Deck 6: International Trade Theory

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Mercantilist doctrine advocates unrestricted free trade between countries.

Question 5

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

Question 6

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

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

XYZ Toys manufactures and sells small quantities of each of its products, but it can still benefit from economies of scale.

Question 9

________ 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 10

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

Question 11

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

Question 12

Apple's iPhone was unique when it first came out, with many features that no other phones had. As such, it enjoyed great success and dominated the cell phone market. This demonstrates the first-mover advantage.

Question 13

Resources always move easily from one economic activity to another.

Question 14

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 15

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

Question 16

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

Question 17

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 18

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 19

The theories of Smith and Ricardo show that a country should engage in international trade, even for products that it is able to produce for itself.

Question 20

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 21

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 countries protect the jobs that are available to their citizens.
C) It gives countries access to products that they cannot produce.
D) It allows governments to exert more control on businesses.

Question 22

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

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

Question 23

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 explain nations' dominance in 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 24

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 25

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 26

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 worldwide.

Question 27

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 28

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 29

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 30

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

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

Question 31

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's diamond
D) Heckscher-Ohlin

Question 32

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 33

________ 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 34

________ 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 35

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 36

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's diamond
C) new trade theory
D) Leontief paradox

Question 37

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 38

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 39

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 40

________ 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 41

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

A) business nationalism.
B) free trade.
C) protectionist trade policies.
D) governmental intervention in trade.

Question 42

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 43

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 a trade surplus to succeed in global trade.
D) Global production is greater with free trade than it is with restricted trade.

Question 44

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 45

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 46

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 47

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

A) natural resources
B) climate
C) skilled labor
D) demographics

Question 48

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 49

Professor Baldwin believes that early in the life cycle of a U.S. product, demand in other advanced countries is limited to high-income groups. Consequently, it is seldom worthwhile for firms in those countries to start producing the product. This view conforms to

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

Question 50

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 51

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 52

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

A) Heckscher-Ohlin stresses 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 53

Which of the following is a 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 maintain a negative trade balance.

Question 54

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 55

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 56

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

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

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

Identify the theory that argues that advanced nations have an incentive to develop new consumer products 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 59

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 60

Which of the following terms refers to a nation's position in factors of production, such as skilled labor or the infrastructure necessary to compete in a given industry?

A) current accounts
B) factor endowments
C) national balance
D) national accounts

Question 61

Factor endowments refer to the extent to which a country

A) supports education, research, and development.
B) develops the infrastructure to support industrialism.
C) supports free trade.
D) has such resources as land, labor, and capital.

Question 62

The ________ theory was based on the observation that for most of the twentieth century a very large proportion of the world's new products had been developed by U.S. firms and sold first in the U.S. market.

A) product life-cycle
B) Heckscher-Ohlin
C) new trade
D) Ricardo

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

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 65

One of the advantages of being the first mover in a market is

A) there is little risk involved.
B) to benefit from a higher cost structure.
C) the ability to capture scale economies ahead of later entrants.
D) local governments are more favorable to the first movers.

Question 66

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 67

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 68

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 69

The main tenet of mercantilism is that it is in a country's best interests to

A) maintain a trade deficit.
B) maintain a trade surplus.
C) import goods made from products that it does not have in abundance.
D) import more than it exports.

Question 70

Diminishing returns to specialization occur 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 71

Economies of scale have a number of sources, including the ability

A) to average out the variable costs of production.
B) of large-volume producers to utilize specialized employees and equipment.
C) to adjust the scale of production based upon product saturation in the marketplace.
D) to utilize nonspecialized employees interchangeably.

Question 72

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

A) capital account
B) current account
C) financial account
D) monetary account

Question 73

The commercial aircraft industry can support only a limited number of firms, largely because the existence of established firms would make it difficult to be competitive. This is a basic tenet of

A) mercantilism.
B) the theory of absolute advantage.
C) Heckscher-Ohlin theory.
D) new trade theory.

Question 74

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 75

If, for example, the 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 the 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 76

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 77

If foreigners suddenly reduced their investments in the United States, what would happen?

A) The value of the dollar on foreign exchange markets would increase.
B) The action would have no impact on the U.S. economy.
C) The foreigners would sell U.S. dollars for another currency.
D) The price of U.S. exports would increase.

Question 78

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 an abundant supply of unskilled workers.
D) their domestic consumers are demanding.

Question 79

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 80

China has the infrastructure and the skilled labor that has enabled it to become a world manufacturing leader. This relates to which of Porter's attributes of a nation?

A) firm strategy, structure, and rivalry
B) related and supporting industries
C) demand conditions
D) factor endowments