Question

Q 38, 42, 44

Comparative advantage implies that a country will

A.

export those goods in which the country has a comparative advantage.

B.

import those goods in which the country has a comparative advantage.

C.

export those goods in which the country has an absolute advantage compared to its trading partner.

D.

import those goods in which the country has an absolute advantage compared to its trading partner.

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An income tax​ ________ potential GDP by shifting the labor​ ________ curve​ ________.

A.

​increases; demand; rightward

B.

​increases; supply; rightward

C.

​decreases; demand; leftward

D.

​decreases; supply; leftward

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If the government runs a​ deficit, the total amount of government debt is

A.

increasing.

B.

zero.

C.

constant.

D.

decreasing.

Answer 1

1. Comparative advantage refers to the ability of a country to produce goods or services at a lower opportunity cost than another country. An opportunity cost is the cost that was foregone because of choosing another alternative. Therefore, comparative advantage states that countries should produce and export those goods and services that they specialize in. Hence, comparative advantage implies that a country will export those goods in which the country has a comparative advantage.

2. Income tax weakens the incentive to work. Wages of the employees after tax is lesser and also effects the cost of labor to the firms as employees demand more wages. This results in smaller quantity of labor and as a result, the potential GDP declines which shifts the labor curve leftward. Thus, an income tax​ decreases potential GDP by shifting the labor​ supply curve​ leftward.

3 Government Deficit is the amount in which the government expenses exceeds the government revenue. The government budget is said to be in deficit when the expenses exceed its revenue. When the government borrows money to pay for the budget deficit, the national debt increases. Hence, if the government runs a​ deficit, the total amount of government debt is increasing.