MKT 310 Exam 2

absolute vs comparative advantage

do more during a given time making goods for a lower opportunity cost price is not a direct function of the ability to produce something explains unit cost7

Which two groups are positively impacted when an import tariff is enacted? (Check all that apply.)

domestic producers government

According to Michael Porter, there is a strong correlation between _____ and the creation and persistence of competitive advantage in an industry.

domestic rivalry

One benefit of free trade is that is stimulates economic growth and wealth creation. In other words, it provides _____ economic gains.

dynamic

What theory argues that free trade is beneficial, but that differences in factor endowments, not productivity, determine the pattern of international trade?

heckscher-ohlin

To shift a country's production possibility frontier outward, it is necessary to

inc stock and efficiency

According to a study cited in the text, if advanced countries stopped providing subsidies to farmers, global trade in agricultural products would

increase by 50%

One explanation for the Leontief paradox is that the US has an advantage and exports goods produced with

innovative technologies.

1. Established in 1776, Adam Smith stated in this theory that countries should specialize in the production of goods and services for which they can produce most efficiently and then trade these for goods produced by other countries.Absolute advantage theory 2. In 1817, David Ricardo stated that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries.Comparative advantage theory 3. In the early 1900s, this theory predicts that countries will export those goods that make intensive use of factors that are locally abundant and import goods that make intensive use of factors that are locally scarce.Heckscher-Ohlin theory 4. In the mid-1960s, a theory initially proposed by Raymond Vernon, points out that where a new product is introduced is important. Over time, cost considerations start playing a greater role in the competitive process.Product life-cycle theory 5. Emerging in the 1970s, this theory states that through its impact on economies of scale, trade can increase the variety of goods available to consumers while decreasing the average cost of those goods.New trade theory 6. The most current theory was developed by Michael Porter and states that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage.National competitive advantage theory

1. A Honduran worker leaves his temporary job in the United States and returns home with six months of wages. Capital Account 2. The U.S. government purchases U.K. government bonds. Financial Account 3. U.S. consumers purchase Japanese autos. Current Account 4. Insurance services from a private U.S. firm are contracted out to an Italian contractor. Current Account 5. The Chinese government invests in three-month U.S. Treasury bills. Financial Account 6. A French company pays dividends to a U.S. citizen who owns shares in its stock. Current Account

1. Free trade as a government policy was first officially embraced by Great Britain by the repeal of this particular tariff.Corn Laws Correct 2. Established in 1947, its objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like.GATT Correct 3. Put in place to avoid rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products.Smoot-Hawley Act Correct 4. Among other things, negotiations that took place here reduced tariffs on industrial goods, reduced agricultural subsidies, and offered more protection for intellectual property rights.Uraguay Round Correct 5. Between 1995 and 2017, more than 500 trade disputes between member countries were brought before this organization.WTO Correct 6. By the end of this in 1979, average tariff declined by nearly 92% in the United States.Tokyo Round

1. Developing countries with a comparative advantage in manufacturing should temporarily support new industries until they have grown strong enough to meet international competition. Economic Arguments for Intervention Correct 2. Part of strategic trade policy suggesting that a government can help raise national income if it can ensure that the firm or firms with a first-mover advantage will be domestic. Economic Arguments for Intervention Correct 3. A vocal and active segment of the population feels that domestic companies may shift factories to foreign locations. Political Arguments for Intervention Correct 4. Part of strategic trade policy that suggests it is a good idea to help domestic firms overcome barriers to entry created by foreign firms that have reaped first-mover advantages. Economic Arguments for Intervention Incorrect 5. Certain key industries should be supported so that in case of national emergency or war the country will have access to key supplies and materials. Political Arguments for Intervention Incorrect 6. Certain foreign products seem attractive to consumers, but there are also significant concerns about the safety of the products over the long run. Political Arguments for Intervention Incorrect 7. Poor-quality products may be sold, which lowers profits for firms that originally developed the product. Economic Arguments for Intervention Incorrect 8. As societies get richer, citizens lobby for greater environmental protections. Political Arguments for Intervention

absolute advantage principle

1.A country benefits by producing only those products in which: - it has an absolute advantage. OR -Those products which can be produced using fewer resources than another country. 2.Each country specializes in products (p) and services (s) in which it is advantaged and imports those p and s in which it is disadvantaged. 3.Criticism: -Does not account for countries that have no absolute advantages.

contemporary trade theories

1.Competitive Advantage of nations 2.Michael Porter's Diamond Model 3.National Industrial Policy 4.New Trade Theory

michael porter's diamond model

1.Firm strategy, structure, and rivalry - the presence of strong competitors at home serves as a national competitive advantage 2.Factor conditions - labor, natural resources, capital, technology, entrepreneurship, and know how 3.Demand conditions at home - the strengths and sophistication of customer demand 4.Related and supporting industries - availability of clusters of suppliers and complementary firms with distinctive competences.

defensive rationale

1.Protection of the national economy - protect agriculture 2.Protection of an infant industry - industry just starting out to get up and running (usually not an actual infant industry) 3. National security 4. National culture and identity

comparative advantage principle

1.Two countries can trade without barriers as long as one is more efficient at producing goods or services needed by the other 2.Relative efficiency in producing the product or service matters more than absolute cost of production 3.Specializing in what you produce best and trading for the rest. 4.All countries can trade regardless of absolute advantage. do what is harder and trade for the rest

innovators, early adaptors, early majority, late majority, laggards

2.5% 13.5% 34% 34% 16%

tariffs

A tariff is a tax imposed on imported products. increases the price (aimed at low cost apparel) Export tariff: taxes levied by countries on products exported by their own companies. rare Import tariff: Specific - dollar amount (lower priced products Ad valorem - based on value (%) (higher priced) Combination - both

What are two reasons countries should remain focused on opening markets? (Check all that apply.)

Because of high tariff rates on imports of selected goods from developing nations into developed nations Because average tariffs on services remains higher than on industrial goods

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.

Which of the following two outcomes typically occur with the implementation of local content regulations? (Check all that apply.)

Local content regulations provide protection for a domestic producer. The restrictions on imports raise the prices of imported components, which lead to higher prices for consumers.

protectionism

Protectionism is at odds with the theory of comparative advantage goes back to mercantilism you need to protect the best interest of your country

The Uruguay Round started in 1986 and addressed which three issues?

Reducing agricultural subsidies Reducing tariffs on manufactured goods Reducing tariffs on industrial goods

no tariff trade barriers

Refers to government policies or measures that restrict trade without imposing direct tax or duty. Non tariff barriers include: Quotas Import licenses Government regulations Local content requirements Administrative or bureaucratic procedures. Import licenses: a formal permission to import which restricts imports in way that is similar to quotas. -Governments sell licenses on a first-come, first-served basis. This process discriminates against smaller firms. -Obtaining a license is complicated and covered with red tape in certain countries. E.g. Russia. Local content requirements: requires manufacturers to include a minimum of added value (made locally element) -Discourages imports of raw materials, parts, components and supplies thereby reducing sourcing options. -May result in high costs and low product quality for importers and consumers. -high cost and low quality from reducing supply Government regulations and technical standards: -Health and safety technical regulations; labeling requirements -Delays or blocks the entry of imported products -Country of origin labeling may constitute a barrier Administrative/bureaucratic procedures- complex procedures imposed on importers that hinder their trade activities. -Slows import of products or services -E.g. US barred Mexican trucks from entering the US on the grounds of being unsafe.

Choose three advanced factors that Porter believes are MOST significant for competitive advantage. (Check all that apply.)

Research facilities Technological know-how Skilled labor

Which theory is said to predict trade patterns more accurately?

Ricardo

subsidies and other government support programs

Subsidy: Monetary or other resources a government grants to a firm or group of firms usually intended to ensure their survival by facilitating the production and marketing of products at reduced prices or to encourage exports. E.g. US provides subsidies for the agricultural sector Critics argue that subsidies reduce cost of business for the recipient providing it with unfair advantages. Countervailing duty: a duty imposed on products imported into a country to offset subsidies given to producers or exporters in the exporting country This duty cancels out the effect of the subsidy. Dumping: pricing exported products at less than their normal value -Generally priced for less than their price in the domestic or third country markets or at less than production cost Antidumping duty: A tax imposed on products deemed to be dumped and causing injury to producers of competing products in the importing country. -The WTO allows governments to impose antidumping duties on products that are deemed to be dumped in the importing countries.

What are the two reasons that export tariffs are levied? (Check all that apply.)

To reduce exports from an industry sector, often for political reasons To raise revenue for the government

According to the text, what are three economic effects of import tariffs? (Check all that apply.)

Tariffs are anti-consumer. Tariffs reduce the overall efficiency of the world economy. Tariffs are generally pro-producer.

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 are three reasons that the global trading system erected under GATT was strained during the 1980s and early 1990s? (Check all that apply.)

The economic success of Japan Countries finding ways to get around GATT regulations The persistent trade deficit in the United States

For decades, there have been just two producers of large commercial aircraft, Boeing and Airbus. Which statement best explains how new trade theory views this situation from a manufacturing perspective?

The economies of scale required to be a profitable manufacturer effectively limit the size of the global market.

What are two characteristics of countervailing duties?

They can be substantial and stay in place for 5 years. They are a special tariff.

Why do exporting countries agree to impose voluntary export restraints?

To avoid damaging tariffs and import quotas on their products

In what two ways can a government use intervention in trade as a foreign policy instrument? (Check all that apply.)

To pressure or punish "rogue states" To grant preferential trading terms to countries it wants to build relations with

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 increases the specialization of production within an industry. Trade leads to lower average costs.

specific tariff subsidies import quotas voluntary export restraints (VERs) local content requirements administrative policies anti dumping policy ad valorem tariff

United States levies a $1 tariff on imported watches. EU payments to European farmers. United States restricts the number of imported video games. Peru restricts sugar exports by United States request. Specific percent of goods must be produced domestically. United States stops medicine imports unapproved by FDA. EU imposes a special tariff on the offending foreign imports. United States imposes a 2.5% tariff on imported watches.

What two simultaneous outcomes are implied by new trade theory?

a nation can lower the cost of the goods being offered to consumers a nation can increase the variety of goods available to consumers

Heckscher and Ohlin identified differences in national factor endowments as the root of ______.

comparative advantage

The Japanese government is used in the text as an example of how governments have effectively used ______ to limit imports of vehicle parts through bureaucratic rules.

administrative trade policies

what are the four main instruments of trade policy

antidumping duties tariffs local content requirements import quotas

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 government

industrial clusters

concentration of suppliers and supporting firms from the same industry located within same geographic area

According to product life-cycle theory, as products mature, ______ considerations become far more important in the competitive process.

cost

According to new trade theory, the first mover's ability to benefit from increasing returns ______ for other firms.

create barriers to entry

At one time, strict trade sanctions were in place between the US and Cuba as a way to _____.

create economic hardship and replace the form of government in Cuba

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

What are two reasons diminishing returns to specialization occur?

different goods use resources in different proportions not all resources are the same quality

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.

diminish

Which type of returns to specialization happen when additional units of resources are required to produce each additional unit?

diminishing

What concept negates the idea that a country can specialize to the degree suggested by the Ricardian model?

diminishing returns

The reductions in the cost of a single unit that result from large scale output of that product are called

economies of scale

According to Heckscher and Ohlin, each country has certain ______, such as land, labor, and capital.

factor endowments

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

When the government does not use quotas, taxes or other means to restrict what its citizens can buy from or sell to another country, it is called ________ trade.

free

A consequence of subsidies paid to companies during difficult economic times -- for example, the Japanese farm subsidies -- is

giving recipients an unfair competitive advantage.

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

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

mechantalism

most persuasive and popular until an inquiry into the names and caufes of the wealth of nations adam smith "the best way to grow wealthy was not to manufacture everything itself" must invest in jobs and education everyone needs to be able to find jobs

Theories of international trade and investment

nation - level explanations classical theories -mercantilism - export more than import -absolute advantage principle -comparative advantage principle -factor proportions theory -international product cycle theory contemporary theories -competitive advantage of nations -michael porter's diamond model -national industrial policy -new trade theory

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

______ 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 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 Luck Entrepreneurship Innovation

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

Samuelson is concerned that advances in communications technology will result in the

offshoring service jobs

What aspect of free trade does Samuelson see as a potential negative influence on international trade?

offshoring service jobs such as call centers

Sachs and Warner found a strong correlation between a(n) ______ response to trade and economic growth.

open

opinion leaders vs. change agents vs. gatekeepers

people like you people outside your reference group determine what you buy

The ethnocentric view that most new products are developed and introduced in the US is a key weakness in the ______ theory.

product life-cycle

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

The main objective of antidumping policies is to

protect domestic producers from unfair foreign competition.

What are the four issues currently at the forefront of the WTO agenda?

protectionism in agriculture high tariffs on nonagricultural goods and services lack of intellectual property protection antidumping policies

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

GATT negotiations continue to deal with additional issues such as (Check the three that apply.)

services. agricultural subsidies. intellectual property.

If a country assesses a fixed charge of $5 per unit of rice that's imported, it is using a(n) ______ tariff.

specific

One consequence of free trade is higher domestic consumption and a more efficient use of resources. These would be considered _____ economic gains.

static

Free trade can result in dynamic gains that ______ economic growth.

stimulate

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 theory of international trade, it makes sense for a company to disperse its production to those countries where

they can be performed most efficiently

One of the greatest benefits of local content regulations for a producer is that _____,

they limit foreign competition

What's the main reason a country would use export tariffs?

to ensure sufficient supply of a good within the country

international product cycle theory

•Each product and its associated manufacturing technologies go through three stages of evolution: introduction, growth, and maturity •In the introduction stage, the inventor country enjoys a monopoly both in manufacturing and exports •As the product's manufacturing becomes more standard, other countries will enter the global marketplace •When the product reaches maturity, the original innovator country will become a net importer of the product.

new trade theory

•Economies of scale are an important factor in some industries for superior international performance •Some industries succeed best as their volume of production increases. as you get bigger you manufacture more efficiently does not explain why there's trade between similar countries

factors proportions theory

•Explains how abundant production factors give rise to national advantages. •Countries should export products that intensively use relatively abundant factors of production •Countries should import goods that intensively use relatively scarce factors of production.

free trade

•Gives consumers the freedom of choice and variety •Prices of imported products tend to be lower than domestically produced products •Lower-cost imports help reduce the expenses of firms (companies) raise their profits

competitive advantage of nations

•Governments can proactively implement policies to enhance a nation's competitive advantage, beyond the natural endowments the country possesses •Governments can create national economic advantage by: -Stimulating innovation -Targeting industries for development -Providing low-cost capital -Other incentives

decline

•Hold: Maintain production and add new features and find new uses for the product. Reduce the cost of manufacturing (e.g. move manufacturing to a low cost jurisdiction). Consider whether there are new markets in which the product might be sold. •Harvest: Continue to offer the product, reduce marketing expenditure, and sell possibly to a loyal niche segment of the market. •Divest: Discontinue production, and liquidate the remaining inventory or sell the product to another firm. include •Product consolidation: The number of products may be reduced, and surviving products rejuvenated. •Price: Prices may be lowered to liquidate inventory, or maintained for continued products. •Distribution: Distribution becomes more selective. Channels that are no longer profitable are phased out. •Promotion: Expenditure on promotion is reduced for products subject to the Harvest and Divest strategies. not always exclusive

national industrial policy

•Proactive economic development plan implemented by the public sector to nurture or support promising industry sectors with potential for regional or global dominance. •Public sector initiatives can include: -Tax incentives -Monetary and fiscal policies -Rigorous educational systems -Investment in national infrastructure -Strong legal and regulatory systems

introduction stage

•Product development: Research and development •Pricing: Penetration pricing or a skimming price strategy be used? •Distribution: Selective •Promotion: Marketing efforts are aimed at early adopters monopoly in manufacturing and exports

mature product market

•Product differentiation: Increased competition in the mature product market means that a company must find ways to differentiate its product from that of competitors. Strong branding. •Pricing: Prices may be reduced because of increased competition. Firms in the market should be careful not to start a price war - badly engaging in price lowering and getting no profit overall. •Distribution: Distribution intensifies and incentives may be offered to encourage preference to be given over competing products. •Promotion: Promotion will focus on emphasizing product differences and creating/maintaining a strong brand.

growth stage

•Product improvement: Product quality might be improved, additional features and support services added, and packaging updated. •Pricing: If consumer demand is high the price might be maintained at a high level. •Distribution: Distribution channels might be added as consumer demand increases. •Promotion: Promotion is aimed at a broader audience. A company might spend a lot of resources on promotion during the Growth Stage to build brand loyalty.

factors that enhance diffusion (move product)

•Relative advantage - how much better •Trialability - how easy is it to get without committing financially •Observability - how apparent is it to other people using it •Compatibility - how well does it work with other things you have •Complexity - how easy is it to understand

limitations of early trade theories

•The cost of international transportation •Government restrictions such as tariffs (tax on imports), import restrictions and regulations •Large scale production could offset weak national comparative advantage. •Public sector investment in certain weak industries. •Growth in telecommunications and the internet facilitate costless trade and capital flows.

Mercantilism

•The dominant perspective of international trade in the 1500s •Ideal situation for any nation is to run a trade surplus (export more goods than import). •Neo-Mercantilism: modern day supporters of this view include labor unions (protection of jobs), farmers (to keep crop prices high) and export oriented manufacturers.

why do nations trade?

•Without international trade most countries would be unable to feed, clothe and house their citizens. •Trade allows industries and workers to become more productive •Trade allows countries to enjoy higher standards of living and keep costs of everyday products low.