Question

1. International trade...

a. Shifts a country's production possibility frontier outwards

b. Shifts a country's production possibility frontier inwards

c. Moves production within a country's production possibility frontier

d. Enables a country to consume outside of its production possibility frontier

2. A customs union...

a. Allows members to determine their own trade policies with each other

b. Allows members to determine their own trade policies with non-member countries

c. Has free trade among member countries but common trade policies with non-members

d. Requires members to have a single currency

3. Country A can produce 10 units of X or 2 units of Y; country B can produce 4 units of X or 1 unit of Y.

a. The opportunity cost of 1 X in A is 5 Y

b. The opportunity cost of 1 X in B is 4 Y

c. The opportunity cost of 1 Y in B is 4X

d. Country A has comparative advantage in the production of Y

Answer 1

Answer-1. Correct option is 'd'

International trade enables a country to consume outside of its production possibility frontier. The world PPF is made up by combining country's PPFs. Thia shows that in a free trade system, the absolute quantity of goods available for consumption is higher than the quantity available under autarky.

Answer-2. Correct option is 'c'

A customs union has free trade among member countries but common trade policies with non-members. A custom union is a type of free trade agreement which involves the removal of tariff barriers between members countries, together with the acceptance of the common external tariff against non-member countries.

Answer-3. Correct option is 'c'

The opportunity cost of 1 Y in B is 4X, country B can produce 4 units of X or 1 unit of Y. Opportunity cost is an economic term that refers to the value of what you have to give up in order to choose something else.