Ch 6

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

False

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

-Demand conditions -Factor endowments

Which trade theory explains why countries are trade partners when they are trading similar goods and services?

New trade

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

True or false: First mover advantages are especially important in industries where the global market can profitably support only a limited number of firms.

True

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

What are two reasons for assuming diminishing returns to specialization?

-Different goods use resources in different proportions. -Production might draw on marginal resources whose productivity is less than resources initially used.

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

-Natural resources -Climate

What two situations are consistent with Ricardo's theory of comparative advantage?

-production is greater with unrestricted free trade than it is with restricted trade -even if countries lack an absolute advantage in the production of any good, consumers can still consume more if there are no restrictions on trade

Which form of returns to specialization means that the units of resources required to produce one unit are assumed to remain the same no matter where a country is on the production possibilities frontier?

Constant

According to new trade theory, the dominance of the United States in the commercial jet aircraft industry is related to _________- mover advantages. (Choose first or late.)

First

______ is the opposite of economic isolationism.

Free trade

New trade theory, which states that countries may have an advantage in exporting because of first-mover advantages, is different from which theory that says countries have export advantages because of factor endowments?

Heckscher-Ohlin

According to the Heckscher-Ohlin theory, it is expected that the US would export capital-intensive goods and import labor-intensive goods, but the opposite was found to be true. This became known as the

Leontief paradox.

______ 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

True or false: The product life-cycle theory suggests that mature industries tend to shift production out of the United States and into low-cost assembly locations.

True

True or false: The concept of diminishing returns is proven when a country that has produced rice for five years now has to farm less productive land to produce the same amount of rice it did when it began.

True Reason: When a country has to draw on more marginal resources with lower productivity to produce the same amount of rice it produced before, it is experiencing diminishing returns.

How would experts reply to the question, "Is Porter's theory correct?"

We do not know. It has not been subjected to empirical testing.

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.

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

advanced

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

Which form of returns to specialization means that the units of resources required to produce one unit are assumed to remain the same no matter where a country is on the production possibility frontier?

constant

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

It takes 12 units of resources to produce 100 pounds of silk. It takes 13 units to produce 115 pounds of silk and 15 units to produce 120 pounds of silk. This is an example of _____ returns to specialization.

diminishing

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

diminishing

An assembly line in a candy factory is an example of _____ because it allows the candy company to benefit from cost reductions based on the vast amounts of candy produced.

economies of scale

Under new trade theory, as the size of markets increase, companies may be able to develop better ______.

economies of scale

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

economies of scale.

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

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

factors of production

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

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

Preempting demand, gaining volume cost advantages, building the brand, and establishing a long-term competitive advantage are associated with

first-mover advantages.

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

Ricardo's theory encourages ______ because it suggests that trade is a positive-sum game.

free trade

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

gold and silver

It is realistic to assume that the units of resources required to produce one unit of a good will _____ no matter where a country is on the production possibilities frontier.

increase

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

According to Heckscher and Ohlin, each country has certain factor endowments. What are two examples of these?

labor and land

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.

Rich country A enters into a free trade agreement with poor country B. Poor country B improves its productivity. Rich 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 rich country A.

lower real wage rates

Leontief questioned the validity of the Heckscher-Ohlin theory based on his assumption that the US would be an exporter of _____.

more capital-intensive goods

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

What did Paul Samuelson point to as his biggest concern with free trade and its possible affects on middle-class wages in the United States?

offshoring of jobs as the result of communication technology

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

Photocopiers were initially exported from the United States. As more and more foreign competitors entered the market, the United States began to import photocopiers. This is an example of which theory?

product life-cycle

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

related and supporting

After the company decided to shift production out of the United States and into an overseas operation, Micah lost her job and didn't know what she would do because her skills were limited to the textile industry. This is evidence of how _____ are not always mobile and allow individuals to find new work when their jobs are compromised.

resources

The employees were told that their jobs would no longer exist in June because the company was moving production to China. Julie didn't know what she was going to do because her skills as a seamstress were only in demand for certain types of companies and many of them were moving facilities overseas where labor was cheaper. This demonstrates how ____ do not easily move from one economic activity to another.

resources

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

specialization

Raymond Vernon's product life-cycle theory was based on the observation that for most of the 1900s the majority of the world's new products were developed in

the United States.

Porter states that ______ can influence each of the four components of the diamond through subsidies, education policies and policies towards capital markets.

the government

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

the production of goods it produces most efficiently