MGT 302 Ch. 6

New trade theorists argue that getting a first-mover advantage is not a significant determinant of international trade.

False. New trade theorists stress the role of luck, entrepreneurship, and innovation in giving firm first-mover advantages.

Which of the following argues that when a rich country enters into a free trade agreement with a poor country the poor country benefits more that the rich country?

Paul Samuelson critique. Paul Samuelson's critique argues that when a rich country enters into a free trade agreement with a poor country, there will be a dynamic gain in the efficiency with which resources are used in the poor country. The poor country's productivity will improve rapidly and there will not be any net gain for the rich country.

Which of the following argues that it is in a country's best interests to maintain a trade surplus?

Principle of mercantilism. The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus, to export more than it imported. By doing so, a country would accumulate gold and silver and, consequently, increase its national wealth, prestige, and power.

A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

True. A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

Theories of international trade claim that promoting free trade is generally in the best interests of a country, although it may not always be in the best interest of an individual firm.

True. Because of their pivotal role in international trade, businesses can exert a strong influence on government trade policy, lobbying to promote free trade or trade restrictions. The theories of international trade claim that promoting free trade is generally in the best interests of a country, although it may not always been in the best interest of an individual firm. Many firms recognize this and lobby for open markets.

In industries where economies of scale are important, both the variety of goods that a country can produce and the scale of production are limited by the size of the market.

True. In industries where economies of scale are important, both the variety of goods that a country can produce and the scale of production are limited by the size of the market.

Free trade refers to a situation where _____.

a government does not try to influence what its citizens can buy from global markets. Free trade refers to 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.

Porter argues that a nation's firms should

adopt policies that promote strong competition within domestic markets. According to Porter, businesses should urge government to increase investment in education, infrastructure, and basic research (since all these enhance advanced factors) and to adopt policies that promote strong competition within domestic markets (since this makes firms stronger international competitors, according to Porter's findings).

If Porter's theory is correct, we would expect his model to predict the pattern of international trade that we observe in the real world. For example,

countries should be exporting products from those industries where all four components of the diamond are favorable. If Porter is correct, we would expect his model to predict the pattern of international trade that we observe in the real world. Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable.

Factor endowments refer to the

extent to which a country is gifted with such resources as land, labor, and capital. Factor endowments refer to the extent to which a country is endowed with such resources as land, labor, and capital.

The _____ theory argues that such advanced nations as the United States have an incentive to develop consumer products and hence such nations tend to produce newer products.

product life-cycle. The product life-cycle theory argues that the wealth of such advanced countries as the United States gives them an incentive to develop new consumer goods. Such nations always develop new products.

Which of the following theories proposes that a country should specialize in producing those goods for which it has an absolute advantage?

Adam Smith's theory. According to Adam Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries.

What are first-mover advantages?

Economic and strategic advantages that accrue to early entrants into an industry. A second theme in new trade theory is that the pattern of trade we observe in the world economy may be the result of economies of scale and first-mover advantages. First-mover advantages are the economic and strategic advantages that accrue to early entrants into an industry.

What is the term for unit cost reductions associated with a large amount of output?

Economies of scale. The new trade theory began to emerge in the 1970s when a number of economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade. Economies of scale are unit cost reductions associated with a large scale of output.

The new trade theory stresses that countries should have favorable factor endowments to excel in the production of a good.

False. 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 support only a limited number of firms.

Which of the following theories explains global trade in terms of the international differences in labor productivity?

Ricardo's theory of comparative advantage. David Ricardo's theory of comparative advantage offers an explanation in terms of international differences in labor productivity.

Which of the following is an example of an advanced factor that a nation will possess as proposed by Porter?

Skilled labor. Such factors as natural resources, climate, location, and demographics are basic factors. Factors such as communication infrastructure, sophisticated and skilled labor, research facilities, and technological know-how are examples of and advanced factors.

Paul Samuelson's critique looks at what happens when a rich country enters into a free trade agreement with a poor country.

True. Paul Samuelson's critique looks at what happens when a rich country enters into a free trade agreement with a poor country.

Underlying most trade theories is the notion that different countries have particular advantages in different productive activities.

True. Underlying most of the theories we have discussed is the notion that different countries have particular advantages in different productive activities.

Constant returns to specialization occurs when

units of resources remain stable for any number of goods produced. Constant returns to specialization mean that the units of resources required to produce a good (cocoa or rice) are assumed to remain constant no matter where one is on a country's production possibility frontier.