Question 1

Proponents of ____ maintain that government should enact policies that encourage the development of emerging,"sunrise" industries.
A) Product life cycle policy
B) Static comparative advantage policy
C) Intra-industry trade policy
D) Industrial policy

Accepted Answer

Industrial policy aims to promote the growth and development of certain industries through direct government intervention. This includes providing subsidies, tax incentives, and other forms of assistance to emerging industries that have the potential for growth and job creation. The other options are not directly related to promoting the development of emerging industries.

Question 2

With economies of scale and decreasing unit costs,a country has the incentive to:
A) Specialize completely in the product of its comparative advantage
B) Specialize partially in the product of its comparative advantage
C) Specialize completely in the product of its comparative disadvantage
D) Specialize partially in the product of its comparative disadvantage

Accepted Answer

With economies of scale and decreasing unit costs, it becomes more efficient for a country to specialize in the product of its comparative advantage. This is because the country can produce that good at a lower cost compared to other countries. By specializing completely in this product, the country can maximize its gains from trade and increase its overall output and income. Partial specialization is also a viable option, but complete specialization is more efficient in terms of producing the highest output and income for the country. Specializing in the product of its comparative disadvantage is not an optimal strategy as it would result in higher costs and lower output.

Question 3

The theory of overlapping demands predicts that trade in manufactured goods is unimportant for countries with very different:
A) Tastes and preferences
B) Expectations of future interest rate levels
C) Per-capita income levels
D) Labor productivities

Accepted Answer

The theory of overlapping demands, proposed by economist Staffan Linder, suggests that countries with similar per-capita income levels are more likely to trade manufactured goods with each other because they have similar consumer demands.

Question 4

Intra-industry trade can be explained in part by:
A) Adam Smith's principle of absolute advantage
B) Perfect competition in product markets
C) Diseconomies of large scale production
D) Transportation costs between and within nations

Accepted Answer

Transportation costs between and within nations play a significant role in intra-industry trade because they increase the cost of exporting and importing goods, making it more efficient to trade with countries that are geographically closer. This leads to the specialization and exchange of goods within industries, resulting in intra-industry trade. The other choices do not accurately explain intra-industry trade.

Question 5

Legislation requiring domestic manufacturers to install pollution abatement equipment tends to promote:
A) Higher production costs and an increase in output
B) Higher production costs and a decrease in output
C) Lower production costs and an increase in output
D) Lower production costs and a decrease in output

Accepted Answer

Legislation requiring domestic manufacturers to install pollution abatement equipment increases their production costs as they have to invest in new equipment and technology. This leads to higher prices for their products, reducing demand and output in the market. Thus, the correct option is higher production costs and a decrease in output (Option B).

Question 6

That the division of labor is limited by the size of the market best applies to which explanation of trade?
A) Factor endowment theory
B) Product life cycle theory
C) Economies of scale theory
D) Overlapping demand theory

Accepted Answer

Economies of scale theory

Question 7

Which trade theory contends that a country that initially develops and exports a new product may eventually become an importer of it and may no longer manufacture the product?
A) Theory of factor endowments
B) Theory of overlapping demands
C) Economies of scale theory
D) Product life cycle theory

Accepted Answer

The Product life cycle theory states that a country that initially develops and exports a new product may eventually become an importer of it and may no longer manufacture the product. This is because the product goes through different stages of maturity, starting from introduction, growth, maturity, and decline. As the product reaches the decline stage, it becomes less profitable to produce it locally, and the importing of the product becomes more economical.

Question 8

The simultaneous import and export of computers by Germany is an example of:
A) Intra-industry trade
B) Inter-industry trade
C) Perfect competition
D) Imperfect competition

Accepted Answer

The simultaneous import and export of computers by Germany suggests that the country is engaged in intra-industry trade, which refers to the exchange of similar goods or services among different countries. This trade pattern typically occurs in industries that have a high degree of product differentiation and allows countries to specialize in producing certain varieties of goods while importing others.

Question 9

Stringent governmental regulations (e.g.,air quality standards) imposed on domestic steel manufacturers tend to:
A) Enhance their competitiveness in the international market
B) Detract from their competitiveness in the international market
C) Increase the profitability and productivity of domestic manufacturers
D) Reduce the market share of foreign firms selling steel in the domestic market

Accepted Answer

Stringent governmental regulations impose additional costs on domestic steel manufacturers, which ultimately detracts from their competitiveness in the international market. It is likely that foreign firms will have lower production costs and can offer products at lower prices than domestic firms. As a result, domestic manufacturers may struggle to compete in the global market, particularly if the regulations are not imposed on foreign firms.

Question 10

Linder's theory of overlapping demand provides an explanation of:
A) Product life cycle theory
B) Factor endowment model
C) Economies of large-scale production
D) Intra-industry trade

Accepted Answer

Linder's theory of overlapping demand suggests that countries with similar levels of income and tastes will trade extensively with each other, leading to intra-industry trade, where countries both import and export similar goods within the same industry.

Question 11

Among the determinants underlying a country's international competitiveness in business services (e.g.,construction) are:
A) The potential scale economies afforded by a market's size
B) Abundance of equipment including data processing facilities and computers
C) Skills and capabilities of employees and their wage rates
D) All of the above

Accepted Answer

Each of the choices (potential scale economies, abundance of equipment, and skills/capabilities of employees) are important determinants of a country's international competitiveness in business services such as construction. Potential scale economies are influenced by market size, abundance of equipment such as data processing facilities and computers helps businesses operate efficiently, and skilled employees who may have a lower wage rate can help a company offer competitive pricing while maintaining high quality services.

Question 12

The trade model of the Swedish economists Heckscher and Ohlin maintains that:
A) Absolute advantage determines the distribution of the gains from trade
B) Comparative advantage determines the distribution of the gains from trade
C) The division of labor is limited by the size of the world market
D) A country exports goods for which its resource endowments are most suited

Accepted Answer

The Heckscher-Ohlin trade model asserts that a country will export the goods for which it has the most abundant and suitable resources. This is the idea of comparative advantage, which determines the division of labor and allocation of resources among nations. It is not based on absolute advantage or limited by the size of the world market.

Question 13

Boeing aircraft company was able to cover its production costs of the first "jumbo jet" in the 1970s because Boeing could market it to several foreign airlines in addition to domestic airlines.This illustrates:
A) How economies of scale make possible a larger variety of products in international trade
B) A transfer of wealth from domestic consumers to domestic producers as the result of trade
C) How a natural monopoly is forced to behave more competitively with international trade
D) How a natural monopoly is forced to behave less competitively with international trade

Accepted Answer

The fact that Boeing was able to market its product to multiple foreign airlines in addition to domestic airlines suggests that they were taking advantage of economies of scale in international trade. This allows for a larger variety of products to be produced and sold globally, increasing efficiency and lowering costs.

Question 14

The Leontief paradox provided:
A) Support for the principle of absolute advantage
B) Support for the factor endowment model
C) Evidence against the factor endowment model
D) Evidence against the principle of absolute advantage

Accepted Answer

The Leontief paradox was an unexpected finding from a study by Wassily Leontief, who found that the United States, despite having a relative abundance of capital and a scarcity of labor, was exporting labor-intensive goods and importing capital-intensive goods. This contradicted the predictions of the factor endowment model, which suggests that a country should export goods that use its abundant factors of production and import goods that use its scarce factors. Therefore, the Leontief paradox provided evidence against the factor endowment model.

Question 15

The Heckscher-Ohlin theory explains comparative advantage as the result of differences in countries':
A) Economies of large-scale production
B) Relative abundance of various resources
C) Relative costs of labor
D) Research and development

Accepted Answer

The Heckscher-Ohlin theory argues that countries have a comparative advantage in producing goods that utilize resources that are relatively abundant in that country. This means that countries with different resource endowments will have comparative advantages in different goods, leading to trade.

Question 16

Should international transportation costs decrease,the effect on international trade would include:
A) An increase in the volume of trade
B) A smaller gain from trade
C) A decline in the income of home producers
D) A decrease in the level of specialization in production.

Accepted Answer

If international transportation costs decrease, it becomes less expensive to transport goods between countries. This would naturally result in an increase in the volume of trade since the cost of transporting goods is one of the major determinants of the level of trade. With lower transportation costs, exporters will be able to sell their goods at lower prices while still making a profit. This will increase demand for the products, and more goods will be traded resulting in an increase in the volume of international trade.

Question 17

Which trade theory suggests that comparative advantage tends to shift from one nation to another as a product matures?
A) Interindustry trade theory
B) Intraindustry trade theory
C) Product life cycle theory
D) Overlapping demand theory

Accepted Answer

The Product life cycle theory suggests that comparative advantage tends to shift from one nation to another as a product matures. Initially, a new product is developed and produced in the country where it was invented (typically a developed country). But as the product becomes standardized and more cost-effective, production shifts to developing countries where labor is cheaper. Eventually, even these countries may lose their comparative advantage as new products are developed and produced in different locations, starting the cycle again.

Question 18

For the United States,empirical studies indicate that over the past two decades the cost of international transportation relative to the value of U.S.imports has:
A) Increased
B) Decreased
C) Not changed
D) None of the above

Accepted Answer

Over the past two decades, advancements in technology, increased efficiency, and competition in the shipping industry have generally led to a decrease in the cost of international transportation relative to the value of U.S. imports.

Question 19

According to the factor endowment model,countries heavily endowed with land will:
A) Devote excessive amounts of resources to agricultural production
B) Devote insufficient amounts of resources to agricultural production
C) Export products that are land-intensive
D) Import products that are land-intensive

Accepted Answer

The factor endowment model proposes that countries will specialize in the production and export of products that utilize their abundant factors of production. Therefore, a country heavily endowed with land is likely to specialize in agricultural production and export products that are land-intensive.

Question 20

A larger variety of products results from international trade especially if:
A) International trade affords producers monopoly power
B) National governments levy import tariffs and quotas
C) Producing goods entails increasing costs
D) Economies of scale exist for producers

Accepted Answer

Economies of scale are achieved by producers when they are able to produce large quantities of goods at a lower unit cost. International trade allows producers to access larger markets and therefore enjoy economies of scale, resulting in a greater variety of products being available to consumers.

Quiz 3: Sources of Comparative Advantage

Proponents of ____ maintain that government should enact policies that encourage the development of emerging,"sunrise" industries.

With economies of scale and decreasing unit costs,a country has the incentive to:

The theory of overlapping demands predicts that trade in manufactured goods is unimportant for countries with very different:

Intra-industry trade can be explained in part by:

Legislation requiring domestic manufacturers to install pollution abatement equipment tends to promote:

That the division of labor is limited by the size of the market best applies to which explanation of trade?

Which trade theory contends that a country that initially develops and exports a new product may eventually become an importer of it and may no longer manufacture the product?

The simultaneous import and export of computers by Germany is an example of:

Stringent governmental regulations (e.g.,air quality standards) imposed on domestic steel manufacturers tend to:

Linder's theory of overlapping demand provides an explanation of:

Among the determinants underlying a country's international competitiveness in business services (e.g.,construction) are:

The trade model of the Swedish economists Heckscher and Ohlin maintains that:

Boeing aircraft company was able to cover its production costs of the first "jumbo jet" in the 1970s because Boeing could market it to several foreign airlines in addition to domestic airlines.This illustrates:

The Leontief paradox provided:

The Heckscher-Ohlin theory explains comparative advantage as the result of differences in countries':

Should international transportation costs decrease,the effect on international trade would include:

Which trade theory suggests that comparative advantage tends to shift from one nation to another as a product matures?

For the United States,empirical studies indicate that over the past two decades the cost of international transportation relative to the value of U.S.imports has:

According to the factor endowment model,countries heavily endowed with land will:

A larger variety of products results from international trade especially if: