Deck 6: International Trade Theory

Question 1

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

Answer 1

False

Question 2

The principle of mercantilism views trade as a positive-sum game.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

Simple model of free trade assumed away transportation costs between countries.

Question 6

David Ricardo's theory of comparative advantage explains international trade in terms of international differences in political environments.

Question 7

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

Question 8

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.

Question 9

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

Question 10

New trade theory 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.

Question 11

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

Question 12

The simple comparative advantage model assumed that trade does not change a country's stock of resources or the efficiency with which it utilizes those resources.

Question 13

According to Ricardo's theory of comparative advantage, countries should produce all the products for which they have an absolute advantage.

Question 14

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

Question 15

Resources always move easily from one economic activity to another.

Question 16

Mercantilist doctrine advocates unrestricted free trade between countries.

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

A capital intensive country exports products that are capital intensive. This is an example of Leontief Paradox.

Question 24

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

Question 25

The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally scarce.

Question 26

The product life-cycle theory argues that a large proportion of the world's new products had been developed by U.S. firms.

Question 27

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 28

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

Question 29

Variety of goods that a country can produce is limited by the size of the market in industries where economies of scale are important.

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

New trade theory suggests that nations cannot benefit from trade when they do not differ in resource endowments or technology.

Question 35

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

Question 36

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.

Question 37

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

Question 38

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

Question 39

The theories of international trade claim that promoting free trade is generally in the best interests of an individual firm, although it may not always be in the best interest of a country.

Question 40

Paul Samuelson's critique argues that trade is a positive-sum game in which all countries that participate realize economic gains.

Question 41

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 42

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 43

Porter contends that government has little or no effect on the four components that shape the environment in which firms compete.

Question 44

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 45

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

Question 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

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 62

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 63

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 64

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 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

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 67

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 68

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 69

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 70

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 71

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 72

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.

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 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 75

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 76

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 77

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 78

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 79

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 80

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.