Ch.3 National Differences in Economic Exam Questions 13e

Student name:__________

1) Explain the concept of free trade.

2) How does the Heckscher-Ohlin theory explain international trade?

3) Explain how the theories of trade differ in terms of their support to governmental intervention.

4) Explain Smith’s theory of absolute advantage.

5) Explain Ricardo’s theory of comparative advantage.

6) Identify a major disadvantage of the product life-cycle theory.

7) Explain how the rivalry within an industry affects international competence.

8) What are the four attributes that are discussed in Porter’s diamond?

9) What are the assumptions that we make when we discuss a simple Ricardian model to support free trade?

10) Briefly differentiate between constant returns to specialization and diminishing returns to specialization.

11) Explain how the principle of diminishing returns weakens the Ricardian model.

12) Explain the dynamic gains that are generated by opening an economy to trade.

13) Explain Paul Samuelson’s critique.

14) Do you think a new trade theorist would stress the role of luck and entrepreneurship? Explain.

15) _____ refers to a situation where a government does not attempt to influence through quotas or tariffs what its citizens can buy from another country.

A) Fair trade
B) Trade theory
C) Free trade
D) Mercantilism

16) 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

17) 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

18) 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.

19) 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) Smith’s theory
B) Ricardo’s theory
C) new trade theory
D) Heckscher-Ohlin theory

20) Which of the following refers to a situation where a government does not attempt to influence through quotas or tariffs what its citizens can buy from another country?

A) economic patriotism
B) protectionism
C) free trade
D) offshoring

21) 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.

22) 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) opportunity cost.
D) late-mover advantage that certain countries and firms possess.

23) 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

24) _____ 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

25) _____ 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

26) The principle of mercantilism views trade as a(n) _____ game.

A) advantage
B) positive-sum
C) zero-sum
D) negative-sum

27) _____ 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

28) According to Ricardo’s theory of comparative advantage, countries should

A) specialize in the production of those goods if they have lower opportunity cost.
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 factors of production endowments..

29) 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

30) 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.

31) The _____ theory argues that the pattern of international trade is determined by differences in factors of production endowments.

A) comparative advantage
B) Leontief Paradox
C) Heckscher-Ohlin
D) absolute advantage

32) 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

33) 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

34) _____ 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

35) 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.

36) Which of the following is a flaw associated with mercantilism?

A) Mercantilists do not support government intervention in trade.
B) Mercantilists view trade as a zero-sum game.
C) Mercantilists recommend policies to maximize imports.
D) Mercantilists recommend countries maintain a negative trade balance.

37) A country has an absolute advantage in the production of a product when it

A) has the capability to produce the product within its boundaries.
B) is more productive and cost efficient than any other country in producing it.
C) has the largest domestic demand for the product.
D) has access to the raw materials needed to produce the product.

38) According to Adam Smith, a country should specialize in the production of a good when it has

A) an absolute advantage in the production of the good.
B) a strong domestic demand for the good.
C) the ability to help country increase its national output.
D) the necessary raw materials for production.

39) Country A can produce product X, but it can also buy it at a cheaper price from Country B. Which of the following courses of action is suitable in this situation according to Adam Smith’s theory of absolute advantage?

A) Country A should import product X from Country B and it should not attempt to produce it at home.
B) Country A should partly import the product and produce it domestically.
C) Country A should produce more of product X and should attempt to obtain an absolute advantage for the product.
D) Country A should subsidize the production of product X to obtain an absolute advantage over Country B.

40) According to Ricardo’s theory of comparative advantage, a country should produce goods

A) for which it has access to raw materials.
B) that has lower opportunity cost.
C) that have the highest domestic demand.
D) for which it has an absolute advantage.

41) Which of the following is a statement that supports the theory of comparative advantage?

A) International trade is a zero-sum gain where one nation’s gain is another’s loss.
B) Domestic industries are at risk when a country engages in free trade.
C) A country should maintain a trade surplus to succeed in global trade.
D) Global production is greater with free trade than it is with restricted trade.

42) The theory of comparative advantage provides strong rationale for supporting the idea of

A) business nationalism.
B) free trade.
C) protectionist trade policies.
D) governmental intervention in trade.

43) Which of the following terms refers to a nation’s position in factors of production, such as skilled labor or the infrastructure necessary to compete in a given industry?

A) current accounts
B) factor endowments
C) national balance
D) national accounts

44) Identify the theory that predicts that countries will export those goods that make intensive use of factors that are locally abundant.

A) theory of comparative advantage
B) Ricardo theory
C) new trade theory
D) Heckscher-Ohlin theory

45) Which of the following statements is true of the Leontief paradox?

A) It shows an anomaly that occurs when a nation has high domestic demand for a product.
B) It explains the relationship between domestic demand and comparative advantage.
C) It disproved Ricardo’s theory of comparative advantage.
D) It raised questions about the validity of the Heckscher-Ohlin theory.

46) Identify the theory that argues that advanced nations have an incentive to develop new consumer products and hence such nations always tend to create a good or service for the first time.

A) absolute advantage
B) Ricardo
C) product life-cycle
D) Heckscher-Ohlin

47) Country X, a developed country, invents a revolutionary electronic product. The country markets this new product in other poor countries to garner large profits. This occurrence is against the idea of

A) product life-cycle theory.
B) Ricardo’s theory.
C) theory of absolute advantage.
D) theory of comparative advantage.

48) Professor Baldwin believes that early in the life cycle of a U.S. product, demand in other advanced countries is limited to high-income groups. Consequently, it is seldom worthwhile for firms in those countries to start producing the product. This view conforms to

A) the product life-cycle theory.
B) Ricardo’s theory.
C) the theory of absolute advantage.
D) the theory of comparative advantage.

49) Which of the following is a major disadvantage of the product life-cycle theory introduced by Vernon?

A) The theory’s arguments seem ethnocentric and increasingly dated.
B) The theory failed to explain the dominance of developed nations.
C) The theory applies only when a poor nation invents a new product.
D) The theory cannot be used to explain the production of luxury products.

50) Which of the following terms refers to the unit cost reductions associated with increasing output levels?

A) absolute advantage of production
B) economies of scale
C) constant marginal returns
D) diminishing marginal returns

51) Walmart makes bulk purchases from its vendors and hence it is able to get better deals than its competitors. This allows Walmart to offer greater discounts to its customers. In this case, Walmart benefits from

A) first-mover advantage.
B) constant marginal returns.
C) economies of scale.
D) absolute advantage of production.

52) Which of the following is one of the four attributes present in Porter’s diamond?

A) economies of scale
B) factor conditions
C) structural innovation
D) procedural innovation

53) Which of the following is an example of a basic factor that a nation will possess as proposed by Porter?

A) communication infrastructure
B) skilled labor
C) natural resources
D) technological knowledge

54) Which of the following factors, according to Porter, is most likely to give a country competitive advantage over another country?

A) natural resources
B) climate
C) skilled labor and know-how
D) demographics

55) Porter argues that a nation’s firms gain competitive advantage if

A) their domestic consumers lack technical awareness.
B) they function in a labor-intensive market.
C) the country has an abundant supply of unskilled workers.
D) their domestic consumers and markets are sophisticated and demanding.

56) If, for example, the textile industry in a nation is characterized by vigorous domestic rivalry, which of the following observations of this nation’s international competency is most likely to be true?

A) The nation will have access to such basic factors of the textile industry as natural resources.
B) The nation’s textile firms will have a competitive advantage in international trade.
C) The domestic customers of the textile firms will be less demanding.
D) The nation’s textile industry will lack the advanced factors that are necessary to be internationally competent.

57) A country’s balance-of-payments accounts keep track of the

A) basic factor endowments and advanced factor endowments that the nation possesses.
B) payments to and receipts from other countries for a particular time period.
C) income taxes paid by domestic firms and the spending on the firms.
D) total value of taxes paid by domestic firms and the spending on the firms.

58) Which of the following balance-of-payment accounts records onetime changes in the stock of assets?

A) capital account
B) current account
C) financial account
D) monetary account

59) The main tenet of mercantilism is that it is in a country’s best interests to

A) maintain a trade deficit.
B) maintain a trade surplus.
C) import goods made from products that it does not have in abundance.
D) import more than it exports.

60) Factor endowments refer to the extent to which a country

A) supports education, research, and development.
B) develops the infrastructure to support industrialism.
C) supports free trade.
D) has such factors of production as land, labor, and capital.

61) China has the infrastructure and the skilled labor that has enabled it to become a world manufacturing leader. This relates to which of Porter’s attributes of a nation?

A) firm strategy, structure, and rivalry
B) related and supporting industries
C) demand conditions
D) factor conditions

62) The _____ theory was based on the observation that for most of the twentieth century a very large proportion of the world’s new products had been developed by U.S. firms and sold first in the U.S. market.

A) product life-cycle
B) Heckscher-Ohlin
C) new trade
D) Ricardo

63) Economies of scale have a number of sources, including the ability

A) to average out the variable costs of production.
B) of large-volume producers to utilize specialized employees and equipment.
C) to adjust the scale of production based upon product saturation in the marketplace.
D) to utilize nonspecialized employees interchangeably.

64) One of the advantages of being the first mover in a market is

A) there is little risk involved.
B) to benefit from a higher cost structure.
C) the ability to capture scale economies ahead of later entrants.
D) local governments are more favorable to the first movers.

65) Diminishing returns to specialization occur when

A) each additional unit is produced with lesser number of laborers.
B) a nation’s gross domestic product declines for a few years.
C) production possibility frontier appears as a rectangle.
D) more units of resources are required to produce each additional unit.

66) What will happen, according to Paul Samuelson’s critique, if a rich country enters into a free trade agreement with a poor country?

A) Both the countries will incur losses due to the exchanges between them.
B) The productivity of the poor country will decline rapidly.
C) The poor country will rapidly improve its productivity.
D) Both the countries will garner benefits from the exchanges between them.

67) Company A entered the production of office software before its competitors. Because of this, the company’s products are more familiar among and favored by customers. This situation exemplifies the

A) first-mover advantage.
B) diminishing marginal returns.
C) economies of scale.
D) constant marginal returns.

68) Which of the following theories suggests that first-mover advantage is significant in the export of a good?

A) product life-cycle theory
B) Ricardo’s theory
C) new trade theory
D) theory of comparative advantage

69) New trade theory suggests that nations

A) increase their commitment to research and development.
B) adopt policies that promote strong competition within domestic markets.
C) cannot benefit from trade when they do not differ in resource endowments or technology.
D) may benefit from trade even when they do not differ in resource endowments or technology.

70) The commercial aircraft industry can support only a limited number of firms, largely because the existence of established firms would make it difficult to be competitive. This is a basic tenet of

A) mercantilism.
B) the theory of absolute advantage.
C) Heckscher-Ohlin theory.
D) new trade theory.

71) Which of the following theories stress the role of luck, entrepreneurship, and innovation in the production and export of a good or service by the firms in a country?

A) product life-cycle theory
B) Ricardo’s theory
C) theory of comparative advantage
D) new trade theory

72) Porter contends that government

A) can influence the domestic demand conditions and the domestic rivalry components of the diamond, but not the other two components.
B) can influence each of the four components of the diamond either positively or negatively.
C) can influence the factor endowments and the related and supporting industries components of the diamond, but not the other two components.
D) has little or no effect on the four components that shape the environment in which firms compete.

73) The theories of international trade claim that promoting free trade is generally in the best interests of

A) a country, although it may not always be in the best interest of an individual firm or consumer.
B) all multinational corporations.
C) an individual firm, although it may not always be in the best interest of a country.
D) the World Trade Organization.

74) The theories of Smith and Ricardo show that trade makes every nation better off.

⊚ true
⊚ false

75) Porter’s theory of national competitive advantage recommends that government should never interfere in free trade policies .

⊚ true
⊚ false

76) Mercantilist doctrine advocates unrestricted free trade between countries.

⊚ true
⊚ false

77) A country has an absolute advantage in the production of a product when it is more productive and cost efficient than any other country in producing it.

⊚ true
⊚ false

78) Factor endowments refer to a country’s factors of production, such as land, labor, and capital.

⊚ true
⊚ false

79) Heckscher-Ohlin theory stresses that comparative advantage arises from differences in productivity.

⊚ true
⊚ false

80) A key assumption in the Heckscher-Ohlin theory is that technologies are the same across countries.

⊚ true
⊚ false

81) 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
⊚ false

82) XYZ Toys manufactures and sells small quantities of each of its products, but it can still benefit from economies of scale.

⊚ true
⊚ false

83) The simple model of free trade assumed away transportation costs between countries.

⊚ true
⊚ false

84) Resources always move easily from one economic activity to another.

⊚ true
⊚ false

85) 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
⊚ false

86) 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
⊚ false

87) New trade theorists stress the role of luck, entrepreneurship, and innovation in giving a firm first-mover advantages.

⊚ true
⊚ false

88) 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
⊚ false

89) 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
⊚ false