Deck 2: Trade Theories and Economic Cooperation

Question 1

Trade is a zero sum game.

Answer 1

False

Question 2

The principle of absolute advantage states that a country should import a commodity that can be produced at a lower cost than can other nations.

Answer 2

False

Question 3

If one nation has absolute advantage for all products, trade will not take place.

Answer 3

False

Question 4

As long as the domestic exchange ratio of the United States and that of Canada are identical, the United States should trade with Canada even though the United States may have absolute advantage in all products.

Question 5

If the domestic exchange ratio of the United States and that of Canada are identical, the United States should not trade with Canada even though the United States may have absolute advantage in all products.

Question 6

According to the principle of relative advantage, absolute production costs are irrelevant.

Question 7

Relative production costs can determine whether trade should take place, but they do not determine what items to export or import.

Question 8

The principle of relative advantage suggests that a country should produce a product with the least comparative disadvantage.

Question 9

Because of trade, the two different domestic exchange ratios will be replaced by a new ratio called the world market exchange ratio or terms of trade.

Question 10

International trade is a function of the unequal domestic exchange ratios.

Question 11

A country that has absolute advantage in all products has nothing to gain from trading with other nations.

Question 12

Comparative advantage is a dynamic concept.

Question 13

One basic assumption of the principles of absolute and relative advantage is that the advantage is solely determined by labor.

Question 14

German and Japanese firms are successful in international trade because of their low labor costs.

Question 15

Countries can remain competitive in spite of their higher wages.

Question 16

country's labor cost may be absolutely high and yet relatively low.

Question 17

Comparative advantage can be determined by abundance of factor endowments.

Question 18

According to the theory of factor endowment, the various regions of the world are equally well endowed with regard to production factors.

Question 19

According to the factor endowment theory, a country's comparative advantage is in the production factor that it lacks.

Question 20

The theory of factor endowment holds that the inequality of relative prices is a function of regional factor endowments.

Question 21

Countries have different costs and prices because they differ in the supply of the factors of production.

Question 22

Good governance can help a resource-abundant country to avoid the 'resource curse' phenomenon.

Question 23

The Human Development Index is highly correlated with the widely used measures of poverty.

Question 24

According to Michael Porter's theory of the Competitive Advantage of Nations, there are four major determinants of international competitiveness, and each determinant has no effect on the other determinants.

Question 25

According to Michael Porter's 'diamond,' a nation's competitive industries should be clustered.

Question 26

Michael Porter's 'diamond,' advocates that a nation should not cluster the industries.

Question 27

The evidence that the United States exports labor-intensive goods and imports capital-intensive goods is known as Leontief Paradox.

Question 28

Based on the factor endowment theory, developing countries should trade more with developed countries rather than among themselves.

Question 29

Developed countries tend to trade among themselves rather than with developing countries.

Question 30

While manufacturing jobs can be moved across countries, it is not easy to move knowledge-based jobs.

Question 31

Classical trade theories assume that factors of production are immobile.

Question 32

Production factors are now considered more mobile than previously assumed.

Question 33

Capital, as a factor of production, is mobile.

Question 34

Classical trade theories ignore the marketing aspect of trade.

Question 35

Classical trade theories are concerned primarily with value-added products rather than with commodities.

Question 36

Countries forming a free trade area must have joint boundaries.

Question 37

Monetary union means adoption of multiple currencies.

Question 38

Economic union eliminates foreign exchange transaction costs and risks.

Question 39

An economic and monetary union (EMU) envisages total fiscal and monetary integration.

Question 40

For an economic and monetary union (EMU) to function effectively, member countries should have different economic conditions.

Question 41

'Social dumping' is a movement of business and jobs away from areas with high wages to areas with less organized labor forces and weak social-welfare policies.

Question 42

Economic cooperation results in trade creation as well as trade diversion.

Question 43

Economic integration encourages trade liberalization internally, while it promotes trade protection externally.