Deck 6: International Trade Theory

Question 1

Free trade exists when there is no government influence on what citizens can buy from another country or sell to another country.

Answer 1

True

Question 2

Raymond Vernon's product life-cycle theory was based on the observation that for most of the twentieth century a very large proportion of the world's new products were developed by the firms situated in Germany and sold first in the German market.

Answer 2

False

Question 3

First-mover advantages are gained by those companies that are the early entrants to an industry.

Answer 3

True

Question 4

Mercantilism asserted that gold and silver were the mainstays of national wealth and essential to vigorous commerce.

Question 5

According to the product life cycle theory, as demand for a product grows rapidly in the United States, it will also grow rapidly in other advanced nations and diminish potential exports from the United States.

Question 6

Mercantilism, propagated in the sixteenth and seventeenth centuries, advocated that countries should discourage exports.

Question 7

Adam Smith disagreed with the mercantilist assumption because he believed that countries differ in their ability to produce goods efficiently.

Question 8

New trade theory suggests that world trade in certain products will likely be dominated by countries who acted as late-movers and took advantage of existing innovations.

Question 9

Free trade is likely to increase a country's stock of resources and the efficiency with which it utilizes those resources.

Question 10

A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

Question 11

The factor endowments of a country refer to government resources made available to help businesses.

Question 12

According to Adam Smith, government policy should determine a country's imports and exports.

Question 13

Those who follow the mercantilist doctrine would not want government intervention to be the reason for a surplus in the balance of trade.

Question 14

Vernon's product life cycle theory was based on the idea that most new products were initially produced in the United States.

Question 15

According to the product life-cycle theory, the locus of global production initially switches from developing countries to other advanced nations and then from those nations to the United States.

Question 16

New trade theory stresses that in some cases countries specialize in the production of particular products because of underlying differences in factor endowments.

Question 17

According to the theory of comparative advantage, potential world production is greater with unrestricted free trade than it is with restricted trade.

Question 18

Factor endowments are unit cost reductions associated with a large scale of output.

Question 19

The Heckscher-Ohlin theory is considered the best predictor of real-world international trade patterns.

Question 20

The theory of free trade is enhanced by the idea that resources typically move easily from one economic activity to another and allow nations to adapt quickly.

Question 21

One of the central beliefs of mercantilism is that

A) a country's government should intervene to achieve a surplus in the balance of trade.
B) a large volume of trade is essential regardless of whether it comes from imports or exports.
C) trade is a positive-sum game in which all countries benefit from trading with each other.
D) a country that has an absolute advantage in the production of all goods derives no benefits from international trade.
E) potential world production is greater with unrestricted free trade than it is with restricted trade.

Question 22

The Salcian government decides on the products that can be imported and ensures that any product that can be produced at home is not imported. Instead, the government wants to maximize exports to achieve a surplus in the balance of trade. Which perspective likely influences Salcia's approach to international trade?

A) mercantilism
B) Leontief's paradox
C) product life-cycle theory
D) new trade theory
E) first-mover advantage

Question 23

Porter's theory suggests that it is in the best interest of business for a firm to invest in upgrading advanced factors of production.

Question 24

An inconsistency in the mercantilist doctrine, as pointed out by David Hume, is that

A) the volume of a country's imports increases as an indirect consequence of mercantilism.
B) the exclusion of government influence in matters pertaining to trade is not ideal.
C) in the long run, no country could sustain a surplus on the balance of trade.
D) it was not backed by either sound political principles or social ideologies.
E) trade is a zero-sum game rather than a positive-sum game as postulated by the theory.

Question 25

Garrett works in a country where the government does not set quotas or duties on what its citizens can buy from another country, or what they can produce and sell to another country. In other words, Garrett's country practices

A) free trade.
B) mercantilism.
C) socialism.
D) absolute advantage.
E) a zero-sum game.

Question 26

According to Michael Porter, government can influence each of the four components of Porter's diamond-either positively or negatively.

Question 27

A zero-sum game occurs when

A) the market mechanism determines what a country imports and what it exports.
B) a country engages in international trade even for products it is able to produce for itself.
C) an economic gain by one country results in an economic loss by another.
D) limits on imports are done in the interests of domestic producers, but not domestic consumers.
E) one country has an absolute advantage in the production of all goods.

Question 28

As a trade theory, mercantilism was based on the idea that a trade surplus would lead to

A) absolute advantage among all trading partners.
B) first-mover advantages.
C) lower levels of inflation and a steady economy.
D) accumulations of gold and silver.
E) lower levels of national wealth.

Question 29

Sentoria is an island nation in the Pacific Ocean. Its geographical location is advantageous since it has access to a variety of aquatic life forms and also a number of freshwater sources that provide for fisheries. The lack of arable land drives local demand for seafood, and Sentoria is one of the world's major exporters of this product. Which theory of international trade best explains Sentoria's dominance as an exporter of seafood?

A) new trade theory
B) product life-cycle theory
C) mercantilism
D) Heckscher-Ohlin theory
E) theory of national competitive advantage

Question 30

From the perspective of making a profit, it is sensible for a company to disperse production activities to countries where they can be performed most efficiently.

Question 31

Which theory asserts that countries should simultaneously encourage exports and discourage imports?

A) free trade
B) capitalism
C) new trade
D) mercantilism
E) socialism

Question 32

The theory of ________ was the first to explain why unrestricted free trade benefits a country.

A) Heckscher-Ohlin
B) national competitive advantage
C) free trade
D) absolute advantage
E) zero-sum game

Question 33

The nation of Tazia exports agricultural products and in turn imports products that it does not produce such as computers and electronic devices. As a result, it spends more on imports than it gains from exports. Which perspective would frown on this form of international trade?

A) new trade theory
B) product life-cycle theory
C) mercantilism
D) Heckscher-Ohlin theory
E) theory of national competitive advantage

Question 34

What was the principle currency of trade in the mid-sixteenth century when mercantilism came into favor in England?

A) the pound
B) gold and silver
C) the U.S. dollar
D) salt and spices
E) human labor

Question 35

Michael Porter argues that advanced factors are the most significant for competitive advantage.

Question 36

Many years ago, the Republic of Janua believed that it was in its best interests to maintain a trade surplus, to export more than it imports. In so doing, the Republic of Janua hoped to accumulate gold and silver, and consequently, increase its national wealth, prestige, and power. What influenced the Republic of Marunia's approach to international trade?

A) neo-Ricardian trade theory
B) Leontief's paradox
C) product life-cycle theory
D) new trade theory
E) mercantilism

Question 37

Which strategy is in a country's best interests, according to the main tenet of mercantilism?

A) importing products from developing rather than developed countries
B) importing products even if they are efficiently produced at home
C) importing less specialized goods rather than attempting to make them at home
D) minimizing exports and maximizing imports
E) maintaining a trade surplus

Question 38

Porter's theory has been subjected to detailed empirical testing and it is proven that it accurately predicts international trade patterns.

Question 39

When the country of Matu trades with the country of Balor, Matu experiences a gain because of the high costs of its products while Balor experiences a loss because it is trading small amounts of products that cost very little. Which characteristic of the mercantilist theory does this reflect?

A) factor endowments
B) first-mover advantage
C) zero-sum game
D) late-mover advantage
E) comparative advantage

Question 40

According to the Smith, Ricardo, and Heckscher-Ohlin theories, a country's economy may gain if its citizens buy some products from other nations that could be produced in their home nation. What is the reasoning behind this idea?

A) The natural resources of a country limit the types and quantities of items that can be produced.
B) International trade is typically regulated by government forces that prevent a business from exporting.
C) International trade allows a country to specialize in items that can be produced most efficiently in that country.
D) First-mover advantages limit a country from producing every product that citizens need or want.
E) Innovative products are typically produced in the home country, but high-demand products should be imported.

Question 41

Why do diminishing rather than constant returns to specialization sometimes occur?

A) All resources are of the same quality.
B) Resources can shift from the production of one good to another seamlessly.
C) Each country has a fixed stock of resources.
D) Different goods use different resources in different proportions.
E) Trade does not affect the distribution of income within a country.

Question 42

One of the rebuttals to Samuelson's critique of the free trade model is that

A) the United States' ability to achieve constant returns to specialization is unparalleled.
B) the strict immigration policies of the United States help insulate the economy from inward migration.
C) introducing trade barriers may in fact be beneficial to developed nations to some extent.
D) developing nations are unlikely to upgrade the skill level of their workforce rapidly enough.
E) the developing nations are unlikely to run into diminishing returns in a near future.

Question 43

A neo-mercantilist strategy would promote

A) the equal distribution of exports and imports.
B) boosting exports and limiting imports.
C) boosting both imports and exports.
D) limiting both imports and exports.
E) boosting imports and limiting exports.

Question 44

Nikoli lives in New Salom which specializes in component parts, while its geographical neighbor, Durma specializes in heavy machinery. New Salom exports component parts to Durma, which in turn exports heavy machinery to New Salom. According to the theory of comparative advantage, this mutually beneficial trade relationship best illustrates

A) the significance of trade barriers.
B) a positive-sum game.
C) a first-mover advantage.
D) the advantages of mercantilism.
E) a zero-sum game.

Question 45

Australia is a major producer of agricultural and dairy products and exports coffee, tea, spices, and milk products to the United States. The United States is the world's third largest supplier of machinery and exports heavy machinery to Australia. Adam Smith would say this exchange occurs because

A) tariff barriers determine the flow of goods and services between nations.
B) countries are simultaneously encouraging exports and discouraging imports.
C) first entrants to the industry ensure their nations have the first-mover advantages.
D) nations with an absolute advantage in producing certain goods trade them for goods produced by other countries
E) gold and silver are the mainstays of national wealth and essential to vigorous commerce.

Question 46

Paul Samuelson's critique of free trade is based on the idea that the wealthier nation in the trade agreement might not recognize a net gain if the trade creates

A) the development of a monopoly.
B) a barrier from trading with other nations.
C) more job opportunities in the wealthier nation.
D) lower real wage rates in the wealthier nation.
E) an economic downturn in the poorer nation.

Question 47

Based on the last quarterly report, Jason realizes that it is now taking more resources to produce each of the laptop computers his company makes. What aspect of comparative advantage is Jason noticing?

A) increasing tariffs
B) diminishing returns
C) JIT inventory
D) economies of scale
E) constant returns

Question 48

The country of Zeran specializes in the production of beef and produces beef more efficiently than any other country. It buys soybeans, which it produces less efficiently than beef, from Canta, even though it produces soybeans more efficiently than Canta. Which theory of international trade supports Zeran's decision to buy wheat from Canta?

A) Samuelson critique
B) mercantilism
C) Ricardo's theory of comparative advantage
D) Adam Smith's theory of absolute advantage
E) Leontief's paradox

Question 49

In Latuna, it takes 10 resources to produce 1 ton of coffee and 13.5 resources to produce 1 ton of wheat. In South Narnia, it takes 40 resources to produce 1 ton of coffee and 12 resources to produce 1 ton of wheat. Latuna has a comparative advantage over South Narnia in

A) both coffee and wheat.
B) coffee
C) wheat
D) both coffee and wheat if combined.
E) neither coffee nor wheat.

Question 50

In Appellia, it takes 10 units of resources to increase its output of sugar from 12 tons to 13 tons, but 11 units of resources to increase output from 13 tons to 14 tons, and 12 units of resources to increase output from 14 tons and 15 tons, and so on. The need for increasing resources is an example of

A) comparative advantage.
B) diminishing returns to specialization.
C) absolute advantage.
D) mercantilism
E) Porter's diamond model.

Question 51

In Lurnee, it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1 ton of rice. In South Tyberg, it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice. Lurnee has a comparative advantage over South Tyberg in cocoa. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it; however, this conclusion stems from which of these inaccurate assumptions?

A) We have assumed constant returns to scale.
B) We have assumed the prices of resources and exchange rates in the two countries are dynamic.
C) We have assumed there are barriers to the movement of resources from the production of one good to another within the same country.
D) We have assumed that agrarian nations do not specialize in producing particular products.
E) We have assumed diminishing returns to specialization.

Question 52

Which trade theory suggests that trade is a positive-sum game in which all participating countries fetch economic gains?

A) Heckscher-Ohlin theory
B) mercantilism
C) comparative advantage
D) Leontief's paradox
E) Samuelson critique

Question 53

India specializes in business process outsourcing and does this more efficiently than any other country. It buys agricultural commodities, which it produces less efficiently than outsourcing activities, from the United States, even though it produces these agricultural commodities more efficiently than the United States Which international trade theory supports India's decision to buy agricultural commodities from the United States?

A) Samuelson critique
B) mercantilism
C) Ricardo's theory of comparative advantage
D) Adam Smith's theory of absolute advantage
E) Leontief's paradox

Question 54

India is the largest exporter of information technology services to the United States In turn, the United States exported $3 billion worth of aircraft to India. What theory is illustrated by this form of trade between India and the United States?

A) product life-cycle theory
B) Heckscher-Ohlin theory
C) absolute advantage
D) mercantilism
E) theory of national competitive advantage

Question 55

Consider the two countries of Swala and Atlantis. Swala is a major producer of wheat and rice while Atlantis specializes in the production of marble and automobile parts. Engaging in free trade benefits both countries since Swala is an agrarian nation and Atlantis lacks arable land. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it; however, this conclusion is based on which inaccurate assumptions?

A) We have assumed a simple world in which there are only two countries.
B) We have assumed the prices of resources and exchange rates in the two countries are dynamic.
C) We have assumed there are barriers to the movement of resources from the production of one good to another within the same country.
D) We have assumed that agrarian nations do not specialize in producing fertilizers.
E) We have assumed diminishing returns to specialization.

Question 56

Argonia and Selenia specialize in the production of medical equipment and rice respectively. Argonia exports medical equipment to Selenia, which in turn exports rice to Argonia. According to the theory of comparative advantage, this mutually beneficial trade relationship is an example of

A) the significance of trade barriers.
B) a positive-sum game.
C) a first-mover advantage.
D) the advantages of mercantilism.
E) a zero-sum game.

Question 57

Cadmia and Rhodia specialize in the production of electronics and pharmaceutical products respectively. They are considered the best at their specializations. Cadmia trades electronics with Rhodia in exchange for pharmaceutical products. Which perspective is illustrated by this form of trade between Cadmia and Rhodia?

A) product life-cycle theory
B) Heckscher-Ohlin theory
C) absolute advantage
D) mercantilism
E) theory of national competitive advantage

Question 58

According to the theory of comparative advantage, consumers in all nations can consume more if there are

A) stronger restrictions on trade.
B) more monopolistic businesses.
C) fewer incentives for intellectual property.
D) no restrictions on trade.
E) fewer monopolistic businesses.

Question 59

Garments are exported from China to the United States on a daily basis. In turn, the United States exports agricultural products like soybeans to China. Which statement best explains the trade equation between China and the United States?

A) Tariff barriers determine the flow of goods and services between nations.
B) Countries are simultaneously encouraging exports and discouraging imports.
C) First entrants to the industry ensure their nations have the first-mover advantages.
D) Nations with an absolute advantage in producing certain goods trade them for goods produced by other countries.
E) Gold and silver are the mainstays of national wealth and essential to vigorous commerce.

Question 60

Neo-mercantilists equate political power with economic power and economic power with

A) corruption.
B) a balance-of-trade surplus.
C) regional dominance.
D) a trade monopoly.
E) capitalism.

Question 61

Vernon predicts that as the demand for a new product starts to grow in other advanced countries, in the long run

A) the cost of labor in these advanced countries begins to increase.
B) it becomes profitable for foreign firms to invest in production facilities in the United States.
C) the firms in the United States begin to gain an absolute advantage.
D) it begins to limit the potential for exports from the United States.
E) the same product will begin to command a higher price.

Question 62

The country of Dalima has long been a substantial exporter of seafood, reflecting its unusual abundance of coastal waters; in contrast, its continental neighbor, Bundeeza, has excelled in the export of goods produced in labor-intensive manufacturing industries. Based on this information, the export policies of the two countries is best explained by

A) mercantilism.
B) theory of absolute advantage.
C) Heckscher-Ohlin theory.
D) theory of comparative advantage.
E) Samuelson's critique.

Question 63

According to the product life-cycle theory, while demand for new products is starting to grow rapidly in the United States, demand in other advanced countries

A) remains limited to high-income groups.
B) necessitates production of that product in those countries.
C) necessitates outsourcing of production to low-cost locations.
D) raises the cost of production in the United States.
E) causes a shift in the position of the United States from that of an exporter to an importer.

Question 64

According to the product life-cycle theory, the high cost of U.S. labor gave U.S. firms an incentive to

A) lower costs of services to offset a fall in demand.
B) develop cost-saving process innovations.
C) invite foreign direct investment in domestic industries.
D) embrace and promote open market capitalism.
E) import new consumer products and export agricultural products.

Question 65

Intricate Wiring Corp., based in Ohio, creates a brand new high-tech product. The demand for the product in the United States is high but very low or non-existent elsewhere. The company decides not to locate manufacturing facilities elsewhere and will simply meet the small foreign demand via exports. The theory that best explains the company's policy is

A) product life cycle theory.
B) mercantilism.
C) the Leontief paradox.
D) Heckscher-Ohlin theory.
E) free trade theory.

Question 66

According to the product life-cycle theory, the locus of global production initially switches from the United States to other advanced nations and then from those nations to developing countries. As a result,

A) U.S. imports become less capital-intensive than U.S. exports.
B) the pattern of international trade is affected by differences in factor endowments rather than differences in productivity.
C) over time, the United States switches from being an exporter of a product to an importer of the product.
D) the wage rates in the United States decrease.
E) developing nations fail to upgrade their skill levels to compete with advanced countries.

Question 67

U.S. exports are less capital-intensive than U.S. imports, despite the relative abundance of capital in the country. This is in opposition to the Heckscher-Ohlin theory and has been labelled

A) a zero-sum game.
B) Leontief's paradox.
C) a positive-sum game.
D) Samuelson's critique.
E) a first-mover advantage.

Question 68

Vernon argues that pioneering firms in the United States kept production facilities closer to the market and centers of decision making because

A) of the uncertainty and risks inherent in introducing new products.
B) they believed that foreign production facilities were inferior in technical skills.
C) they believed that U.S. labor costs were much lower than those in foreign markets.
D) the U.S. government was critical of outsourcing production to other countries.
E) of the high trade barriers implemented by several Asian and European countries.

Question 69

According to Vernon, what eliminates the need for pioneering U.S. firms to look for low-cost production sites in other countries?

A) The uncertainties and risks inherent in introducing new products are very low.
B) The demand for most new products tends to be based mainly on price.
C) U.S. labor costs are relatively low compared to global standards.
D) Firms can charge relatively high prices for new products.
E) The production of innovative products in other advanced countries limits the potential for exports from the United States.

Question 70

Raymond Vernon's product life cycle theory stemmed from the idea that for most of the twentieth century,

A) European industries guided the rest of the world in new products.
B) cost-saving processes were not as important as the development of new products.
C) many of the world's new products were developed and first sold in the United States.
D) most new products were developed for the manufacturing and agricultural industries.
E) the United States had lower technology-driven innovations than other developed nations.

Question 71

What is true of the relationship between trade and economic growth?

A) Countries open to international trade display higher growth rates than those that close their economies to trade.
B) Within a group of developing countries, closed economies grow faster than open economies.
C) The Leontief paradox notes that adopting an open economy and embracing free trade does not reward a nation with higher economic growth.
D) Free trade hampers economic growth and leads to lower living standards in the long run.
E) Free trade has historically benefited poor counties and hence trade barriers should be introduced to protect rich countries from exploitation.

Question 72

For years, many U.S. corporations made cameras. Today; however, most cameras sold in the United States are imported from Japan and few are manufactured in the United States. Which trade theory does this demonstrate?

A) product life cycle
B) Heckscher-Ohlin
C) absolute advantage
D) comparative advantage
E) mercantilism

Question 73

Sandvor and Milese specialize in the production of dairy and textiles respectively. While Sandvor doesn't produce textiles, Milese is not as technologically advanced as Sandvor. In this situation, according to the Heckscher-Ohlin theory,

A) Sandvor will import textiles from Milese and export dairy to it.
B) Sandvor will invest more than Milese in the production of textiles to exploit its comparative advantage.
C) Sandvor and Milese will raise their trade barriers to protect their economies.
D) Milese will recruit experts from Sandvor to specialize in the production of dairy.
E) Sandvor will recruit workers from Milese to improve its standing in the textile industry.

Question 74

According to the Heckscher-Ohlin theory, the pattern of international trade is determined by differences in

A) labor productivity.
B) diminishing returns.
C) factor endowments.
D) management practices.
E) trade barriers.

Question 75

Which theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce?

A) mercantilism
B) theory of absolute advantage
C) Heckscher-Ohlin theory
D) theory of comparative advantage
E) Samuelson's critique

Question 76

Vernon theorizes that as the market in the United States and other advanced nations matures, ________ becomes the main competitive weapon.

A) placement
B) standardization
C) marketing
D) price
E) customization

Question 77

Bethany works for a company that makes sports socks. Unlike many smaller companies, Bethany's company ships out such large quantities of sports socks that their unit cost is less than half of the competition. What does this company benefit from?

A) mercantilism
B) diminishing returns
C) economies of scale
D) product life-cycle
E) JIT inventory

Question 78

One reason used to explain the Leontief paradox observed in the case of the United States is that the United States

A) imports goods that heavily use skilled labor and innovative entrepreneurship.
B) has a special advantage in producing new products made with innovative technologies.
C) exports heavy manufacturing products that use large amounts of capital.
D) has a strong absolute advantage over other nations because of its advantageous factor endowments.
E) imports goods that make intensive use of factors that are locally abundant.

Question 79

According to Vernon, what influences the movement of the locus of global production from advanced countries to developing countries?

A) cost considerations
B) factor endowments
C) domestic competition
D) supporting industries
E) firm structure

Question 80

The difference between Ricardo's theory and the Heckscher-Ohlin theory is that the Heckscher-Ohlin theory

A) makes more simplifying assumptions.
B) cannot be subjected to empirical tests.
C) actually predicts trade patterns with greater accuracy.
D) argues that the pattern of international trade is determined by differences in national factor endowments.
E) suggests that trade is a positive-sum game in which all countries that participate realize economic gains.