International Trade Theory
1. Countries such as the U.S should not participate in free trade because it leads to a migration of jobs overseas and ultimately leads to lower living standards.
2. 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 is known as free trade.
3. According to the theories of Smith, Ricardo and Heckscher-Ohlin, if a country can produce a product itself it should not import that product.
4. The theories of Smith, Ricardo and Heckscher-Ohlin tell us that a country's economy may gain if its citizens buy certain products from other nations that could be produced at home.
5. The Heckscher-Ohlin theory emphasizes the interplay between the proportions in which the factors of production are available in different countries and the proportions in which they are need for producing particular goods.
6. The Heckscher-Ohlin theory has proven to be a powerful explanation of world trade patterns.
7. 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 only support a limited number of firms.
8. Ricardo noted 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.
9. The theory of absolute advantage was the first theory of international trade.
10. According to the theory of comparative advantage, it is in a country's best interest to maintain a trade surplus and to export more than it imports.
11. When a gain by one country results in a loss by another, there is a zero-sum game.
12. Smith's theory of international trade suggests that when one country has an absolute advantage in the production of all goods, the country might not derive any benefit from international trade.
13. According to Ricardo, there may be cases when it makes sense for a country to buy goods from another country that it can make more efficiently itself.
14. While popular in its time, Ricardo's theory is no longer a major intellectual weapon for those who argue for free trade.
15. Ricardo's theory of comparative advantage provides a strong rationale for encouraging free trade.
16. The theory of comparative advantage suggests that trade is a positive-sum game in which all countries that participate realize economic gains.
17. Political opposition to the adoption of a free trade regime typically comes from those whose jobs are most at risk.
18. Because of diminishing returns, it is not feasible for a country to specialize to the degree suggested by the simple Ricardian model.
19. In general, economic studies suggest that countries that adopt a more open stance toward international trade enjoy higher growth rates than those who keep their economies closed to trade.
20. The Heckscher-Ohlin theory argues that free trade is not beneficial to most nations.
21. The Heckscher-Ohlin theory gains predictive power once the impact of differences of technology on productivity is controlled for.
22. Ray Vernon suggested the wealth and size of the U.S. market gave U.S. firms a strong incentive to develop new consumer products.
23. A central point in Vernon's product life cycle was that demand for new products tends to be solely based on price factors.
24. Historically, the product life cycle theory seems to be an accurate explanation of international trade patterns.
25. Because a growing number of new products are now introduced simultaneously in the U.S, Japan and the advanced European nations, Vernon's product life cycle is limited in explaining world trade patterns.
26. Economies of scale are unit cost reductions associated with a large scale of output.
27. Trade is mutually beneficial, according to new trade theory, because it allows for the specialization of production, the realization of scale economies and the production of a greater variety of products at lower prices.
28. New trade theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology.
29. New trade theory and the Heckscher-Ohlin theory are in complete agreement with regard to world trade patterns.
30. According to Porter, four broad attributes of a nation shape the environment in which local firms compete include. These are supply conditions, factor endowments, regulation and advanced factors.
31. Porter argues that favorable demand conditions will result in competitive advantage unless the state of rivalry is sufficient to cause firms to respond to them.
32. Factor endowments lie at the center of the Heckscher–Ohlin theory.
33. According to Porter, the characteristics of home demand are particularly important in shaping the attributes of domestically made products and in creating pressures for innovation and quality.
34. Porter suggests that different nations are characterized by different management ideologies, which either help them or do not help them to build national competitive advantage.
35. Porter's diamond of competitive advantage has proven to be a powerful predictor of world trade patterns.
36. From a profit perspective, it makes sense for a firm to disperse its productive activities to those countries where, according to the theory of international trade, they can be performed most efficiently.
37. Assembly of electronic components is a relatively labor-intensive process requiring only low-skilled labor and cost pressures are intense. As a result, final assembly may be carried out in a country such as the United States.
38. 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.
39. 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.
40. Porter's theory of national competitive advantage suggests that it is in the best interest of business for a firm to invest in upgrading advanced factors of production.
Multiple Choice Questions
41. Propagated in the 16th and 17th centuries, _____ advocated that countries should simultaneously encourage exports and discourage imports.
A. Ethnocentrism
B. Capitalism
C. Collectivism
D. Mercantilism
42. According to _____, maintaining a laissez-faire stance toward trade is to the best interests of a country.
A. The mercantilist philosophy
B. Adam Smith
C. Milton Friedman
D. John Stuart Mill
43. Free trade
A. Formed the basis for the mercantilist philosophy
B. Is in direct contrast to the notion of the invisible hand as advocated by Smith
C. Refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country
D. Rejects the laissez-faire stance toward trade and maintains that it is not in the best interests of a country
44. This theory, proposed in 1776, was the first to explain why unrestricted free trade is beneficial to a country.
A. Mercantilism
B. Heckscher-Ohlin
C. Comparative advantage
D. Absolute advantage
45. Which of the following scholars argued that the "invisible hand" of the market mechanism, rather than government policy, should determine what a country imports and what it exports?
A. Milton Friedman
B. John Stuart Mill
C. Carl Marx
D. Adam Smith
46. This theory, advanced by the 19th-century English economist David Ricardo, forms the intellectual basis of the modern argument for unrestricted free trade.
A. Heckscher-Ohlin
B. Mercantilism
C. Comparative advantage
D. Absolute advantage
47. All of the following theories show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself, except
A. Mercantilism.
B. Heckscher-Ohlin
C. Comparative advantage
D. Absolute advantage
48. _____ suggests that international differences in labor productivity are key to understanding patterns of international trade.
A. Mercantilism
B. Vernon
C. Michael Porter
D. David Ricardo
49. This theory explains the observed patterns of international trade by emphasizing 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. Mercantilism
B. Absolute advantage
C. Heckscher-Ohlin
D. Comparative advantage
50. Which of the following is an assumption of the Heckscher-Ohlin theory?
A. Countries have varying endowments of the various factors of production
B. Gold and silver were the mainstays of national wealth and essential to vigorous commerce
C. It is in a country's best interests to maintain a trade surplus
D. Trade is a zero-sum game
51. The product life cycle theory was developed by
A. Adam Smith
B. David Ricardo
C. Raymond Vernon
D. Eli Heckscher
52. Identify the incorrect statement pertaining to Raymond Vernon's product life-cycle theory.
A. Early in their life cycle, most new products are produced in and exported from the country in which they were developed
B. As a new product becomes widely accepted internationally production starts in other countries
C. A product in the early stage of the product life cycle is imported by the country where it was innovated
D. A product may ultimately be exported back to the country of its original innovation
53. Which 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?
A. Balanced trade
B. Heckscher-Olin
C. New trade
D. Product life cycle
54. The theory of _____, developed by Michael Porter, focuses on the importance of country factors, in addition to factor endowments, such as domestic demand and domestic rivalry in explaining a nation's dominance in the production and export of particular products.
A. New trade
B. Absolute advantage
C. Comparative advantage
D. National competitive advantage
55. The theory of _____ makes a crude case for government involvement in promoting exports and limiting imports.
A. Mercantilism
B. Free trade
C. Absolute advantage
D. Comparative advantage
56. Identify the theory that can be interpreted as justifying some limited government intervention to support the development of certain export-oriented industries.
A. Theory of national competitive advantage
B. Heckscher-Ohlin theory
C. Theory of comparative advantage
D. Theory of absolute advantage
57. According to the _____, U.S is a major player in the commercial jet aircraft industry because U.S firms were first movers in the world market.
A. Product life cycle theory
B. Theory of mercantilism
C. New trade theory
D. Theory of absolute advantage
58. The main tenet of mercantilism was that it was in a country's best interest to maintain a trade
A. Balance
B. Embargo
C. Surplus
D. Deficit
59. Under mercantilism, countries strived to maintain
A. High exports and low imports
B. Low exports and high imports
C. An inflow of gold and high imports
D. An outflow of gold, high exports
60. When a government limits imports via tariffs and quotas and subsidizes exports in order to maximize exports and minimize imports, the country is following
A. A mercantilist philosophy
B. The theory of absolute advantage
C. The theory of comparative advantage
D. The Heckscher-Ohlin theory
61. Mercantilism viewed trade as
A. A zero-sum game
B. An economic evil
C. A non essential economic activity
D. A threat to a government's independence
62. China, deliberately keeping its currency value low against the U.S. dollar in order to sell more goods to the United States and thus amass a trade surplus and foreign exchange reserves is viewed by critics as following a
A. Zero-sum game
B. Neo-mercantilist policy
C. Positive-sum game
D. Free trade policy
63. According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then
A. Retain these goods for strictly domestic sales
B. Trade these goods for the goods produced by other countries
C. Sell these goods to the highest domestic or international bidder
D. Prohibit the import of these goods from other countries
64. According to Adam Smith, if a country is more efficient than any other country in producing a particular product, the country has a(n) ______ in the production of the product.
A. Absolute advantage
B. Comparative advantage
C. Relative advantage
D. Proportional advantage
65. The different combinations of two goods that an economy could efficiently produce with limited productive resources can be referred to as a country's
A. Economic output
B. Efficiency graph
C. Productivity curve
D. Production possibility frontier
66. Trade produces net gains for all involved and hence is a
A. Zero-sum game
B. Balance of trade game
C. Positive-sum game
D. Equilibrium-gain game
67. According to the theory of _____, it makes sense for a country to specialize in producing the goods it produces most efficiently and buy the products it produces less efficiently from other countries, even if it could produce the good more efficiently itself.
A. Strategic trade
B. Pertinent advantage
C. Comparative advantage
D. Absolute advantage
68. What is the basic message of the theory of comparative advantage?
A. Countries are similar in their ability to produce goods efficiently
B. International trade is rarely beneficial to a country
C. Potential world production is greater with unrestricted free trade than it is with restricted trade
D. Trade is a zero-sum game
69. A basic tenet of Ricardo's theory is that
A. Consumers in those countries with an absolute advantage in the production of all goods might derive no benefits from international trade
B. Consumers in all nations can consume more if there are no restrictions on trade
C. Restrictions on trade help consumers in countries that lack an absolute advantage in the production of a particular good
D. Trade is a zero-sum game
70. The comparative advantage model of trade assumed that a country's stock of resource and the efficiency with which it utilizes those resources
A. Remains the same over time
B. Increases over time
C. Decreases with time
D. Follows a bell-shaped curve