46) India is the largest exporter of information technology services to the United States In turn, the
United States exported $3 billion worth of aircraft to India. What theory is illustrated by this form
of trade between India and the United States?
A) product life-cycle theory
B) Heckscher-Ohlin theory
C) absolute advantage
D) mercantilism
E) theory of national competitive advantage
47) The country of Zeran specializes in the production of beef and produces beef more efficiently
than any other country. It buys soybeans, which it produces less efficiently than beef, from Canta,
even though it produces soybeans more efficiently than Canta. Which theory of international trade
supports Zeran’s decision to buy wheat from Canta?
A) Samuelson critique
B) mercantilism
C) Ricardo’s theory of comparative advantage
D) Adam Smith’s theory of absolute advantage
E) Leontief’s paradox
48) India specializes in business process outsourcing and does this more efficiently than any other
country. It buys agricultural commodities, which it produces less efficiently than outsourcing
activities, from the United States, even though it produces these agricultural commodities more
efficiently than the United States Which international trade theory supports India’s decision to buy
agricultural commodities from the United States?
A) Samuelson critique
B) mercantilism
C) Ricardo’s theory of comparative advantage
D) Adam Smith’s theory of absolute advantage
E) Leontief’s paradox
49) According to the theory of comparative advantage, consumers in all nations can consume more
if there are
A) stronger restrictions on trade.
B) more monopolistic businesses.
C) fewer incentives for intellectual property.
D) no restrictions on trade.
E) fewer monopolistic businesses.
50) Which trade theory suggests that trade is a positive-sum game in which all participating
countries fetch economic gains?
A) Heckscher-Ohlin theory
B) mercantilism
C) comparative advantage
D) Leontief’s paradox
E) Samuelson critique
51) Argonia and Selenia specialize in the production of medical equipment and rice respectively.
Argonia exports medical equipment to Selenia, which in turn exports rice to Argonia. According to
the theory of comparative advantage, this mutually beneficial trade relationship is an example of
A) the significance of trade barriers.
B) a positive-sum game.
C) a first-mover advantage.
D) the advantages of mercantilism.
E) a zero-sum game.
52) Nikoli lives in New Salom which specializes in component parts, while its geographical
neighbor, Durma specializes in heavy machinery. New Salom exports component parts to Durma,
which in turn exports heavy machinery to New Salom. According to the theory of comparative
advantage, this mutually beneficial trade relationship best illustrates
A) the significance of trade barriers.
B) a positive-sum game.
C) a first-mover advantage.
D) the advantages of mercantilism.
E) a zero-sum game.
53) In Latuna, it takes 10 resources to produce 1 ton of coffee and 13.5 resources to produce 1 ton
of wheat. In South Narnia, it takes 40 resources to produce 1 ton of coffee and 12 resources to
produce 1 ton of wheat. Latuna has a comparative advantage over South Narnia in
A) both coffee and wheat.
B) coffee
C) wheat
D) both coffee and wheat if combined.
E) neither coffee nor wheat.
54) Consider the two countries of Swala and Atlantis. Swala is a major producer of wheat and rice
while Atlantis specializes in the production of marble and automobile parts. Engaging in free trade
benefits both countries since Swala is an agrarian nation and Atlantis lacks arable land. This
follows the theory of comparative advantage, and we can say that engaging in free trade benefits
all countries that participate in it; however, this conclusion is based on which inaccurate
assumptions?
A) We have assumed a simple world in which there are only two countries.
B) We have assumed the prices of resources and exchange rates in the two countries are dynamic.
C) We have assumed there are barriers to the movement of resources from the production of one
good to another within the same country.
D) We have assumed that agrarian nations do not specialize in producing fertilizers.
E) We have assumed diminishing returns to specialization.
55) In Lurnee, it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1 ton
of rice. In South Tyberg, it takes 40 resources to produce 1 ton of cocoa and 20 resources to
produce 1 ton of rice. Lurnee has a comparative advantage over South Tyberg in cocoa. This
follows the theory of comparative advantage, and we can say that engaging in free trade benefits
all countries that participate in it; however, this conclusion stems from which of these inaccurate
assumptions?
A) We have assumed constant returns to scale.
B) We have assumed the prices of resources and exchange rates in the two countries are dynamic.
C) We have assumed there are barriers to the movement of resources from the production of one
good to another within the same country.
D) We have assumed that agrarian nations do not specialize in producing particular products.
E) We have assumed diminishing returns to specialization.
56) Based on the last quarterly report, Jason realizes that it is now taking more resources to
produce each of the laptop computers his company makes. What aspect of comparative advantage
is Jason noticing?
A) increasing tariffs
B) diminishing returns
C) JIT inventory
D) economies of scale
E) constant returns
57) In Appellia, it takes 10 units of resources to increase its output of sugar from 12 tons to 13 tons,
but 11 units of resources to increase output from 13 tons to 14 tons, and 12 units of resources to
increase output from 14 tons and 15 tons, and so on. The need for increasing resources is an
example of
A) comparative advantage.
B) diminishing returns to specialization.
C) absolute advantage.
D) mercantilism
E) Porter’s diamond model.
58) Why do diminishing rather than constant returns to specialization sometimes occur?
A) All resources are of the same quality.
B) Resources can shift from the production of one good to another seamlessly.
C) Each country has a fixed stock of resources.
D) Different goods use different resources in different proportions.
E) Trade does not affect the distribution of income within a country.
59) Paul Samuelson’s critique of free trade is based on the idea that the wealthier nation in the trade
agreement might not recognize a net gain if the trade creates
A) the development of a monopoly.
B) a barrier from trading with other nations.
C) more job opportunities in the wealthier nation.
D) lower real wage rates in the wealthier nation.
E) an economic downturn in the poorer nation.
60) One of the rebuttals to Samuelson’s critique of the free trade model is that
A) the United States’ ability to achieve constant returns to specialization is unparalleled.
B) the strict immigration policies of the United States help insulate the economy from inward
migration.
C) introducing trade barriers may in fact be beneficial to developed nations to some extent.
D) developing nations are unlikely to upgrade the skill level of their workforce rapidly enough.
E) the developing nations are unlikely to run into diminishing returns in a near future.
61) What is true of the relationship between trade and economic growth?
A) Countries open to international trade display higher growth rates than those that close their
economies to trade.
B) Within a group of developing countries, closed economies grow faster than open economies.
C) The Leontief paradox notes that adopting an open economy and embracing free trade does not
reward a nation with higher economic growth.
D) Free trade hampers economic growth and leads to lower living standards in the long run.
E) Free trade has historically benefited poor counties and hence trade barriers should be introduced
to protect rich countries from exploitation.
62) According to the Heckscher-Ohlin theory, the pattern of international trade is determined by
differences in
A) labor productivity.
B) diminishing returns.
C) factor endowments.
D) management practices.
E) trade barriers.
63) Sandvor and Milese specialize in the production of dairy and textiles respectively. While
Sandvor doesn’t produce textiles, Milese is not as technologically advanced as Sandvor. In this
situation, according to the Heckscher-Ohlin theory,
A) Sandvor will import textiles from Milese and export dairy to it.
B) Sandvor will invest more than Milese in the production of textiles to exploit its comparative
advantage.
C) Sandvor and Milese will raise their trade barriers to protect their economies.
D) Milese will recruit experts from Sandvor to specialize in the production of dairy.
E) Sandvor will recruit workers from Milese to improve its standing in the textile industry.
64) The difference between Ricardo’s theory and the Heckscher-Ohlin theory is that the
Heckscher-Ohlin theory
A) makes more simplifying assumptions.
B) cannot be subjected to empirical tests.
C) actually predicts trade patterns with greater accuracy.
D) argues that the pattern of international trade is determined by differences in national factor
endowments.
E) suggests that trade is a positive-sum game in which all countries that participate realize
economic gains.
65) Which theory predicts that countries will export those goods that make intensive use of factors
that are locally abundant, while importing goods that make intensive use of factors that are locally
scarce?
A) mercantilism
B) theory of absolute advantage
C) Heckscher-Ohlin theory
D) theory of comparative advantage
E) Samuelson’s critique
66) The country of Dalima has long been a substantial exporter of seafood, reflecting its unusual
abundance of coastal waters; in contrast, its continental neighbor, Bundeeza, has excelled in the
export of goods produced in labor-intensive manufacturing industries. Based on this information,
the export policies of the two countries is best explained by
A) mercantilism.
B) theory of absolute advantage.
C) Heckscher-Ohlin theory.
D) theory of comparative advantage.
E) Samuelson’s critique.
67) U.S. exports are less capital-intensive than U.S. imports, despite the relative abundance of
capital in the country. This is in opposition to the Heckscher-Ohlin theory and has been labelled
A) a zero-sum game.
B) Leontief’s paradox.
C) a positive-sum game.
D) Samuelson’s critique.
E) a first-mover advantage.
68) One reason used to explain the Leontief paradox observed in the case of the United States is
that the United States
A) imports goods that heavily use skilled labor and innovative entrepreneurship.
B) has a special advantage in producing new products made with innovative technologies.
C) exports heavy manufacturing products that use large amounts of capital.
D) has a strong absolute advantage over other nations because of its advantageous factor
endowments.
E) imports goods that make intensive use of factors that are locally abundant.
69) Raymond Vernon’s product life cycle theory stemmed from the idea that for most of the
twentieth century,
A) European industries guided the rest of the world in new products.
B) cost-saving processes were not as important as the development of new products.
C) many of the world’s new products were developed and first sold in the United States.
D) most new products were developed for the manufacturing and agricultural industries.
E) the United States had lower technology-driven innovations than other developed nations.
70) According to the product life-cycle theory, the high cost of U.S. labor gave U.S. firms an
incentive to
A) lower costs of services to offset a fall in demand.
B) develop cost-saving process innovations.
C) invite foreign direct investment in domestic industries.
D) embrace and promote open market capitalism.
E) import new consumer products and export agricultural products.
71) Vernon argues that pioneering firms in the United States kept production facilities closer to the
market and centers of decision making because
A) of the uncertainty and risks inherent in introducing new products.
B) they believed that foreign production facilities were inferior in technical skills.
C) they believed that U.S. labor costs were much lower than those in foreign markets.
D) the U.S. government was critical of outsourcing production to other countries.
E) of the high trade barriers implemented by several Asian and European countries.
72) According to Vernon, what eliminates the need for pioneering U.S. firms to look for low-cost
production sites in other countries?
A) The uncertainties and risks inherent in introducing new products are very low.
B) The demand for most new products tends to be based mainly on price.
C) U.S. labor costs are relatively low compared to global standards.
D) Firms can charge relatively high prices for new products.
E) The production of innovative products in other advanced countries limits the potential for
exports from the United States.
73) According to the product life-cycle theory, while demand for new products is starting to grow
rapidly in the United States, demand in other advanced countries
A) remains limited to high-income groups.
B) necessitates production of that product in those countries.
C) necessitates outsourcing of production to low-cost locations.
D) raises the cost of production in the United States.
E) causes a shift in the position of the United States from that of an exporter to an importer.
74) Intricate Wiring Corp., based in Ohio, creates a brand new high-tech product. The demand for
the product in the United States is high but very low or non-existent elsewhere. The company
decides not to locate manufacturing facilities elsewhere and will simply meet the small foreign
demand via exports. The theory that best explains the company’s policy is
A) product life cycle theory.
B) mercantilism.
C) the Leontief paradox.
D) Heckscher-Ohlin theory.
E) free trade theory.
75) Vernon predicts that as the demand for a new product starts to grow in other advanced
countries, in the long run
A) the cost of labor in these advanced countries begins to increase.
B) it becomes profitable for foreign firms to invest in production facilities in the United States.
C) the firms in the United States begin to gain an absolute advantage.
D) it begins to limit the potential for exports from the United States.
E) the same product will begin to command a higher price.
76) Vernon theorizes that as the market in the United States and other advanced nations matures,
________ becomes the main competitive weapon.
A) placement
B) standardization
C) marketing
D) price
E) customization
77) According to Vernon, what influences the movement of the locus of global production from
advanced countries to developing countries?
A) cost considerations
B) factor endowments
C) domestic competition
D) supporting industries
E) firm structure
78) According to the product life-cycle theory, the locus of global production initially switches
from the United States to other advanced nations and then from those nations to developing
countries. As a result,
A) U.S. imports become less capital-intensive than U.S. exports.
B) the pattern of international trade is affected by differences in factor endowments rather than
differences in productivity.
C) over time, the United States switches from being an exporter of a product to an importer of the
product.
D) the wage rates in the United States decrease.
E) developing nations fail to upgrade their skill levels to compete with advanced countries.
79) For years, many U.S. corporations made cameras. Today; however, most cameras sold in the
United States are imported from Japan and few are manufactured in the United States. Which trade
theory does this demonstrate?
A) product life cycle
B) Heckscher-Ohlin
C) absolute advantage
D) comparative advantage
E) mercantilism
80) Bethany works for a company that makes sports socks. Unlike many smaller companies,
Bethany’s company ships out such large quantities of sports socks that their unit cost is less than
half of the competition. What does this company benefit from?
A) mercantilism
B) diminishing returns
C) economies of scale
D) product life-cycle
E) JIT inventory
81) Economies of scale are achieved as the result of ________ that creates unit cost reductions.
A) trade policies
B) increased tariffs
C) large scale output
D) diminishing returns
E) absolute advantages
82) Intel spreads the huge fixed costs of developing new generation chips over the nearly 2 billion
chips it sells to computer makers. Intel benefits from
A) comparative advantages.
B) factor endowments.
C) economies of scale.
D) diminishing returns.
E) absolute advantages.
83) New trade theory argues that, through its impact on economies of scale, trade can
A) increase the average costs of goods.
B) enable the global market to support a wide range of enterprises.
C) negatively affect the first-mover advantage for all products
D) increase the variety of goods available to consumers.
E) prevent diminishing of returns and promote constant returns to specialization.
84) Which of the following theories states that in those industries where the output required to
attain economies of scale represents a significant proportion of total world demand, the global
market may be able to support only a small number of enterprises?
A) Heckscher-Ohlin
B) comparative advantage
C) product life-cycle
D) new trade
E) absolute advantage