International Business Ch. 6: International Trade Theory

What is the theory that states that countries will export goods that make intensive use of factor endowments 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

Mercantilism promoted the idea that trade was a zero-sum game which means that _____.

a gain by one country results in a loss by another

A country has an absolute advantage when it is able to produce

a greater quantity of a product than its competitors, using the same amount of resources

The theory of ______ proposed by Adam Smith was the first to attack the tenet of mercantilism that trade is a zero-sum game.

absolute

Porter argues that ______ factors are the most significant when determining competitive advantage for a country.

advanced

Adam Smith and David Ricardo pointed out limitations in mercantilism when they advocated that trade was a positive-sum game which means that _____.

all countries benefit

What are the types of factors of production identified by Porter?

basic and advanced

What are the two basic factors of production as labeled by Porter?

climate and natural resources

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

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

New trade theory implies that the first mover's ability to benefit from increasing returns ______ for other firms.

creates a barrier to entry

Porter states that firms are typically most sensitive to the needs of their closest customers. He called this _____ conditions.

demand

Even though it was extra work for the company to implement, Johan was happy that consumers had asked for a better grade of plastic for the toys his company produced. In this instance, the competitive advantage of Johan's company is being affected by _____.

demand conditions

When considering how rivalry affects competitive advantage, Porter would say that vigorous ____________ rivalry is beneficial and creates pressure to innovate and achieve competitive advantage

domestic

Which three factors did Michael Porter point to in his explanation of why some nations achieve international success in particular industries?

domestic rivalry, factor endowments and domestic demand

The cost reductions that comes from increased output of a product are known as

economies of scale

When considering free trade opportunities in Mexico, with access to cheap labor and diverse plant life, it makes sense for Mexico to _____ agricultural goods.

export

Which of the four attributes identified by Porter would be evident in a country that has the necessary infrastructure to compete in a given industry?

factor endowments

Which two of these attributes did Porter believe are MOST significant for competitive advantage?

factor endowments and demand conditions

The Heckscher-Ohlin theory of international trade focuses on ______ when explaining what a country chooses to export.

factors of production

True or false: Porter would agree that there is a weak association between vigorous domestic rivalry and the creation of competitive advantage.

false

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

According to new trade theory, the dominance of the United States in the commercial jet aircraft industry is related to ____________ mover advantages

first

Carl's company was able to gain economic advantage over all of its competition when it premiered the digital camera into South America before them. This is an example of a _____.

first-mover advantage

A country that does not implement quotas on imported products and does not limit what its citizens can produce and sell to another country is practicing _____.

free trade

_____________ is the opposite of economic isolationism

free trade

According to mercantilism, _____ were the mainstays of national wealth and were essential to business activity.

gold and silver

The most contentious implication behind new trade theory is the argument that it generates for ______.

government intervention

A new trade theorist would say that a company should rely on what three factors to gain first-mover advantages? (Check all that apply.)

innovation, luck and entrepreneurship

According to Adam Smith, a country has an absolute advantage in the production of a product when it _____.

is more efficient than any other country at producing it

When trying to understand 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

A new trade theorist would say that a company should rely on what three factors to gain first-mover advantages?

luck, entrepreneurship and innovation

______ is a theory of trade which advocates that a country should export more than it imports which would result in the accumulation of gold and silver and increased national wealth and power.

mercantilism

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 reflects which theory of international trade?

new trade

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

new trade

A country which has related and supporting industries that spill over into other industries can have a _____ on that country's competitive advantage.

positive effect

According to Porter, when _____ industries invest in advanced factors of production, it can help an industry achieve a global competitive advantage.

related and supporting

What are two examples of advanced factors of production as identified by Porter?

skilled labor and research facilities

Free trade has the benefit of ______, which allows a country to manufacture and export in locations where they have a comparative advantage.

specialization

What are three sources of economies of scale?

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

According to David Ricardo's theory of comparative advantage, a country should focus on _____.

the production of goods it produces most efficiently

What two predictions of new trade theory are supported by studies?

trade increases the variety of products available and trade increases the specialization of production within an industry

True or false: New trade theory is very useful in explaining trade patterns.

true

True or false: Successful industries within a country tend to group into clusters of related industries.

true

True or false: Under the theory of absolute advantage, a country should never produce goods at home that it could buy at a lower cost from other countries.

true

Porter would agree that there is a strong association between _____ and the creation of competitive advantage in an industry.

vigorous domestic rivalry