chapter 3 international trade theory

1.Mercantilism advocated that countries should simultaneously encourage exports and discourage imports.

A) True

B) False

2.Adam Smith and David Ricardo were able to demonstrate that international trade is fundamentally a zero-sum game.

A) True

B) False

3.Research has shown that countries that adopt an open economy and embrace free trade will enjoy higher economic growth rates.

A) True

B) False

4.When a government does not attempt to influence through trade barriers what its citizens can buy from another country, or what they can sell to another country, the government is promoting:

A) free trade.

B) capitalism.

C) mercantilism.

D) ethnocentrism.

5.Although import controls may benefit _____________, the theories of Smith, Ricardo and Hecksher-Ohlin suggest that the economy as a whole is hurt by such actions.

A) exporters

B) importers

C) producers or manufacturers

D) consumers

6.In Adam Smith's theory of absolute advantage, he argues that __________________.

A) a country should never produce goods at home that it can buy at a lower cost from other countries

B) import controls should be used to maintain an absolute advantage in domestic production

C) the first mover advantage is the most important and therefore absolute

D) a government should discourage imports and encourage exports

7.In the theories of absolute and comparative advantage, trade ________________.

A) should only be conducted among developed nations until developing nations can build their infrastructure

B) produces net gains for all involved

C) should be closely regulated by the national government to ensure the security of the nation and the strategic advantages the country has developed

D) is seen as less important than developing domestic industries

8.The theory of comparative advantage:

A) holds that it may make sense to purchase goods from another country even if your country can efficiently produce it.

B) repudiated Adam Smith's theory of absolute advantage.

C) holds that in some cases it is better to restrict trade to gain a comparative advantage.

D) is no longer relevant in today's world because of the impact of the Internet.

9.Hecksher and Ohlin examined ______ in their theory of why nations trade.

A) differences in labor productivity

B) differences in national factor endowments

C) differences in production levels

D) differences in trade barriers

10.The product life-cycle theory:

A) continues to maintain its vitality into the 21st Century as new products are developed in the US.

B) seems ethnocentric as it assumes innovations and new products come from the US.

C) has never been able to explain international trade patterns despite its intuitive appeal.

D) is useful in marketing, but has no particular relevance to international trade theory.

11.The _________ suggests that trade is mutually beneficial because it allows for the specialization of production, the realization of scale economies, the production of a greater variety of products, and lower prices.

A) product life cycle theory

B) new trade theory

C) theory of competitive advantage

D) theory of comparative advantage

12.Porter argues that:

A) the diamond is a mutually reinforcing system.

B) government should not play a role in a nation's competitiveness.

C) chance has little bearing on the success of a firm.

D) factor endowments should be treated as a constant.

13.Which of the following is NOT an important implication for international business of international trade theory?

A) It makes sense for a firm to disperse its productive activities to countries where they can be performed most efficiently.

B) It makes sense for the individual firm to invest substantial resources to build a first mover or early mover advantage.

C) Businesses can exert a strong influence on government trade policy so it is important to understand the theories of international trade.

D) Because of the many debates on international trade theory, it is generally wiser for a

company to ignore international trade theory and focus on its own strategies and tactics.

14.A firm can preempt available demand, gain cost advantages related to volume, build an enduring brand ahead of competitors and establish a long-term, sustainable competitive advantage by establishing a(n)_____________________.

A) absolute advantage

B) comparative advantage

C) first mover advantage

D) factor endowment advantage

15. Suppose that shoes can be produced with two hours of labor input in Italy and three hours of labor input in the United States, and that shirts can be produced with four hours of labor in both countries, then it is correct to say that,

A) Italy has a comparative advantage in the production of shirts.

B) Italy has an absolute advantage in the production of shirts.

C) the U.S. has a comparative advantage in the production of shirts.

D) the U.S. has an absolute advantage in the production of shirts.

16. The Heckscher-Ohlin theorem sates that a country will have a(n) ________________ advantage in the production of a good which uses its relatively ___________________________.

A) absolute, scare input intensively. B) absolute, abundant input intensively.

C) comparative, abundant input intensively. D) comparative, scarce input intensively.

17. The Recardian model of comparative advantage is based on all of the following assumptions except:

A) Labor is the only factor of production.

B)The good in question is heterogeneous.

C) Labor productivity does not change over time

D) Only two nations and two products.

18. Intra-industry trade takes place

A) because perfect competition is the prevalent form of market organization.

B) because products are homogeneous.

C) in order to take advantage of economies of scale.

D) all of the above.

19. The Leontief paradox refers to the empirical finding that U.S.

A) exports are more K-intensive than import substitutes.

B) imports substitutes are more K-intensive than exports.

C) exports more than imports.

D) imports more than exports.

20. Incomplete specialization may be caused by

A) Increasing opportunity cost

B) unrestricted trade

C) Constant opportunity cost

D) Decreasing opportunity cost