Chapter 6 Connect

A criticism of Ricardo's theory of comparative advantage is that it is a simple model that includes many

unrealistic assumptions.

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

According to Adam Smith's theory of absolute advantage, who benefits from engaging in trade?

both countries engaging in a trade process

Economic studies have suggested that according to the theory of ______ advantage, countries will experience higher growth rates if they follow a more open stance toward international growth.

comparative

Porter states that a company can gain ______ advantage if their home customers are demanding and knowledgeable.

competitive

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

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

What are two reasons diminishing returns to specialization occur?

Different goods use resources in different proportions. Not all resources are of the same quality.

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

True or False: According to Adam Smith, a country should produce all goods at home that it can, even if it could buy those goods at a lower cost from other countries.

False

______ is reflected in a nation in which the government does not attempt to influence what its citizens can buy from another country by applying import duties or what citizens can produce and sell to another country.

Free trade

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.

What assumption does the Ricardian model of comparative advantage make in terms of converting resources?

It assumes that all resources can easily shift from one thing to another.

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.

Which theory does NOT support unrestricted free trade between countries?

Mercantilism

______ is the first theory of trade that advocated that a country should export more than it imports and should accumulate gold and silver to make up the difference and maintain a trade surplus.

Mercantilism

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

What two simultaneous outcomes are implied by new trade theory?

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

The theory of ______ advantage was the first to attack the tenet of mercantilism which implied that trade is a zero-sum game.

absolute

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

Ricardo's theory of comparative advantage assumes ______ returns to scale.

constant

Country A wants to produce more rice. Unfortunately, it will have to farm less productive land to produce this rice. This fact represents the idea of ______ returns to specialization.

diminishing

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

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

domestic rivalry

Portugal can produce wine and cloth with less labor than England. But, given all factors of production, England can produce cloth relatively better than Portugal. According to Ricardo's theory of comparative advantage, it make sense for England to

export cloth and import wine from Portugal.

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

factor endowments

Manatee Mfg. is able to source parts for its refrigeration products from anywhere in the world because the United States does not place any quotas or limitations on the imports they need. This is a reflection of a _____ policy.

free trade

Ricardo's theory encourages ______ because it suggests that trade is a positive-sum game where all participating countries realize economic gains.

free trade

If a country has an open economy and embraces free trade, citizens, on average, will benefit from ______ income levels and living standards.

higher

New trade theory states that some countries specialize in the production and export of a particular product because

in certain industries the world can only support a limited number of firms.

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

increase the efficiency with which resources are used. increase the stock of the country's resources.

A country is said to have an absolute advantage in the production of an item when the country

is more efficient than any other country at producing the item.

When a government intervenes to achieve a surplus in the nation's balance of trade, this action is consistent with the main tenet of ______.

mercantilism

Because of economies of scale, 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 is a reflection of _____.

new trade theory

A basic message of Ricardo's theory of comparative advantage is that:

potential world 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.

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

product life-cycle

When discussing constant returns to specialization, it is realistic to assume that the units of resources required to produce one unit will _____ no matter where a country is on the production possibilities frontier.

remain the same

Reflecting the theories of Smith, Ricardo, and Heckscher-Ohlin, free trade permits ______, which allows a country to manufacture and export in those areas where they have a comparative advantage.

specialization

What are three sources of economies of scale?

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