International Business - Chapter 6
What concept negates the idea that a country can specialize to the degree suggested by the Ricardian model?
Diminishing returns
The trade theories associated with Smith and Ricardo advocate for _____ free trade.
unrestricted
The proponents of mercantilism see trade as a ______ -sum game.
zero
Government can detract or improve a country's advantage by choice of policies.
True
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
Free trade _____ the efficient use of resources within a country.
might increase
The ______ theory predicts that mature industries tend to shift production out of advanced nations and into low-cost assembly locations.
product life-cycle
What are the types of factors of production identified by Porter?
Basic and advanced
Besides the four broad attributes of a nation that shape the environment in which local firms compete, what two additional variables did Porter discuss that can influence the national diamond? (Check all that apply.)
Chance events Government
The Autor study noted in the text provides evidence of support of Samuelson's thesis. Which country did the study use to analyze its manufacturing exposure within the United States?
China
True or false: New trade theory is very useful in explaining trade patterns.
True
What was the basic premise of mercantilism?
countries should encourage exports and discourage imports
According to new trade theory, the first mover's ability to benefit from increasing returns ______ for other firms.
creates a barrier to entry
Based on new trade theory, as the size of markets increases, companies may be able to attain better ______.
economies of scale
When applying reasoning for why Japan exports automobiles or why Switzerland exports watches, David Ricardo's theory of comparative advantage bases the explanation in terms of differences in
labor productivity.
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
It has been argued that Donald Trump favors _____ views because he wants the country to export products but does not favor importing products.
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
Samuelson is concerned that advances in communications technology will result in the
offshoring of service jobs.
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
The primary problem with mercantilism is that its supporters claimed that trade should
show a gain by one country that results in a loss by another.
Free trade can result in dynamic gains that ______ economic growth.
stimulate
Which two factors does Porter label as basic factors of production? (Check all that apply.)
Climate Natural resources
Heckscher and Ohlin identified differences in national factor endowments as the root of ______.
Comparative advantage
The Middle East has an abundance of oil reserves; therefore, exporting oil supports the ______ theory which is based on creating an advantage based on factor endowments.
Heckscher-Ohlin
A new trade theorist would say that a company should rely on which three things to gain first-mover advantages? (Check all that apply.)
Innovation Luck Entrepreneurship
______ 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
What aspect of free trade does Samuelson see as a potential negative influence on international trade?
Offshoring of service jobs such as call centers
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
Choose three advanced factors that Porter believes are MOST significant for competitive advantage. (Check all that apply.)
Research facilities Skilled labor Technological know-how
Which theory is said to predict trade patterns more accurately?
Ricardo
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
US
Economist David Hume argued that an inherent inconsistency with mercantilism is that in the long run no country could sustain
a surplus on the balance of trade.
The theory of ______ advantage was the first to attack the tenet of mercantilism which implied that trade is a zero-sum game.
absolute
To gain competitive advantage, it is important to encourage companies to invest in ___ factors of production. (Choose between advanced or basic.)
advanced
Porter's study identified components of the German textile and apparel sector: cotton, wool, synthetic fibers, sewing machine needles, textile machinery. These were all successful industries in a single country that grouped into related industries. This grouping is an example of a(n)
cluster
Porter states that a company can gain ______ advantage if their home customers are demanding and knowledgeable.
competitive
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
Since the global market can only support one producer of superjumbo aircraft, Airbus had the benefit of a(n) _____.
first-mover advantage
Preempting demand, gaining volume cost advantages, building the brand, and establishing a long-term competitive advantage are associated with
first-mover advantages.
Porter developed ______ broad attributes of a nation that shape the environment in which local firms compete.
four
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
Porter's theory stresses the advantages of businesses working with ______ to promote strong competition within domestic markets.
government
The most contentious implication behind new trade theory is the argument that it generates for ______ intervention.
government
If a country has an open economy and embraces free trade, citizens, on average, will benefit from ______ income levels and living standards.
higher
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.
A country is said to have an absolute advantage in the production of an item when the country
is more efficient than any other country at producing the item.
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
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
What did Porter call the concept where firms are typically most sensitive to the needs of their closest customers?
Demand conditions
Choose the four national attributes that Porter theorizes shape the environment that local firms compete in.
Demand conditions Factor endowments Firm strategy, structure & rivalry Related & supporting industries
Which of the following are two examples of basic factors of production as identified by Porter? (Check all that apply.)
Demographics Location
According to the Samuelson critique, middle class wages in the United States will be _____ as the result of the offshoring of service jobs and rapid advances in foreign labor productivity.
Diminished
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.
True or False: According to Adam Smith, a country should produce all goods at home that it can, even if it could buy those goods at a lower cost from other countries.
False
True or false: Most economists prefer the Ricardian model when discussing trade even though it is a relatively poor predictor of real--world international trade.
False
True or false: Porter's theory of national competitive advantage stresses a decreased commitment by companies to research and development.
False
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 is the theory that states that countries will export goods that make intensive use of the factors that are abundant in the economy?
Heckscher-Ohlin
What theory argues that free trade is beneficial, but that differences in factor endowments, not productivity, determine the pattern of international trade?
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
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
______ theory states that, because of economies of scale, trade can increase the variety of goods available and decrease the average cost of these goods.
New trade
Which theory implies that the global market may only be able to support a limited number of firms in industries when the output required to attain economies of scale represents a significant amount of total world demand?
New trade theory
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.
The Leontief paradox would be used to explain which of these situations?
The US exports goods that require skilled labor and imports heavy manufacturing products that require large amounts of capital.
What three predictions of new trade theory regarding trade patterns are supported by studies? (Check all that apply.)
Trade increases the variety of products available. Trade leads to lower average costs. Trade increases the specialization of production within an industry.
True or false: Successful industries within a country tend to group into clusters of related industries.
True
True or false: The US has an abundance of arable land and has long been an exporter of agricultural products. This is a good application of the Heckscher-Ohlin theory.
True
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
According to Adam Smith's theory of absolute advantage, who benefits from engaging in trade?
both countries engaging in a trade process
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
Ricardo's theory of comparative advantage assumes ______ returns to scale.
constant
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
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
According to product life-cycle theory, as products mature, ______ considerations become far more important in the competitive process.
cost
In the study by MIT economist David Autor noted in the text, it was found that regions of the United States with greater exposure to competition from Chinese manufacturers saw _____ employment.
declining
A production possibilities frontier shows ___returns to specialization when more units of resources are required to produce each additional unit. (Choose diminishing or increasing.)
diminishing
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
The reductions in the cost of a single unit that result from large scale output of that product are called
economies of scale.
Companies will try to ___ governments to influence trade policy, such as promoting free trade or trade restrictions. (Choose between encourage or discourage.)
encourage
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
The Heckscher-Ohlin theory of international trade focuses on ______ when explaining what a country chooses to export.
factors of production
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
The development of the superjumbo jet by Airbus, which basically shuts out other producers of this type of aircraft, demonstrates the idea of a(n) ______ based on scale economies because the global market can probably only support one producer of superjumbo aircraft.
first-mover advantage
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
______ 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
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.
If a country decides to focus production on wheat because it has an absolute advantage in this crop and it trades with another country that has an absolute advantage in its corn crop, then the level of production of these crops for both countries is likely to
increase
When a country decides to specialize in the production of one item, it is most likely to ____ the level of production of that item. (Choose increase or decrease.)
increase
One explanation for the Leontief paradox is that the US has an advantage and exports goods produced with
innovative technologies.
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
The factor that impacts all the theories of trade because companies should produce where it is most efficient is
location
The final conclusion of the product life-cycle theory is that ultimately a product
may be exported back to the country where it was originally invented.
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
A basic message of Ricardo's theory of comparative advantage is that: (Check the two that apply.)
potential world production is greater with unrestricted free trade than it is with restricted trade. 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.
The ______ shows the combination of goods and/or services that can be produced by a country based on available resources.
production possibilities frontier
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
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
What are three sources of economies of scale?
the ability of large-volume producers to use more effective, specialized employees spreading fixed costs over a larger volume the ability of large-volume producers to use more specialized equipment
According to the product life cycle theory, when a product is in the early stages of its life cycle, it is most likely to be produced and exported from
the country where it was developed.
The main criticism of mercantilism was that
the goal of a constant positive balance of trade is impossible.
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 efficiently
A criticism of Ricardo's theory of comparative advantage is that it is a simple model that includes many
unrealistic assumptions.
