Chapter 06
International Trade Theory
True / False Questions
1. Free trade refers to a situation where a government does not attempt to influence through quotas
or duties what its citizens can buy from another country.
True
False
2. The theories of Smith and Ricardo show that countries should not engage in international trade
for products that it is able to produce for itself.
True
False
3. David Ricardo's theory of comparative advantage explains international trade in terms of
international differences in political environments.
True
False
4. New trade theory stresses that in some cases countries specialize in the production and export of
particular products because the world market can support only a limited number of firms.
True
False
5. Porter's theory of national competitive advantage recommends unrestricted free trade between
countries.
True
False
6. Heckscher-Ohlin theory supports the case for unrestricted free trade between nations.
True
False
7. Mercantilism supports the idea that countries should export more than what they import.
True
False
8. Mercantilist doctrine advocates unrestricted free trade between countries.
True
False
9. The principle of mercantilism views trade as a positive-sum game.
True
False
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.
True
False
11. Adam smith argued that countries should specialize in the production of goods for which they
have an absolute advantage.
True
False
12. According to Ricardo's theory of comparative advantage, countries should produce all the
products for which they have an absolute advantage.
True
False
13. According to Ricardo's theory of comparative advantage, countries shall not produce a good even
if they have an absolute advantage in its production.
True
False
14. The theory of comparative advantage suggests that trade is a positive-sum game in which all
countries that participate realize economic gains.
True
False
15. Simple model of free trade assumed away transportation costs between countries.
True
False
16. Resources always move easily from one economic activity to another.
True
False
17. The production possibility frontier will be parabolic if constant return to specialization is observed.
True
False
18. The production possibility frontier will be convex if constant return to specialization is observed.
True
False
19. Diminishing returns show that it is feasible for a country to specialize to the degree suggested by
the simple Ricardian model.
True
False
20. The simple comparative advantage model assumed that trade does not change a country's stock
of resources or the efficiency with which it utilizes those resources.
True
False
21. According to Paul Samuelson's critique, a poor country will rapidly improve its productivity if a rich
country enters into a free trade agreement with it.
True
False
22. Paul Samuelson's critique argues that trade is a positive-sum game in which all countries that
participate realize economic gains.
True
False
23. A rich country improves its productivity by engaging in free trade with a poor country. This
situation supports Paul Samuelson's critique.
True
False
24. Factor endowments refer to the extent to which a country is gifted with such resources as land,
labor, and capital.
True
False
25. The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive
use of factors that are locally scarce.
True
False
26. Heckscher-Ohlin theory stresses that comparative advantage arises from differences in
productivity.
True
False
27. The Heckscher-Ohlin theory argues that the pattern of international trade is determined by
differences in factor endowments.
True
False
28. Ricardo's theory makes fewer simplifying assumptions compared to Heckscher-Ohlin theory.
True
False
29. A capital intensive country exports products that are capital intensive. This is an example of
Leontief Paradox.
True
False
30. A key assumption in the Heckscher-Ohlin theory is that technologies are the same across
countries.
True
False
31. The product life-cycle theory argues that a large proportion of the world's new products had been
developed by U.S. firms.
True
False
32. The product life-cycle theory argues that the developing nations will not produce a product if the
product is highly standardized.
True
False
33. Some of the arguments made by the product life-cycle theory seems ethnocentric and
increasingly dated when viewed from an Asian or European perspective.
True
False
34. Economies of scale are unit cost reductions associated with a large scale of output.
True
False
35. Companies that trade small volumes of product can benefit from economies of scale.
True
False
36. Variety of goods that a country can produce is limited by the size of the market in industries
where economies of scale are important.
True
False
37. First-mover advantages are the economic and strategic advantages that accrue to early entrants
into an industry.
True
False
38. New trade theory suggests that nations cannot benefit from trade when they do not differ in
resource endowments or technology.
True
False
39. According to the new trade theory, firms that establish a first-mover advantage with regard to the
production of a particular new product may subsequently dominate global trade in that product.
True
False
40. The theories of international trade claim that promoting free trade is generally in the best interests
of an individual firm, although it may not always be in the best interest of a country.
True
False
Multiple Choice Questions
41. Which of the following refers to a situation where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country?
A. Economic patriotism
B. Protectionism
C. Free trade
D. Offshoring
42. Which of the following is a major benefit of engaging in free trade?
A. It helps to reduce the financial volatility in global markets.
B. It helps the countries protect the jobs that are available to their citizens.
C. It gives countries access to products that they cannot produce.
D. It allows the governments to exert more control on businesses.
43. David Ricardo's theory of comparative advantage explains global trade in terms of the _____.
A. first mover advantage that certain countries and firms enjoy
B. geographical differences between various countries
C. international differences in labor productivity
D. late mover advantage that certain countries and firms possess
44. Which of the following theories emphasizes the interplay between the proportions in which the
factors of production are available in different countries and the proportions in which they are
needed for producing particular goods?
A. Porter's theory
B. Smith's theory
C. Ricardo's theory
D. Heckscher-Ohlin theory
45. Identify the theory that supports the view that in some cases countries export for the reason that
the world market can support only a limited number of firms.
A. Heckscher-Ohlin theory
B. Smith's theory
C. Ricardo's theory
D. New trade theory
46. Country A exports electronic goods from Country B although there are no underlying differences
in factor endowments between the two countries. Which of the following theories explains this
anomaly?
A. Comparative advantage theory
B. New trade theory
C. Ricardo's theory
D. Smith's theory
47. Which of the following observations is consistent with Michael Porter's theory of national
competitive advantage?
A. Factors such as domestic demand and domestic rivalry determine nations' dominance on
production.
B. Countries should produce only those goods for which they have a comparative advantage.
C. Interplay between the factors of production cause international marketing decisions.
D. International differences in labor productivity determine nations' supremacy in production.
48. Which of the following is a theory that can be used to justify limited government intervention to
support the development of certain export-oriented industries?
A. Comparative advantage theory
B. Ricardo's theory
C. New trade theory
D. Heckscher-Ohlin theory
49. Which of the following is the main principle of mercantilism?
A. Protection of domestic industries is not essential for a nation's welfare.
B. Government intervention is not required in global trade.
C. Countries should encourage absolute free trade.
D. It is in a country's best interests to maintain a trade surplus.
50. Which of the following is a major flaw associated with mercantilism?
A. Mercantilists do not support government intervention in trade.
B. Mercantilists view trade as a zero-sum game.
C. Mercantilists recommend policies to maximize imports.
D. Mercantilists recommend countries to maintain a negative trade balance.
51. A country has an absolute advantage in the production of a product when it _____.
A. has the capability to produce the product within its boundaries
B. is more efficient than any other country in producing it
C. has the largest domestic demand for the product
D. has access to the raw materials needed to produce the product
52. According to Adam Smith, A country should specialize in the production of a good when it has
_____.
A. an absolute advantage in the production of the good
B. a strong domestic demand for the good
C. the ability to help country increase its national output
D. the necessary raw materials for production
53. Country A can produce product X, but it can also buy it at a cheap rate from Country B. Which of
the following courses of action is suitable in this situation according to Adam Smith's theory of
absolute advantage?
A. Country A should import product X from country B and it should not attempt to produce it at
home.
B. Country A should partly import the product and produce it domestically.
C. Country A should produce more of product X and should attempt to obtain an absolute
advantage for the product.
D. Country A should subsidize the production of product X to obtain an absolute advantage over
country B.
54. According to Ricardo's theory of comparative advantage, a country should produce goods _____.
A. for which it has access to raw materials
B. that it produces most efficiently
C. that have the highest domestic demand
D. for which it has an absolute advantage
55. Which of the following is a statement that supports the theory of comparative advantage?
A. International trade is a zero-sum gain where one nation's gain is another's loss.
B. Domestic industries are at risk when a country engages in free trade.
C. A country should maintain trade surplus to succeed in global trade.
D. Global production is greater with free trade than it is with restricted trade.
56. The theory of comparative advantage provides strong rationale for supporting the idea of _____.
A. business nationalism
B. free trade
C. protectionism
D. governmental intervention in trade
57. Diminishing returns to specialization occurs when _____.
A. each additional unit is produced with lesser number of laborers
B. a nation's gross domestic product declines for a few years
C. production possibility frontier appears as a rectangle
D. more units of resources are required to produce each additional unit
58. Which of the following is a major limitation of the simple Ricardian model of comparative
advantage?
A. The model ignores the principle of diminishing marginal returns.
B. The model recommends excessive governmental intervention in trade.
C. The outcome of the model suggested by Ricardo is a zero-sum game.
D. The model is against the idea of engaging in free trade with nations.
59. What will happen, according to Paul Samuelson's critique, if a rich country enters into a free trade
agreement with a poor country?
A. Both the countries will incur losses due to the exchanges between them.
B. The productivity of the poor country will decline rapidly.
C. The poor country will rapidly improve its productivity.
D. Both the countries will garner benefits from the exchanges between them.
60. Which of the following arguments supports the Paul Samuelson's critique?
A. A rich country cannot produce net gains by engaging in free trade with a poor country.
B. Governmental intervention will reduce the likeliness of countries' economic success.
C. Countries should attempt to specialize in the production of goods and services.
D. Trade is a positive-sum game in which all countries that participate realize economic gains.
61. Which of the following terms refers to the extent to which a country is gifted with such resources
as land, labor, and capital?
A. Current accounts
B. Factor endowments
C. National balance
D. National accounts
62. Identify the theory that predicts that countries will export those goods that make intensive use of
factors that are locally abundant.
A. Theory of comparative advantage
B. Ricardo theory
C. New trade theory
D. Heckscher-Ohlin theory
63. Which of the following is the reason why most economists prefer Heckscher-Ohlin theory to
Ricardo's theory?
A. Heckscher-Ohlin stresses on the differences in productivity between nations.
B. Ricardo's theory considers factor endowments to describe national competitiveness.
C. Heckscher-Ohlin theory makes fewer simplifying assumptions.
D. Ricardo's theory considers the law of marginal returns.
64. Which of the following statements is true of the Leontief Paradox?
A. It shows an anomaly that occurs when a nation has high domestic demand for a product.
B. It explains the relationship between domestic demand and comparative advantage.
C. It disproved Ricardo's theory of comparative advantage.
D. It raised questions about the validity of the Heckscher-Ohlin theory.
65. Identify the theory that argues that advanced nations have an incentive to develop a new offering
and hence such nations always tend to create a good or service for the first time.
A. Absolute advantage
B. Ricardo
C. Product life-cycle
D. Heckscher-Ohlin
66. Country X, a poor country, invents a revolutionary electronic product. The country markets this
new product in other poor countries to garner large profits. This occurrence is against the idea of
_____.
A. product life-cycle theory
B. Ricardo's theory
C. theory of absolute advantage
D. theory of comparative advantage
67. Which of the following is a major disadvantage of the product life-cycle theory introduced by
Vernon?
A. The theory's arguments seem ethnocentric and increasingly dated.
B. The theory failed to explain the dominance of developed nations.
C. The theory applies only when a poor nation invents a new product.
D. The theory cannot be used to explain the production of luxury products.
68. Which of the following terms refers to the unit cost reductions associated with large sized
outputs?
A. Absolute advantage of production
B. Economies of scale
C. Constant marginal returns
D. Diminishing marginal returns
69. Wal-Mart makes bulk purchases from its vendors and hence it is able to get better deals than its
competitors. This allows Wal-Mart to offer greater discounts to its customers. In this case, WalMart benefits from _____.
A. first mover advantage
B. constant marginal returns
C. economies of scale
D. absolute advantage of production
70. Company A entered the production of office software before its competitors. Because of this, the
company's products are more familiar among and favored by customers. This situation
exemplifies the _____.
A. first mover advantage
B. diminishing marginal returns
C. economies of scale
D. constant marginal returns
71. Which of the following theories suggests that first mover advantage is significant in the export of a
good?
A. Product life-cycle theory
B. Ricardo's theory
C. New trade theory
D. Theory of comparative advantage
72. Which of the following theories stress the role of luck, entrepreneurship, and innovation in the
production and export of a good or service by the firms in a country?
A. Product life-cycle theory
B. Ricardo's theory
C. Theory of comparative advantage
D. New trade theory
73. Which of the following is one of the four attributes present in Porter's diamond?
A. Economies of scale
B. Factor endowments
C. Structural innovation
D. Procedural innovation
74. Which of the following is an example of a basic factor that a nation will possess as proposed by
Porter?
A. Communication infrastructure
B. Skilled labor
C. Natural resources
D. Technological knowledge
75. Which of the following factors, according to Porter's national Diamond, is most likely to give a
country competitive advantage over another country?
A. Natural resources
B. Climate
C. Skilled labor
D. Demographics
76. Porter argues that a nation's firms gain competitive advantage if _____.
A. their domestic consumers lack technical awareness
B. they function in a labor intensive market
C. the country has abundant supply of unskilled workers
D. their domestic consumers are demanding
77. Textile industry in a nation is characterized by vigorous domestic rivalry. Which of the following
observations of this nation's international competency is most likely to be true?
A. The nation will have access to such basic factors of textile industry as natural resources.
B. The nation's textile firms will have a competitive advantage in international trade.
C. The domestic customers of the textile firms will be less demanding.
D. The nation's textile industry will lack the advanced factors that are necessary to be
internationally competent.
78. A country's balance-of-payments accounts keep track of the _____.
A. basic factor endowments and advanced factor endowments that the nation possesses
B. payments to and receipts from other countries for a particular time period
C. income taxes paid by domestic firms and the spending on the firms
D. total value of taxes paid by domestic firms and the spending on the firms
79. Which of the following balance-of-payment accounts records one-time changes in the stock of
assets?
A. Capital account
B. Current account
C. Financial account
D. Monetary account
80. Which of the following accounts records transactions that involve the purchase or sale of assets?
A. Capital account
B. Current account
C. Principal account
D. Financial account
Essay Questions
81. Explain the concept of free trade.
82. How does the Heckscher-Ohlin theory explain international trade?
83. Explain how the theories of trade differ in terms of their support to governmental intervention.
84. What is the main principle of mercantilism?
85. Identify a major flaw associated with mercantilism.
86. Explain Smith's theory of absolute advantage.
87. Explain Ricardo's theory of comparative advantage.
88. What are the assumptions that we make when we discuss a simple Ricardian model to support
free trade?
89. Briefly differentiate between constant returns to specialization and diminishing returns to
specialization.
90. Explain how the principle of diminishing returns weakens the Ricardian model.
91. Explain the dynamic gains that are generated by opening an economy to trade.
92. Explain the Paul Samuelson's critique.
93. What are factor endowments?
94. Briefly explain Vernon's product life-cycle theory.
95. Identify a major disadvantage of the product life-cycle theory.
96. What are the sources of economies of scale?
97. What are first-mover advantages?
98. Do you think a new trade theorist would stress the role of luck and entrepreneurship? Explain.
99. What are the four attributes that are discussed in Porter's diamond?
100.Explain how the rivalry within an industry affects international competence.
Chapter 06 International Trade Theory Answer Key
True / False Questions
1.
Free trade refers to a situation where a government does not attempt to influence through
quotas or duties what its citizens can buy from another country.
TRUE
Free trade refers to a situation where 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
2.
The theories of Smith and Ricardo show that countries should not engage in international
trade for products that it is able to produce for itself.
FALSE
The theories of Smith, Ricardo, and Heckscher-Ohlin show why it is beneficial for a country to
engage in international trade even for products it is able to produce for itself.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
3.
David Ricardo's theory of comparative advantage explains international trade in terms of
international differences in political environments.
FALSE
David Ricardo's theory of comparative advantage explains international trade in terms of
international differences in labor productivity.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
4.
New trade theory stresses that in some cases countries specialize in the production and
export of particular products because the world market can support only a limited number of
firms.
TRUE
New trade theory stresses that in some cases countries specialize in the production and
export of particular products not because of underlying differences in factor endowments, but
because in certain industries the world market can support only a limited number of firms.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
5.
Porter's theory of national competitive advantage recommends unrestricted free trade between
countries.
FALSE
Porter's theory of national competitive advantage can be interpreted as justifying some limited
government intervention to support the development of certain export-oriented industries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
6.
Heckscher-Ohlin theory supports the case for unrestricted free trade between nations.
TRUE
The theories of Smith, Ricardo, and Heckscher-Ohlin support the case for unrestricted free
trade.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
7.
Mercantilism supports the idea that countries should export more than what they import.
TRUE
The main tenet of mercantilism was that it is in a country's best interests to maintain a trade
surplus, to export more than it imported.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
8.
Mercantilist doctrine advocates unrestricted free trade between countries.
FALSE
Mercantilist doctrine advocated government intervention to achieve a surplus in the balance of
trade.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
9.
The principle of mercantilism views trade as a positive-sum game.
FALSE
The flaw with mercantilism was that it viewed trade as a zero-sum game.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
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.
TRUE
A country has an absolute advantage in the production of a product when it is more efficient
than any other country in producing it.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
11.
Adam smith argued that countries should specialize in the production of goods for which they
have an absolute advantage.
TRUE
According to 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Absolute Advantage
12.
According to Ricardo's theory of comparative advantage, countries should produce all the
products for which they have an absolute advantage.
FALSE
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 buy the
goods that it produces less efficiently from other countries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
13.
According to Ricardo's theory of comparative advantage, countries shall not produce a good
even if they have an absolute advantage in its production.
TRUE
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 buy the
goods that it produces less efficiently from other countries even if the country has an absolute
advantage over its production.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
14.
The theory of comparative advantage suggests that trade is a positive-sum game in which all
countries that participate realize economic gains.
TRUE
The theory of comparative advantage suggests that trade is a positive-sum game in which all
countries that participate realize economic gains.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
15.
Simple model of free trade assumed away transportation costs between countries.
TRUE
Simple model of free trade assumed away transportation costs between countries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
16.
Resources always move easily from one economic activity to another.
FALSE
Resources do not always move easily from one economic activity to another.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
17.
The production possibility frontier will be parabolic if constant return to specialization is
observed.
FALSE
Constant returns to specialization mean that the units of resources required to produce a good
are assumed to remain constant no matter where one is on a country's production possibility
frontier. Thus the production possibility frontier will be a straight line.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
18.
The production possibility frontier will be convex if constant return to specialization is
observed.
FALSE
Constant returns to specialization means that the units of resources required to produce a
good (cocoa or rice) are assumed to remain constant no matter where one is on a country's
production possibility frontier (PPF). In this case, the PPF will be a straight line.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
19.
Diminishing returns show that it is feasible for a country to specialize to the degree suggested
by the simple Ricardian model.
FALSE
Diminishing returns show that it is not feasible for a country to specialize to the degree
suggested by the simple Ricardian model.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
20.
The simple comparative advantage model assumed that trade does not change a country's
stock of resources or the efficiency with which it utilizes those resources.
TRUE
The simple comparative advantage model assumed that trade does not change a country's
stock of resources or the efficiency with which it utilizes those resources.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
21.
According to Paul Samuelson's critique, a poor country will rapidly improve its productivity if a
rich country enters into a free trade agreement with it.
TRUE
Paul Samuelson's critique argues that when a rich country enters into a free trade agreement
with a poor country, there will be a dynamic gain in the efficiency with which resources are
used in the poor country. The poor country's productivity will improve rapidly.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
22.
Paul Samuelson's critique argues that trade is a positive-sum game in which all countries that
participate realize economic gains.
FALSE
Paul Samuelson's critique argues that when a rich country enters into a free trade agreement
with a poor country, only the poor country benefits from the relationship.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
23.
A rich country improves its productivity by engaging in free trade with a poor country. This
situation supports Paul Samuelson's critique.
FALSE
Paul Samuelson's critique argues that when a rich country enters into a free trade agreement
with a poor country, only the poor country benefits from the relationship.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
24.
Factor endowments refer to the extent to which a country is gifted with such resources as
land, labor, and capital.
TRUE
Factor endowments refer to the extent to which a country is endowed with such resources as
land, labor, and capital.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
25.
The Heckscher-Ohlin theory predicts that countries will export those goods that make
intensive use of factors that are locally scarce.
FALSE
The Heckscher-Ohlin theory 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
26.
Heckscher-Ohlin theory stresses that comparative advantage arises from differences in
productivity.
FALSE
Unlike Ricardo's theory, however, the Heckscher-Ohlin theory argues that the pattern of
international trade is determined by differences in factor endowments, rather than differences
in productivity.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
27.
The Heckscher-Ohlin theory argues that the pattern of international trade is determined by
differences in factor endowments.
TRUE
The Heckscher-Ohlin theory argues that the pattern of international trade is determined by
differences in factor endowments.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
28.
Ricardo's theory makes fewer simplifying assumptions compared to Heckscher-Ohlin theory.
FALSE
Most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because it makes
fewer simplifying assumptions.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
29.
A capital intensive country exports products that are capital intensive. This is an example of
Leontief Paradox.
FALSE
The Leontief Paradox explains a deviation of the Heckscher-Ohlin theory. The given situation
follows the Heckscher-Ohlin theory.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
30.
A key assumption in the Heckscher-Ohlin theory is that technologies are the same across
countries.
TRUE
A key assumption in the Heckscher-Ohlin theory is that technologies are the same across
countries.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
31.
The product life-cycle theory argues that a large proportion of the world's new products had
been developed by U.S. firms.
TRUE
The product life-cycle theory argues that a large proportion of the world's new products had
been developed by U.S. firms.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
32.
The product life-cycle theory argues that the developing nations will not produce a product if
the product is highly standardized.
FALSE
The product life-cycle theory argues that the developing nations will produce a product only
when the product becomes highly standardized.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
33.
Some of the arguments made by the product life-cycle theory seems ethnocentric and
increasingly dated when viewed from an Asian or European perspective.
TRUE
Viewed from an Asian or European perspective, the theory's argument that most new products
are developed and introduced in the United States seems ethnocentric and increasingly dated.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
34.
Economies of scale are unit cost reductions associated with a large scale of output.
TRUE
Economies of scale are unit cost reductions associated with a large scale of output.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: New Trade Theory
35.
Companies that trade small volumes of product can benefit from economies of scale.
FALSE
Economies of scale are unit cost reductions associated with a large scale of output. This
means that companies that trade in large volumes benefit from the economies of scale.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: New Trade Theory
36.
Variety of goods that a country can produce is limited by the size of the market in industries
where economies of scale are important.
TRUE
In industries where economies of scale are important, both the variety of goods that a country
can produce and the scale of production are limited by the size of the market.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: New Trade Theory
37.
First-mover advantages are the economic and strategic advantages that accrue to early
entrants into an industry.
TRUE
First mover advantages are the economic and strategic advantages that accrue to early
entrants into an industry.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: New Trade Theory
38.
New trade theory suggests that nations cannot benefit from trade when they do not differ in
resource endowments or technology.
FALSE
New trade theory suggests that nations may benefit from trade even when they do not differ in
resource endowments or technology.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: New Trade Theory
39.
According to the new trade theory, firms that establish a first-mover advantage with regard to
the production of a particular new product may subsequently dominate global trade in that
product.
TRUE
According to the new trade theory, firms that establish a first-mover advantage with regard to
the production of a particular new product may subsequently dominate global trade in that
product.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Understand the important implications that international trade theory holds for business practice.
Topic: Implications for Managers
40.
The theories of international trade claim that promoting free trade is generally in the best
interests of an individual firm, although it may not always be in the best interest of a country.
FALSE
The theories of international trade claim that promoting free trade is generally in the best
interests of a country, although it may not always be in the best interest of an individual firm.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Understand the important implications that international trade theory holds for business practice.
Topic: Implications for Managers
Multiple Choice Questions
41.
Which of the following refers to a situation where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country?
A. Economic patriotism
B. Protectionism
C. Free trade
D. Offshoring
Free trade refers to a situation where 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
42.
Which of the following is a major benefit of engaging in free trade?
A. It helps to reduce the financial volatility in global markets.
B. It helps the countries protect the jobs that are available to their citizens.
C. It gives countries access to products that they cannot produce.
D. It allows the governments to exert more control on businesses.
Countries can benefit from exchanging goods that they can produce efficiently to obtain
products that they cannot produce.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
43.
David Ricardo's theory of comparative advantage explains global trade in terms of the _____.
A. first mover advantage that certain countries and firms enjoy
B. geographical differences between various countries
C. international differences in labor productivity
D. late mover advantage that certain countries and firms possess
David Ricardo's theory of comparative advantage offers an explanation in terms of
international differences in labor productivity.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
44.
Which of the following theories emphasizes the interplay between the proportions in which the
factors of production are available in different countries and the proportions in which they are
needed for producing particular goods?
A. Porter's theory
B. Smith's theory
C. Ricardo's theory
D. Heckscher-Ohlin theory
The Heckscher-Ohlin theory emphasizes the interplay between the proportions in which the
factors of production (such as land, labor, and capital) are available in different countries and
the proportions in which they are needed for producing particular goods.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
45.
Identify the theory that supports the view that in some cases countries export for the reason
that the world market can support only a limited number of firms.
A. Heckscher-Ohlin theory
B. Smith's theory
C. Ricardo's theory
D. New trade theory
New trade theory stresses that in some cases countries specialize in the production and
export of particular products not because of underlying differences in factor endowments, but
because in certain industries the world market can support only a limited number of firms.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
46.
Country A exports electronic goods from Country B although there are no underlying
differences in factor endowments between the two countries. Which of the following theories
explains this anomaly?
A. Comparative advantage theory
B. New trade theory
C. Ricardo's theory
D. Smith's theory
New trade theory stresses that in some cases countries specialize in the production and
export of particular products not because of underlying differences in factor endowments, but
because in certain industries the world market can support only a limited number of firms.
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
47.
Which of the following observations is consistent with Michael Porter's theory of national
competitive advantage?
A. Factors such as domestic demand and domestic rivalry determine nations' dominance on
production.
B. Countries should produce only those goods for which they have a comparative advantage.
C. Interplay between the factors of production cause international marketing decisions.
D. International differences in labor productivity determine nations' supremacy in production.
Michael Porter's theory of national competitive advantage attempts to explain why particular
nations achieve international success in particular industries. In addition to factor
endowments, Porter points out the importance of country factors such as domestic demand
and domestic rivalry in explaining a nation's dominance in the production and export of
particular products.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
48.
Which of the following is a theory that can be used to justify limited government intervention to
support the development of certain export-oriented industries?
A. Comparative advantage theory
B. Ricardo's theory
C. New trade theory
D. Heckscher-Ohlin theory
Both the new trade theory and Porter's theory of national competitive advantage can be
interpreted as justifying some limited government intervention to support the development of
certain export-oriented industries.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
49.
Which of the following is the main principle of mercantilism?
A. Protection of domestic industries is not essential for a nation's welfare.
B. Government intervention is not required in global trade.
C. Countries should encourage absolute free trade.
D. It is in a country's best interests to maintain a trade surplus.
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. By doing so, a country would accumulate gold and
silver and, consequently, increase its national wealth, prestige, and power.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
50.
Which of the following is a major flaw associated with mercantilism?
A. Mercantilists do not support government intervention in trade.
B. Mercantilists view trade as a zero-sum game.
C. Mercantilists recommend policies to maximize imports.
D. Mercantilists recommend countries to maintain a negative trade balance.
The flaw with mercantilism was that it viewed trade as a zero-sum game. A zero-sum game is
one in which a gain by one country results in a loss by another.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
51.
A country has an absolute advantage in the production of a product when it _____.
A. has the capability to produce the product within its boundaries
B. is more efficient than any other country in producing it
C. has the largest domestic demand for the product
D. has access to the raw materials needed to produce the product
A country has an absolute advantage in the production of a product when it is more efficient
than any other country in producing it.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Absolute Advantage
52.
According to Adam Smith, A country should specialize in the production of a good when it has
_____.
A. an absolute advantage in the production of the good
B. a strong domestic demand for the good
C. the ability to help country increase its national output
D. the necessary raw materials for production
According to 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Absolute Advantage
53.
Country A can produce product X, but it can also buy it at a cheap rate from Country B. Which
of the following courses of action is suitable in this situation according to Adam Smith's theory
of absolute advantage?
A. Country A should import product X from country B and it should not attempt to produce it at
home.
B. Country A should partly import the product and produce it domestically.
C. Country A should produce more of product X and should attempt to obtain an absolute
advantage for the product.
D. Country A should subsidize the production of product X to obtain an absolute advantage
over country B.
Smith's basic argument is that a country should never produce goods at home that it can buy
at a lower cost from other countries.
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Absolute Advantage
54.
According to Ricardo's theory of comparative advantage, a country should produce goods
_____.
A. for which it has access to raw materials
B. that it produces most efficiently
C. that have the highest domestic demand
D. for which it has an absolute advantage
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 buy the
goods that it produces less efficiently from other countries, even if this means buying goods
from other countries that it could produce more efficiently itself.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
55.
Which of the following is a statement that supports the theory of comparative advantage?
A. International trade is a zero-sum gain where one nation's gain is another's loss.
B. Domestic industries are at risk when a country engages in free trade.
C. A country should maintain trade surplus to succeed in global trade.
D. Global production is greater with free trade than it is with restricted trade.
The basic message of the theory of comparative advantage is that potential world production
is greater with unrestricted free trade than it is with restricted trade.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
56.
The theory of comparative advantage provides strong rationale for supporting the idea of
_____.
A. business nationalism
B. free trade
C. protectionism
D. governmental intervention in trade
The theory of comparative advantage suggests that trade is a positive-sum game in which all
countries that participate realize economic gains. As such, this theory provides a strong
rationale for encouraging free trade.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
57.
Diminishing returns to specialization occurs when _____.
A. each additional unit is produced with lesser number of laborers
B. a nation's gross domestic product declines for a few years
C. production possibility frontier appears as a rectangle
D. more units of resources are required to produce each additional unit
Diminishing returns to specialization occurs when more units of resources are required to
produce each additional unit.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
58.
Which of the following is a major limitation of the simple Ricardian model of comparative
advantage?
A. The model ignores the principle of diminishing marginal returns.
B. The model recommends excessive governmental intervention in trade.
C. The outcome of the model suggested by Ricardo is a zero-sum game.
D. The model is against the idea of engaging in free trade with nations.
Diminishing returns show that it is not feasible for a country to specialize to a great extent.
Ricardian model ignores this principle of diminishing returns.
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
59.
What will happen, according to Paul Samuelson's critique, if a rich country enters into a free
trade agreement with a poor country?
A. Both the countries will incur losses due to the exchanges between them.
B. The productivity of the poor country will decline rapidly.
C. The poor country will rapidly improve its productivity.
D. Both the countries will garner benefits from the exchanges between them.
Paul Samuelson's critique argues that when a rich country enters into a free trade agreement
with a poor country, there will be a dynamic gain in the efficiency with which resources are
used in the poor country. The poor country's productivity will improve rapidly.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
60.
Which of the following arguments supports the Paul Samuelson's critique?
A. A rich country cannot produce net gains by engaging in free trade with a poor country.
B. Governmental intervention will reduce the likeliness of countries' economic success.
C. Countries should attempt to specialize in the production of goods and services.
D. Trade is a positive-sum game in which all countries that participate realize economic gains.
Paul Samuelson's critique argues that when a rich country enters into a free trade agreement
with a poor country, only the poor country benefits from the relationship.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
61.
Which of the following terms refers to the extent to which a country is gifted with such
resources as land, labor, and capital?
A. Current accounts
B. Factor endowments
C. National balance
D. National accounts
Factor endowments refer to the extent to which a country is endowed with such resources as
land, labor, and capital.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
62.
Identify the theory that predicts that countries will export those goods that make intensive use
of factors that are locally abundant.
A. Theory of comparative advantage
B. Ricardo theory
C. New trade theory
D. Heckscher-Ohlin theory
The Heckscher-Ohlin theory 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
63.
Which of the following is the reason why most economists prefer Heckscher-Ohlin theory to
Ricardo's theory?
A. Heckscher-Ohlin stresses on the differences in productivity between nations.
B. Ricardo's theory considers factor endowments to describe national competitiveness.
C. Heckscher-Ohlin theory makes fewer simplifying assumptions.
D. Ricardo's theory considers the law of marginal returns.
Most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because it makes
fewer simplifying assumptions.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
64.
Which of the following statements is true of the Leontief Paradox?
A. It shows an anomaly that occurs when a nation has high domestic demand for a product.
B. It explains the relationship between domestic demand and comparative advantage.
C. It disproved Ricardo's theory of comparative advantage.
D. It raised questions about the validity of the Heckscher-Ohlin theory.
Leontief Paradox raised questions about the validity of the Heckscher-Ohlin theory.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
65.
Identify the theory that argues that advanced nations have an incentive to develop a new
offering and hence such nations always tend to create a good or service for the first time.
A. Absolute advantage
B. Ricardo
C. Product life-cycle
D. Heckscher-Ohlin
The theory argues that the wealth of such advanced countries as the United States gives them
an incentive to develop new consumer goods. Such nations always develop new products.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
66.
Country X, a poor country, invents a revolutionary electronic product. The country markets this
new product in other poor countries to garner large profits. This occurrence is against the idea
of _____.
A. product life-cycle theory
B. Ricardo's theory
C. theory of absolute advantage
D. theory of comparative advantage
The theory argues that the wealth of such advanced countries as the United States gives them
an incentive to develop new consumer goods. The theory also argues that new products are
always introduced in developed nations.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
67.
Which of the following is a major disadvantage of the product life-cycle theory introduced by
Vernon?
A. The theory's arguments seem ethnocentric and increasingly dated.
B. The theory failed to explain the dominance of developed nations.
C. The theory applies only when a poor nation invents a new product.
D. The theory cannot be used to explain the production of luxury products.
Vernon's argument that most new products are developed and introduced in the United States
seems ethnocentric and increasingly dated.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
68.
Which of the following terms refers to the unit cost reductions associated with large sized
outputs?
A. Absolute advantage of production
B. Economies of scale
C. Constant marginal returns
D. Diminishing marginal returns
Economies of scale are unit cost reductions associated with a large scale of output.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: New Trade Theory
69.
Wal-Mart makes bulk purchases from its vendors and hence it is able to get better deals than
its competitors. This allows Wal-Mart to offer greater discounts to its customers. In this case,
Wal-Mart benefits from _____.
A. first mover advantage
B. constant marginal returns
C. economies of scale
D. absolute advantage of production
Economies of scale are unit cost reductions associated with a large scale of output. Here,
Wal-Mart is benefiting from the economies of scale.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: New Trade Theory
70.
Company A entered the production of office software before its competitors. Because of this,
the company's products are more familiar among and favored by customers. This situation
exemplifies the _____.
A. first mover advantage
B. diminishing marginal returns
C. economies of scale
D. constant marginal returns
First mover advantages are the economic and strategic advantages that accrue to early
entrants into an industry.
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: New Trade Theory
71.
Which of the following theories suggests that first mover advantage is significant in the export
of a good?
A. Product life-cycle theory
B. Ricardo's theory
C. New trade theory
D. Theory of comparative advantage
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 firms among the first to produce that good.
Because they are able to gain economies of scale, the first movers in an industry may get a
lock on the world market that discourages subsequent entry.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: New Trade Theory
72.
Which of the following theories stress the role of luck, entrepreneurship, and innovation in the
production and export of a good or service by the firms in a country?
A. Product life-cycle theory
B. Ricardo's theory
C. Theory of comparative advantage
D. New trade theory
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 firms among the first to produce that good.
New trade theorists stress the role of luck, entrepreneurship, and innovation in giving a firm
first mover advantages.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 Explain the arguments of those who maintain that government can play a proactive role in promoting national competitive
advantage in certain industries.
Topic: New Trade Theory
73.
Which of the following is one of the four attributes present in Porter's diamond?
A. Economies of scale
B. Factor endowments
C. Structural innovation
D. Procedural innovation
Porter theorizes four broad attributes of a nation shape the environment in which local firms
compete. These four factors are factor endowments, demand conditions, relating and
supporting industries, and firm strategy, structure, and rivalry.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: National Competitive Advantage: Porter's Diamond
74.
Which of the following is an example of a basic factor that a nation will possess as proposed
by Porter?
A. Communication infrastructure
B. Skilled labor
C. Natural resources
D. Technological knowledge
Such factors as natural resources, climate, location, and demographics are basic factors.
Factors such as communication infrastructure, sophisticated and skilled labor, research
facilities, and technological know-how are examples of and advanced factors.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: National Competitive Advantage: Porter's Diamond
75.
Which of the following factors, according to Porter's national Diamond, is most likely to give a
country competitive advantage over another country?
A. Natural resources
B. Climate
C. Skilled labor
D. Demographics
Factors such as communication infrastructure, sophisticated and skilled labor, research
facilities, and technological know-how are examples of and advanced factors. Porter argues
that advanced factors are the most significant for competitive advantage.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: National Competitive Advantage: Porter's Diamond
76.
Porter argues that a nation's firms gain competitive advantage if _____.
A. their domestic consumers lack technical awareness
B. they function in a labor intensive market
C. the country has abundant supply of unskilled workers
D. their domestic consumers are demanding
Porter argues that a nation's firms gain competitive advantage if their domestic consumers are
sophisticated and demanding.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: National Competitive Advantage: Porter's Diamond
77.
Textile industry in a nation is characterized by vigorous domestic rivalry. Which of the following
observations of this nation's international competency is most likely to be true?
A. The nation will have access to such basic factors of textile industry as natural resources.
B. The nation's textile firms will have a competitive advantage in international trade.
C. The domestic customers of the textile firms will be less demanding.
D. The nation's textile industry will lack the advanced factors that are necessary to be
internationally competent.
Porter's second point is that there is a strong association between vigorous domestic rivalry
and the creation and persistence of competitive advantage in an industry. Vigorous domestic
rivalry induces firms to look for ways to improve efficiency, which makes them better
international competitors.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: National Competitive Advantage: Porter's Diamond
78.
A country's balance-of-payments accounts keep track of the _____.
A. basic factor endowments and advanced factor endowments that the nation possesses
B. payments to and receipts from other countries for a particular time period
C. income taxes paid by domestic firms and the spending on the firms
D. total value of taxes paid by domestic firms and the spending on the firms
A country's balance-of-payments accounts keep track of the payments to and receipts from
other countries for a particular time period.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: International Trade and the Balance of Payments
79.
Which of the following balance-of-payment accounts records one-time changes in the stock of
assets?
A. Capital account
B. Current account
C. Financial account
D. Monetary account
The capital account records one-time changes in the stock of assets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Balance-of-Payments Accounts
80.
Which of the following accounts records transactions that involve the purchase or sale of
assets?
A. Capital account
B. Current account
C. Principal account
D. Financial account
The financial account (formerly the capital account) records transactions that involve the
purchase or sale of assets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Balance-of-Payments Accounts
Essay Questions
81.
Explain the concept of free trade.
Free trade refers to a situation where 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. Smith, who proposed free trade, argued that the invisible hand of the
market mechanism, rather than government policy, should determine what a country imports
and what it exports.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
82.
How does the Heckscher-Ohlin theory explain international trade?
The Heckscher-Ohlin theory emphasizes the interplay between the proportions in which the
factors of production (such as land, labor, and capital) are available in different countries and
the proportions in which they are needed for producing particular goods. This explanation
rests on the assumption that countries have varying endowments of the various factors of
production.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
83.
Explain how the theories of trade differ in terms of their support to governmental intervention.
The theories of Smith, Ricardo, and Heckscher-Ohlin form part of the case for unrestricted free
trade. The argument for unrestricted free trade is that both import controls and export
incentives (such as subsidies) are self-defeating and result in wasted resources. Both the new
trade theory and Porter's theory of national competitive advantage can be interpreted as
justifying some limited government intervention to support the development of certain exportoriented industries.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
84.
What is the main principle of mercantilism?
The main tenet of mercantilism is that it is in a country's best interests to maintain a trade
surplus, to export more than it imported. By doing so, a country would accumulate gold and
silver and, consequently, increase its national wealth, prestige, and power.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
85.
Identify a major flaw associated with mercantilism.
The flaw with mercantilism was that it viewed trade as a zero-sum game. A zero-sum game is
one in which a gain by one country results in a loss by another.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
86.
Explain Smith's theory of absolute advantage.
A country has an absolute advantage in the production of a product when it is more efficient
than any other country in producing it.
According to 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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Absolute Advantage
87.
Explain Ricardo's theory of comparative advantage.
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 buy the
goods that it produces less efficiently from other countries, even if this means buying goods
from other countries that it could produce more efficiently itself.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
88.
What are the assumptions that we make when we discuss a simple Ricardian model to
support free trade?
1. We have assumed a simple world in which there are only two countries and two goods.
2. We have assumed away transportation costs between countries.
3. We have assumed away differences in the prices of resources in different countries.
4. We have assumed that resources can move freely from the production of one good to
another within a country.
5. We have assumed constant returns to scale.
6. We have assumed that each country has a fixed stock of resources and that free trade does
not change the efficiency with which a country uses its resources.
7. We have assumed away the effects of trade on income distribution within a country.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
89.
Briefly differentiate between constant returns to specialization and diminishing returns to
specialization.
By constant returns to specialization we mean the units of resources required to produce a
good (cocoa or rice) are assumed to remain constant no matter where one is on a country's
production possibility frontier (PPF). Diminishing returns to specialization occurs when more
units of resources are required to produce each additional unit.
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
90.
Explain how the principle of diminishing returns weakens the Ricardian model.
Diminishing returns show that it is not feasible for a country to specialize to the degree
suggested by the simple Ricardian model outlined earlier. Diminishing returns to specialization
suggest that the gains from specialization are likely to be exhausted before specialization is
complete.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
91.
Explain the dynamic gains that are generated by opening an economy to trade.
First, free trade might increase a country's stock of resources as increased supplies of labor
and capital from abroad become available for use within the country.
Second, free trade might also increase the efficiency with which a country uses its resources.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
92.
Explain the Paul Samuelson's critique.
Paul Samuelson's critique looks at what happens when a rich country enters into a free trade
agreement with a poor country that rapidly improves its productivity after the introduction of a
free trade regime. Samuelson's model suggests that in such cases, the lower prices that the
rich country's consumers pay for goods imported from the poor country following the
introduction of a free trade regime may not be enough to produce a net gain for the rich
country's economy if the dynamic effect of free trade is to lower real wage rates in the rich
country.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
93.
What are factor endowments?
Factor endowments refer to the extent to which a country is endowed with such resources as
land, labor, and capital. Nations have varying factor endowments, and different factor
endowments explain differences in factor costs.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
94.
Briefly explain Vernon's product life-cycle theory.
Vernon's theory was based on the observation that for most of the twentieth century a very
large proportion of the world's new products had been developed by U.S. firms and sold first in
the U.S. market. To explain this, Vernon argued that the wealth and size of the U.S. market
gave U.S. firms a strong incentive to develop new consumer products.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
95.
Identify a major disadvantage of the product life-cycle theory.
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.
This is a major disadvantage of the product life-cycle theory.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
96.
What are the sources of economies of scale?
Economies of scale are unit cost reductions associated with a large scale of output.
Economies of scale have a number of sources, including the ability to spread fixed costs over
a large volume, and the ability of large-volume producers to utilize specialized employees and
equipment that are more productive than less specialized employees and equipment.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: New Trade Theory
97.
What are first-mover advantages?
First-mover advantages are the economic and strategic advantages that accrue to early
entrants into an industry. The ability to capture scale economies ahead of later entrants, and
thus benefit from a lower cost structure, is an important first-mover advantage.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: New Trade Theory
98.
Do you think a new trade theorist would stress the role of luck and entrepreneurship? Explain.
Perhaps the most contentious implication of the new trade theory is the argument that it
generates for government intervention and strategic trade policy. New trade theorists stress
the role of luck, entrepreneurship, and innovation in giving firm first-mover advantages.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-04 Explain the arguments of those who maintain that government can play a proactive role in promoting national competitive
advantage in certain industries.
Topic: New Trade Theory
99.
What are the four attributes that are discussed in Porter's diamond?
The four factors are:
(1) Factor endowments — a nation's position in factors of production such as skilled labor or
the infrastructure necessary to compete in a given industry.
(2) Demand conditions — the nature of home demand for the industry's product or service.
(3) Relating and supporting industries — the presence or absence of supplier industries and
related industries that are internationally competitive.
(4) Firm strategy, structure, and rivalry — the conditions governing how companies are
created, organized, and managed and the nature of domestic rivalry.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: National Competitive Advantage: Porter's Diamond
100.
Explain how the rivalry within an industry affects international competence.
Porter's second point is that there is a strong association between vigorous domestic rivalry
and the creation and persistence of competitive advantage in an industry. Vigorous domestic
rivalry induces firms to look for ways to improve efficiency, which makes them better
international competitors. Domestic rivalry creates pressures to innovate, to improve quality, to
reduce costs, and to invest in upgrading advanced factors. All this helps to create world-class
competitors.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: National Competitive Advantage: Porter's Diamond