Chapter 5 - International Trade and Factor-Mobility Theory
According to the PLC theory, what is the most likely reason that companies manufacture products in locations with high labor rates during the introductory stage of a product's life cycle?
Many consumers are willing to pay high costs for the newest products.
(T/F) Under mercantilism, colonial powers sought to run trade surpluses with their colonies by preventing the colonies from manufacturing.
TRUE
(T/F) Understanding trade theories helps companies know if they will need to compete against goods and services produced abroad.
TRUE
Countries with large land areas are generally less dependent on trade than countries with small land areas because of
higher transportation costs related to foreign trade
Between now and 2050, countries undergoing a simultaneous population reduction and an increased percentage of retirees in the population most likely will need more
immigrants
Labor and capital mobility are intertwined because
immigrants bring an investment in human capital with them
Contrary to the product life cycle theory, there has been an increased tendency for companies to
introduce new products simultaneously in domestic and foreign markets
Which of the following assumptions was made in the original theories of absolute and comparative advantage?
labor resources are fully employed
Tests to substantiate the factor proportions theory have had mixed results most likely because ________.
labor skills and education are not homogeneous
According to the PLC theory, at an early stage of a product's life cycle the product is likely to be made in a more ________ method than in its later stages.
labor-intensive
Under mercantilism, governments sought to influence trade by
limiting imports and subsidizing exports
Costa Rica applied the concepts of the diamond of national advantage theory to help transform its economy by
looking globally to develop favorable conditions
Comparative advantage differs from absolute advantage in that the former ________, whereas the latter ________.
states that there is a basis of trade even if one country can produce everything more efficiently than another country; does not deal with this issue
The inability of a company to gain foreign production factors to use in its domestic operations most likely
stimulates the company to adopt efficient substitute methods of production
The premise that there will be more finely tuned specialization of production among countries is most likely based on the idea that companies will
take advantage of wage and skill differences among countries
Research shows that urbanization leads to higher productivity. Which of the following is the LEAST likely reason for this?
Urbanization establishes an inflow of immigrants who will work for less money.
As a leading exporter of luxury automobiles, Germany has built a strong reputation in engineering. Germany's trade most likely relies on
acquired advantage
One way that developed countries specialize in order to gain acquired advantages is by
allocating research efforts more heavily in specific sectors
Most world trade takes place
among developed countries
Which of the following is most likely a basis for a Jamaican natural advantage in international trade?
beautiful beaches and climate
According to the product life cycle theory, production and sales are primarily domestic in the introductory stage because
businesses need quick market feedback
According to the PLC theory, developing countries have their best production advantage in which stage of the product life cycle?
decline
Countries with varied climates and varied natural resources generally
depend less heavily on trade
Eight of the top 10 exporting and importing countries are countries with
developed economies
Which of the following undesirable results will most likely occur for a country running a favorable balance of trade?
granting credit that may be risky
El Salvador has a population density of about 620 people per square mile and neighboring Honduras a population density of about 115 people per square mile. According to the factor proportions theory of trade, one would expect El Salvador's exports to Honduras to
have a higher labor-to-land ratio than its imports from Honduras
All of the following factors most likely led to Costa Rica's attraction of high-tech FDI EXCEPT the country's
A) DEMAND FOR HIGH-TECH PRODUCTS B) literacy rate C) quality of life D) political stability
Which of the following statements is most likely FALSE?
A) Developing countries trade mainly with developed countries. B) Developed countries trade mainly with other developed countries. C) Cultural similarity among countries enhances their trade with each other. D) THE GREATER THE GEOGRAPHIC DISTANCE BETWEEN COUNTRIES THE GREATER THE TRADE
Which of the following is the LEAST likely result of outward migration?
A) Emigrants remit capital used to start businesses in their home countries. B) NATIONS RECEIVE MORE FOREIGN AID C) Nations lose highly educated and productive workers. D) Countries receive remittances from emigrants.
All the following are reasons for the lower international mobility of people than capital EXCEPT which one?
A) THE DIFFERENCES IN ECONOMIC RETURN BETWEEN COUNTRIES ARE LOWER FOR PEOPLE THAN FOR CAPITAL B) It is more expensive to move people than capital. C) People may have to learn another language and adapt to a different culture. D) International capital transfers have less cumbersome legal restrictions than international movements of people.
All of the following are reasons that foreign investment may stimulate exports from the home (donor) country EXCEPT which of the following?
A) The investor often sends home-country components to its facilities abroad. B) The investor often sends home-country equipment to its facilities abroad. C) HOME-COUNTRY AID USUALLY GOES WHERE THE INVESTMENTS ARE MADE D) The foreign facility is adept at selling the investors' home country products.
All of the following are examples of international labor mobility EXCEPT
A) a manager assigned by an MNE to work short-term abroad B) a refugee who takes up employment in another country C) A COLLEGE STUDENT ON A STUDY ABROAD PROGRAM D) an illegal immigrant working in another country
All of the following are features of the diamond of national advantage theory EXCEPT
A) firm strategy, structure, and rivalry B) STRATEGIC TRADE POLICY REGULATIONS C) related and supporting industries D) demand conditions
According to Adam Smith's theory of absolute advantage, specialization allows countries to increase their efficiency for each of the following reasons EXCEPT
A) labor could become more skilled by repeating the same tasks B) TRANSPORTATION COSTS COULD BE LOWERED BY PRODUCING CLOSER TO MARKETS C) labor would not lose time in switching from the production of one kind of product to another D) higher production would provide incentives for the development of more effective working methods
All of the following are types of products that are usually exceptions to what is predicted by the product life cycle theory EXCEPT
A) trendy clothing B) luxury items C) differentiated products D) CONSUMER DURABLES
Why is the United States both an exporter and importer of such products as vehicles and passenger aircraft?
Companies differentiate products to appeal to different consumers.
Which of the following is NOT a reason that international trade theory is useful for managers to understand?
Countries use laissez-faire policies to intervene in the free movement of international trade, thus affecting where companies can produce most efficiently.
Why should managers in international business understand international trade theories?
Countries' trade policies, based on trade theories, influence which products companies might export to given countries.
Country X brings in a large number of unskilled immigrants to meet its labor needs. Which of the following is the LEAST likely to occur in Country X as a result?
Country X will experience a significant transfer of knowledge and a resulting rise in start-up businesses.
Which of the following statements most likely undermines the arguments for a strategic trade policy?
Entrepreneurs, rather than governments, should take business risks.
(T/F) A strategic trade policy is one that develops industries to lessen dependence on foreign military goods.
FALSE
(T/F) According to the PLC theory of trade, most new products are produced in countries where wage rates are low.
FALSE
(T/F) According to theories of specialization in international trade, gains occur because specialized workers move to countries that can use their skills more effectively.
FALSE
(T/F) An objective of neomercantilism is to build up gold reserves.
FALSE
(T/F) Comparative advantage theory holds that gains from trade are the result of capital movements from countries with low interest rates to countries with higher interest rates.
FALSE
(T/F) Luxury products are the most likely types of products to behave according to the product life cycle theory of trade.
FALSE
(T/F) Most world trade takes place between raw material exporters and manufacturing exporters.
FALSE
(T/F) The factor proportions theory holds that countries should improve their competitiveness by importing capital and skilled employees from abroad.
FALSE
(T/F) The finite nature of natural resources should work as a disadvantage for the export prices of developing countries.
FALSE
(T/F) The free trade theories of specialization assume that countries will be better off even though some people are unemployed.
FALSE
(T/F) The international mobility of labor includes workers, students, tourists, and retirees who travel to another country.
FALSE
(T/F) The term brain drain describes the export of high-technology products in exchange for low-technology products.
FALSE
(T/F) The top 10 exporting countries are dominated by developing countries.
FALSE
(T/F) Trade occurs more between culturally dissimilar countries than between culturally similar countries
FALSE
(T/F) Under the theory of absolute advantage, countries hold two types of advantages—acquired advantages and technological advantages.
FALSE
Which of the following best supports a nation's decision to implement a strategic trade (industrial) policy?
Government actions should target industries that are believed to give the country its best export advantages.
(T/F) An exception to the PLC theory in terms of production location is often a product with very rapid change in innovation.
TRUE
(T/F) Companies and individuals transfer capital internationally primarily because of expectations of earning higher returns.
TRUE
(T/F) Countries enact trade policies based on trade theories, which, in turn, affect companies' optimum production locations.
TRUE
(T/F) Countries with large land areas are generally less dependent on trade than countries with small land areas.
TRUE
(T/F) Many products' location of production will shift internationally as the products go through their life cycle.
TRUE
(T/F) The combination of free trade and free movement of production factors offers maximum production efficiency.
TRUE
(T/F) The comparative advantage theory holds that a country will gain from trade even though it can produce all goods more efficiently than other countries.
TRUE
(T/F) The existence of the four favorable conditions of the diamond of national advantage does not guarantee that an industry will develop in a given locale.
TRUE
(T/F) The factor proportions theory holds that countries should concentrate production on those products that use their most abundant production factors.
TRUE
(T/F) The foreign-born population as a percentage of total population is substantial for some countries and insignificant for others.
TRUE
(T/F) The four favorable domestic conditions of the diamond of national advantage help to explain how and where globally competitive companies develop and sustain themselves.
TRUE
(T/F) The growth of small-scale production technology will most likely enable small countries to produce products efficiently for their own consumption.
TRUE
(T/F) The theory of absolute advantage holds that there are advantages
TRUE
Mercantilism
The trade theory that says a country should export more than it imports
factor proportions theory
The trade theory that says countries should concentrate production on those products using their most abundant production factors
The diamond of national advantage would be best used to answer which of the following questions?
Why do specialized competitive advantages differ among countries?
Which of the hypothetical new products, if successful, would most likely diffuse its production and sales according to the product life cycle theory?
a Sony television that receives global transmissions without a satellite dish or cable connection, introduced at a high price but targeted eventually for sale to a mass market
All countries face the questions of what, how much, and with whom they should import and export. How they answer these questions primarily affects whether
a company's present production location will be competitive
Brain drain
a country's loss of educated, productive people
Costa Rica's recent economic transformation to depend more on high-tech manufacturing is largely due to its adoption of
a strategic trade policy
Neomercantilism describes the approach of countries that try to run a favorable balance of trade to
achieve a social or political objective
Nontradable goods
products and services for which exporting costs are excessive
The free trade theories of specialization primarily assume that
resources are immobile internationally
The free trade theories of specialization primarily assume that
resources can move domestically from the production of one good to another
Analysts conclude that the finite supply of natural resources will most likely
serve as an advantage for developing countries in their sales to developed countries
The most internationally mobile factor of production is
short-term capital
A governmental strategic trade (industrial) policy is one that
targets the resources needed to support industries that seem to fit best with the country's advantages
comparative advantage theory
that a country will gain from trade even though it can produce all goods more efficiently than other countries
Assume the following conditions: In the United States it takes 5 units of resources to produce a ton of potatoes and 10 to produce a ton of coal. In Canada it takes 6 units of resources to produce a ton of potatoes and 9 to produce a ton of coal. According to the theory of absolute advantage
the United States should export potatoes to Canada and import coal from Canada
Assume the following conditions: In the United States it takes 4 units of resources to produce a ton of potatoes and 5 to produce a ton of coal. In Canada it takes 6 units of resources to produce a ton of potatoes and 10 to produce a ton of coal. According to the theory of comparative advantage
the United States should import potatoes from Canada and export coal to Canada
According to the theory of comparative advantage, a country gains from foreign trade even though it may have an absolute advantage in the production of all products because
the country will forego producing its less efficient output in order to produce its more efficient output
In this example, assume that both trade and production factors are internationally mobile. Using domestic labor, the labor cost per silicon chip is $.10 in Japan and $.20 in the United States. Using domestic capital, the capital cost per chip is $.10 in Japan and $.05 in the United States. Chip transportation in either direction is $.10. Japanese labor is willing to work in the United States for $.15 per chip including the workers' transport cost. U.S. capital will go to Japan at a cost of $.08 per chip including transaction costs. Which silicon chips will the United States buy?
those made in the United States with Japanese labor and U.S. capital
Because all countries face the questions of what, how much, and with whom they should import and export, international business managers should most likely
understand the theories used to answer these questions because policies affect business operations
According to the diamond of national advantage theory, the domestic existence of all four conditions best explains
where globally competitive firms develop and sustain themselves