Test Bank Chapter 4 International trade theory and the firm

Chapter 4

Test Bank

Type: multiple choice question

Title: Chapter 04 Question 01

1) According to the theory of comparative advantage, which of the following is correct?

Feedback: Theory of comparative advantage explains that a country that is more efficient in producing two products will gain more from trade if the country focuses on producing only the product that it can produce better in relative to any other country. Therefore, a country that has less efficient production can still export its product to other countries even it does not enjoy an absolute advantage.

A-head reference: 4.2 International trade theory ‘without the firm’

a. A country gains from trade only when it can produce goods and services more efficiently than any other country.

b. A country gains from trade because it has cheaper labour compared to other countries.

c. A country can export its products to other countries despite it has less efficient production than other countries.

d. To gain from trade, a country should specialise in producing goods and services that it can produce more efficiently and cheaply compared to any other country.

Type: multiple response question

Title: Chapter 04 Question 02

2) Which of the following is correct? Please select all that apply.

Feedback: Mercantilism suggests that a nation should aim to export so that it can stock more gold. Theory of absolute advantage suggests that a country should specialise in producing product that it can produce cheaply and efficiently and a country a country should not produce products that it can buy cheaply. Theory of comparative advantage suggests that a country could gain from trade even it does not have absolute advantage. So, the option stating that theory of absolute advantage promote exports without import is incorrect. Other options are correct.

A-head reference: 4.2 International trade theory ‘without the firm’

a. Mercantilism promotes exports.

b. Theory of comparative advantage predicts that a country could gain from trade despite the country’s inefficient production.

c. Theory of absolute advantage promote exports without imports.

d. Theory of absolute advantage predicts that a country could gain more from export products in which it can produce cheaply.

Type: true-false

Title: Chapter 04 Question 03

3) Assume there are two countries, A and B. If country A is better in producing two products than country B, according to the theory of comparative advantage, is it true or false that country B should not produce nor export any product?

a. True

Feedback: The theory that suggests that country A should produce and export both products to country B is the theory of absolute advantage.

A-head reference: 4.2 International trade theory ‘without the firm’

b. False

Feedback: According to the theory of comparative advantage, country A should produce one product that it can produce better in relative to country B, and export another product from country B. So, country B can still produce and export one product.

A-head reference: 4.2 International trade theory ‘without the firm’

Type: true-false

Title: Chapter 04 Question 04

4) Is the following statement true or false? According to the theory of comparative advantage, the allocation of resource among countries participating in international trade will return the greatest welfare for all countries.

a. True

Feedback: According to the theory of comparative advantage, each country is able to produce a product at lower cost when it participates in international trade. The cost of products for each country becomes cheaper compared to the cost a country has to pay without international trade. The allocations of resources are operated in the best possible way that benefits all countries.

A-head reference: 4.2 International trade theory ‘without the firm’

b. False

Type: multiple response question

Title: Chapter 04 Question 05

5) Which of the following are the limitations of Ricardo’s theory of comparative advantage? Please select all that apply.

Feedback: Despite the powerful implication of the theory of comparative advantage by David Ricardo, there are some limitations. The theory claims all can gain from trade, but, in the reality, some industries may lose from international trade. When a country imports products that other countries can produce cheaper, the import-competing industries are likely to lose from trade. Job loss in these import-competing industries may occur because workers may not have skills to work in other industries that survive from international trade. Another limitation is that it does not consider time dimension, so, that it cannot explain technological changes. Hence, the option stating that job loss is likely to occur in exporting industries is incorrect. Other options are correct.

A-head reference: 4.2 International trade theory ‘without the firm’

a. Not all countries gain from international trade. Job loss is likely to occur in import-competing industries after international trade.

b. Not all countries gain from international trade. Job loss is likely to occur in exporting industries after international trade.

c. Ricardo’s model cannot capture technological change.

d. Ricardo’s model is static.

Type: multiple choice question

Title: Chapter 04 Question 06

6) Which industry is most likely to loss (e.g. facing unemployment) from international trade?

Feedback: An industry that is most likely to loss from international trade is import-competing industry because the competition in this industry is higher and jobs in this industry will be lost.

A-head reference: 4.2 International trade theory ‘without the firm’

a. Export-oriented industry

b. The industry producing exporting products made from importing raw materials

c. The industry that uses importing goods to produce products for both domestic and foreign markets

d. Import-competing industry

Type: multiple choice question

Title: Chapter 04 Question 07

7) Which of the following explains why a country which has rich natural resources can become less competitive compared to some other countries?

Feedback: A country that has a strong comparative advantage in the production of commodities or natural resources can become locked into low-value natural resources or commodities production, especially if firms in that country do not develop created assets or capabilities that help them compete with firms in other countries.

A-head reference: 4.2 International trade theory ‘without the firm’

a. A country cannot export its natural resources.

b. A country focuses mainly on producing low-valued natural products without producing created assets.

c. A country does not have absolute advantage in producing natural assets.

d. A country does not have comparative advantage in producing natural assets.

Type: multiple choice question

Title: Chapter 04 Question 08

8) Which of the following is wrong?

Feedback: Locational advantages include both natural endowments of countries and an outcome of those factors that are wedded to the country. The quality of labour and its supply are therefore considered as locational advantages.

A-head reference: 4.3 International trade theory ‘with the firm’

a. The quality of labour in a country is not a locational advantage.

b. The high quantity of oil and gas in a country can be considered as its locational advantage.

c. The investment in research and development of a firm creates its ownership advantage.

d. Locational advantages, in general, are available to all firms in the same country.

Type: multiple choice question

Title: Chapter 04 Question 09

9) Which firm is most likely to successfully compete in foreign direct investment?

Feedback: A firm that is most likely to compete successfully in foreign direct investment is a firm that has competitive advantages based on its created assets. The firm’s investment in research and development can help them develop and own new technology in which they can transfer this ownership advantages to compete in foreign markets.

A-head reference: 4.3 International trade theory ‘with the firm’

a. A firm that has competitive advantages based on its cheaper labour

b. A firm that is specialise in producing produces based mainly on limited natural resource

c. A firm that is owned by the government

d. A firm that has competitive advantages based on its investment in research and development

Type: multiple choice question

Title: Chapter 04 Question 10

10) Which of the following is best described as the driving force of the growth of international trade among advanced economies?

Feedback: Technology is identified as the driving force of the growth of trade among advanced economies. The firms’ investment in technology can create the firm’s ownership advantage that help them compete in international trade.

A-head reference: 10

a. Government support

b. Technology

c. Social capital

d. Institutional development

Type: multiple response question

Title: Chapter 04 Question 11

11) Which of the following are the limitations of Vernon’s product cycle model? Please select all that apply.

Feedback: There are several limitations of the product cycle models (PCM). First, while PCM can explain many products, it does not the best explanation for the international trade of commodities or raw materials that are better explained by Ricardo’s comparative advantage. Also, modern MNEs develop products worldwide rather than developing new product based entirely on one domestic market as suggested in PCM. Firms can also use other strategy to maintain its differentiations rather than price competition as it is suggested in PCM. Despite several limitations, PCM adds time dimension to the understanding of firms and international trade, therefore it is not a static model.

A-head reference: 4.3 International trade theory ‘with the firm’

a. Modern firms do not develop products focusing only for domestic market.

b. Price competition is not the only way to compete in the market.

c. Product cycle model is a static model.

d. Product cycle model may not explain some types of products.

Type: multiple choice question

Title: Chapter 04 Question 12

12) According to product life cycle theory, which of the following explains a situation when a country will eventually import the product which is initially developed and exported by the country itself?

Feedback: The product cycle model suggests the changes in international location of production. When a product is more mature or standardised, the production will move to countries that have lower production costs. The country that initially creates the product would eventually import the product back if the wage cost outside the country were very low and offset the cost of transport the product back to the country.

A-head reference: 4.3 International trade theory ‘with the firm’

a. That product is cheaper producing in other countries

b. Other country creates more advance technology to produce that particular product

c. That country does not has strict regulations on property right

d. That product is no longer needed in the country that initially created it.

Type: true-false

Title: Chapter 04 Question 13

13) Is the following statement true or false? New trade theory differs mainly from classic trade theory because it provides comprehensive explanation of the role of the firm in international trade.

a. True

Feedback: New trade theory provides explanation of intra-industry trade which is not considered in the classic trade theory. It focuses on the aggregate level of international trade, rather than the firm level.

A-head reference: 4.3 International trade theory ‘with the firm’

b. False

Type: multiple choice question

Title: Chapter 04 Question 14

14) Which of the following is not included in the Porter’s diamond?

Feedback: The four aspects of the Porter’s diamond are factor endowments, demand conditions, related and supporting industries, and firm strategy, structure and rivalry. Capabilities of managers are not included in this model.

A-head reference: 4.3 International trade theory ‘with the firm’

a. Demand conditions

b. Factor endowments

c. Capabilities of the managers

d. Related and supporting industries

Type: multiple choice question

Title: Chapter 04 Question 15

15) Which of the following is not the form of government subsidies?

Feedback: Subsidies are government payments to domestic producers in form of cash grants, low-interest loans, and tax relief. Quantitative restrictions or quotas restrict the quantity of imports to protect market share of domestic firms.

A-head reference: 4.4 ‘Barriered trade’, and the arguments for and against protection

a. Low-interest rate loan

b. Tax relief

c. Quantitative restrictions

d. Cash grants

Type: multiple choice question

Title: Chapter 04 Question 16

16) Which of the following is wrong?

Feedback: Non-tariff barriers may be employed by governments, but not only by governments. Private interests can construct non-tariff barriers such as encouragements public to buy domestic products.

A-head reference: 4.4 ‘Barriered trade’, and the arguments for and against protection

a. Artificial barriers control trade quantity by influencing domestic prices.

b. Artificial barriers control trade quantity by influencing the quantity imported.

c. Non-tariff barriers are employed only by governments.

d. Non-tariff barriers can be applied to trade in services

Type: multiple response question

Title: Chapter 04 Question 17

17) Which of the following are correct? Please select all that apply.

Feedback: Tariff barriers affect only visible, or merchandise, trade. They do not affect trade in services. Other options are correct.

A-head reference: 4.4 ‘Barriered trade’, and the arguments for and against protection

a. Subsidies are government payments to domestic producers, in the form of cash grants, low-interest loans, and tax relief.

b. Quantitative restrictions or quotas restrict the quantity of imports in order to protect the market share of domestic firms.

c. Tariff barriers can affect both merchandise and trade in services.

d. Quantitative restrictions or quotas are enforced by issuing licenses to a group of firms

Type: multiple response question

Title: Chapter 04 Question 18

18) Which of the following are the reasons a country applies trade protections? Please select all that apply.

Feedback: A country applies trade protection because of many reasons. The protection of employment, consumers, or infant industry are all the reasons for trade protection. A country can also apply trade protection in order to promote national interests such as to raise income for the government.

A-head reference: 4.4 ‘Barriered trade’, and the arguments for and against protection

a. To promote its industrialisation

b. To protect its consumers

c. To raise the government income

d. To safeguard domestic jobs

Type: multiple choice question

Title: Chapter 04 Question 19

19) Which of the following explains ‘offshoring foreign direct investment ’?

Feedback: Offshoring foreign direct investment refers to the situation in which production is moved to a location abroad, generally to reduce costs and to increase efficiency, but also to reduce risk.

A-head reference: 4.4 ‘Barriered trade’, and the arguments for and against protection

a. Offshoring foreign direct investment happens when a production is moved to a location abroad to reduce costs, increase efficiency, and reduce risk.

b. Offshoring foreign direct investment is the same with licensing.

c. Offshoring foreign direct investment happens when a production is moved to a cheaper location in the home country.

d. Offshoring foreign direct investment happens when a production is assigned to other firms hired by the multinational company.

Type: true-false

Title: Chapter 04 Question 20

20) Is the following statement true or false? Only by international outsourcing that integrated productive activities are segmented and spread over an international network of production.

a. True

b. False

Feedback: Integrated productive activities are segmented and spread over an international network of production under the international fragmentation of production, which is generated by both offshoring FDI and international outsourcing.

A-head reference: 4.4 ‘Barriered trade’, and the arguments for and against protection