Question 1

There are a number of advantages in focusing attention on a nation that is already a sizable purchaser of goods coming from the would-be exporter's country.

Accepted Answer

Why should we know which countries are our own nation's major trade partners? Here are some of the advantages: (1) The business climate in these importing nations is already relatively favorable. (2) Export and import regulations are not insurmountable. (3) There should be no strong cultural objections at home to buying that nation's goods. (4) Satisfactory transportation facilities have already been established. (5) Import channel members (merchants, banks, and customs brokers) are experienced in handling import shipments from the exporter's area. (6) Currency from the foreign country is available to pay for the exports. (7) The government of a trading partner may be applying pressure on its importers to buy from countries that, like the United States, are good customers for that nation's exports.

Question 2

The proportion of world trade coming from Latin America,Africa,and the Middle East has decreased since 1980.

Accepted Answer

Although the absolute value of their merchandise exports increased, the proportion of world trade coming from North America, Latin America, Africa, and the Middle East decreased since 1980, reflecting the greater level of export growth in other regions.

Question 3

International trade includes exports,imports,and foreign direct investment.

Accepted Answer

International trade includes exports and imports, not foreign direct investment.

Question 4

According to the theory of comparative advantage,a nation can gain from trade if it is not equally less efficient in producing two goods.

Accepted Answer

British economist David Ricardo demonstrated in 1817 that even though one nation held an absolute advantage over another in the production of each of two different goods, international trade could still be a positive-sum game in which both countries benefit. The only limitation to such benefit-creating trade is that the less-efficient nation cannot be equally less efficient in the production of both goods.

Question 5

The predictable decline in the average cost of producing each unit of output as a production facility gets larger and output increases is known as the experience curve.

Accepted Answer

The predictable decline in the average cost of producing each unit of output as a production facility gets larger and output increases is known as an economy of scale.

Question 6

Nearly 60 percent of global output is now destined for international trade.

Accepted Answer

Nearly 60 percent of global output is now destined for international trade-another indication of the extent to which international trade has become a critical factor in the economic activity of many, if not most, of the countries of the world.

Question 7

All regions of the world experienced an absolute increase in the dollar volume of their services exports since 1980,although the U.S.proportion has risen by approximately one-third since that time.

Accepted Answer

All regions and essentially all of the primary-world nations experienced an absolute increase in the dollar volume of their services exports, though the proportion of world exports of commercial services from Latin America, the European Union, Africa, and the Middle East has declined since 1980. However, the U.S. proportion has risen by approximately one-third since 1980.

Question 8

The theory of absolute advantage suggests that under free,unregulated trade,each nation should specialize in producing those goods it can produce most efficiently,based on naturally occurring endowments such as minerals.

Accepted Answer

Specialization should be based on market forces, and its absolute advantage could be either natural or acquired.

Question 9

The development of expanded regional trade agreements,such as the Association of Southeast Asian Nations,Mercosur,and the EU,can substantially alter the level and proportion of trade flows within and across regions.

Accepted Answer

World trade continues to be dominated by exchanges within-not between-geographic regions. For example, in 2014, approximately half the exports from North American nations went to other nations in North America. A little more than half of Asian nations' exports were to other Asian nations, and more than 70 percent of exports from European nations went to other European countries. This regionalization of trade is being reinforced by the development of expanded regional trade associations and agreements, such as the Association of Southeast Asian Nations (ASEAN, which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam), Mercosur in South America (comprised of Argentina, Bolivia, Brazil, Paraguay, Uruguay, and Venezuela, and the 28-nation European Union).

Question 10

According to the text,differences in taste,a demand variable,can reverse the direction of trade predicted by the theory.

Accepted Answer

According to Linder's theory of overlapping demand, customers' tastes are strongly affected by their income levels, and therefore a nation's level of income per capita determines the kinds of goods its people will demand. For example, countries with high levels of average income may have substantial levels of demand for items such as large display televisions, high-fashion branded clothing, jewelry, luxury automobiles, and gourmet foods and beverages. In contrast, countries with low average incomes may exhibit greater demand for simpler and more basic items of food, clothing, and shelter. Goods produced for domestic consumption will eventually be exported to countries that have similar levels of income, and therefore, demand. This suggests that international trade in manufactured goods will be greater between nations with similar levels of per capita income than between those with dissimilar levels of per capita income. Even though two developed countries may have similar resource endowments, they still can have a large volume of trade in goods for which both countries have a demand.

Question 11

Record levels of American outward foreign direct investment from 2010 to 2013,totaling more than $1.4 trillion,caused U.S.exports to decline during this time period.

Accepted Answer

American outward FDI reached a record $1.40 trillion from 2010 to 2013. These figures represent almost three times the U.S. average a decade before. Yet the overall level of American exports of goods and services increased from $1.1 trillion in 2000 to $2.3 trillion in 2010, an increase of more than 100 percent.

Question 12

In 2013,the top 10 exporting and importing nations collectively accounted for over half of all exports and imports of merchandise and services worldwide.

Accepted Answer

Table 2.1 presents the world's 10 largest nations in terms of exports and imports of merchandise and of services. As you can see, they are generally developed countries, although China ranks in the top five on each list and India in the top 10 for imports of merchandise and for both imports and exports of services. These 10 largest exporters and importers collectively account for over half the world's exports and imports, which highlights the fact that international trade continues to be unevenly distributed across countries and regions of the world.

Question 13

Approximately two-thirds of the exports from developed countries go to developed countries.

Accepted Answer

More than half the exports from developing nations do go to developed countries, but this proportion has been declining as the developing nations participate more extensively in trade with other developing nations, from 72 percent in 1970 to about 50 percent by 2013. About two-thirds of exports from developed economies go to other industrialized nations.

Question 14

The first formulation of international trade theory,by Adam Smith,was motivated by political considerations.

Accepted Answer

A profoundly influential early attempt to develop an international trade theory was actually politically motivated. Adam Smith, a Scottish philosopher and economist, was incensed by British government intervention and control over both domestic and foreign trade. In 1776, he published An Inquiry into the Nature and Causes of the Wealth of Nations, in which he attacked the mercantilist philosophy that prevailed at that time.

Question 15

The central idea of mercantilism is there should be an export surplus so a nation can accumulate precious metals.

Accepted Answer

A complex political and economic theory, mercantilism viewed precious metals such as gold and silver as the only source of wealth, and their accumulation as essential to a nation's welfare. Because England had no gold or silver mines, mercantilists looked to exploration and international trade to supply these metals. The government established restrictions such as import duties to reduce imports, and subsidies to exporters to increase exports. In addition to protecting jobs within the mercantilist nation, those acts created a trade surplus meant to generate increased holdings of gold and silver.

Question 16

Michael Porter claims that demand conditions,factor conditions,related and supporting industries,and firm strategy,structure,and rivalry,rather than government and chance,are factors that affect national competitiveness.

Accepted Answer

Porter's theorizing about his diamond model of national advantage also acknowledged that competitiveness could be affected by government and chance.

Question 17

Currency devaluation helps a nation avoid losing markets and regain competitiveness in world markets.

Accepted Answer

A nation can attempt to regain competitiveness in world markets through currency devaluation, which lowers the value of a nation's currency relative to other currencies and therefore effectively lowers the prices of its exports.

Question 18

If a Chinese worker earns $1.00 a day,then goods produced by this worker will cost less than the same goods produced by an American earning $18.00 an hour.

Accepted Answer

Wage costs are neither all of the production costs nor all of the labor costs, and labor can also exhibit differences in productivity.

Question 19

A theory developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics suggests that differences in resource endowments will make developed countries more likely to trade with developed countries whose resource endowments are likely to be very similar,than with developing countries whose endowments are dissimilar.

Accepted Answer

A theory developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics suggests that differences in resource endowments will make developed countries more likely to trade with developing countries whose resource endowments are likely to be very dissimilar, than with other developed countries whose endowments are similar.

Question 20

The international product life-cycle theory may have its greatest usefulness in explaining trade and investment behavior when international firms introduce their new products in home markets first.

Accepted Answer

The international product life-cycle theory may have its greatest usefulness in explaining trade and investment behavior when international firms introduce their new products in home markets first. For example, personal computers were initially introduced in the United States, then exported to other countries. Over time, production moved to lower-cost locations such as Taiwan and China, and now almost all computers sold in the United States are imported from abroad.

Quiz 2: International Trade and Investment