IntB Chapter 6 International Trade Theory

Ricardo's theory of comparative advantage assumes ______ returns to scale.

constant

A criticism of Ricardo's theory of comparative advantage is that it is a simple model that includes many

unrealistic assumptions.

The trade theories associated with Smith and Ricardo advocate for _____ free trade.

unrestricted

True or false: First mover advantages are especially important in industries where the global market can profitably support only a limited number of firms.

True

Based on the theories of Smith, Ricardo, and Heckscher-Ohlin, in a country with access to cheap labor, productive land, and diverse plant life, it makes sense to _____ agricultural goods.

export

Porter developed ______ broad attributes of a nation that shape the environment in which local firms compete.

four

Samuelson is concerned that advances in communications technology will result in the

offshoring of service jobs.

Which two factors does Porter label as basic factors of production? (Check all that apply.)

Climate Natural resources

What did Porter call the concept where firms are typically most sensitive to the needs of their closest customers?

Demand conditions

Which type of returns to specialization happen when additional units of resources are required to produce each additional unit?

Diminishing

What concept negates the idea that a country can specialize to the degree suggested by the Ricardian model?

Diminishing returns

Which of the following statements regarding openness of an economy and growth is TRUE?

Economies that are open to trade grow at a faster rate economically than those that are closed.

______ is reflected in a nation in which the government does not attempt to influence what its citizens can buy from another country by applying import duties or what citizens can produce and sell to another country.

Free trade

What is the likely result for the gains from specialization according to the concept of diminishing returns?

Gains are likely to be exhausted before specialization is complete.

New trade theory, which states that countries may have an advantage in exporting because of first-mover advantages, is different from which theory that says countries have export advantages because of factor endowments?

Heckscher-Ohlin

What assumption does the Ricardian model of comparative advantage make in terms of converting resources?

It assumes that all resources can easily shift from one thing to another.

Which theory does NOT support unrestricted free trade between countries?

Mercantilism

Choose three advanced factors that Porter believes are MOST significant for competitive advantage. (Check all that apply.)

Technology know-how Research facilities Skilled labor

The theory of ______ advantage was the first to attack the tenet of mercantilism which implied that trade is a zero-sum game.

absolute

A company _____ benefit from related industries that are internationally competitive and can spill over into the company.

can

Economic studies have suggested that according to the theory of ______ advantage, countries will experience higher growth rates if they follow a more open stance toward international growth.

comparative

Ricardo's theory of _____ advantage states that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and then purchase 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.

comparative

Heckscher and Ohlin identified differences in national factor endowments as the root of ______.

comparative advantage

Porter states that a company can gain ______ advantage if their home customers are demanding and knowledgeable.

competitive

According to new trade theory, first movers in an industry can gain a scale-based _____ advantage that later entrants find almost impossible to match.

cost

Based on new trade theory, as the size of markets increases, companies may be able to attain better ______.

economies of scale

The reductions in the cost of a single unit that result from large scale output of that product are called

economies of scale.

In Porter's model of the determinants of national competitive advantage, he noted many US firms were led by people with ______ backgrounds, likely leading to US firms' lack of attention to improving manufacturing process and product design.

finance

Ricardo's theory encourages ______ because it suggests that trade is a positive-sum game where all participating countries realize economic gains.

free trade

Porter states that ______ can influence each of the four components of the diamond through subsidies, education policies and policies towards capital markets.

government

To shift a country's production possibility frontier outward, it is necessary to (Check the two that apply.)

increase the efficiency with which resources are used. increase the stock of the country's resources

The factor that impacts all the theories of trade because companies should produce where it is most efficient is

location

Free trade _____ the efficient use of resources within a country.

might increase

The ethnocentric view that most new products are developed and introduced in the US is a key weakness in the ______ theory.

product life-cycle

When discussing constant returns to specialization, it is realistic to assume that the units of resources required to produce one unit will _____ no matter where a country is on the production possibilities frontier.

remain the same

Reflecting the theories of Smith, Ricardo, and Heckscher-Ohlin, free trade permits ______, which allows a country to manufacture and export in those areas where they have a comparative advantage.

specialization

According to the theory of international trade, it makes sense for a company to disperse its production to those countries where

they can be performed most efficientlyf

In the real world, it costs money to move products from one country to another, but Ricardo's model does not address these ______ costs.

transportation

Which form of returns to specialization means that the units of resources required to produce one unit are assumed to remain the same no matter where a country is on the production possibilities frontier?

Constant

Choose the four national attributes that Porter theorizes shape the environment that local firms compete in.

Factor endowments Firm strategy, structure & rivalry Related & supporting industries Demand conditions

______ raised questions about the Heckscher-Ohlin theory.

Leontief

According to the Heckscher-Ohlin theory, it is expected that the US would export capital-intensive goods and import labor-intensive goods, but the opposite was found to be true. This became known as the

Leontief paradox.

______ is the first theory of trade that advocated that a country should export more than it imports and should accumulate gold and silver to make up the difference and maintain a trade surplus.

Mercantilism

Which theory states that for products where economies of scale are significant and that control a substantial amount of world demand, the first movers in an industry can gain a scale-based cost advantage NOT available to late entrants?

New trade

Which trade theory has these implications: (1) nations may benefit from trade even when they do not differ in resource endowments or technology; and (2) specialization allows for scale economies and lower production costs?

New trade

What are two reasons diminishing returns to specialization occur? (Check both responses.)

Not all resources are of the same quality. Different goods use resources in different proportions.

Which theory was based on the observation that early in the development of a commodity, all the parts and labor come from the area in which it was invented?

Product life-cycle

True or false: The benefits from free trade are not evenly distributed throughout an economy.

True

What two simultaneous outcomes are implied by new trade theory?

a nation can increase the variety of goods available to consumers a nation can lower the cost of the goods being offered to consumers

When a country is more efficient at producing a product than any other country, the country has a(n) ______ advantage in the production of that product.

absolute

In order to gain competitive advantage, it would be more important to encourage a company to invest in factors of production. (advanced or basic?)

advanced

According to new trade theory, the first mover's ability to benefit from increasing returns ______ for other firms.

creates a barrier to entry

Country A wants to produce more rice. Unfortunately, it will have to farm less productive land to produce this rice. This fact represents the idea of ______ returns to specialization.

diminishing

It takes 12 units of resources to produce 100 pounds of silk. It takes 13 units to produce 115 pounds of silk and 15 units to produce120 pounds of silk. This is an example of ______ returns to specialization.

diminishing

According to Michael Porter, there is a strong correlation between _____ and the creation and persistence of competitive advantage in an industry.

domestic rivalry

Porter argues that achieving international success in a certain industry is a function of factor endowments, domestic demand conditions, related and supported industries, and ______.

domestic rivalry

A basic message of Ricardo's theory of comparative advantage is that: (Check the two that apply.)

even if countries lack an absolute advantage in the production of any good, consumers can still consume more if there are no restrictions on trade. potential world production is greater with unrestricted free trade than it is with restricted trade.

Portugal can produce wine and cloth with less labor than England. But, given all factors of production, England can produce cloth relatively better than Portugal. According to Ricardo's theory of comparative advantage, it make sense for England to

export cloth and import wine from Portugal.

According to Heckscher and Ohlin, each country has certain ______, such as land, labor, and capital.

factor endowments

According to new trade theory, the dominance of the United States in the commercial jet aircraft industry is related to - mover advantages. (Choose first or late.)

first

Preempting demand, gaining volume cost advantages, building the brand, and establishing a long-term competitive advantage are associated with

first-mover advantages.

Manatee Mfg. is able to source parts for its refrigeration products from anywhere in the world because the United States does not place any quotas or limitations on the imports they need. This is a reflection of a _____ policy.

free trade

If a country has an open economy and embraces free trade, citizens, on average, will benefit from ______ income levels and living standards.

higher

New trade theory states that some countries specialize in the production and export of a particular product because

in certain industries the world can only support a limited number of firms.

Generally, an open economy can a country's stock of resources. (Choose increase or decrease.)

increase

A company decides to outsource all product designs to Singapore because it has been found to have the most efficient design companies. In this situation, the ______ implication for international business is being considered.

location

To achieve the highest efficiencies, a US company decides to manufacture its products in Thailand, but does all final assembly of the products in China. The company is focusing on the ______ implication for international business.

location

Wealthy country A enters into a free trade agreement with poor country B. Country B improves its productivity. Country A pays lower prices for goods imported from poor country B. However, Samuelson expresses concern that these lower prices may not offset possible ______ in wealthy country A.

lower real wage rates

When a government intervenes to achieve a surplus in the nation's balance of trade, this action is consistent with the main tenet of ______.

mercantilism

Because of economies of scale, some countries specialize in manufacturing a particular product (such as cars) for which the global market can only support a limited number of firms. This is a reflection of _____.

new trade theory

Sachs and Warner found a strong correlation between a(n) ______ response to trade and economic growth.

open

While not as relevant today, the trade theory that was useful in explaining the pattern of trade when the US dominated the global market is the ______ theory.

product life-cycle

Which aspect of Porter's Diamond is best evidenced by the US semiconductor industry providing the basis for US success in the production of personal computers?

related and supporting industries

What are three sources of economies of scale?

spreading fixed costs over a larger volume the ability of large-volume producers to use more effective, specialized employees the ability of large-volume producers to use more specialized equipment

Free trade can result in dynamic gains that ______ economic growth.

stimulate

Raymond Vernon's product life-cycle theory was based on the observation that for most of the 1900s the majority of the world's new products were developed in

the United States.