Question 1

The theory of national competitive advantage of industries does not take domestic demand conditions into account.

Accepted Answer

The theory of national competitive advantage of industries actually includes domestic demand conditions as one of the four determinants of national competitive advantage. The other three determinants are factor conditions, related and supporting industries, and firm strategy, structure, and rivalry.

Question 2

By trying to be self-sufficient and producing a wide range of goods,mercantilist policies help sustain the wealth of a nation in the long run.

Accepted Answer

Mercantilist policies may initially help a nation accumulate wealth, but in the long run, they can hinder economic growth by discouraging trade and specialization. By producing goods that could be acquired more efficiently and cost-effectively from other countries, a nation may be wasting resources and limiting its economic potential. Additionally, mercantilist policies often lead to trade wars and protectionist measures that can harm domestic consumers and businesses. Overall, a more open and free trade policy tends to have greater benefits for sustained economic growth and prosperity.

Question 3

Government intervention in international trade was proposed by the factor endowment theory.

Accepted Answer

The factor endowment theory, also known as the Heckscher-Ohlin model, explains trade patterns based on countries' differences in factor endowments (such as labor, land, and capital) rather than government intervention. It suggests that countries will export goods that utilize their abundant factors of production and import goods that require factors in which they are relatively scarce.

Question 4

The product life cycle theory is popularly known as the "diamond" theory.

Accepted Answer

The product life cycle theory is not known as the "diamond" theory; it describes the stages a product goes through from introduction to decline. The "diamond" theory refers to Michael Porter's Diamond Model, which is a framework for understanding the competitive advantage of nations.

Question 5

Both exporting and importing are taken into account when calculating balance of trade.

Accepted Answer

Balance of trade takes into account both exports and imports of a country. If a country exports more than it imports, it has a positive balance of trade, while if it imports more than it exports, it has a negative balance of trade.

Question 6

The theory of mercantilism viewed international trade as a zero-sum game.

Accepted Answer

Mercantilism believed that a country's wealth and power were directly tied to its holdings of gold and silver, and therefore international trade was seen as a competition for a limited amount of precious metals. This view saw international trade as a zero-sum game where one country's gain was another country's loss.

Question 7

The Heckscher-Ohlin theory proposed that nations will develop comparative advantage based on their locally abundant factors.

Accepted Answer

The Heckscher-Ohlin theory, also known as the factor proportions theory, suggests that countries will develop comparative advantage based on their locally abundant factors of production, such as natural resources or skilled labor. This theory is based on the idea that countries will specialize in producing goods that use their abundant factors more intensively, allowing them to gain a comparative advantage in those goods.

Question 8

The product life cycle theory is the first dynamic theory to account for changes in the patterns of trade over time.

Accepted Answer

The product life cycle theory developed by Raymond Vernon is the first dynamic theory to explain the changes in the patterns of international trade over time as products move through various stages in their life cycle.

Question 9

The strategic trade theory was mainly proposed for low capital-investment industries.

Accepted Answer

The strategic trade theory was mainly proposed for high capital-investment industries where governments have a potential role in supporting domestic firms to compete with foreign rivals.

Question 10

The theory of absolute advantage is categorized as a classical theory of international trade.

Accepted Answer

The theory of absolute advantage was proposed by Adam Smith in his book "The Wealth of Nations" in 1776, which makes it a classical theory of international trade.

Question 11

Factor endowments is one of the four interacting aspects of the theory of national competitive?advantage of industries.

Accepted Answer

Factor endowments, along with related and supporting industries, demand conditions, and firm strategy, structure, and rivalry, are the four interacting aspects of the theory of national competitive advantage of industries, proposed by Michael Porter in his book "The Competitive Advantage of Nations".

Question 12

Strategic trade theory advocates mercantilist policy for all industries.

Accepted Answer

Strategic trade theory suggests that governments should intervene in industries where firms have a strategic advantage, which may involve providing subsidies or protectionist measures. However, this does not necessarily mean that mercantilist policies should be applied to all industries, as this approach could lead to negative consequences such as trade wars and inefficiency. Instead, strategic trade theory emphasizes the importance of targeting specific industries to promote competitiveness and improve overall economic outcomes.

Question 13

Economist Adam Smith proposed the theory of comparative advantage.

Accepted Answer

The theory of comparative advantage was proposed by David Ricardo, not Adam Smith. Adam Smith is best known for his theory of the division of labor and the concept of the "invisible hand."

Question 14

Classical theories are based on the assumption of perfect resource mobility.

Accepted Answer

Classical theories in economics assume that resources are perfectly mobile, meaning that they can quickly move from one sector or industry to another in response to changes in demand or production. This assumption underlies many of the predictions and conclusions of classical economic models, such as the tendency toward long-run equilibrium and the efficiency of market outcomes.

Question 15

Trade deficit occurs when a nation exports more than it imports.

Accepted Answer

Trade deficit occurs when a nation imports more than it exports.

Question 16

The concept of opportunity cost is crucial to the theory of comparative advantage.

Accepted Answer

The concept of opportunity cost is central to understanding the theory of comparative advantage. The theory states that countries should specialize in producing goods and services in which they have a lower opportunity cost compared to other countries, and this specialization leads to mutual gains from trade. Without the concept of opportunity cost, the theory of comparative advantage cannot be fully understood or applied.

Question 17

Classical theories assume no foreign exchange complications.

Accepted Answer

Classical theories of economics do not take into account the complexities of international trade and foreign exchange rates.

Question 18

The basic concept of protectionism and mercantilism is the same.

Accepted Answer

Protectionism and mercantilism both involve government policies designed to protect domestic industries and promote economic growth. Protectionism seeks to limit imports through tariffs and other barriers, while mercantilism emphasizes the accumulation of wealth through exports and favorable trade balances. Both approaches are based on the idea that a country's economic success depends on promoting its own interests at the expense of others.

Question 19

The product life cycle theory explains patterns of trade based on factor endowments.

Accepted Answer

The product life cycle theory explains patterns of trade based on the maturation process of a product, from its introduction to its decline, rather than on factor endowments, which are explained by the Heckscher-Ohlin model.

Question 20

The theory of national competitive advantage of industries assumes that comparative advantage always resides in the lead innovation nation.

Accepted Answer

The theory of national competitive advantage of industries suggests that countries can gain competitive advantage in certain industries due to a combination of factors such as factor conditions, related and supporting industries, firm strategy, structure and rivalry, and chance. This means that comparative advantage may not always reside in the lead innovation nation.

Quiz 5: Trading Internationally