

raising government spending

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

Given the data in the chart above, which of the following statement is true?

Developing Country B has an absolute advantage in producing sugar

Developing Country B has an absolute advantage in producing coffee

Developed Country A has an absolute advantage in producing sugar

Developed Country A has an absolute advantage in producing coffee

Which of the follow is true of the trade relationship between Developed Country A and Developing Country B?

Developed Country A has a comparative advantage to Developing Country B in producing coffee

Developed Country A has an absolute advantage in producing sugar and coffee

Developing Country B has a comparative advantage to Developed Country A in producing coffee

Developing Country B has an absolute advantage in producing sugar and coffee

Worker hours to produce one

Worker hours to produce one unit of oil

unit of natural gas

Columbia

4

9

Chile

2

10

Honduras

3

7

United States

1

6

According to the chart above, which country has an absolute advantage in natural gas?

Chile

Columbia

Honduras

United States

According to the chart above, which country has the comparative advantage in oil production?

Chile

Columbia

Honduras

United States

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?

The opportunity cost of producing wheat is lower for India.

The opportunity cost of producing cotton is higher for Russia.

Russia has a natural resource advantage in wheat.

India has a natural resource advantage in cotton.

The United States enjoys certain economic advantages. Which is not one of those economic advantages?

Expansive territory

Fertile farmland

Highly educated population

Inexpensive labor force

What kind of trade barrier would be used by a country if it raises taxes on imported machinery items?

Embargo

License

Quota

Tariff

Canada, Mexico and the United States belong to NAFTA. How can this affect the United States?

Cost of trade increases

Exports decrease

Imports decrease

Trade increases

Because the United States has an embargo on North Korea,

the United States regularly increases the taxes on North Korea imports

North Korea exports the majority of North Korea products to American companies

virtually no North Korea products are legally available in the United States

North Korea must sell products directly to state governments in the United States

How would a strong Saudi riyal ($) impact the trade of oil produced in Saudi Arabia?

Saudi Arabia oil exports decrease

Saudi Arabia oil exports increase

Saudi Arabia oil imports decrease

Saudi Arabia oil imports stagnate

High inflation in one country does not

create a significant rise in the price of goods

haves a negative impact on that countries currency exchange rate

reduce the demand for the countries goods in global trade

result in an individuals income increasing

Which economist would most likely support the government announcing plans to open twenty Federally-Run grocery stores?

John Keynes

Adam Smith

Karl Marx

Henry George

If the inflation rate increases faster then your income, you will most likely

stop spending money.

get more goods and services for less money.

spend a higher percentage of your income on basic needs.

spend a lower percentage of your income on basic needs.

Which of the following reason would describe why Brazil is a developing country?

A market economy with a high Human Development Index

A market economy with a high per capita income

A mixed economy with a low Human Development Index

A market economy with a high GDP

Draw conclusions as to why some US companies pay oversees labor to make products instead of paying labor here in the US.

High unemployment rate in the US

Low unemployment in outside country

Lower labor costs in outside country

Lower labor costs in the US

Which economist believes that the 3 economic questions should be answered by the individuals and not the government?

John Maynard Keynes

Adam Smith

Karl Marx

How can comparative advantage help a country become more efficient with the resources that they have available?

Comparative advantage will allow the country to focus on the product that they have the lowest opportunity cost to produce.

Comparative advantage will allow the country to focus on the product that they have the highest opportunity cost to produce

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.

Comparative advantage will allow the country to explore the possibility of having absolute advantage.

John Maynard Keynes would favor which type of economic system?

Traditional

Market

Command

Mixed

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 command economy

A high per capita income

Low productivity

Standard of living ranked 120th out of 150 countries

Hours to produce one

Hours to produce one

Additional hours

compact car

computer

needed to produce

computers instead of

cars

China

4

9

Canada

2

10

Japan

3

7

United States

1

6

According to the chart, which country has a comparative advantage in producing computers? (Hint, fill in the last column before making a determination.)

China

Canada

Japan

United States

Are the areas highlighted in green on the map

Mostly developing

Mostly developed

Command economies

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.