Question 1

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

Product life cycle theory suggests that comparative advantage tends to shift from one nation to another as a product matures. This theory explains how a product moves through different stages of production and how its manufacturing shifts from one country to another based on changes in demand, cost of production, and innovation.

Question 2

Intraindustry 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

Intraindustry trade refers to the exchange of similar products or goods within the same industry between two or more countries. Transportation costs are a key factor in explaining intraindustry trade because they affect the price and availability of goods in different markets. Higher transportation costs can make it more difficult for producers to compete in foreign markets, and can lead to more trade between countries that are geographically close to each other. Therefore, option D is the best choice. Option A refers to the principle of specialization and comparative advantage, which is not directly related to intraindustry trade. Option B refers to a theoretical concept in economics, but does not explain intraindustry trade. Option C refers to the potential drawbacks of large-scale production but is not directly related to intraindustry trade.

Question 3

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

According to the Heckscher-Ohlin model, a country will export goods for which its resource endowments are most suited. This is based on the theory that countries will specialize in producing goods that they can produce most efficiently, given their available resources such as land, labor, and capital. This allows for greater productivity and lower costs, leading to increased trade and economic growth. Therefore, the correct answer is (D) - A country exports goods for which its resource endowments are most suited.

Question 4

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

Empirical studies indicate that over the past two decades, the cost of international transportation relative to the value of U.S. imports has decreased.

Question 5

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 asserts that a country which initially develops and exports a new product may eventually become an importer of it because the product gradually enters the maturity stage and is produced more efficiently in other countries.

Question 6

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 attributes comparative advantage to differences in countries' relative abundance or scarcity of certain factors of production, such as land, labor, and capital. Countries with an abundance of a certain factor are expected to specialize in and export goods that use that factor intensively, while importing goods that use alternative factors.

Question 7

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 refer to the cost savings that come with producing more units of a product. When a country engages in international trade, it can access markets with larger consumer bases, which can increase demand for its products and allow producers to achieve economies of scale. This can result in a larger variety of products being produced and traded internationally. A, B, and C are not relevant to the question.

Question 8

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

The installation of pollution abatement equipment increases the production costs for domestic manufacturers due to the additional expenses incurred for the equipment and its maintenance. As a result, it leads to a decrease in output as manufacturers reduce their production levels to accommodate the higher costs.

Question 9

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

As economies of scale increase and unit costs decrease, a country will have a comparative advantage in producing the good efficiently. Therefore, it would be beneficial for the country to specialize completely in the product of its comparative advantage in order to maximize its gains from trade. This will allow the country to produce the good at a lower opportunity cost and trade with other countries to acquire goods that it cannot produce efficiently. Specializing partially or completely in the product of its comparative disadvantage would not be a wise choice as it would lead to higher opportunity costs and inefficiencies in production.

Question 10

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) Intraindustry trade policy
D) Industrial policy

Accepted Answer

The policy being described is industrial policy, which seeks to support the development of new industries through government intervention. The other options do not address the idea of supporting emerging industries.

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

All of the options listed contribute to a country's international competitiveness in business services. Market size provides potential scale economies, equipment availability is important for efficient and effective service provision, and skilled employees with reasonable wage rates improve overall quality and cost-effectiveness.

Question 12

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

According to the factor endowment model, countries heavily endowed with land will specialize in and export products that are land-intensive. This is because they have a comparative advantage in producing these goods due to their abundance of land resources.

Question 13

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 increase the cost of production for domestic steel manufacturers, which makes it less competitive in the international market. This often makes it difficult for domestic manufacturers to compete with foreign firms who operate in countries with lower regulatory standards.

Question 14

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

This scenario illustrates how economies of scale make it possible for Boeing to produce a larger quantity of their product, the jumbo jet, because they can sell it to both domestic and foreign airlines. This also shows how international trade allows for a wider variety of products to be produced due to a larger market size.

Question 15

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 16

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 answer of The theory of overlapping demands predicts that...

Question 17

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

Lower transportation costs would make it cheaper to import and export goods, which would increase the volume of trade. This is because the cost of transporting goods would no longer be a significant barrier to trade, which would make it easier for countries to engage in trade with each other. This increase in trade volume could lead to more specialization, which could benefit both consumers and producers.

Question 18

The simultaneous import and export of computers by Germany is an example of:
A) Intraindustry trade
B) Interindustry trade
C) Perfect competition
D) Imperfect competition

Accepted Answer

Germany's simultaneous import and export of computers is an example of intraindustry trade, which refers to the trade between countries in similar types of industries or products. In this case, Germany is both exporting and importing computers, indicating that they have a strong presence in the computer industry and are actively trading with other countries in the same industry. This type of trade is characterized by relatively low transportation costs, high product differentiation, and a focus on economies of scale.

Question 19

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) Intraindustry trade

Accepted Answer

Linder's theory of overlapping demand explains the concept of intraindustry trade, which refers to the exchange of goods and services within the same industry between countries. The theory states that countries with similar income levels and preferences will have a higher likelihood to engage in intraindustry trade as they demand similar products.

Question 20

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 provided evidence against the factor endowment model, which assumes that a country with a relative abundance of a certain factor of production will have a comparative advantage in producing goods that use that factor intensively. However, the United States had a high capital-to-labor ratio and was still importing capital-intensive goods while exporting labor-intensive goods, which contradicted the predictions of the factor endowment model.

Quiz 3: Sources of Comparative Advantage

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

Intraindustry trade can be explained in part by:

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

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:

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

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

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

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

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

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

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

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

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:

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

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

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

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

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

The Leontief paradox provided: