Question 1

International trade theory shows that nations will attain a higher level of living by specializing in goods for which they possess a comparative advantage and importing those for which they have a comparative disadvantage.

Accepted Answer

This statement accurately reflects the basic principles of international trade theory, as developed by economists such as David Ricardo and Adam Smith. The idea is that countries can benefit from trade by focusing on producing goods that they are relatively more efficient at producing (i.e. have a comparative advantage) and trading with other countries for goods that they are less efficient at producing (i.e. have a comparative disadvantage). This can allow for greater specialization and efficiency, leading to increased productivity and higher standards of living.

Question 2

Reflecting their continued economic development, developing countries have dramatically increased their share of FDI stock, from 1 percent in 1980 to 14 percent in 2010.

Accepted Answer

This statement is true.

Question 3

The primary reason for international trade is a lack of natural resources in the developed nations.

Accepted Answer

The primary reason for international trade is not just a lack of natural resources, but also differences in technological capabilities, production efficiencies, and market demand. Developed nations also engage in international trade to access cheaper labor and increase their market reach.

Question 4

The theory of absolute advantage suggests that under free, unregulated trade, each nation should specialize in producing those goods it can produce most efficiently.

Accepted Answer

The theory of absolute advantage, proposed by Adam Smith, argues that each nation should specialize in producing goods it can produce most efficiently, leading to increased productivity and lower costs. This will result in greater overall economic welfare for all nations involved in the trade.

Question 5

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

The theory of comparative advantage states that a nation should specialize in producing goods in which it has a lower opportunity cost than other nations and trade with other nations for the goods in which it has a higher opportunity cost. This means that even if a nation is less efficient in producing both goods, it can still gain from trade if it has a lower opportunity cost in one of them. Therefore, the statement is true.

Question 6

An important development in the level of worldwide FDI is the emergence of what has been called the "bamboo network" of ethnic Chinese family businesses based outside China.

Accepted Answer

The statement accurately represents the emergence of the "bamboo network" of ethnic Chinese family businesses based outside China being an important development in the level of worldwide FDI.

Question 7

The book value, or the value of the total outstanding stock, of all foreign direct investment worldwide was $19 trillion at the beginning of 2010.

Accepted Answer

This statement is true. According to data from the United Nations Conference on Trade and Development, the book value of all foreign direct investment worldwide was $19 trillion at the beginning of 2010.

Question 8

An arrangement in which one or more activities that could be provided in-house are instead provided by another company is offshoring.

Accepted Answer

Offshoring refers to relocating a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. The term you're describing is more accurately called outsourcing.

Question 9

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

Accepted Answer

The text states that differences in taste can lead to a reversal in the direction of trade, which means that the theory may not always hold true.

Question 10

Linder's theory of overlapping demand explains the direction of trade for minerals and agricultural products.

Accepted Answer

Linder's theory of overlapping demand primarily explains trade patterns based on similar preferences of consumers in countries with comparable levels of income, focusing more on manufactured goods rather than minerals and agricultural products.

Question 11

A nation's relative ability to design, produce, distribute, or service products within an international trading context, while earning increasing returns on its resources, is known as national competitiveness.

Accepted Answer

This statement accurately defines national competitiveness.

Question 12

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

Accepted Answer

Currency devaluation can make a country's exports cheaper and more attractive in the global market, which can help the country avoid losing its markets and regain its competitiveness.

Question 13

Direct investment refers to overseas purchases of stocks and bonds to gain a return on the funds invested.

Accepted Answer

Direct investment refers to the purchase of physical assets such as factories, real estate, and businesses, rather than stocks and bonds.

Question 14

If a Chinese worker earns $1 a day, then goods produced by this worker will cost less than the same goods produced by an American earning $18 an hour.

Accepted Answer

The answer of If a Chinese worker earns $1 a...

Question 15

The price of one currency stated in terms of another currency is the exchange rate.

Accepted Answer

This is the correct definition of exchange rate.

Question 16

Portfolio investment is the purchase of sufficient stock in a firm to obtain significant management control.

Accepted Answer

Portfolio investment refers to the purchase of a diversified portfolio of securities, such as stocks, bonds, and other financial instruments, for the purpose of generating returns. It does not involve obtaining significant management control of a particular company. That is more closely associated with strategic or direct investment.

Question 17

Adam Smith explained how countries can benefit from international trade even if they lack any absolute advantage over their trade partners.

Accepted Answer

Adam Smith's theory of absolute advantage suggests that countries benefit from trade by specializing in goods where they have an absolute advantage, not when they lack it. The concept of benefiting from trade without an absolute advantage was later explained by David Ricardo's theory of comparative advantage.

Question 18

Some observers have argued that American industry and the American economy as a whole will be strengthened by offshoring activities to workers in India or other nations that have comparative advantages in areas such as labor costs.

Accepted Answer

This is a commonly held belief among economists and many business leaders, as offshoring to countries with lower labor costs can increase efficiency and competitiveness for American companies. However, there are also concerns about the impact on domestic employment and the potential exploitation of foreign workers.

Question 19

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

Michael Porter's Diamond Model actually includes government and chance as two additional factors that influence national competitiveness, alongside the four main determinants: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry.

Question 20

The proportion of the outstanding stock of foreign direct investment accounted for by the United States declined by two-thirds between 1980 and 2010.

Accepted Answer

The answer of The proportion of the outstanding stock of...

Quiz 2: International Trade and Foreign Direct Investment