Deck 6: International Trade Theory

Question 1

The major advantage of mercantilism was that it viewed trade as a zero-sum game.

Answer 1

False

Question 2

According to Adam Smith,countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries.

Answer 2

True

Question 3

Limits on imports are often in the interests of domestic consumers,but not domestic producers.

Answer 3

False

Question 4

The theories of Smith,Ricardo,and Heckscher-Ohlin failed to identify the specific benefits of international trade.

Question 5

Smith,Ricardo,and Heckscher-Ohlin suggested that a country's economy would gain only if its citizens buy products that are made in that country.

Question 6

According to Adam Smith,market mechanism,rather than government policy,should determine a country's imports and exports.

Question 7

The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus.

Question 8

In his book,"The Wealth of Nations," Adam Smith supported the mercantilist assumption that trade is a zero-sum game.

Question 9

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 10

According to Ricardo's theory of comparative advantage,it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to import goods that it produces less efficiently.

Question 11

David Ricardo's theory of comparative advantage was the first to explain why unrestricted free trade is beneficial to a country.

Question 12

Ricardo's theory of comparative advantage is a major intellectual weapon for advocates of free trade because it provides a strong rationale for encouraging free trade.

Question 13

Mercantilism,propagated in the sixteenth and seventeenth centuries,advocated that countries should simultaneously encourage both imports and exports.

Question 14

Free trade refers to a situation in which a government,through quotas or duties,attempts to influence what its citizens can buy from another country,or what they can produce and sell to another country.

Question 15

A certain amount of friction is involved when resources are required to move from one economic activity to another.

Question 16

New trade theory stresses that in some cases countries specialize in the production of particular products because of underlying differences in factor endowments.

Question 17

According to the theory of comparative advantage,potential world production is greater with unrestricted free trade than it is with restricted trade.

Question 18

The Nobel Prize-winning economist Paul Samuelson argued that contrary to the standard interpretation,in certain circumstances the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor nation.

Question 19

The first theory of international trade that emerged in England asserted that gold and silver were the mainstays of national wealth and essential to vigorous commerce.

Question 20

Although mercantilism is an old and largely discredited doctrine,its echoes remain in modern political debate and in the trade policies of many countries.

Question 21

Free trade is likely to increase a country's stock of resources and the efficiency with which it utilizes those resources.

Question 22

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

Question 23

Michael Porter argues that advanced factors are the most significant for competitive advantage.

Question 24

According to the product life-cycle theory,the locus of global production initially switches from developing countries to other advanced nations and then from those nations to the United States .

Question 25

While Vernon's theory is useful for explaining the pattern of international trade in the modern world,its relevance during the period of American global dominance seemed more limited.

Question 26

The new trade theory suggests that a country may predominate in the export of a good simply because it was lucky enough to have one or more pioneering firms to produce that good.

Question 27

Viewed from an Asian or European perspective,Vernon's argument that most new products are developed and introduced in the United States seems ethnocentric and increasingly dated.

Question 28

Despite the short-term adjustment costs associated with adopting a free trade regime,trade would seem to produce greater economic growth and higher living standards in the long run.

Question 29

Raymond Vernon's product life-cycle theory was based on the observation that for most of the twentieth century a very large proportion of the world's new products were developed by the firms situated in Germany and sold first in the German market.

Question 30

When the impact of differences of technology on productivity is controlled for,Heckscher-Ohlin theory gains predictive power.

Question 31

The new trade theory emerged from the thought that the ability of firms to attain economies of scale might have important implications for international trade.

Question 32

Porter's theory has been subjected to detailed empirical testing and it is proven that it accurately predicts international trade patterns.

Question 33

Individual firms should invest substantial financial resources in trying to build a first-mover advantage,even if that means several years of losses before a new venture becomes profitable.

Question 34

According to the product life cycle theory,as demand for a product starts to grow in other advanced countries,potential for exports from the U.S.will gradually increase.

Question 35

The Heckscher-Ohlin theory is the best predictor of real-world international trade patterns.

Question 36

Porter's theory suggests that it is in the best interest of business for a firm to invest in upgrading advanced factors of production.

Question 37

Factor endowments refer to the extent to which free trade impacts the wealth of a country.

Question 38

Porter argues that an absence of domestic rivalry is vital to the creation and persistence of international competitive advantage in an industry.

Question 39

Most economists prefer Ricardo's theory to the Heckscher-Ohlin theory because it makes fewer simplifying assumptions.

Question 40

According to Michael Porter,the government can influence each of the four components of Porter's diamond-either positively or negatively.

Question 41

The argument for unrestricted free trade is that both import controls and export incentives:

A) help firms build a competitive advantage that is subsequently difficult to challenge.
B) help firms to capture first-mover advantages.
C) imply that a laissez-faire stance toward trade is in the best interests of a country.
D) are self-defeating and result in wasted resources.
E) are not in line with principles of mercantilism.

Question 42

Salcia is a country that depends heavily on domestic products.The Salcian government decides on the products that can be imported and ensures that any product that can be produced at home is not imported.A major part of Salcia's trade is concentrated on exporting agricultural produce and textiles.Which of the following influences Salcia's approach to international trade?

A) Mercantilism
B) Leontief's paradox
C) Product life-cycle theory
D) New trade theory
E) Neo-Ricardian trade theory

Question 43

What is a zero-sum game?

A) A situation in which the market mechanism determines what a country imports and what it exports.
B) A situation in which a country engages in international trade even for products it is able to produce for itself.
C) A situation in which a gain by one country results in a loss by another.
D) A situation in which limits on imports are often in the interests of domestic producers, but not domestic consumers.
E) A situation in which one country has an absolute advantage in the production of all goods.

Question 44

Sentoria is an island nation in the Pacific ocean.It's geographical location is advantageous since it has access to a variety of aquatic life forms and also a number of fresh water sources that provide for fisheries.The lack of arable land drives local demand for seafood.The competition in the domestic fishing industry is fierce and enables Sentoria to be one of the major exporters of seafood.Which of the following theories of international trade best explains Sentoria's dominance as an exporter of seafood?

A) New trade theory
B) Product life-cycle theory
C) Mercantilism
D) Heckscher-Ohlin theory
E) Theory of national competitive advantage

Question 45

According to Adam Smith and David Ricardo,trade is _____.

A) a zero-sum game
B) a threat to a nation's sovereignty
C) a threat to a nation's economy
D) a positive-sum game
E) harmful for all developed nations

Question 46

Which of the following is consistent with the central beliefs of mercantilism?

A) A country's government should intervene to achieve a surplus in the balance of trade.
B) A large volume of trade is essential regardless of whether it comes from imports or exports.
C) Trade is a positive-sum game in which all countries benefit from trading with each other.
D) A country that has an absolute advantage in the production of all goods derives no benefits from international trade.
E) Potential world production is greater with unrestricted free trade than it is with restricted trade.

Question 47

Neo-mercantilists equate political power with economic power and economic power with _____.

A) corruption
B) a balance-of-trade surplus
C) regional dominance
D) a trade monopoly
E) capitalism

Question 48

Which of the following is in a country's best interests according to the main tenet of mercantilism?

A) Importing products from developing rather than developed countries
B) Importing products even if they are efficiently produced at home
C) Importing less specialized goods rather than attempting to make them at home
D) Minimizing exports and maximizing imports
E) Maintaining a trade surplus

Question 49

Considered to be the first theory of international trade,the principal assertion of mercantilism is that:

A) countries differ in their ability to produce goods efficiently.
B) gold and silver are the mainstays of a country's wealth and essential to vigorous commerce.
C) countries should specialize in the production of goods for which they have an absolute advantage.
D) differences in labor productivity between nations underlie the notion of comparative advantage.
E) resources can move freely from the production of one good to another within a nation.

Question 50

Which of the following terms best represents a situation in which a government does not attempt to influence through quotas or duties what its citizens can buy from another country,or what they can produce and sell to another country?

A) Free trade
B) Positive-sum game
C) Socialism
D) Absolute advantage
E) Zero-sum game

Question 51

The Republic of Argonia,owing to it's vast resources of arable land and fresh water,is an agrarian nation.It exports agricultural products and in turn imports products that it does not produce such as oil,machinery,computers,and electronic devices.The result is that it spends more on imports than what it gains from exports.Which of the following theories prohibits such international trade?

A) New trade theory
B) Product life-cycle theory
C) Mercantilism
D) Heckscher-Ohlin theory
E) Theory of national competitive advantage

Question 52

Cadmia and Rhodia specialize in the production of textiles and agricultural products respectively.They are the best at their respective specializations.Cadmia trades textiles with Rhodia in exchange for agricultural products.Which of the following is illustrated by this form of trade between Cadmia and Rhodia?

A) Product life-cycle theory
B) Heckscher-Ohlin theory
C) The concept of absolute advantage
D) Mercantilism
E) Theory of national competitive advantage

Question 53

_____ advocated that countries should simultaneously encourage exports and discourage imports.

A) Ethnocentrism
B) Capitalism
C) Collectivism
D) Mercantilism
E) Socialism

Question 54

Which of the following factors is taken into consideration by David Ricardo's theory of comparative advantage in order to explain the pattern of international trade?

A) Absolute advantage of a country with reference to natural resources
B) The proportions in which the factors of production are available
C) International differences in labor productivity
D) Specialization in the production of particular products
E) The ability of firms to capture first mover advantages

Question 55

Which of the following is a correct inference from Adam Smith's theory of absolute advantage?

A) There is no virtue in a large volume of trade. Rather, policies should be implemented to maximize exports and minimize imports.
B) It is in a country's best interests to maintain a trade surplus, to export more than it imports.
C) Trade is a zero-sum game in which a gain by one country results in a loss by another.
D) A country that has an absolute advantage in the production of all goods might derive no benefits from international trade.
E) Trade is a positive-sum game in which all countries that participate realize economic gains.

Question 56

In his 1776 landmark book The Wealth of Nations,Adam Smith attacked _____ by criticizing its assumption that trade is a zero-sum game.

A) mercantalism
B) capitalism
C) the new trade theory
D) the product life-cycle theory
E) the theory of factor endowments

Question 57

The flaw with mercantilism was that it viewed trade as a:

A) zero-sum game.
B) mutually beneficial activity.
C) positive-sum game.
D) threat to a nation's sovereignty.
E) threat to a nation's economy.

Question 58

According to Adam Smith,countries should specialize in the production of goods for which they have an absolute advantage and then:

A) retain these goods for strict domestic sales.
B) trade these goods for goods produced by other countries.
C) sell these products domestically at prices which are much below the cost price.
D) sell these products at a price, which is lower than the cost price, in developing countries so as to help them achieve economic progress.
E) devote all available resources to produce only those goods.

Question 59

A country is said to have a(n)_____ in the production of a product when it is more efficient than any other country in producing that product.

A) comparative advantage
B) relative advantage
C) differential advantage
D) absolute advantage
E) conditional advantage

Question 60

An inconsistency in the mercantilist doctrine,as pointed out by David Hume,is that:

A) the volume of a country's imports increase as an indirect consequence of mercantilism.
B) the exclusion of government influence in matters pertaining to trade is not ideal.
C) in the long run, no country could sustain a surplus on the balance of trade.
D) it was not backed by either sound political principles or social ideologies.
E) trade is a zero-sum game rather than a positive-sum game as postulated by the theory.

Question 61

Palladia specializes in the production of beef and produces beef more efficiently than any other country.It buys wheat,which it produces less efficiently than beef,from Rhodia,even though it produces wheat more efficiently than Rhodia.Which of the following theories of international trade support Palladia's decision to buy wheat from Rhodia?

A) The Samuelson critique
B) Mercantilism
C) Ricardo's theory of comparative advantage
D) Adam Smith's theory of absolute advantage
E) The Leontief paradox

Question 62

Nations have varying factor endowments,and different factor endowments explain differences in _____.

A) labor productivity
B) the returns obtained from the factors
C) diminishing returns
D) factor costs
E) trade barriers

Question 63

The difference between Ricardo's theory and the Heckscher-Ohlin theory is that the Heckscher-Ohlin theory:

A) makes more simplifying assumptions.
B) cannot be subjected to empirical tests.
C) actually predicts trade patterns with greater accuracy.
D) argues that the pattern of international trade is determined by differences in national factor endowments.
E) suggests that trade is a positive-sum game in which all countries that participate realize economic gains.

Question 64

_____ suggests that trade is a positive-sum game in which all participating countries fetch economic gains.

A) The Heckscher-Ohlin theory
B) Mercantilism
C) The theory of comparative advantage
D) Leontief's paradox
E) The Samuelson critique

Question 65

_____ means that the units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier.

A) Zero-sum game
B) Positive-sum game
C) Constant returns to specialization
D) Diminishing returns
E) Economies of scale

Question 66

_____ argued that in certain circumstances the theory of comparative advantage predicts that a rich country might be worse off by switching to a free trade regime with a poor nation.

A) Raymond Vernon
B) Andrew Warner
C) Paul Samuelson
D) Jeffery Sachs
E) David Ricardo

Question 67

Who is the proponent of the theory of comparative advantage?

A) Adam Smith
B) David Ricardo
C) Paul Samuelson
D) Eli Heckscher
E) Bertil Ohlin

Question 68

Which of the following statements best indicates Samuelson's criticism of free trade?

A) Dynamic gains lead to a universally beneficial outcome for all countries.
B) Offshoring service jobs that were traditionally mobile will increase the market clearing wage rate.
C) Free trade has historically been beneficial only to third world countries.
D) By importing cheap goods from a poor country a rich country may not be able to produce a net gain if the dynamic effect of free trade is to lower real wage rates in the rich country.
E) Trade changes a country's stock of resources and the efficiency with which it utilizes those resources.

Question 69

One of the rebuttals to Samuelson's critique of the free trade model is that:

A) the United States' ability to achieve constant returns to specialization is unparalleled.
B) the strict immigration policies of the United States help insulate the economy from inward migration.
C) introducing trade barriers may in fact be beneficial to developed nations to some extent.
D) developing nations are unlikely to upgrade the skill level of their workforce rapidly enough.
E) the developing nations are unlikely to run into diminishing returns in a near future.

Question 70

_____ predicts that countries will export those goods that make intensive use of factors that are locally abundant,while importing goods that make intensive use of factors that are locally scarce.

A) Mercantilism
B) The theory of absolute advantage
C) The Heckscher-Ohlin theory
D) The theory of comparative advantage
E) Samuelson's critique

Question 71

Argonia and Selenia have specialized in the production of industrial equipment and pharmaceuticals respectively.Argonia exports industrial equipment to Selenia,which in turn exports chemicals and medicines to Argonia.This mutually beneficial trade relationship best illustrates _____.

A) the significance of trade barriers
B) a positive-sum game
C) a first-mover advantage
D) the advantages of mercantilism
E) a zero-sum game

Question 72

Which of the following is true of the relationship between trade and economic growth?

A) Countries open to international trade display higher growth rates than those that close their economies to trade.
B) Within a group of developing countries, closed economies grow faster than open economies.
C) The Leontief paradox notes that adopting an open economy and embracing free trade does not reward a nation with higher economic growth.
D) Free trade hampers economic growth and leads to lower living standards in the long run.
E) Free trade has historically benefited poor counties and hence trade barriers should be introduced to protect rich countries from exploitation.

Question 73

It more realistic to assume diminishing returns to specialization when applying the theory of comparative advantage to a simplified model with two nations because:

A) there exist differences in the prices of resources in different countries.
B) resources can move freely from the production of one good to another within a country.
C) all resources are not of the same quality.
D) different goods use resources in the same proportions.
E) trade does not affect the income distribution within a country.

Question 74

According to the Heckscher-Ohlin theory,the pattern of international trade is determined by differences in _____.

A) labor productivity
B) diminishing returns
C) factor endowments
D) management practices
E) trade barriers

Question 75

_____ suggests that consumers in all nations can consume more if there are no restrictions on trade.

A) The Heckscher-Ohlin theory
B) Mercantilism
C) Leontief's paradox
D) Ricardo's theory of comparative advantage
E) The Samuelson critique

Question 76

Which of the following is a reason for diminishing rather than constant returns to specialization?

A) All resources are of the same quality.
B) Resources can shift from the production of one good to another seamlessly.
C) Each country has a fixed stock of resources.
D) Different goods use different resources in different proportions.
E) Trade does not affect the distribution of income within a country.

Question 77

Consider two countries Daria and Atlantis.Daria is a major producer of wheat and rice while Atlantis specializes in the production of fertilizers and manufacturing equipment.Engaging in free trade benefits both countries since Daria is an agrarian nation and Atlantis lacks arable land.This follows the theory of comparative advantage,and we can say that engaging in free trade benefits all countries that participate in it.Which of the following is an inaccurate assumption on which this conclusion is based?

A) We have assumed a simple world in which there are only two countries.
B) We have assumed that each country has a fixed stock of resources.
C) We have assumed that Daria and Atlantis do not engage in freed trade with other countries.
D) We have assumed that agrarian nations do not specialize in producing fertilizers.
E) We have assumed that industrial nations do not have arable land.

Question 78

Diminishing returns to specialization occurs when:

A) resources can move freely from the production of one good to another within a country.
B) more units of resources are required to produce each additional unit.
C) the cost of producing goods reduces substantially with increase in number of goods produced.
D) the quality of resources comes down as a result of producing more goods.
E) the pain caused by the movement toward a free trade regime is a long-term phenomenon.

Question 79

Dynamic gains in both the stock of a country's resources and the efficiency with which resources are utilized will:

A) cause the country's production possibility frontier to assume a bell-shaped curve.
B) enable the country to produce more goods than it did before the introduction of free trade.
C) cause the country's production possibility frontier to shift inward.
D) enable the country to achieve constant returns to specialization.
E) diminish static gains that stagnate economic growth.

Question 80

Meitneria and Seaboria specialize in the production of heavy machinery and textiles respectively.While Meitneria doesn't produce textiles,Seaboria is not as technologically advanced as Meitneria.In this situation,according to the Heckscher-Ohlin theory:

A) Meitneria will import textiles from Seaboria and export heavy machinery to it.
B) Meitneria will invest more than Seaboria in the production of textiles to exploit its comparative advantage.
C) Meitneria and Seaboria will raise their trade barriers to protect their economies.
D) Seaboria will recruit experts from Meitneria to specialize in the production of heavy machinery.
E) Meitneria will recruit worksmen from Seaboria to improve its standing in the textile industry.