Unit notes and practice questions
Everything here is for unit 5 of the Grade 11 Economics textbook: what the chapter covers, the short notes, practice questions with their answers, and the lesson video where one exists.
The cards filed under this chapter on the Grade 11 Economics page. Open one at a time.
When you use it
Use this equation to find the total balance of payments from the sum of the current account and capital account balances.
Watch out
Current Account (CA) includes trade balance, net services, and net transfers. Do not substitute merchandise trade balance alone for CA.
Drafted from Grade 11 Economics, pages 115-145, then checked twice before it went up
| Theory | Key Economist | Basis for Trade |
|---|---|---|
| Absolute Advantage | Adam Smith | Lower labor hours or direct cost in producing a good |
| Comparative Advantage | David Ricardo | Lower opportunity cost in producing a good |
When you use it
Use this table to distinguish between Adam Smith's absolute advantage and David Ricardo's comparative advantage models.
Watch out
Even when one country holds an absolute advantage in all goods, mutual trade still benefits both countries under comparative advantage based on lower opportunity costs.
Drafted from Grade 11 Economics, pages 115-145, then checked twice before it went up
When you use it
Use this to avoid mixing up currency value terminology across fixed and flexible exchange rate systems.
Watch out
Do not use devaluation and depreciation interchangeably. Devaluation is an official policy action by a government or central bank under a fixed exchange rate system, whereas depreciation occurs via market forces under a floating exchange rate system.
Drafted from Grade 11 Economics, pages 115-145, then checked twice before it went up
When you use it
Use this formula to calculate the relative price of goods and purchasing power across two nations given the nominal exchange rate and price levels.
Watch out
The nominal exchange rate e must be expressed as the domestic price of foreign currency. If it is given as foreign units per domestic unit, invert it first.
Drafted from Grade 11 Economics, pages 115-145, then checked twice before it went up
10 multiple-choice questions written against this chapter, each with its answer and the reason. Try one before you open the answer.
Question 1
Which international organization was established on 1 January 1995 to administer the rules of trade between nations?
Answer: B World Trade Organization (WTO)
Why
The World Trade Organization (WTO) was created on 1 January 1995 to administer international trade and replace the GATT arrangement.
Question 2
According to the mercantilist philosophy of the 16th to 18th centuries, a country's wealth and power were measured by its holdings of:
Answer: A Precious metals such as gold and silver
Why
Mercantilists believed that a nation's wealth depended on accumulating precious metals like gold and silver by maintaining a trade surplus.
Question 3
What term describes an economic situation where there is no international trade and a country is entirely self-sufficient?
Answer: A Autarky
Why
Autarky is defined as a situation where there is no international trade and a nation is assumed to be self-sufficient.
Question 4
In the balance of payments, unrequited receipts such as gifts, foreign aid donations, and remittances sent to families in Ethiopia are classified under:
Answer: C Net transfers
Why
Net transfers include unilateral receipts such as gifts, donations, and remittances because residents receive them for free without paying anything in return.
Question 5
Within domestic trade, what is the main function of a retailer?
Answer: A Selling goods in small quantities directly to final consumers
Why
A retailer is the final seller in the distribution chain, buying goods from wholesalers and selling them in small quantities to consumers for direct consumption.
Question 6
When a government sets a physical limit on the maximum quantity of a specific good that can be imported, it is using a:
Answer: C Import quota
Why
An import quota is a quantitative restriction that fixes the maximum amount of a good permitted to enter a country.
Question 7
A trade strategy that aims to replace foreign imported products with domestic production while protecting infant industries is called:
Answer: B Import substitution strategy
Why
Import substitution is a trade and economic policy that advocates replacing foreign imports with domestic products to develop local industries.
Question 8
Under a fixed exchange rate system, when the central bank deliberately increases the price of foreign currency in terms of the domestic currency, this action is known as:
Answer: C Devaluation
Why
Under a fixed exchange rate system, an official increase in the domestic price of foreign currency is called devaluation, which makes exports cheaper and imports more expensive.
Question 9
According to David Ricardo's principle of comparative advantage, mutually beneficial international trade can take place as long as:
Answer: B Differences exist in the opportunity costs of producing goods between nations
Why
David Ricardo showed that even if one country is more efficient in producing all goods, mutually beneficial trade is possible if countries specialize based on lower opportunity costs (relative costs).
Question 10
Suppose the nominal exchange rate is 45 ETB per 1 USD. A pair of shoes costs 900 ETB in Addis Ababa and 40 USD in the United States. What is the real exchange rate?
Answer: C 2.00
Why
The formula for the real exchange rate is: RER = e * (P* / P). Here, RER = 45 * (40 / 900) = 1800 / 900 = 2.00. This means 40 USD buys 2 times the equivalent goods in Ethiopia.
The app holds 12 questions on this unit, marked as you go. These are the first 10.
A lesson on this chapter from YouTube. It loads only when you press play.
Trade and tariffs · Watch on YouTube
Unit 5 runs from page 115 to page 145 of the Ministry of Education edition.
Ministry of Education edition, English, 202 pages
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