Global Business Today, 11e (Hill)
Chapter 6 International Trade Theory
1) Mercantilism, propagated in the sixteenth and seventeenth centuries, advocated that countries
should discourage exports.
2) Free trade exists when there is no government influence on what citizens can buy from another
country or sell to another country.
3) According to Adam Smith, government policy should determine a country’s imports and
exports.
4) New trade theory stresses that in some cases countries specialize in the production of particular
products because of underlying differences in factor endowments.
5) Mercantilism asserted that gold and silver were the mainstays of national wealth and essential to
vigorous commerce.
6) Those who follow the mercantilist doctrine would not want government intervention to be the
reason for a surplus in the balance of trade.
7) A country has an absolute advantage in the production of a product when it is more efficient
than any other country in producing it.
8) Adam Smith disagreed with the mercantilist assumption because he believed that countries
differ in their ability to produce goods efficiently.
9) According to the theory of comparative advantage, potential world production is greater with
unrestricted free trade than it is with restricted trade.
10) The theory of free trade is enhanced by the idea that resources typically move easily from one
economic activity to another and allow nations to adapt quickly.
11) Free trade is likely to increase a country’s stock of resources and the efficiency with which it
utilizes those resources.
12) The factor endowments of a country refer to government resources made available to help
businesses.
13) The Heckscher-Ohlin theory is considered the best predictor of real-world international trade
patterns.
14) Raymond Vernon’s product life-cycle theory was based on the observation that for most of the
twentieth century a very large proportion of the world’s new products were developed by the firms
situated in Germany and sold first in the German market.
15) According to the product life cycle theory, as demand for a product grows rapidly in the United
States, it will also grow rapidly in other advanced nations and diminish potential exports from the
United States.
16) According to the product life-cycle theory, the locus of global production initially switches
from developing countries to other advanced nations and then from those nations to the United
States.
17) Vernon’s product life cycle theory was based on the idea that most new products were initially
produced in the United States.
18) Factor endowments are unit cost reductions associated with a large scale of output.
19) New trade theory suggests that world trade in certain products will likely be dominated by
countries who acted as late-movers and took advantage of existing innovations.
20) First-mover advantages are gained by those companies that are the early entrants to an
industry.
21) Michael Porter argues that advanced factors are the most significant for competitive
advantage.
22) According to Michael Porter, government can influence each of the four components of
Porter’s diamond—either positively or negatively.
23) Porter’s theory has been subjected to detailed empirical testing and it is proven that it
accurately predicts international trade patterns.
24) From the perspective of making a profit, it is sensible for a company to disperse production
activities to countries where they can be performed most efficiently.
25) Porter’s theory suggests that it is in the best interest of business for a firm to invest in upgrading
advanced factors of production.
26) Garrett works in a country where the government does not set quotas or duties on what its
citizens can buy from another country, or what they can produce and sell to another country. In
other words, Garrett’s country practices
A) free trade.
B) mercantilism.
C) socialism.
D) absolute advantage.
E) a zero-sum game.
27) The theory of ________ was the first to explain why unrestricted free trade benefits a country.
A) Heckscher-Ohlin
B) national competitive advantage
C) free trade
D) absolute advantage
E) zero-sum game
28) Sentoria is an island nation in the Pacific Ocean. Its geographical location is advantageous
since it has access to a variety of aquatic life forms and also a number of freshwater sources that
provide for fisheries. The lack of arable land drives local demand for seafood, and Sentoria is one
of the world’s major exporters of this product. Which theory of international trade best explains
Sentoria’s dominance as an exporter of seafood?
A) new trade theory
B) product life-cycle theory
C) mercantilism
D) Heckscher-Ohlin theory
E) theory of national competitive advantage
29) According to the Smith, Ricardo, and Heckscher-Ohlin theories, a country’s economy may
gain if its citizens buy some products from other nations that could be produced in their home
nation. What is the reasoning behind this idea?
A) The natural resources of a country limit the types and quantities of items that can be produced.
B) International trade is typically regulated by government forces that prevent a business from
exporting.
C) International trade allows a country to specialize in items that can be produced most efficiently
in that country.
D) First-mover advantages limit a country from producing every product that citizens need or
want.
E) Innovative products are typically produced in the home country, but high-demand products
should be imported.
30) The Salcian government decides on the products that can be imported and ensures that any
product that can be produced at home is not imported. Instead, the government wants to maximize
exports to achieve a surplus in the balance of trade. Which perspective likely influences Salcia’s
approach to international trade?
A) mercantilism
B) Leontief’s paradox
C) product life-cycle theory
D) new trade theory
E) first-mover advantage
31) Many years ago, the Republic of Janua believed that it was in its best interests to maintain a
trade surplus, to export more than it imports. In so doing, the Republic of Janua hoped to
accumulate gold and silver, and consequently, increase its national wealth, prestige, and power.
What influenced the Republic of Marunia’s approach to international trade?
A) neo-Ricardian trade theory
B) Leontief’s paradox
C) product life-cycle theory
D) new trade theory
E) mercantilism
32) As a trade theory, mercantilism was based on the idea that a trade surplus would lead to
A) absolute advantage among all trading partners.
B) first-mover advantages.
C) lower levels of inflation and a steady economy.
D) accumulations of gold and silver.
E) lower levels of national wealth.
33) Which theory asserts that countries should simultaneously encourage exports and discourage
imports?
A) free trade
B) capitalism
C) new trade
D) mercantilism
E) socialism
34) Which strategy is in a country’s best interests, according to the main tenet of mercantilism?
A) importing products from developing rather than developed countries
B) importing products even if they are efficiently produced at home
C) importing less specialized goods rather than attempting to make them at home
D) minimizing exports and maximizing imports
E) maintaining a trade surplus
35) What was the principle currency of trade in the mid-sixteenth century when mercantilism came
into favor in England?
A) the pound
B) gold and silver
C) the U.S. dollar
D) salt and spices
E) human labor
36) One of the central beliefs of mercantilism is that
A) a country’s government should intervene to achieve a surplus in the balance of trade.
B) a large volume of trade is essential regardless of whether it comes from imports or exports.
C) trade is a positive-sum game in which all countries benefit from trading with each other.
D) a country that has an absolute advantage in the production of all goods derives no benefits from
international trade.
E) potential world production is greater with unrestricted free trade than it is with restricted trade.
37) The nation of Tazia exports agricultural products and in turn imports products that it does not
produce such as computers and electronic devices. As a result, it spends more on imports than it
gains from exports. Which perspective would frown on this form of international trade?
A) new trade theory
B) product life-cycle theory
C) mercantilism
D) Heckscher-Ohlin theory
E) theory of national competitive advantage
38) An inconsistency in the mercantilist doctrine, as pointed out by David Hume, is that
A) the volume of a country’s imports increases as an indirect consequence of mercantilism.
B) the exclusion of government influence in matters pertaining to trade is not ideal.
C) in the long run, no country could sustain a surplus on the balance of trade.
D) it was not backed by either sound political principles or social ideologies.
E) trade is a zero-sum game rather than a positive-sum game as postulated by the theory.
39) A zero-sum game occurs when
A) the market mechanism determines what a country imports and what it exports.
B) a country engages in international trade even for products it is able to produce for itself.
C) an economic gain by one country results in an economic loss by another.
D) limits on imports are done in the interests of domestic producers, but not domestic consumers.
E) one country has an absolute advantage in the production of all goods.
40) When the country of Matu trades with the country of Balor, Matu experiences a gain because
of the high costs of its products while Balor experiences a loss because it is trading small amounts
of products that cost very little. Which characteristic of the mercantilist theory does this reflect?
A) factor endowments
B) first-mover advantage
C) zero-sum game
D) late-mover advantage
E) comparative advantage
41) Neo-mercantilists equate political power with economic power and economic power with
A) corruption.
B) a balance-of-trade surplus.
C) regional dominance.
D) a trade monopoly.
E) capitalism.
42) A neo-mercantilist strategy would promote
A) the equal distribution of exports and imports.
B) boosting exports and limiting imports.
C) boosting both imports and exports.
D) limiting both imports and exports.
E) boosting imports and limiting exports.
43) Australia is a major producer of agricultural and dairy products and exports coffee, tea, spices,
and milk products to the United States. The United States is the world’s third largest supplier of
machinery and exports heavy machinery to Australia. Adam Smith would say this exchange
occurs because
A) tariff barriers determine the flow of goods and services between nations.
B) countries are simultaneously encouraging exports and discouraging imports.
C) first entrants to the industry ensure their nations have the first-mover advantages.
D) nations with an absolute advantage in producing certain goods trade them for goods produced
by other countries
E) gold and silver are the mainstays of national wealth and essential to vigorous commerce.
44) Garments are exported from China to the United States on a daily basis. In turn, the United
States exports agricultural products like soybeans to China. Which statement best explains the
trade equation between China and the United States?
A) Tariff barriers determine the flow of goods and services between nations.
B) Countries are simultaneously encouraging exports and discouraging imports.
C) First entrants to the industry ensure their nations have the first-mover advantages.
D) Nations with an absolute advantage in producing certain goods trade them for goods produced
by other countries.
E) Gold and silver are the mainstays of national wealth and essential to vigorous commerce.
45) Cadmia and Rhodia specialize in the production of electronics and pharmaceutical products
respectively. They are considered the best at their specializations. Cadmia trades electronics with
Rhodia in exchange for pharmaceutical products. Which perspective is illustrated by this form of
trade between Cadmia and Rhodia?
A) product life-cycle theory
B) Heckscher-Ohlin theory
C) absolute advantage
D) mercantilism
E) theory of national competitive advantage