All Free Economics MCQs with Answers

• A. relative factor competition
• B. relative factor mobility
• C. relative factor substitution
• D. relative factor endowments

Explanation: Countries have different relative costs mainly because they possess different relative quantities of land, labour, capital and other…

• A. differences in technology
• B. differences in factor endowments
• C. scale economies
• D. All of the above

Explanation: Specialization can arise from technological differences, unequal factor endowments and economies of scale.

• A. Comparative advantage
• B. Comparative scale
• C. Economies of advantage
• D. Production possibility advantage

Explanation: Free trade allows countries to specialize in goods they produce at lower opportunity cost than other countries.

• A. To protect infant industries
• B. To increase the level of imports
• C. To Protect strategic industries
• D. To improve the balance of payments

Explanation: Protectionism restricts imports through tariffs or other barriers, so increasing imports is not a justification for it.

• A. balance of trade
• B. comparative advantage
• C. balance of payments
• D. terms of trade

Explanation: A large trading bloc can use its substantial market power to influence world prices and negotiate better export and import prices.

• A. common market
• B. free trade area
• C. customs union
• D. federation

Explanation: A customs union removes trade barriers among its members and applies a common external tariff to non-members.

• A. Comparative advantage is achieved
• B. Price elasticity of imports is unity and tariff revenue is maximized
• C. import prices are the same as export prices
• D. marginal social cost equals marginal social benefit

Explanation: An optimum tariff balances the gain from improving the country’s terms of trade against the domestic distortion caused by restricting…

• A. Side payments
• B. Tariffs
• C. subsidies
• D. export quotas

Explanation: Subsidies are government payments that lower domestic firms’ costs or raise their returns, making their goods more competitive abroad.

• A. The price of goods when they leave the producing country
• B. a limit on the quantity of a good that can be imported into a country
• C. a tax on imports
• D. a government payment to encourage exports

Explanation: A tariff is a tax imposed on imported goods, usually raising their domestic price and protecting competing local producers.

• A. its opportunity costs; world opportunity costs
• B. export prices; import prices
• C. Value of exports; value of imports
• D. its currency; other currencies

Explanation: The terms of trade measure the price of a country’s exports relative to the price of its imports, expressed as export prices divided by…

• A. absolute advantage
• B. mutual advantage
• C. multilateral advantage
• D. comparative advantage

Explanation: Ricardo’s argument for free trade is based on comparative advantage: countries benefit by specializing according to relative opportunity…

• A. Ricardo Malthus theorem
• B. Heckscher Ohlin theorem
• C. Lucas-Laffer theorem
• D. Friedman Samuelson theorem

Explanation: The Heckscher-Ohlin theorem links comparative advantage to relative factor endowments.

• A. Decreased productivity in U.S manufacturing
• B. High incomes of American households
• C. Relatively low interest rates in the United States
• D. High levels of investment by American corporations

Explanation: Lower productivity raises the cost of producing U.S. manufactured goods relative to foreign goods, reducing their competitiveness in world…

• A. Provide benefits for all producers and consumers
• B. Increase the nation's aggregate income
• C. Reduce unemployment for all domestic workers
• D. Ensure that industries can operate at less than full capacity

Explanation: Both technological progress and international trade can raise productivity or specialization, increasing a nation’s aggregate real income.

• A. Technological progress, but not international trade
• B. International trade but not technological progress
• C. Technological Progress and international trade
• D. Neither technological progress nor international trade

Explanation: Technological progress raises productive efficiency, while international trade permits specialization and access to goods at lower…

• A. Imported, but not exported
• B. Exported, but not imported
• C. Exported and imported
• D. Neither imported not exported

Explanation: The United States both imports automobiles from foreign producers and exports vehicles to overseas markets.

• A. a final good
• B. an intermediate good
• C. an injection
• D. a leakage

Explanation: Steel sold to a car producer is used as an input in producing cars, so it is an intermediate good rather than a final good.

• A. benefits if each acts in his/her own interest
• B. will increase their profits in a free market
• C. should act to maximize economic growth
• D. should act to promote the public interest

Explanation: Smith's invisible hand suggests that, under competition and appropriate institutions, individuals pursuing their own interests can…

• A. be a manufactured good
• B. be a primary product
• C. have a low price elasticity of supply
• D. have a high price elasticity of demand

Explanation: A commodity with relatively inelastic supply is easier for an export cartel to control because member producers cannot quickly expand…

• A. relatively greater than
• B. relatively less than
• C. the same as
• D. Any of the above

Explanation: With highly inelastic supply, demand shifts produce relatively large price changes but relatively small quantity changes.