Question 1

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

Accepted Answer

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.

Accepted Answer

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?

Accepted Answer

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.

Accepted Answer

According to the theory of comparative advantage, each country is able to produce a product at lower cost when it participates in international trade. The cost of products for each country becomes cheaper compared to the cost a country has to pay without international trade. The allocations of resources are operated in the best possible way that benefits all countries.

Question 5

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

Accepted Answer

Despite the powerful implication of the theory of comparative advantage by David Ricardo, there are some limitations. The theory claims all can gain from trade, but, in the reality, some industries may lose from international trade. When a country imports products that other countries can produce cheaper, the import-competing industries are likely to lose from trade. Job loss in these import-competing industries may occur because workers may not have skills to work in other industries that survive from international trade. Another limitation is that it does not consider time dimension, so, that it cannot explain technological changes. Hence, the option stating that job loss is likely to occur in exporting industries is incorrect. Other options are correct.

Question 6

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

Accepted Answer

An industry that is most likely to loss from international trade is import-competing industry because the competition in this industry is higher and jobs in this industry will be lost.

Question 7

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

Accepted Answer

A country that has a strong comparative advantage in the production of commodities or natural resources can become locked into low-value natural resources or commodities production, especially if firms in that country do not develop created assets or capabilities that help them compete with firms in other countries.

Question 8

Which of the following is wrong?

Accepted Answer

Locational advantages include both natural endowments of countries and an outcome of those factors that are wedded to the country. The quality of labour and its supply are therefore considered as locational advantages.

Question 9

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

Accepted Answer

A firm that is most likely to compete successfully in foreign direct investment is a firm that has competitive advantages based on its created assets. The firm's investment in research and development can help them develop and own new technology in which they can transfer this ownership advantages to compete in foreign markets.

Question 10

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

Accepted Answer

Technology is identified as the driving force of the growth of trade among advanced economies. The firms' investment in technology can create the firm's ownership advantage that help them compete in international trade.

Question 11

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

Accepted Answer

There are several limitations of the product cycle models (PCM). First, while PCM can explain many products, it does not the best explanation for the international trade of commodities or raw materials that are better explained by Ricardo's comparative advantage. Also, modern MNEs develop products worldwide rather than developing new product based entirely on one domestic market as suggested in PCM. Firms can also use other strategy to maintain its differentiations rather than price competition as it is suggested in PCM. Despite several limitations, PCM adds time dimension to the understanding of firms and international trade, therefore it is not a static model.

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?

Accepted Answer

The product cycle model suggests the changes in international location of production. When a product is more mature or standardised, the production will move to countries that have lower production costs. The country that initially creates the product would eventually import the product back if the wage cost outside the country were very low and offset the cost of transport the product back to the country.

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.

Accepted Answer

New trade theory provides explanation of intra-industry trade which is not considered in the classic trade theory. It focuses on the aggregate level of international trade, rather than the firm level.

Question 14

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

Accepted Answer

The four aspects of the Porter's diamond are factor endowments, demand conditions, related and supporting industries, and firm strategy, structure and rivalry. Capabilities of managers are not included in this model.

Question 15

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

Accepted Answer

Subsidies are government payments to domestic producers in form of cash grants, low-interest loans, and tax relief. Quantitative restrictions or quotas restrict the quantity of imports to protect market share of domestic firms.

Question 16

Which of the following is wrong?

Accepted Answer

Non-tariff barriers may be employed by governments, but not only by governments. Private interests can construct non-tariff barriers such as encouragements public to buy domestic products.

Question 17

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

Accepted Answer

Tariff barriers affect only visible, or merchandise, trade. They do not affect trade in services. Other options are correct.

Question 18

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

Accepted Answer

A country applies trade protection because of many reasons. The protection of employment, consumers, or infant industry are all the reasons for trade protection. A country can also apply trade protection in order to promote national interests such as to raise income for the government.

Question 19

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

Accepted Answer

Offshoring foreign direct investment refers to the situation in which production is moved to a location abroad, generally to reduce costs and to increase efficiency, but also to reduce risk.

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.

Accepted Answer

Integrated productive activities are segmented and spread over an international network of production under the international fragmentation of production, which is generated by both offshoring FDI and international outsourcing.

Quiz 4: International Trade Theory and the Firm

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

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

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?

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.

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

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

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

Which of the following is wrong?

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

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

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

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?

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.

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

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

Which of the following is wrong?

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

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

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

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.