Deck 6: International Trade Theory

Question 1

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.

Answer 1

True
Explanation: Ricardo's theory of comparative advantage provides a strong rationale for encouraging free trade and is powerful enough to remain a major intellectual weapon for those who argue for free trade.

Question 2

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.

Answer 2

False
Explanation: Free trade refers to 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.

Question 3

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

Answer 3

True
Explanation: The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus (to export more than it imported), thereby accumulating gold and silver and, consequently, increasing its national wealth, prestige, and power.

Question 4

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 5

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

Question 6

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

Question 7

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 8

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

Question 9

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 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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 19

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.

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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

Question 30

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 31

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 32

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

Question 33

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

Question 34

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

Question 35

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 36

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 37

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 38

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 39

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

Question 40

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 41

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 42

Which of the following 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 43

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 the prices of resources and exchange rates in the two countries are dynamic.
C)We have assumed there are barriers to the movement of resources from the production of one good to another within the same country.
D)We have assumed that agrarian nations do not specialize in producing fertilizers.
E)We have assumed diminishing returns to specialization.

Question 44

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 45

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. According to the theory of comparative advantage, 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 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

A zero-sum game is a situation in which:

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

Question 48

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 supports 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 49

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 50

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 51

Which of the following 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 52

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)The ability of firms to cope with late-mover disadvantages
E)The ability of firms to capture first-mover advantages

Question 53

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 54

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

A)the volume of a country's imports increases 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 55

The Republic of Argonia, owing to its 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 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 56

Australia is a major producer of agricultural and dairy products and exports coffee, tea, spices, and milk products to the United States. United States is the world's third largest supplier of machinery and exports heavy machinery to Australia. What explains the trade equation between Australia and the United States?

A)Tariff barriers determine the flow of goods and services between nations.
B)Countries are simultaneously encouraging exports and discouraging imports.
C)First entrants to the industry ensure their nations have the first-mover advantages.
D)Nations with an absolute advantage in producing certain goods trade them for goods produced by other countries.
E)Gold and silver are the mainstays of national wealth and essential to vigorous commerce.

Question 57

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 58

Which of the following asserts that countries should simultaneously encourage exports and discourage imports?

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

Question 59

Sentoria is an island nation in the Pacific Ocean. Its geographical location is advantageous since it has access to a variety of aquatic life forms and also a number of freshwater 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 60

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 61

Which of the following is most likely an explanation for the Leontief paradox observed in the case of the United States?

A)The United States imports goods that heavily use skilled labor and innovative entrepreneurship.
B)The United States has a special advantage in producing new products made with innovative technologies.
C)The United States exports heavy manufacturing products that use large amounts of capital.
D)The United States has a strong absolute advantage over other nations because of its advantageous factor endowments.
E)The United States imports goods that make intensive use of factors that are locally abundant.

Question 62

According to Vernon, which of the following factors obviates the need for pioneering U.S. firms to look for low-cost production sites in other countries?

A)The uncertainties and risks inherent in introducing new products are very low.
B)The demand for most new products tends to be based mainly on price.
C)U.S. labor costs are relatively low compared to global standards.
D)Firms can charge relatively high prices for new products.
E)The production of innovative products in other advanced countries limits the potential for exports from the United States.

Question 63

According to the product life-cycle theory, the locus of global production initially switches from the United States to other advanced nations and then from those nations to developing countries. Which of the following is most likely to be a consequence of these trends?

A)U.S. imports become less capital-intensive than U.S. exports.
B)The pattern of international trade is affected by differences in factor endowments rather than differences in productivity.
C)Over time, the United States switches from being an exporter of a product to an importer of the product.
D)The wage rates in the United States decrease.
E)Developing nations fail to upgrade their skill levels to compete with advanced countries.

Question 64

Vernon theorizes that as the market in the United States and other advanced nations matures:

A)it necessitates exports from the United States to those countries.
B)it is no longer worthwhile for foreign producers to produce for their home markets.
C)it obviates the need to look for low-cost production sites in other countries.
D)the product becomes more standardized, and price becomes the main competitive weapon.
E)the resources used in production begin to become scarce.

Question 65

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 developing 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 66

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 67

Which of the following 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 68

According to Vernon, which of the following influences the movement of the locus of global production from advanced countries to developing countries?

A)Cost considerations
B)Factor endowments
C)Domestic competition
D)Supporting industries
E)Firm structure

Question 69

Vernon predicts that as the demand for a new product starts to grow in other advanced countries, in the long run:

A)the cost of labor in these advanced countries begins to increase.
B)it becomes profitable for foreign firms to invest in production facilities in the United States.
C)the firms in the United States begin to gain an absolute advantage.
D)it begins to limit the potential for exports from the United States.
E)the same product will begin to command a higher price.

Question 70

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 71

Vernon argues that pioneering firms in the United States kept production facilities closer to the market and centers of decision making because:

A)of the uncertainty and risks inherent in introducing new products.
B)they believed that foreign production facilities were inferior in technical skills.
C)they believed that U.S. labor costs were much lower than those in foreign markets.
D)the U.S. government was critical of outsourcing production to other countries.
E)of the high trade barriers implemented by several Asian and European countries.

Question 72

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 73

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 74

Diminishing returns to specialization occur 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 quality of goods produced per unit of resource begins to improve.

Question 75

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 workers from Seaboria to improve its standing in the textile industry.

Question 76

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 77

U.S. exports are less capital-intensive than U.S. imports, despite the relative abundance of capital in the country. What is this phenomenon that runs contrary to the prediction of the Heckscher-Ohlin theory called?

A)A zero-sum game
B)The Leontief paradox
C)A positive-sum game
D)Samuelson's critique
E)A first-mover advantage

Question 78

According to the product life-cycle theory, the high cost of U.S. labor gave U.S. firms an incentive to:

A)lower costs of services to offset a fall in demand.
B)develop cost-saving process innovations.
C)invite foreign direct investment in domestic industries.
D)embrace and promote open market capitalism.
E)import new consumer products and export agricultural products.

Question 79

Vernon argues that early in the life cycle of a typical new product, while demand is starting to grow rapidly in the United States, demand in other advanced countries:

A)remains limited to high-income groups.
B)necessitates production of that product in those countries.
C)necessitates outsourcing of production to low-cost locations.
D)raises the cost of production in the United States.
E)causes a shift in the position of the United States from that of an exporter to an importer.

Question 80

On which of the following observations was Raymond Vernon's product life-cycle theory based?

A)The wealth and size of the U.S. market gave U.S. firms a strong incentive to develop new consumer products.
B)The high cost of U.S. labor gave U.S. firms an incentive to develop cost-saving process innovations.
C)The United States developed a very large proportion of the world's new products for most of the twentieth century and sold them first in the U.S. market.
D)The United States exports goods that heavily use skilled labor and imports heavy manufacturing products that use large amounts of capital.
E)The United States has long been a substantial exporter of agricultural goods, reflecting in part its unusual abundance of arable land.