Deck 6: International Trade Theory

Question 1

Mercantilist doctrine advocates unrestricted free trade between countries.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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 8

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

Question 9

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 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

Resources always move easily from one economic activity to another.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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 27

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 28

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

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

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

Question 39

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

Question 40

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

Question 41

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 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 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 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 56

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 57

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 58

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 59

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 60

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 61

Explain the concept of free trade.

Question 62

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 63

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 64

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 65

A country's balance-of-payments accounts keep track of the _____.

A) basic factor endowments and advanced factor endowments that the nation possesses
B) payments to and receipts from other countries for a particular time period
C) income taxes paid by domestic firms and the spending on the firms
D) total value of taxes paid by domestic firms and the spending on the firms

Question 66

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 67

Which of the following balance-of-payment accounts records one-time changes in the stock of assets?

A) Capital account
B) Current account
C) Financial account
D) Monetary account

Question 68

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 69

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 70

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 71

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 72

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 73

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 74

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 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

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 77

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 78

Which of the following accounts records transactions that involve the purchase or sale of assets?

A) Capital account
B) Current account
C) Principal account
D) Financial account

Question 79

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 80

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