Chapter 6 International Business

Which of the following is consistent with the central beliefs of mercantilism? A. A country's government should intervene to achieve a surplus in the balance of trade. B. A large volume of trade is essential regardless of whether it comes from imports or exports. C. Trade is a positive-sum game in which all countries benefit from trading with each other. D. A country that has an absolute advantage in the production of all goods derives no benefits from international trade. E. Potential world production is greater with unrestricted free trade than it is with restricted trade.

A. A country's government should intervene to achieve a surplus in the balance of trade.

Which of the following terms best represents a situation in which 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? A. Free trade B. Positive-sum game C. Socialism D. Absolute advantage E. Zero-sum game

A. Free trade

Which of the following is a drawback of the product life-cycle theory? A. Its relevance in the modern world seems limited. B. It makes many simplifying assumptions. C. It fails to explain the pattern of international trade during the period of American global dominance. D. It fails to explain what happens when a product's market in the United States and other advanced nations matures. E. It fails to account for diminishing returns.

A. Its relevance in the modern world seems limited.

Salcia is a country that depends heavily on domestic products. The Salcian government decides on the products that can be imported and ensures that any product that can be produced at home is not imported. A major part of Salcia's trade is concentrated on exporting agricultural produce and textiles. Which of the following influences Salcia's approach to international trade? A. Mercantilism B. Leontief's paradox C. Product life-cycle theory D. New trade theory E. Neo-Ricardian trade theory

A. Mercantilism

Most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because: A. it makes fewer simplifying assumptions. B. it predicts real-world international trade patterns with greater accuracy. C. it suggests that nations may benefit from trade even when they do not differ in resource endowments or technology. D. ricardo's theory is too complicated to be applied to real-world scenarios. E. it states that economies of scale have important implications for international trade.

A. it makes fewer simplifying assumptions.

In his 1776 landmark book The Wealth of Nations, Adam Smith attacked _____ by criticizing its assumption that trade is a zero-sum game. A. mercantalism B. capitalism C. the new trade theory D. the product life-cycle theory E. the theory of factor endowments

A. mercantalism

The flaw with mercantilism was that it viewed trade as a: A. zero-sum game. B. mutually beneficial activity. C. positive-sum game. D. threat to a nation's sovereignty. E. threat to a nation's economy.

A. zero-sum game.

Which of the following is a result of certain products having small national markets, in the absence of trade? A. The variety of products available to consumers increases. B. Limited demand for such products leads to non realization of economies of scale. C. Each nation will specialize in producing a narrower range of products than it would in the presence of trade. D. At low volumes of production, unit costs and prices would be lowered. E. The first movers in an industry may get a lock on the world market that discourages subsequent entry.

B. Limited demand for such products leads to non realization of economies of scale.

Which of the following is most likely to be a possible explanation for the Leontief paradox observed in the case of the United States? A. U.S. imports goods that heavily use skilled labor and innovative entrepreneurship. B. U.S. has a special advantage in producing new products made with innovative technologies. C. U.S. exports heavy manufacturing products that use large amounts of capital. D. U.S. has a strong absolute advantage over other nations because of its advantageous factor endowments. E. U.S. imports goods that make intensive use of factors that are locally abundant.

B. U.S. has a special advantage in producing new products made with innovative technologies.

Neo-mercantilists equate political power with economic power and economic power with _____. A. corruption B. a balance-of-trade surplus C. regional dominance D. a trade monopoly E. capitalism

B. a balance-of-trade surplus

According to the product life-cycle theory, the high cost of U.S. labor gave U.S. firms an incentive to: A. lower costs of services to offset a fall in demand. B. develop cost-saving process innovations. C. invite foreign direct investment in domestic industries. D. embrace and promote open market capitalism. E. import new consumer products and export agricultural products.

B. develop cost-saving process innovations.

Dynamic gains in both the stock of a country's resources and the efficiency with which resources are utilized will: A. cause the country's production possibility frontier to assume a bell-shaped curve. B. enable the country to produce more goods than it did before the introduction of free trade. C. cause the country's production possibility frontier to shift inward. D. enable the country to achieve constant returns to specialization. E. diminish static gains that stagnate economic growth.

B. enable the country to produce more goods than it did before the introduction of free trade.

Considered to be the first theory of international trade, the principal assertion of mercantilism is that: A. countries differ in their ability to produce goods efficiently. B. gold and silver are the mainstays of a country's wealth and essential to vigorous commerce. C. countries should specialize in the production of goods for which they have an absolute advantage. D. differences in labor productivity between nations underlie the notion of comparative advantage. E. resources can move freely from the production of one good to another within a nation.

B. gold and silver are the mainstays of a country's wealth and essential to vigorous commerce.

Diminishing returns to specialization occurs when: A. resources can move freely from the production of one good to another within a country. B. more units of resources are required to produce each additional unit. C. the cost of producing goods reduces substantially with increase in number of goods produced. D. the quality of resources comes down as a result of producing more goods. E. the pain caused by the movement toward a free trade regime is a long-term phenomenon.

B. more units of resources are required to produce each additional unit.

The new trade theory states that: A. the locus of global production initially switches from the United States to other advanced nations. B. world trade in certain products may be dominated by countries whose firms were first movers in their production. C. differences in technology may lead to differences in productivity, which in turn, drives international trade patterns. D. differences in labor productivity between nations underlie the notion of comparative advantage. E. a rich country might actually be worse off by switching to a free trade regime with a poor nation.

B. world trade in certain products may be dominated by countries whose firms were first movers in their production.

What is a zero-sum game? A. A situation in which the market mechanism determines what a country imports and what it exports. B. A situation in which a country engages in international trade even for products it is able to produce for itself. C. A situation in which a gain by one country results in a loss by another. D. A situation in which limits on imports are often in the interests of domestic producers, but not domestic consumers. E. A situation in which one country has an absolute advantage in the production of all goods.

C. A situation in which a gain by one country results in a loss by another.

_____ means 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. A. Zero-sum game B. Positive-sum game C. Constant returns to specialization D. Diminishing returns E. Economies of scale

C. Constant returns to specialization

According to the new trade theory, which of the following is most likely to be a result of market expansion due to trade? A. A wide variety of products is produced at greater unit costs than in the absence of trade. B. As the variety of products increases, demand for individual products decreases, leading to non-realization of economies of scale. C. Each nation may specialize in producing a narrower range of products, importing goods that it does not make. D. The ability to capture first-mover advantages is restricted in a world that allows trade. E. When countries do not differ in their resource endowments or technology, trade does not offer mutual benefits.

C. Each nation may specialize in producing a narrower range of products, importing goods that it does not make.

_____ are unit cost reductions associated with a large scale of output. A. Comparative advantages B. Factor endowments C. Economies of scale D. Diminishing returns E. Absolute advantages

C. Economies of scale

Which of the following factors is taken into consideration by David Ricardo's theory of comparative advantage in order to explain the pattern of international trade? A. Absolute advantage of a country with reference to natural resources B. The proportions in which the factors of production are available C. International differences in labor productivity D. Specialization in the production of particular products E. The ability of firms to capture first mover advantages

C. International differences in labor productivity

_____ suggests that trade is a positive-sum game in which all participating countries fetch economic gains. A. The Heckscher-Ohlin theory B. Mercantilism C. The theory of comparative advantage D. Leontief's paradox E. The Samuelson critique

C. The theory of comparative advantage

According to the new trade theory, how does trade offer an opportunity for mutual gain when countries do not differ in their resource endowments or technology? A. Trade results in a contraction of the size of the markets of individual firms. B. Trade allows for production of products at higher prices. C. Trade increases the variety of goods available to consumers and lowers the costs of those goods. D. Trade allows countries to attain self-sufficiency in the production of all goods. E. Trade guarantees first-mover advantages to all the countries that engage in trade.

C. Trade increases the variety of goods available to consumers and lowers the costs of those goods.

According to the new trade theory: A. the ability to capture first-mover advantages is restricted in a world that allows trade. B. differences in labor productivity between nations underlie the notion of comparative advantage. C. a country may predominate in the export of a good because it has firms that were among the first to produce that good. D. to ensure economic progress, countries should implement several trade barriers. E. different goods use resources in different proportions and this leads to constant returns to specialization.

C. a country may predominate in the export of a good because it has firms that were among the first to produce that good.

It more realistic to assume diminishing returns to specialization when applying the theory of comparative advantage to a simplified model with two nations because: A. there exist differences in the prices of resources in different countries. B. resources can move freely from the production of one good to another within a country. C. all resources are not of the same quality. D. different goods use resources in the same proportions. E. trade does not affect the income distribution within a country.

C. all resources are not of the same quality.

According to the new trade theory, trade, through its impact on economies of scale, is most likely to: A. reduce the volume of the goods produced. B. decrease the variety of goods available to consumers. C. decrease the average costs of goods. D. inhibit first-mover advantages in all industries. E. only benefit nations that differ in resource endowments or technology.

C. decrease the average costs of goods.

According to the Heckscher-Ohlin theory, the pattern of international trade is determined by differences in _____. A. labor productivity B. diminishing returns C. factor endowments D. management practices E. trade barriers

C. factor endowments

An inconsistency in the mercantilist doctrine, as pointed out by David Hume, is that: A. the volume of a country's imports increase as an indirect consequence of mercantilism. B. the exclusion of government influence in matters pertaining to trade is not ideal. C. in the long run, no country could sustain a surplus on the balance of trade. D. it was not backed by either sound political principles or social ideologies. E. trade is a zero-sum game rather than a positive-sum game as postulated by the theory.

C. in the long run, no country could sustain a surplus on the balance of trade.

The _____ theory began to emerge when economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade. A. comparative advantage B. Heckscher-Ohlin C. new trade D. product life-cycle E. absolute advantage

C. new trade

Which of the following is a correct inference from Adam Smith's theory of absolute advantage? A. There is no virtue in a large volume of trade. Rather, policies should be implemented to maximize exports and minimize imports. B. It is in a country's best interests to maintain a trade surplus, to export more than it imports. C. Trade is a zero-sum game in which a gain by one country results in a loss by another. D. A country that has an absolute advantage in the production of all goods might derive no benefits from international trade. E. Trade is a positive-sum game in which all countries that participate realize economic gains.

D. A country that has an absolute advantage in the production of all goods might derive no benefits from international trade.

Which of the following is a reason for diminishing rather than constant returns to specialization? A. All resources are of the same quality. B. Resources can shift from the production of one good to another seamlessly. C. Each country has a fixed stock of resources. D. Different goods use different resources in different proportions. E. Trade does not affect the distribution of income within a country.

D. Different goods use different resources in different proportions.

_____ advocated that countries should simultaneously encourage exports and discourage imports. A. Ethnocentrism B. Capitalism C. Collectivism D. Mercantilism E. Socialism

D. Mercantilism

According to Adam Smith and David Ricardo, trade is _____. A. a zero-sum game B. a threat to a nation's sovereignty C. a threat to a nation's economy D. a positive-sum game E. harmful for all developed nations

D. a positive-sum game

A country is said to have a(n) _____ in the production of a product when it is more efficient than any other country in producing that product. A. comparative advantage B. relative advantage C. differential advantage D. absolute advantage E. conditional advantage

D. absolute advantage

The argument for unrestricted free trade is that both import controls and export incentives: A. help firms build a competitive advantage that is subsequently difficult to challenge. B. help firms to capture first-mover advantages. C. imply that a laissez-faire stance toward trade is in the best interests of a country. D. are self-defeating and result in wasted resources. E. are not in line with principles of mercantilism.

D. are self-defeating and result in wasted resources.

The difference between Ricardo's theory and the Heckscher-Ohlin theory is that the Heckscher-Ohlin theory: A. makes more simplifying assumptions. B. cannot be subjected to empirical tests. C. actually predicts trade patterns with greater accuracy. D. argues that the pattern of international trade is determined by differences in national factor endowments. E. suggests that trade is a positive-sum game in which all countries that participate realize economic gains.

D. argues that the pattern of international trade is determined by differences in national factor endowments.

One of the rebuttals to Samuelson's critique of the free trade model is that: A. the United States' ability to achieve constant returns to specialization is unparalleled. B. the strict immigration policies of the United States help insulate the economy from inward migration. C. introducing trade barriers may in fact be beneficial to developed nations to some extent. D. developing nations are unlikely to upgrade the skill level of their workforce rapidly enough. E. the developing nations are unlikely to run into diminishing returns in a near future.

D. developing nations are unlikely to upgrade the skill level of their workforce rapidly enough.

Nations have varying factor endowments, and different factor endowments explain differences in _____. A. labor productivity B. the returns obtained from the factors C. diminishing returns D. factor costs E. trade barriers

D. factor costs

New trade theory argues that, through its impact on economies of scale, trade can: A. increase the average costs of goods. B. enable the global market to support a wide range of enterprises. C. negatively affect the first-mover advantage for all products. D. increase the variety of goods available to consumers. E. prevent diminishing of returns and promote constant returns to specialization.

D. increase the variety of goods available to consumers.

One of the drawbacks of the Heckscher-Ohlin theory is that: A. it does not explain the differences in national factor endowments. B. it argues that comparative advantage arises from differences in the countries' labor productivity. C. it lacks commonsense appeal. D. it is a relatively poor predictor of real-world international trade patterns. E. it cannot be subjected to many empirical tests.

D. it is a relatively poor predictor of real-world international trade patterns.

Which of the following is in a country's best interests according to the main tenet of mercantilism? A. Importing products from developing rather than developed countries B. Importing products even if they are efficiently produced at home C. Importing less specialized goods rather than attempting to make them at home D. Minimizing exports and maximizing imports E. Maintaining a trade surplus

E. Maintaining a trade surplus

Sentoria is an island nation in the Pacific ocean. It's geographical location is advantageous since it has access to a variety of aquatic life forms and also a number of fresh water sources that provide for fisheries. The lack of arable land drives local demand for seafood. The competition in the domestic fishing industry is fierce and enables Sentoria to be one of the major exporters of seafood. Which of the following theories of international trade best explains Sentoria's dominance as an exporter of seafood? A. New trade theory B. Product life-cycle theory C. Mercantilism D. Heckscher-Ohlin theory E. Theory of national competitive advantage

E. Theory of national competitive advantage