International business test bank chap 6 PDF

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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.

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.

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.

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.

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.

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.

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.

8.

Mercantilist doctrine advocates unrestricted free trade between countries. FALSE Mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade.

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.

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.

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.

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.

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.

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.

15.

Simple model of free trade assumed away transportation costs between countries. TRUE Simple model of free trade assumed away transportation costs between countries.

16.

Resources always move easily from one economic activity to another. FALSE Resources do not always move easily from one economic activity to another.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

28.

Ricardo's theory makes fewer simplifying assumptions compared to HeckscherOhlin theory. FALSE Most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because it makes fewer simplifying assumptions.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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. Protectionis m C. Free trade D. Offshorin g 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.

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.

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.

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.

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.

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.

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.

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.

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. 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 zerosum game is one in which a gain by one country results in a loss by another.

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.

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. 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.

54.