Deck 4: International Trade Theory and the Firm

Question 1

According to the theory of comparative advantage, which of the following is correct?

A) A country gains from trade only when it can produce goods and services more efficiently than any other country.
B) A country gains from trade because it has cheaper labour compared to other countries.
C) A country can export its products to other countries despite it has less efficient production than other countries.
D) To gain from trade, a country should specialise in producing goods and services that it can produce more efficiently and cheaply compared to any other country.

Answer 1

C
Explanation: Theory of comparative advantage explains that a country that is more efficient in producing two products will gain more from trade if the country focuses on producing only the product that it can produce better in relative to any other country. Therefore, a country that has less efficient production can still export its product to other countries even it does not enjoy an absolute advantage.

Question 2

Which of the following is correct? Please select all that apply.

A) Mercantilism promotes exports.
B) Theory of comparative advantage predicts that a country could gain from trade despite the country's inefficient production.
C) Theory of absolute advantage promote exports without imports.
D) Theory of absolute advantage predicts that a country could gain more from export products in which it can produce cheaply.

Answer 2

A, B, D
Explanation: Mercantilism suggests that a nation should aim to export so that it can stock more gold. Theory of absolute advantage suggests that a country should specialise in producing product that it can produce cheaply and efficiently and a country a country should not produce products that it can buy cheaply. Theory of comparative advantage suggests that a country could gain from trade even it does not have absolute advantage. So, the option stating that theory of absolute advantage promote exports without import is incorrect. Other options are correct.

Question 3

Assume there are two countries, A and B. If country A is better in producing two products than country B, according to the theory of comparative advantage, is it true or false that country B should not produce nor export any product?

Answer 3

False
Explanation: According to the theory of comparative advantage, country A should produce one product that it can produce better in relative to country B, and export another product from country B. So, country B can still produce and export one product.

Question 4

Is the following statement true or false? According to the theory of comparative advantage, the allocation of resource among countries participating in international trade will return the greatest welfare for all countries.

Question 5

Which of the following are the limitations of Ricardo's theory of comparative advantage? Please select all that apply.

A) Not all countries gain from international trade. Job loss is likely to occur in import-competing industries after international trade.
B) Not all countries gain from international trade. Job loss is likely to occur in exporting industries after international trade.
C) Ricardo's model cannot capture technological change.
D) Ricardo's model is static.

Question 6

Which industry is most likely to loss (e.g. facing unemployment) from international trade?

A) Export-oriented industry
B) The industry producing exporting products made from importing raw materials
C) The industry that uses importing goods to produce products for both domestic and foreign markets
D) Import-competing industry

Question 7

Which of the following explains why a country which has rich natural resources can become less competitive compared to some other countries?

A) A country cannot export its natural resources.
B) A country focuses mainly on producing low-valued natural products without producing created assets.
C) A country does not have absolute advantage in producing natural assets.
D) A country does not have comparative advantage in producing natural assets.

Question 8

Which of the following is wrong?

A) The quality of labour in a country is not a locational advantage.
B) The high quantity of oil and gas in a country can be considered as its locational advantage.
C) The investment in research and development of a firm creates its ownership advantage.
D) Locational advantages, in general, are available to all firms in the same country.

Question 9

Which firm is most likely to successfully compete in foreign direct investment?

A) A firm that has competitive advantages based on its cheaper labour
B) A firm that is specialise in producing produces based mainly on limited natural resource
C) A firm that is owned by the government
D) A firm that has competitive advantages based on its investment in research and development

Question 10

Which of the following is best described as the driving force of the growth of international trade among advanced economies?

A) Government support
B) Technology
C) Social capital
D) Institutional development

Question 11

Which of the following are the limitations of Vernon's product cycle model? Please select all that apply.

A) Modern firms do not develop products focusing only for domestic market.
B) Price competition is not the only way to compete in the market.
C) Product cycle model is a static model.
D) Product cycle model may not explain some types of products.

Question 12

According to product life cycle theory, which of the following explains a situation when a country will eventually import the product which is initially developed and exported by the country itself?

A) That product is cheaper producing in other countries
B) Other country creates more advance technology to produce that particular product
C) That country does not has strict regulations on property right
D) That product is no longer needed in the country that initially created it.

Question 13

Is the following statement true or false? New trade theory differs mainly from classic trade theory because it provides comprehensive explanation of the role of the firm in international trade.

Question 14

Which of the following is not included in the Porter's diamond?

A) Demand conditions
B) Factor endowments
C) Capabilities of the managers
D) Related and supporting industries

Question 15

Which of the following is not the form of government subsidies?

A) Low-interest rate loan
B) Tax relief
C) Quantitative restrictions
D) Cash grants

Question 16

Which of the following is wrong?

A) Artificial barriers control trade quantity by influencing domestic prices.
B) Artificial barriers control trade quantity by influencing the quantity imported.
C) Non-tariff barriers are employed only by governments.
D) Non-tariff barriers can be applied to trade in services

Question 17

Which of the following are correct? Please select all that apply.

A) Subsidies are government payments to domestic producers, in the form of cash grants, low-interest loans, and tax relief.
B) Quantitative restrictions or quotas restrict the quantity of imports in order to protect the market share of domestic firms.
C) Tariff barriers can affect both merchandise and trade in services.
D) Quantitative restrictions or quotas are enforced by issuing licenses to a group of firms

Question 18

Which of the following are the reasons a country applies trade protections? Please select all that apply.

A) To promote its industrialisation
B) To protect its consumers
C) To raise the government income
D) To safeguard domestic jobs

Question 19

Which of the following explains 'offshoring foreign direct investment '?

A) Offshoring foreign direct investment happens when a production is moved to a location abroad to reduce costs, increase efficiency, and reduce risk.
B) Offshoring foreign direct investment is the same with licensing.
C) Offshoring foreign direct investment happens when a production is moved to a cheaper location in the home country.
D) Offshoring foreign direct investment happens when a production is assigned to other firms hired by the multinational company.

Question 20

Is the following statement true or false? Only by international outsourcing that integrated productive activities are segmented and spread over an international network of production.