Deck 5: International Trade and Foreign Direct Investments

Question 1

International trade refers to the purchase and sale of good between countries

Answer 1

True

Question 2

Mercantilism refers to the philosophy that the cheaper the imports, the greater the savings to a country.

Answer 2

False

Question 3

According to the price-specie flow mechanism, if a country continues to export and accumulate gold, it will lead to inflation.

Answer 3

True

Question 4

Adam Smith was among the first economists to show that two-way trade is more beneficial to a country that only exporting in exchange for gold or currencies.

Question 5

The theory of absolute advantage states that if a country can produce more efficiently than another country, it should specialize in the production of that good.

Question 6

Adam Smith was the first to show that a country that has a comparative advantage in producing a good should specialize in the production of that good and world trade will increase.

Question 7

The Heckscher-Ohlin theorem predicts that if a country has abundant labor, it should specialize in producing labor-intensive products.

Question 8

Wassily Leontief found that United States imported more labor-intensive goods and exported more capital-intensive goods.

Question 9

During the mature stage of the product life cycle theory, companies will begin to export their goods.

Question 10

The product life cycle theory is better at explaining trade patterns ex-post rather than ex-ante.

Question 11

The World Trade Organization succeeded the General Agreement on Trade and Tariffs, a world body that focused on ensuring fair trade around the world.

Question 12

The WTO reaches an agreement on new rules by consensus only.

Question 13

It is necessary for a multinational to own 100 percent of a foreign firm for its investment to be termed FDI.

Question 14

The U.S. State department considers 15 percent ownership of a foreign firm as sufficient to be classified as FDI.

Question 15

Greenfield FDI refers to overseas investments by multinationals where new plants and factories are built.

Question 16

Brownfield investments refer to overseas investments by multinationals where new plants and factories are built.

Question 17

Dunning's OLI paradigm to explain FDI refers to Ownership, Location and Internationalization.

Question 18

If FDI is accomplished by acquisition of a firm overseas, employment may not increase and may even decrease in the short run in the foreign country.

Question 19

FDI in extractive industries is usually large investments that last for many years.

Question 20

A new pattern in international trade is for companies from developing countries to invest in developed economies.

Question 21

International trade refers to the

A) exports of goods between countries
B) imports of goods between countries
C) imports and exports of goods between countries
D) foreign direct investments by countries

Question 22

The economic philosophy of mercantilism

A) encourages countries to export goods a much as possible
B) encourages countries to import as much goods as possible
C) encourages countries to invest overseas as much as possible
D) encourages countries to resist investments from overseas as much as possible

Question 23

Adam's Smith's theory of specialization

A) expects a country to have absolute advantage in producing goods efficiently
B) expects a country to have comparative advantage in producing goods efficiently
C) expects a country to be able to produce more labor-intensive than capital-intensive goods
D) expects a country to be able to produce more capital-intensive than labor-intensive goods

Question 24

David Ricardo's theory of specialization

A) expects a country to have absolute advantage in producing goods efficiently
B) expects a country to have comparative advantage in producing goods efficiently
C) expects a country to be able to produce more labor-intensive than capital-intensive goods
D) expects a country to be able to produce more capital-intensive than labor-intensive goods

Question 25

The Heckscher-Ohlin theorem states that a country with abundant labor resources

A) should specialize in producing capital-intensive goods
B) should specialize in producing labor-intensive goods
C) should specialize in producing labor-intensive goods and capital-intensive goods
D) should specialize in producing goods with higher capital-labor ratio
E) should specialize in producing neither labor nor capital-intensive goods

Question 26

Wassily Leontief showed that the the Heckshcer-Ohlin theorem

A) was verified empirically because the United States exported more capital-intensive goods
B) was not verified empirically because the United States exported more capital-intensive goods
C) was verified empirically because the United States exported more labor-intensive goods
D) was not verified empirically because the United States exported more labor-intensive goods
E) was not verified empirically because the United States neither exported more capital- or labor-intensive goods.

Question 27

Under the product life-cycle theory, some goods are imported back to the country that first manufactured them as a result of cheaper manufacturing costs during the

A) introductory stage
B) growth stage
C) mature stage
D) declining stage
E) between the introductory and growth stage

Question 28

The World Trade Organization (WTO)

A) was succeeded by the General Agreement on Trade and Tariffs (GATT)
B) succeeded the General Agreement on Trade and Tariffs (GATT)
C) prefers bilateral treaties to multilateral treaties.
D) main goal is to reduce tariffs on consumer and capital goods
E) consists of the group of the twenty most industrialized countries.

Question 29

When a multinational purchases 20 percent shares of a company overseas

A) it can be classified as an FDI even if it has no controlling interest
B) it can be classified as an FDI only if it has a controlling interest
C) it can be classified as a portfolio investment if it has a controlling interest
D) it cannot be classified as a FDI since it does not own 100 percent of the shares
E it cannot be classified as a portfolio investment because it does not own 100 percent of the shares

Question 30

The State department considers the following percent ownership as sufficient for being classified as FDI

A) 10 percent
B) 15 percent
C) 25 percent
D) 50 percent
E) 100 percent

Question 31

Greenfield investments refer to

A) construction of new plants and factories overseas
B) acquisition of existing plants and factories overseas
C) licensing agreements
D) joint venture agreements
E) portfolio investments

Question 32

Horizontal FDI refers to foreign direct investment in plants and factories

A) that contribute to the upstream and downstream segment of the company's existing business
B) not in the company's existing line of business
C) that does not contribute to the upstream segment of the company's existing business
D) that contributes to the upstream segment of the company's existing business
E) in the company's existing line of business

Question 33

In John Dunning's OLI paradigm

A) O refers to the advantages of outward foreign direct investment enjoyed by multinationals
B) L refers to the licensing advantages available to multinationals because of the special know how
C) I refers to the investment advantages available to multinationals that are unavailable to domestic firms
D) O refers to ownership advantages in the area of technical know-how including managerial and process skill
E) I refers to internalization where the multinational is better off outsourcing the foreign portion of its work to outside firms

Question 34

In John Dunning's OLI paradigm

A) O refers to the advantages of outward foreign direct investment enjoyed by multinationals
B) L refers to the licensing advantages available to multinationals because of the special know how
C) I refers to the investment advantages available to multinationals that are unavailable to domestic firms
D) O refers to ownership advantages in arranging efficient joint venture contracts
E) I refers to internalization where the multinational posses advantages in the efficient execution of projects rather than outsourcing to other firms

Question 35

The following are strategic reasons for multinationals to invest overseas except

A) seek resources
B) seek markets
C) avoid import barriers
D) nature of product
E) abundance of foreign exchange

Question 36

The following government policies are used to influence the flow of foreign direct investment (FDI) except

A) restrictions on investment in strategic industries
B) subsidized loans
C) personal income taxes
D) restrictions on foreign ownership
E) withholding taxes

Question 37

Recent studies have shown that

A) the relationship between trade and FDI is negative
B) the relationship between trade and FDI is positive
C) there is no relationship between trade and FDI
D) the relationship between trade and government regulation is positive
E) the relationship between trade and government regulation is negative

Question 38

Brownfield investments refer to

A) construction of new plants and factories overseas
B) acquisition of existing plants and factories overseas
C) licensing agreements
D) joint venture agreements
E) portfolio investments

Question 39

Vertical FDI refers to foreign direct investment in plants and factories

A) that contribute to the upstream and downstream segment of the company's existing business
B) not in the company's existing line of business
C) that does not contribute to the upstream segment of the company's existing business
D) that contributes to the upstream segment of the company's existing business only
E) in the company's existing line of business

Question 40

Withholding taxes

A) are corporate taxes imposed on profits earned by the multinationals
B) are personal taxes on foreign corporate executives
C) are taxes paid on licensing fees earned by multinationals
D) are additional taxes paid on dividends repatriated by multinationals to their parent company

Question 41

Distinguish between the theory of absolute advantage and the theory of comparative advantage in international trade.

Question 42

Discuss the Heckscher-Ohlin model's to explain for differences in international trade patterns.

Question 43

What roles do GATT and WTO play in international trade?

Question 44

What are some of the major motives for foreign direct investment by multinationals?

Question 45

How does FDI in the extractive industries impact trade, investments and technology transfers in the receiving country?