Deck 5: International Trade Theory

Question 1

Ricardo noted the importance of country factors such as domestic demand and domestic rivalry in explaining a nation's dominance in the production and export of particular products.

Answer 1

False

Question 2

Mercantilism advocated that countries should encourage exports and imports.

Answer 2

False

Question 3

The Heckscher-Ohlin theory has proven to be a powerful explanation of world trade patterns.

Answer 3

False

Question 4

A situation where a government does not attempt to influence,through quotas or duties,what its citizens can buy from another country or what they can produce and sell to another country is known as free trade.

Question 5

Because of diminishing returns,it is not feasible for a country to specialize to the degree suggested by the simple Ricardian model.

Question 6

Smith's theory of international trade suggests that when one country has an absolute advantage in the production of all goods,the country might not derive any benefit from international trade.

Question 7

The theory of comparative advantage suggests that trade is a zero-sum game in which all countries that participate realize economic gains.

Question 8

The Heckscher-Ohlin theory argues that free trade is not beneficial to most nations.

Question 9

The Heckscher-Ohlin theory emphasizes the interplay between the proportions in which the factors of production are available in different countries and the proportions in which they are needed for producing particular goods.

Question 10

When a gain by one country results in a loss by another,there is a positive-sum game.

Question 11

According to the theories of Smith,Ricardo,and Heckscher-Ohlin,if a country can produce a product by itself,it should not import that product.

Question 12

Diminishing returns to specialization occurs when lesser units of resources are required to produce each additional unit.

Question 13

Limits on imports are often in the interests of domestic consumers,but not domestic producers.

Question 14

While popular in its time,Ricardo's theory is no longer a major intellectual weapon for those who argue for free trade.

Question 15

According to the theory of comparative advantage,it is in a country's best interest to maintain a trade surplus and to export more than it imports.

Question 16

In general,economic studies suggest that countries that adopt a more open stance toward international trade enjoy higher growth rates than those who keep their economies closed to trade.

Question 17

New trade theory stresses that in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments,but because in certain industries the world market can only support a limited number of firms.

Question 18

According to Ricardo,there may be cases when it makes sense for a country to buy goods from another country that it can make more efficiently itself.

Question 19

Adam Smith's basic argument is that a country should produce goods at home even if it can buy at a lower cost from other countries.

Question 20

Political opposition to the adoption of a free trade regime typically comes from those whose jobs are most at risk.

Question 21

According to the new trade theory,firms that establish a first-mover advantage with regard to the production of a particular new product may subsequently dominate global trade in that product.

Question 22

New trade theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology.

Question 23

From a profit perspective,it makes sense for a firm to disperse its productive activities to those countries where,according to the theory of international trade,they can be performed most efficiently.

Question 24

Economies of scale are unit cost reductions associated with a large-scale output.

Question 25

Porter argues that favorable demand conditions will result in competitive advantage unless the state of rivalry is sufficient to cause firms to respond to them.

Question 26

The theories of international trade claim that promoting free trade is generally in the best interest of an individual firm,although it may not always be in the best interests of a country.

Question 27

Assembly of electronic components is a relatively labor-intensive process requiring only low-skilled labor,and cost pressures are intense.As a result,final assembly may be carried out in a country such as the United States.

Question 28

Because a growing number of new products are now introduced simultaneously in the United States,Japan,and the advanced European nations,Vernon's product life-cycle is limited in explaining world trade patterns.

Question 29

New trade theory and the Heckscher-Ohlin theory are in complete agreement with regard to world trade patterns.

Question 30

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

Question 31

Historically,the product life-cycle theory seems to be an inaccurate explanation of international trade patterns.

Question 32

According to Porter,four broad attributes of a nation shape the environment in which local firms compete including supply conditions,factor endowments,regulation,and advanced factors.

Question 33

According to Porter,the characteristics of home demand are particularly important in shaping the attributes of domestically made products and in creating pressures for innovation and quality.

Question 34

A central point in Vernon's product life-cycle was that demand for new products tends to be solely based on price factors.

Question 35

Porter suggests that different nations are characterized by different management ideologies,which either help them or do not help them to build national competitive advantage.

Question 36

Raymond Vernon suggested that the wealth and size of the U.S.market gave U.S.firms a strong incentive to develop new consumer products.

Question 37

The Heckscher-Ohlin theory gains predictive power once the impact of differences of technology on productivity is controlled for.

Question 38

Porter's diamond of competitive advantage has proven to be a powerful predictor of world trade patterns.

Question 39

Trade is mutually beneficial,according to new trade theory,because it allows for the specialization of production,the realization of scale economies,and the production of a greater variety of products at lower prices.

Question 40

Factor endowments lie at the center of the Heckscher-Ohlin theory.

Question 41

Propagated in the 16^th and 17^th centuries,_____ advocated that countries should simultaneously encourage exports and discourage imports.

A)ethnocentrism
B)capitalism
C)collectivism
D)mercantilism

Question 42

Trade produces net gains for all involved and hence is a:

A)zero-sum game.
B)balance-of-trade game.
C)positive-sum game.
D)equilibrium-gain game.

Question 43

The theory of _____,developed by Michael Porter,focuses on the importance of country factors,in addition to factor endowments,such as domestic demand and domestic rivalry in explaining a nation's dominance in the production and export of particular products.

A)new trade
B)absolute advantage
C)comparative advantage
D)national competitive advantage

Question 44

According to Smith,countries should specialize in the production of goods for which they have an absolute advantage and then:

A)retain these goods for strictly domestic sales.
B)trade these goods for the goods produced by other countries.
C)sell these goods to the highest domestic or international bidder.
D)prohibit the import of these goods from other countries.

Question 45

This theory explains the observed patterns of international trade by emphasizing the interplay between the proportions in which the factors of production are available in different countries and the proportions in which they are needed for producing particular goods.

A)Mercantilism
B)Absolute advantage
C)Heckscher-Ohlin
D)Comparative advantage

Question 46

Free trade:

A)formed the basis for the mercantilist philosophy.
B)is in direct contrast to the notion of the invisible hand as advocated by Smith.
C)refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country.
D)rejects the laissez-faire stance toward trade and maintains that it is not in the best interests of a country.

Question 47

According to the theory of _____,it makes sense for a country to specialize in producing the goods it produces most efficiently and buy the products it produces less efficiently from other countries,even if it could produce the good more efficiently itself.

A)strategic trade
B)pertinent advantage
C)comparative advantage
D)absolute advantage

Question 48

Which theory stresses that in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments,but because in certain industries the world market can support only a limited number of firms?

A)Balanced trade
B)Heckscher-Ohlin
C)New trade
D)Product life-cycle

Question 49

The theory of _____ makes a crude case for government involvement in promoting exports and limiting imports.

A)mercantilism
B)free trade
C)absolute advantage
D)comparative advantage

Question 50

The different combinations of two goods that an economy could efficiently produce with limited productive resources can be referred to as a country's:

A)economic output.
B)efficiency graph.
C)productivity curve.
D)production possibility frontier.

Question 51

The main tenet of mercantilism was that it was in a country's best interest to maintain a trade:

A)balance.
B)embargo.
C)surplus.
D)deficit.

Question 52

When a government limits imports via tariffs and quotas,and subsidizes exports in order to maximize exports and minimize imports,the country is following:

A)a mercantilist philosophy.
B)the theory of absolute advantage.
C)the theory of comparative advantage.
D)the Heckscher-Ohlin theory.

Question 53

China,deliberately keeping its currency value low against the U.S.dollar in order to sell more goods to the United States,and thus amass a trade surplus and foreign exchange reserves,is viewed by critics as following a:

A)zero-sum game.
B)neo-mercantilist policy.
C)positive-sum game.
D)free trade policy.

Question 54

This theory,advanced by the 19^th-century English economist David Ricardo,forms the intellectual basis of the modern argument for unrestricted free trade.

A)Heckscher-Ohlin
B)Mercantilism
C)Comparative advantage
D)Absolute advantage

Question 55

According to the _____,the United States is a major player in the commercial jet aircraft industry because American firms were first movers in the world market.

A)product life-cycle theory
B)theory of mercantilism
C)new trade theory
D)theory of absolute advantage

Question 56

Mercantilism viewed trade as a(n):

A)zero-sum game.
B)economic evil.
C)nonessential economic activity.
D)threat to a government's independence.

Question 57

Identify the theory that can be interpreted as justifying some limited government intervention to support the development of certain export-oriented industries.

A)Theory of national competitive advantage
B)Heckscher-Ohlin theory
C)Theory of comparative advantage
D)Theory of absolute advantage

Question 58

Which of the following is an assumption of the Heckscher-Ohlin theory?

A)Countries have varying endowments of the various factors of production
B)Gold and silver were the mainstays of national wealth and essential to vigorous commerce
C)It is in a country's best interests to maintain a trade surplus
D)Trade is a zero-sum game

Question 59

All of the following theories show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself except:

A)mercantilism.
B)Heckscher-Ohlin.
C)comparative advantage.
D)absolute advantage.

Question 60

Identify the incorrect statement pertaining to Raymond Vernon's product life-cycle theory.

A)Early in their life cycle,most new products are produced in and exported from the country in which they were developed.
B)As a new product becomes widely accepted internationally,production starts in other countries.
C)A product in the early stage of the product life-cycle is imported by the country where it was innovated.
D)A product may ultimately be exported back to the country of its original innovation.

Question 61

Porter explains the United States' loss of competitiveness in engineering-based industries where manufacturing processes and product design issues are critical as a consequence of:

A)differing management ideologies.
B)differing factor endowments.
C)differing demand conditions.
D)chance.

Question 62

The simple comparative advantage model assumes constant returns to specialization.However,it is more realistic to assume diminishing returns to specialization because of all of the following reasons except:

A)all resources are of the same quality.
B)different goods use resources in different proportions.
C)as a country tries to increase its output of a certain good,it is more likely to draw on more marginal resources whose productivity is not as great as those initially employed.
D)if a country specializes to the degree suggested by the simple Ricardian model,the gains from specialization are likely to be exhausted before specialization is complete.

Question 63

A basic tenet of Ricardo's theory is that:

A)consumers in those countries with an absolute advantage in the production of all goods might derive no benefits from international trade.
B)consumers in all nations can consume more if there are no restrictions on trade.
C)restrictions on trade help consumers in countries that lack an absolute advantage in the production of a particular good.
D)trade is a zero-sum game.

Question 64

According to Porter,all of the following are broad attributes of a nation that shape the environment in which local firms compete except:

A)factor endowments.
B)supply fluctuations.
C)relating and supporting industries.
D)firm strategy,structure,and rivalry.

Question 65

_____ means that the units of resources required to produce a good are assumed to remain unvarying no matter where one is on a country's production possibility frontier.

A)Economies of scale
B)Law of diminishing returns
C)Constant returns to specialization
D)Zero-sum game

Question 66

According to Porter,advanced factors:

A)include natural resources,climate,location,and demographics.
B)are the least significant for competitive advantage.
C)are naturally endowed.
D)are a product of investment by individuals,companies,and governments.

Question 67

According to Heckscher and Ohlin,_____ meant the extent to which a country is provided with such resources as land,labor,and capital.

A)factors of production
B)economic facilitators
C)factor endowments
D)manufacturing factors

Question 68

According to the product life-cycle theory,the locus of global production initially switches from the U.S.to other advanced nations and then from those nations to developing countries.The consequence of this trend for the pattern of world trade is that over time the U.S.:

A)becomes the sole producer of the product.
B)switches from being an exporter of the product to being an importer of the product.
C)switches from being an importer of the product to being an exporter of the product.
D)becomes the sole consumer of the product.

Question 69

Even if we relax the assumptions of the simple Ricardian model that there are constant returns to scale and realistically assume diminishing returns to specialization,it can still be concluded that:

A)the benefits of unrestricted trade do not hold.
B)free trade is beneficial but the gains may not be as great as in a constant returns case.
C)governments should intervene in the market to bring about a zero-sum game.
D)the benefits of free trade are comparatively much less than government-regulated trade.

Question 70

The product life-cycle theory:

A)remains a relevant theory of explaining international trade in the modern world.
B)was useful for explaining the pattern of trade during the brief period of American global dominance.
C)proved to be a poor explanation of world trade patterns during the 1960s and 1970s.
D)was a strong predictor of trade patterns during the 1800s.

Question 71

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)Comparative advantage
B)Absolute advantage
C)Heckscher-Ohlin
D)Samuelson

Question 72

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

A)Theory of competitive advantage
B)Product life-cycle theory
C)New trade theory
D)National competitive advantage theory

Question 73

According to the new trade theorists,because early entrants are able to gain _____,the early entrants into an industry may get a lock on the world market that discourages subsequent entry.

A)zero-sum advantages
B)highly skilled employees
C)process expertise
D)economies of scale

Question 74

What is the basic message of the theory of comparative advantage?

A)Countries are similar in their ability to produce goods efficiently
B)International trade is rarely beneficial to a country
C)Potential world production is greater with unrestricted free trade than it is with restricted trade
D)Trade is a zero-sum game

Question 75

_____ suggests that when nations trade,each nation may be able to specialize in producing a narrower range of products than it would in the absence of trade,and through trade,each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods.

A)The product life-cycle theory
B)Porter's diamond of competitive advantage
C)New trade theory
D)The theory of comparative advantage

Question 76

According to the _____ model,when a rich country enters into a free trade agreement with a poor country that rapidly experiences dynamic gains,the rich country is likely to not have net gains.

A)absolute advantage
B)mercantilist
C)Heckscher-Ohlin
D)Samuelson

Question 77

The simple comparative advantage model assumes that trade does not change a country's stock of resources or their utilization efficiency.If we relax this assumption to make allowances for dynamic changes,all of the following become apparent except:

A)opening the economy to trade would be likely to generate dynamic gains.
B)free trade may increase the country's stock of resources.
C)free trade might increase the efficiency with which the country uses its resources.
D)dynamic gains will cause the country's PPF to shift inward.

Question 78

Contrary to what the Heckscher-Ohlin theory would predict,the United States has been a primary importer rather than an exporter of capital goods.This phenomenon is referred to as the _____ paradox.

A)zero-sum
B)Leontief
C)empirical
D)Ricardo

Question 79

Raymond Vernon argued that new products were developed by U.S.firms and first sold in the U.S.market because:

A)European competitors were not active in product R&D.
B)American firms were able to take advantage of tax credits for product R&D.
C)the wealth and size of the U.S.market gave the firms an incentive to develop new products.
D)the low cost of U.S.labor gave U.S.firms an incentive to develop costly process innovations.

Question 80

_____ occur(s)when more units of resources are required to produce each additional unit.

A)Economies of scale
B)Diminishing returns to specialization
C)A positive-sum game
D)Constant returns to specialization