Deck 6: International Trade Theory

Question 1

A key assumption in the Heckscher-Ohlin theory is that technologies are the same across countries.

Answer 1

True
Explanation: A key assumption in the Heckscher-Ohlin theory is that technologies are the same across countries.

Question 2

The theories of Smith and Ricardo show that countries should not engage in international trade for products that it is able to produce for itself.

Answer 2

False
Explanation: The theories of Smith, Ricardo, and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself.

Question 3

According to Paul Samuelson's critique, a poor country will rapidly improve its productivity if a rich country enters into a free trade agreement with it.

Answer 3

True
Explanation: Paul Samuelson's critique argues that when a rich country enters into a free trade agreement with a poor country, there will be a dynamic gain in the efficiency with which resources are used in the poor country. The poor country's productivity will improve rapidly.

Question 4

Resources always move easily from one economic activity to another.

Question 5

A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

Question 6

Factor endowments refer to the extent to which a country is gifted with such resources as land, labor, and capital.

Question 7

Companies that trade small volumes of product can benefit from economies of scale.

Question 8

The simple model of free trade assumed away transportation costs between countries.

Question 9

The production possibility frontier will be parabolic if constant return to specialization is observed.

Question 10

Heckscher-Ohlin theory supports the case for unrestricted free trade between nations.

Question 11

Heckscher-Ohlin theory stresses that comparative advantage arises from differences in productivity.

Question 12

A rich country improves its productivity by engaging in free trade with a poor country. This situation supports Paul Samuelson's critique.

Question 13

Porter's theory of national competitive advantage recommends unrestricted free trade between countries.

Question 14

Diminishing returns show that it is feasible for a country to specialize to the degree suggested by the simple Ricardian model.

Question 15

First-mover advantages are the economic and strategic advantages that accrue to early entrants into an industry.

Question 16

Some of the arguments made by the product life-cycle theory seem ethnocentric and increasingly dated when viewed from an Asian or European perspective.

Question 17

Ricardo's theory makes fewer simplifying assumptions compared to Heckscher-Ohlin theory.

Question 18

According to Ricardo's theory of comparative advantage, countries shall not produce a good, even if they have an absolute advantage in its production, if they do not produce it efficiently.

Question 19

The product life-cycle theory argues that the developing nations will not produce a product if the product is highly standardized.

Question 20

Mercantilist doctrine advocates unrestricted free trade between countries.

Question 21

New trade theorists stress the role of luck in giving a firm first-mover advantages.

Question 22

The simple comparative advantage model assumed that trade:

A) changes efficiency with which a country utilizes resources.
B) changes a country's stock of resources.
C) allows for dynamic changes in the marketplace.
D) does not change a country's stock of resources.

Question 23

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

A) net-sum
B) positive-sum
C) zero-sum
D) negative-sum

Question 24

The production possibility frontier will be _____ if constant return to specialization is observed.

A) convex
B) parabolic
C) a straight line
D) logarithmic

Question 25

_____ stresses that in some cases countries specialize in the production and export of particular products because the world market can support only a limited number of firms.

A) New trade theory
B) Absolute advantage
C) The world market theory
D) Mercantilism

Question 26

David Ricardo's theory of comparative advantage explains:

A) domestic trade in terms of international differences in political environments.
B) international trade in terms of international differences in political environments.
C) domestic trade in terms of international differences in labor productivity.
D) international trade in terms of international differences in labor productivity.

Question 27

The variety of goods that a country can produce is limited by the size of the market in industries where _____ are important.

A) factor endowments
B) current account deficits
C) economies of scale
D) current account surpluses

Question 28

Paul Samuelson's critique argues that:

A) when a rich country enters into a free trade agreement with a poor country, only the poor country benefits from the relationship.
B) trade is a positive-sum game in which all countries that participate realize economic gains.
C) when a rich country enters into a free trade agreement with a poor country, only the rich country benefits from the relationship.
D) trade is a net-sum game in which all countries that participate realize economic gains.

Question 29

_____ supports the idea that countries should export more than what they import.

A) Absolute advantage
B) Mercantilism
C) The world market theory
D) New trade theory

Question 30

The _____ theory argues that the pattern of international trade is determined by differences in factor endowments.

A) comparative advantage
B) Leontief Paradox
C) Heckscher-Ohlin
D) absolute advantage

Question 31

From a profit perspective, it makes sense for firms to disperse their productive activities to those countries where they can be performed most efficiently.

Question 32

According to Ricardo's theory of comparative advantage, countries should:

A) specialize in the production of those goods that it produces most efficiently.
B) specialize in the production of those goods that their competitors in the world market currently have monopolies on.
C) produce all the products for which they have an absolute advantage.
D) produce only the products for which they have an absolute advantage.

Question 33

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

A) Current account deficits
B) Economies of scale
C) Current account surpluses
D) Factor endowments

Question 34

The _____ argues that a large proportion of the world's new products had been developed by U.S. firms.

A) product life-cycle theory
B) Porter Diamond Model
C) new trade theory
D) Leontief Paradox

Question 35

_____ refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country.

A) Fair trade
B) Trade theory
C) Free trade
D) Mercantilism

Question 36

The principle of mercantilism views trade as a(n) _____ game.

A) advantage
B) positive-sum
C) zero-sum
D) negative-sum

Question 37

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 38

The Heckscher-Ohlin theory predicts that countries will:

A) export those goods that make intensive use of factors that are locally scarce.
B) export those goods that make intensive use of factors that are locally abundant.
C) import those goods that make intensive use of factors that are locally abundant.
D) import those goods that make intensive use of factors that are available world-wide.

Question 39

A capital intensive country exports products that are capital intensive. Which theory is this an example of?

A) New trade
B) Leontief Paradox
C) Porter Diamond Model
D) Heckscher-Ohlin

Question 40

_____ argued that countries should specialize in the production of goods for which they have an absolute advantage.

A) Paul Krugman
B) David Hume
C) David Ricardo
D) Adam Smith

Question 41

A country has an absolute advantage in the production of a product when it:

A) has the capability to produce the product within its boundaries.
B) is more efficient than any other country in producing it.
C) has the largest domestic demand for the product.
D) has access to the raw materials needed to produce the product.

Question 42

Country A exports electronic goods from Country B although there are no underlying differences in factor endowments between the two countries. Which of the following theories explains this anomaly?

A) Comparative advantage theory
B) New trade theory
C) Ricardo's theory
D) Smith's theory

Question 43

According to Adam Smith, a country should specialize in the production of a good when it has:

A) an absolute advantage in the production of the good.
B) a strong domestic demand for the good.
C) the ability to help country increase its national output.
D) the necessary raw materials for production.

Question 44

Which of the following theories 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?

A) Porter's theory
B) Smith's theory
C) Ricardo's theory
D) Heckscher-Ohlin theory

Question 45

Country A can produce product X, but it can also buy it at a cheap rate from Country B. Which of the following courses of action is suitable in this situation according to Adam Smith's theory of absolute advantage?

A) Country A should import product X from country B and it should not attempt to produce it at home.
B) Country A should partly import the product and produce it domestically.
C) Country A should produce more of product X and should attempt to obtain an absolute advantage for the product.
D) Country A should subsidize the production of product X to obtain an absolute advantage over country B.

Question 46

Which of the following is a statement that supports the theory of comparative advantage?

A) International trade is a zero-sum gain where one nation's gain is another's loss.
B) Domestic industries are at risk when a country engages in free trade.
C) A country should maintain trade surplus to succeed in global trade.
D) Global production is greater with free trade than it is with restricted trade.

Question 47

Which of the following refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country?

A) Economic patriotism
B) Protectionism
C) Free trade
D) Offshoring

Question 48

New trade theory suggests that nations:

A) increase their commitment to research and development.
B) adopt policies that promote strong competition within domestic markets.
C) cannot benefit from trade when they do not differ in resource endowments or technology.
D) may benefit from trade even when they do not differ in resource endowments or technology.

Question 49

Which of the following is a theory that can be used to justify limited government intervention to support the development of certain export-oriented industries?

A) Comparative advantage theory
B) Ricardo's theory
C) New trade theory
D) Heckscher-Ohlin theory

Question 50

The theories of international trade claim that promoting free trade is generally in the best interests of:

A) a country, although it may not always be in the best interest of an individual firm.
B) all multinational corporations.
C) an individual firm, although it may not always be in the best interest of a country.
D) the World Trade Organization.

Question 51

Which of the following observations is consistent with Michael Porter's theory of national competitive advantage?

A) Factors such as domestic demand and domestic rivalry determine nations' dominance on production.
B) Countries should produce only those goods for which they have a comparative advantage.
C) Interplay between the factors of production cause international marketing decisions.
D) International differences in labor productivity determine nations' supremacy in production.

Question 52

Identify the theory that supports the view that, in some cases, countries export for the reason that the world market can support only a limited number of firms.

A) Heckscher-Ohlin theory
B) Smith's theory
C) Ricardo's theory
D) New trade theory

Question 53

Which of the following is the main principle of mercantilism?

A) Protection of domestic industries is not essential for a nation's welfare.
B) Government intervention is not required in global trade.
C) Countries should encourage absolute free trade.
D) It is in a country's best interests to maintain a trade surplus.

Question 54

David Ricardo's theory of comparative advantage explains global trade in terms of the:

A) first mover advantage that certain countries and firms enjoy.
B) geographical differences between various countries.
C) international differences in labor productivity.
D) late mover advantage that certain countries and firms possess.

Question 55

Which of the following is a major flaw associated with mercantilism?

A) Mercantilists do not support government intervention in trade.
B) Mercantilists view trade as a zero-sum game.
C) Mercantilists recommend policies to maximize imports.
D) Mercantilists recommend countries to maintain a negative trade balance.

Question 56

The theory of comparative advantage provides strong rationale for supporting the idea of _____.

A) business nationalism
B) free trade
C) protectionism
D) governmental intervention in trade

Question 57

According to Ricardo's theory of comparative advantage, a country should produce goods:

A) for which it has access to raw materials.
B) that it produces most efficiently.
C) that have the highest domestic demand.
D) for which it has an absolute advantage.

Question 58

Diminishing returns to specialization occurs when:

A) each additional unit is produced with lesser number of laborers.
B) a nation's gross domestic product declines for a few years.
C) production possibility frontier appears as a rectangle.
D) more units of resources are required to produce each additional unit.

Question 59

Porter contends that government:

A) can influence the domestic demand conditions and the domestic rivalry components of the diamond, but not the other two components.
B) can influence each of the four components of the diamond either positively or negatively.
C) can influence the factor endowments and the related and supporting industries components of the diamond, but not the other two components.
D) has little or no effect on the four components that shape the environment in which firms compete.

Question 60

Which of the following is a major benefit of engaging in free trade?

A) It helps to reduce the financial volatility in global markets.
B) It helps the countries protect the jobs that are available to their citizens.
C) It gives countries access to products that they cannot produce.
D) It allows the governments to exert more control on businesses.

Question 61

Wal-Mart makes bulk purchases from its vendors and hence it is able to get better deals than its competitors. This allows Wal-Mart to offer greater discounts to its customers. In this case, Wal-Mart benefits from _____.

A) first-mover advantage
B) constant marginal returns
C) economies of scale
D) absolute advantage of production

Question 62

Which of the following arguments supports the Paul Samuelson's critique?

A) A rich country cannot produce net gains by engaging in free trade with a poor country.
B) Governmental intervention will reduce the likeliness of countries' economic success.
C) Countries should attempt to specialize in the production of goods and services.
D) Trade is a positive-sum game in which all countries that participate realize economic gains.

Question 63

Which of the following theories suggests that first mover advantage is significant in the export of a good?

A) Product life-cycle theory
B) Ricardo's theory
C) New trade theory
D) Theory of comparative advantage

Question 64

Which of the following is one of the four attributes present in Porter's diamond?

A) Economies of scale
B) Factor endowments
C) Structural innovation
D) Procedural innovation

Question 65

Which of the following terms refers to the unit cost reductions associated with large sized outputs?

A) Absolute advantage of production
B) Economies of scale
C) Constant marginal returns
D) Diminishing marginal returns

Question 66

Which of the following is an example of a basic factor that a nation will possess as proposed by Porter?

A) Communication infrastructure
B) Skilled labor
C) Natural resources
D) Technological knowledge

Question 67

Country X, a poor country, invents a revolutionary electronic product. The country markets this new product in other poor countries to garner large profits. This occurrence is against the idea of ____.

A) product life-cycle theory
B) Ricardo's theory
C) theory of absolute advantage
D) theory of comparative advantage

Question 68

Which of the following is a major disadvantage of the product life-cycle theory introduced by Vernon?

A) The theory's arguments seem ethnocentric and increasingly dated.
B) The theory failed to explain the dominance of developed nations.
C) The theory applies only when a poor nation invents a new product.
D) The theory cannot be used to explain the production of luxury products.

Question 69

Identify the theory that predicts that countries will export those goods that make intensive use of factors that are locally abundant.

A) Theory of comparative advantage
B) Ricardo theory
C) New trade theory
D) Heckscher-Ohlin theory

Question 70

What will happen, according to Paul Samuelson's critique, if a rich country enters into a free trade agreement with a poor country?

A) Both the countries will incur losses due to the exchanges between them.
B) The productivity of the poor country will decline rapidly.
C) The poor country will rapidly improve its productivity.
D) Both the countries will garner benefits from the exchanges between them.

Question 71

Which of the following statements is true of the Leontief Paradox?

A) It shows an anomaly that occurs when a nation has high domestic demand for a product.
B) It explains the relationship between domestic demand and comparative advantage.
C) It disproved Ricardo's theory of comparative advantage.
D) It raised questions about the validity of the Heckscher-Ohlin theory.

Question 72

Identify the theory that argues that advanced nations have an incentive to develop a new offering and hence such nations always tend to create a good or service for the first time.

A) Absolute advantage
B) Ricardo
C) Product life-cycle
D) Heckscher-Ohlin

Question 73

Company A entered the production of office software before its competitors. Because of this, the company's products are more familiar among and favored by customers. This situation exemplifies the _____.

A) first-mover advantage
B) diminishing marginal returns
C) economies of scale
D) constant marginal returns

Question 74

Which of the following terms refers to the extent to which a country is gifted with such resources as land, labor, and capital?

A) Current accounts
B) Factor endowments
C) National balance
D) National accounts

Question 75

Which of the following factors, according to Porter's national Diamond, is most likely to give a country competitive advantage over another country?

A) Natural resources
B) Climate
C) Skilled labor
D) Demographics

Question 76

Porter argues that a nation's firms gain competitive advantage if:

A) their domestic consumers lack technical awareness
B) they function in a labor intensive market
C) the country has abundant supply of unskilled workers
D) their domestic consumers are demanding

Question 77

Which of the following theories stress the role of luck, entrepreneurship, and innovation in the production and export of a good or service by the firms in a country?

A) Product life-cycle theory
B) Ricardo's theory
C) Theory of comparative advantage
D) New trade theory

Question 78

Textile industry in a nation is characterized by vigorous domestic rivalry. Which of the following observations of this nation's international competency is most likely to be true?

A) The nation will have access to such basic factors of textile industry as natural resources.
B) The nation's textile firms will have a competitive advantage in international trade.
C) The domestic customers of the textile firms will be less demanding.
D) The nation's textile industry will lack the advanced factors that are necessary to be internationally competent.

Question 79

Which of the following is the reason why most economists prefer Heckscher-Ohlin theory to Ricardo's theory?

A) Heckscher-Ohlin stresses on the differences in productivity between nations.
B) Ricardo's theory considers factor endowments to describe national competitiveness.
C) Heckscher-Ohlin theory makes fewer simplifying assumptions.
D) Ricardo's theory considers the law of marginal returns.

Question 80

Which of the following is a major limitation of the simple Ricardian model of comparative advantage?

A) The model ignores the principle of diminishing marginal returns.
B) The model recommends excessive governmental intervention in trade.
C) The outcome of the model suggested by Ricardo is a zero-sum game.
D) The model is against the idea of engaging in free trade with nations.