Chapter 6 International Trade Theory
TRUE/FALSE
1] The theories of Smith and Ricardo show that a country should engage in international
trade, even for products that it is able to produce for itself. TRUE
2] Porter's theory of national competitive advantage recommends unrestricted free trade
between countries. FALSE
3] Heckscher-Ohlin theory supports the case for unrestricted free trade between nations.
TRUE
4] Mercantilist doctrine advocates unrestricted free trade between countries. FALSE
5] A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it. TRUE
6] Factor endowments refer to the extent to which a country is gifted with such resources as
land, labor, and capital. TRUE
7] Heckscher-Ohlin theory stresses that comparative advantage arises from differences in
productivity. FALSE
8] Ricardo's theory makes fewer simplifying assumptions compared to Heckscher-Ohlin
theory. FALSE
9] A key assumption in the Heckscher-Ohlin theory is that technologies are the same across
countries. TRUE
10] Some of the arguments made by the product life-cycle theory seem ethnocentric and
increasingly dated when viewed from an Asian or European perspective. TRUE
11] XYZ Toys manufactures and sells small quantities of each of its products, but it can still
benefit from economies of scale. FALSE
12] The simple model of free trade assumed away transportation costs between countries.
TRUE
13] Resources always move easily from one economic activity to another. FALSE
14] Diminishing returns show that it is feasible for a country to specialize to the degree
suggested by the simple Ricardian model. FALSE
15] According to Paul Samuelson's critique, a poor country will rapidly improve its
productivity if a rich country enters into a free trade agreement with it. TRUE
16] Apple's iPhone was unique when it first came out, with many features that no other
phones had. As such, it enjoyed great success and dominated the cell phone market. This
demonstrates the first-mover advantage. TRUE
17] New trade theorists stress the role of luck in giving a firm first-mover advantages.
TRUE
18] According to the new trade theory, firms that establish a first-mover advantage with
regard to the production of a particular new product may subsequently dominate global
trade in that product. TRUE
19] From a profit perspective, it makes sense for firms to disperse their productive activities
to those countries where they can be performed most efficiently. TRUE
MULTIPLE CHOICES
20] ________ refers to a situation where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country.
A] Fair trade
B] Trade theory
C] Free trade
D] Mercantilism
21] Identify the theory that supports the view that, in some cases, countries export for the
reason that the world market can support only a limited number of firms.
A] Heckscher-Ohlin theory
B] Smith's theory
C] Ricardo's theory
D] new trade theory
22] Country A exports electronic goods from Country B although there are no underlying
differences in factor endowments between the two countries. Which of the following
theories explains this anomaly?
A] comparative advantage theory
B] new trade theory
C] Ricardo's theory
D] Smith's theory
23] Which of the following observations is consistent with Michael Porter's theory of
national competitive advantage?
A] Factors such as domestic demand and domestic rivalry explain nations' dominance
in production.
B] Countries should produce only those goods for which they have a comparative
advantage.
C] Interplay between the factors of production cause international marketing decisions.
D] International differences in labor productivity determine nations' supremacy in
production.
24] Which of the following is a theory that can be used to justify limited government
intervention to support the development of certain export-oriented industries?
A] comparative advantage theory
B] Ricardo's theory
C] new trade theory
D] Heckscher-Ohlin theory
25] Which of the following refers to a situation where a government does not attempt to
influence through quotas or duties what its citizens can buy from another country?
A] economic patriotism
B] protectionism
C] free trade
D] offshoring
26] Which of the following is a major benefit of engaging in free trade?
A] It helps to reduce the financial volatility in global markets.
B] It helps countries protect the jobs that are available to their citizens.
C] It gives countries access to products that they cannot produce.
D] It allows governments to exert more control on businesses.
27] David Ricardo's theory of comparative advantage explains global trade in terms of the
A] first-mover advantage that certain countries and firms enjoy.
B] geographical differences between various countries.
C] international differences in labor productivity.
D] late-mover advantage that certain countries and firms possess.
28] Which of the following theories emphasizes the interplay between the proportions in
which the factors of production are available in different countries and the proportions in
which they are needed for producing particular goods?
A] Porter's theory
B] Smith's theory
C] Ricardo's theory
D] Heckscher-Ohlin theory
29] ________ stresses that in some cases countries specialize in the production and export
of particular products because the world market can support only a limited number of firms.
A] New trade theory
B] Absolute advantage
C] The world market theory
D] Mercantilism
30] ________ supports the idea that countries should export more than they import.
A] Absolute advantage
B] Mercantilism
C] The world market theory
D] New trade theory
31] The principle of mercantilism views trade as a[n] ________ game.
A] advantage
B] positive-sum
C] zero-sum
D] negative-sum
32] ________ argued that countries should specialize in the production of goods for which
they have an absolute advantage.
A] Paul Krugman
B] David Hume
C] David Ricardo
D] Adam Smith
33] According to Ricardo's theory of comparative advantage, countries should
A] specialize in the production of those goods that it produces most efficiently.
B] specialize in the production of those goods that their competitors in the world market
currently have monopolies on.
C] produce all the products for which they have an absolute advantage.
D] produce only the products for which they have an absolute advantage.
34] The theory of comparative advantage suggests that trade is a ________ game in which
all countries that participate realize economic gains.
A] net-sum
B] positive-sum
C] zero-sum
D] negative-sum
35] The Heckscher-Ohlin theory predicts that countries will
A] export those goods that make intensive use of factors that are locally scarce.
B] export those goods that make intensive use of factors that are locally abundant.
C] import those goods that make intensive use of factors that are locally abundant.
D] import those goods that make intensive use of factors that are available worldwide.
36] The ________ theory argues that the pattern of international trade is determined by
differences in factor endowments.
A] comparative advantage
B] Leontief Paradox
C] Heckscher-Ohlin
D] absolute advantage
37] A capital-intensive country exports products that are capital intensive. Which theory is
this an example of?
A] new trade
B] Leontief paradox
C] Porter's diamond
D] Heckscher-Ohlin
38] The ________ argues that a large proportion of the world's new products had been
developed by U.S. firms.
A] product life-cycle theory
B] Porter's diamond
C] new trade theory
D] Leontief paradox
39] ________ are unit cost reductions associated with a large scale of output.
A] Current account deficits
B] Economies of scale
C] Current account surpluses
D] Factor endowments
40] Which of the following is the main principle of mercantilism?
A] Protection of domestic industries is not essential for a nation's welfare.
B] Government intervention is not required in global trade.
C] Countries should encourage absolute free trade.
D] It is in a country's best interests to maintain a trade surplus.