Chapter 5: Trading Internationally
TRUE/FALSE
1. The theory of mercantilism viewed international trade as a win-win game.
2. Trade deficit occurs when a nation exports more than it imports.
3. Whether a country has a trade surplus or deficit leads to the country’s balance of trade.
4. Mercantilism suggests that self-sufficiency is the best for a country.
5. The theory of absolute advantage was advocated by French statesman Jean Baptist Colbert.
6. The theory of absolute advantage espouses that the economic advantage one nation enjoys is superior
to another nation.
7. The theory of comparative advantage states that even if a country does not have absolute advantage in
production, the country can still profitably specialize if the country is relatively more efficient.
8. A country has a comparative advantage when that country can be more efficient than any other country
in the production of any good or service.
9. Classical theories exclude the comparative advantage of nations.
10. Mercantilism is the direct intellectual ancestor of modern-day protectionism.
11. Adam Smith proposed the theory of comparative advantage.
12. Opportunity cost refers to the cost of pursuing one activity at the expense of another activity, given the
alternatives.
13. Factor endowment theory is a proposition that nations will develop comparative advantage based on
their locally abundant factors.
14. Mercantilism, absolute advantage, and comparative advantage are examples of modern theories.
15. Product life cycle theory was developed by American economist Raymond Vernon in 1966.
16. Product life cycle theory is the first dynamic theory to account for changes in the patterns of trade over
time.
17. Strategic trade is the first theory to incorporate dynamic changes in patterns of trade.
18. Strategic trade theory suggests that strategic intervention by governments in certain industries can
improve the odds for international success.
19. First-mover advantages are enjoyed by first entrants and not shared with late entrants.
20. National competitive advantage of industries is the most recent, most complex, and most realistic
among various theories.
21. According to absolute advantage theory, by specializing and trading, each nation produces more and
consumes more.
22. Based on the mercantilism theory, the wealth of all trading nations and the world increases.
23. Factor endowments, domestic demand, firm strategy, structure and rivalry, and related and supporting
industries are aspects of strategic trade theory.
24. Government payments to domestic firms to produce a competitive advantage are subsidies.
25. Administrative policy is a superficial policy to show that exporting countries voluntarily agree to
restrict their exports.
26. Bureaucratic rules that make it harder to import foreign goods are defined as administrative policies.
27. Import quota is a type of nontariff barriers.
28. Foreign policy objectives are often sought through trade intervention.
29. Trade embargo is politically motivated trade sanction against foreign countries to signal displeasure.
30. Political arguments against free trade state infant industry cannot be protected under free trade.
31. Germany persistently generates a trade deficit with the Eurozone.
32. Classical theorists and their modern-day disciples argue that Europe and India trade by tapping into
each other’s comparative advantages.
33. German managers can be expected to move low-end production to new places outside Europe because
of reduced comparative advantage.
34. German managers can be also be expected to retain high-end manufacturing in-country to ensure
future comparative advantage.
35. Managers need to continually monitor and be politically active to appreciate the gains from trade
locations.
MULTIPLE CHOICE
1. ________ occurs when a nation imports more than it exports.
a.
Trade deficit
c.
Trade surplus
b.
Balance of trade
d.
Trade embargo
2. The aggregation of importing and exporting by both sides leads to a:
a.
Both a balance of trade and a trade surplus or deficit
b.
Balance of trade
c.
Trade surplus or deficit
d.
Different nation’s trade
3. Which is seen by economists as the better predictor global business; the institution-based view or the
resource based view?
a.
Neither of these choices
c.
Both of these choices
b.
The Resource-based view
d.
The Institution-based view
4. Widely practiced during the 1700s, ________ viewed international trade as a zero-sum game.
a.
Theory of mercantilism
c.
Free trade
b.
Classical trade theories
d.
Protectionism
5. The idea that governments should actively protect domestic industries from imports and vigorously
promote exports represents:
a.
Theory of mercantilism
c.
Modern trade theories
b.
Theory of absolute advantage
d.
Protectionism
6. The theory of absolute advantage is:
a.
The economic advantage one nation enjoys that is absolutely superior to other nations
b.
The idea that governments should actively protect domestic industries from imports and
vigorously promote exports
c.
The idea that free market forces should determine how much to trade with little
government intervention
d.
The belief that held that the wealth of the world was fixed and that a nation that exported
more and imported less would enjoy the net inflows of gold and silver and thus become
richer
7. The relative advantage in one economic activity that one nation enjoys in comparison with other
nations is known as:
a.
Free-trade advantage
c.
Theory of absolute advantage
b.
Theory of comparative advantage
d.
Theory of nations advantage
8. British economist ________ developed a theory of absolute advantage.
a.
David Ricardo
c.
Bertil Ohlin
b.
Michael Porter
d.
Adam Smith
9. The classical theories that have evolved since the 1700’s are based on:
a.
Mercantilism
c.
Comparative advantage
b.
Absolute advantage
d.
All of these answers
10. American economist Raymond Vernon divided the world into:
a.
Other developed nations
c.
Developing nations
b.
Lead innovation nations
d.
All of these answers
11. The modern economic theory that accounts for changes in the patterns of trade over time is known as:
a.
Strategic trade policy
c.
Product life cycle theory
b.
First-mover advantage theory
d.
Strategic trade theory
12. The factor endowment theory is identified as:
a.
Proposition that nations will develop comparative advantage based on their locally
abundant factors
b.
Theory that the competitive advantage of certain industries in different nations depends on
four aspects that form a “diamond”
c.
Economic theory that accounts for changes in the patterns of trade over time
d.
Theory that suggests that strategic intervention by governments in certain industries can
enhance their odds for international success
13. ________ is the extent to which different countries possess various factors of production such as labor,
land, and technology.
a.
Product lifecycle
c.
Factor endowment
b.
Absolute advantage
d.
Comparative advantage
14. The policy to assist strategic advantage is known as:
a.
Strategic trade policy
c.
Heckscher-Ohlin policy
b.
Free trade policy
d.
“Diamond” policy
15. Factor endowments were noted by:
a.
Raymond Vernon
c.
Michael Porter
b.
Adam Smith
d.
Heckscher-Ohlin
16. The national competitive advantage of industries depends on:
a.
Related and supporting industries
b.
Country factor endowments and firm strategy, structure, and rivalry
c.
Domestic demand conditions
d.
All of these answers
17. The birth of modern economics and the forerunner of the free trade movement are strengths and
influences of:
a.
Comparative advantage
c.
Mercantilism
b.
National competitive advantage
d.
Absolute advantage
18. Which of the following is a classical theory?
a.
Absolute advantage
c.
National competitive advantage
b.
Strategic trade
d.
Product life cycle
19. Which of the following is the first theory to incorporate dynamic changes in patterns of trade:
a.
Mercantilism
c.
Product life cycle
b.
Strategic trade
d.
Absolute advantage
20. Which of the following is the strength of a comparative advantage?
a.
It explains patterns of trade based on factor endowments.
b.
It positively incorporates the role of governments in trade.
c.
It defeats mercantilism, at least intellectually.
d.
It provides direct policy advice.
21. ________ are government payments to domestic firms.
a.
Tariffs
c.
Trade embargoes
b.
Quotas
d.
Subsidies
22. Which of the factors is not in the Porter’s diamond model?
a.
Country factor endowments
c.
Foreign demand conditions
b.
Domestic demand conditions
d.
Related and supporting industries
23. As a major tariff barrier, a(n) ________ is a tax imposed on imports.
a.
Import tariff
c.
Non Trade Barrier
b.
Export tariff
d.
Deadweight costs
24. Which of the theories assumes perfect resource mobility?
a.
Comparative advantage theory
c.
Absolute advantage theory
b.
Mercantilism theory
d.
All of these answers
25. Deadweight costs are net losses that occur when ________ are imposed.
a.
Import quotas
c.
Import tariffs
b.
Voluntary export restraints
d.
Local content requirements
26. ________ discourages imports by placing taxes on imported goods.
a.
Import quota
c.
Antidumping duty
b.
Nontariff barrier
d.
Tariff barrier
27. NTBs (nontariff barriers) include:
a.
Export restraints, local content requirements
b.
Subsidies, import quotas
c.
Administrative policies, antidumping duties
d.
All of these answers
28. Import quota is a kind of:
a.
Nontariff barriers
c.
Tariff barriers
b.
Antidumping duty
d.
Voluntary export restraints
29. A superficial policy to show that exporting countries voluntarily agree to restrict their exports is
known as:
a.
Voluntary export restraints
c.
Antidumping duties
b.
Local content requirements
d.
Administrative policies
30. ________ are restrictions on the quantity of imports for specific periods of time.
a.
Export restraints
c.
Local content requirements
b.
Import quotas
d.
Antidumping duties
31. Political arguments against free trade’s ability to advance a nation’s political, social, and environmental
agenda, regardless of possible economic gains from trade, include:
a.
National security, consumer perception, foreign policy, and environmental and social
responsibility
b.
Foreign policy and environmental and social responsibility
c.
Foreign policy and national security
d.
National security and consumer perception
32. Young domestic firms that need government protection are in the:
a.
Standard industry
c.
Infant industry
b.
Mature industry
d.
Declining industry
33. One of the ________ is about service trade and high skill jobs in high technology such as IT.
a.
The classical theories versus new realities debate
b.
The infant industry argument
c.
Trade embargoes
d.
The trade deficit versus trade surplus debate
34. What determines the success and failure of a firm’s exports around the globe?
a.
Discovering and leveraging the comparative advantage of world-class locations
b.
Monitoring and nurturing the current comparative advantage of certain locations combined
with taking advantage of new locations
c.
Being politically active to demonstrate, safeguard, and advance the gains from
international trade
d.
All of these answers
ESSAY
1. Discuss the characteristics of the modern theories of international trade.
2. Compare and contrast absolute advantage and comparative advantage trade theories for nations.
3. Discuss the national competitive advantage of industries.
4. Identify the strengths and influences of the classical theories of international trade.
5. Define three Non-Tariff Barriers and explain their implications.
6. Discuss the political arguments against free trade.
7. From a management perspective, what determines the success and failure of a firm’s exports around
the globe?
8. From a government perspective, discuss the economic arguments against free trade.
