Chapter 6
True or false: New trade theory is very useful in explaining trade patterns.
True
Porter states that ______ can influence each of the four components of the diamond through subsidies, education policies, and policies toward capital markets.
government
Porter's theory stresses the advantages of businesses working with ______ to promote strong competition within domestic markets.
government
The trade theories associated with Smith and Ricardo advocate for _____ free trade.
unrestricted
The proponents of mercantilism see trade as a ______ -sum game.
zero
What are two examples of basic factors of production as identified by Porter?
-Demographics -Location
What are two reasons diminishing returns to specialization occur?
-Different goods use resources in different proportions. -Not all resources are of the same quality.
A new trade theorist would say that a company should rely on which three things to gain first-mover advantages?
-Innovation -Luck -Entrepreneurship
According to the Autor study, what are two results that have occurred in U.S. manufacturer's that have high levels of exposure to competition from China?
-Larger loss in manufacturing jobs -Decline in employment
Choose three advanced factors that Porter believes are MOST significant for competitive advantage.
-Technological know-how -Skilled labor -Research facilities
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 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.
What are three sources of economies of scale?
-the ability of large-volume producers to use more specialized equipment -the ability of large-volume producers to use more effective, specialized employees -spreading fixed costs over a larger volume
What are the types of factors of production identified by Porter?
Basic and advanced
According to Adam Smith's theory of absolute advantage, who benefits from engaging in trade?
Both countries engaging in a trade process
The Autor study noted in the text provides evidence of support of Samuelson's thesis. Which country did the study use to analyze its manufacturing exposure within the United States?
China
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 was the basic premise of mercantilism?
Countries should encourage exports and discourage imports.
What did Porter call the concept where firms are typically most sensitive to the needs of their closest customers?
Demand conditions
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
Which statement regarding openness of an economy and growth is TRUE?
Economies that are open to trade grow at a faster rate economically than those that are closed.
Drag and drop the descriptions of the attributes in Porter's Diamond next to the corresponding attributes listed on the left.
Factor endowments- A nation's position in areas such as skilled labor, arable land, or infrastructure Demand conditions- The nature of home stipulations for a product or service Related and supporting industries- The presence or absence of businesses that are internationally competitive Firm strategy, structure, and rivalry- The conditions governing how companies are created, organized, and managed
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
True or false: Most economists prefer the Ricardian model when discussing trade even though it is a relatively poor predictor of real-world international trade.
False
True or false: Porter's theory of national competitive advantage stresses a decreased commitment by companies to research and development.
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.
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
The Middle East has an abundance of oil reserves; therefore, exporting oil supports the ______ theory which is based on creating an advantage based on factor endowments.
Heckscher-Ohlin
What is the theory that states that countries will export goods that make intensive use of the factors 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
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.
How does the product-life cycle theory relate to the modern world?
Its relevance in the modern world seems limited as more and more products are introduced outside of the United States.
According to the Heckscher-Ohlin theory, it is expected that the United States 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 of these companies is demonstrating a first-mover advantage?
Nelson Concrete recently opened a production plant in the Middle East after learning there were no competitive firms in that area.
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
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
______ 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 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
What aspect of free trade does Samuelson see as a potential negative influence on international trade?
Offshoring of service jobs such as call centers
Which aspect of Porter's Diamond is best evidenced by the U.S. semiconductor industry providing the basis for U.S. success in the production of personal computers?
Related and supporting industries
Which of the following theories is said to predict trade patterns more accurately?
Ricardian theory
The Leontief paradox would be used to explain which of these situations?
The United States exports goods that require skilled labor and imports heavy manufacturing products that require large amounts of capital.
True or False: A 2019 study assessing the effects of the Trump administration's tariff barriers on imports of aluminum and steel revealed that the tariffs had the opposite intended effect on manufacturing employment.
True
True or False: Government can detract or improve a country's advantage by choice of policies.
True
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
True or false: Successful industries within a country tend to group into clusters of related industries.
True
True or false: The United States has an abundance of arable land and has long been an exporter of agricultural products. This is a good application of the Heckscher-Ohlin theory.
True
Which scenario depicts the Leontief paradox?
U.S. exports were less capital intensive than U.S. imports.
Economist David Hume argued that an inherent inconsistency with mercantilism is that in the long run no country could sustain
a surplus on the balance of trade.
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.
a. first-mover advantage
When a country is more efficient at producing a product than any other country, the country has a(n) ______ advantage in the production of that product.
absolute
To gain competitive advantage, it is important to encourage companies to invest in _____ factors of production.
advanced
A company _____ benefit from related industries that are internationally competitive and can spill over into the company.
can
Companies participating in international trade _____ exert strong influences on government trading policies.
can
Porter's study identified components of the German textile and apparel sector: cotton, wool, synthetic fibers, sewing machine needles, and 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.
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
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
Porter states that a company can gain ______ advantage if their home customers are demanding and knowledgeable.
competitive
According to new trade theory, first movers in an industry can gain a scale-based _____ advantage that later entrants find almost impossible to match.
cost
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.
creates a barrier to entry
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
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.
diminished
A production possibilities frontier shows _____ returns to specialization when more units of resources are required to produce each additional unit. (Choose diminishing or increasing.)
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
Porter argues that achieving international success in a certain industry is a function of factor endowments, domestic demand conditions, related and supported industries, and ______.
domestic rivalry
Based on new trade theory, as the size of markets increases, companies may be able to attain better ______.
economies of scale
The reductions in the cost of a single unit that result from large scale output of that product are called
economies of scale.
Based on the theories of Smith, Ricardo, and Heckscher-Ohlin, in a country with access to cheap labor, productive land, and diverse plant life, it makes sense to _____ agricultural goods.
export
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
The resources that a country is endowed with such as land, labor, and capital are referred to as _____.
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 U.S. firms were led by people with ______ backgrounds, likely leading to U.S. 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 advantage.
first
Since the global market can only support one producer of superjumbo aircraft, Airbus had the benefit of a(n) _____.
first-mover advantage
Jameson Machinery Inc. wants to release their newest equipment in the South American market before other companies in order to establish the Jameson brand. In other words, the company wants to benefit from ____.
first-mover advantages
Preempting demand, gaining volume cost advantages, building the brand, and establishing a long-term competitive advantage are associated with
first-mover advantages.
Porter developed ______ broad attributes of a nation that shape the environment in which local firms compete.
four
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
The most contentious implication behind new trade theory is the argument that it generates for ______ intervention.
government
The Winston Sporting Goods Company is lobbying members of Congress to encourage them to open a trading agreement with South America. The company believes it can triple its sales by accessing this market which will benefit the United States in export tariffs. This demonstrates how _____ affects/affect trade.
government policy
According to Vernon's product life-cycle theory, while demand for a product is starting to grow rapidly in the United States, demand for the product in other countries is limited to _____.
high-income groups
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
One explanation for the Leontief paradox is that the United States has an advantage and exports goods produced with
innovative technologies.
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 applying reasoning for 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 company decides to outsource all product designs to Singapore because it has been found to have the most efficient design companies. In this situation, the ______ implication for international business is being considered.
location
To achieve the highest efficiencies, a U.S. 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
The factor that impacts all the theories of trade because companies should produce where it is most efficient is
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
The final conclusion of the product life-cycle theory is that ultimately a product
may be exported back to the country where it was originally invented.
It has been argued that Donald Trump favored _____ views because he wants the country to export products but does not favor importing products.
mercantilism
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
Free trade _____ the efficient use of resources within a country.
might increase
Heckscher and Ohlin theorized that a country's comparative advantage results from differences in ______.
national factor endowments
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
Samuelson is concerned that advances in communications technology will result in the
offshoring of service jobs.
Sachs and Warner found a strong correlation between a(n) ______ response to trade and economic growth.
open
The ______ theory predicts that mature industries tend to shift production out of advanced nations and into low-cost assembly locations.
product life-cycle
The ethnocentric view that most new products are developed and introduced in the United States is a key weakness in the ______ theory.
product life-cycle
The ______ shows the combination of goods and/or services that can be produced by a country based on available resources.
production possibilities frontier
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
The primary problem with mercantilism is that its supporters claimed that trade should
show a gain by one country that results in a loss by another.
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
Free trade can result in dynamic gains that ______ economic growth.
stimulate
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.
According to the product life cycle theory, when a product is in the early stages of its life cycle, it is most likely to be produced and exported from
the country where it was developed.
The main criticism of mercantilism was that
the goal of a constant positive balance of trade is impossible.
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.
In the real world, it costs money to move products from one country to another, but Ricardo's model does not address these ______ costs.
transportation
True or false: The benefits from free trade are not evenly distributed throughout an economy.
true
A criticism of Ricardo's theory of comparative advantage is that it is a simple model that includes many
unrealistic assumptions.
Which 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.
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?
-Chance events -Government
A 2019 study by two economists associated with the U.S. Federal Reserve Board, showed two preliminary results from the Trump administration's tariff barriers on imports of aluminum and steel. What were these two results?
-Reductions in U.S. manufacturing employment -Increases in producer prices in the United States
What three predictions of new trade theory regarding trade patterns are supported by studies?
-Trade decreases the variety of products available - Trade leads to lower average costs -Trade increases the specialization of production within an industry.