International Business: The Challenges of Globalization, 7e (Wild)
Chapter 5 International Trade
1) International trade is the purchase, sale, or exchange of goods and services across national
borders.
2) The value of trade passing through the borders of all countries exceeds the amount of goods
and services they produce.
3) Most of the world’s merchandise trade is composed of trade in agricultural products.
4) Trade in services tends to be relatively more important for the world’s richest countries.
5) When a country’s currency is weak relative to other nations, domestic products are more
expensive than imports.
6) Trade between most nations is presently characterized by a certain degree of isolationism.
7) Mercantilism states that nations should only concern themselves with accumulating financial
wealth.
8) Mercantilist countries used to amass wealth by acquiring less-developed territories around the
world.
9) Trade deficit occurs when the value of a country’s imports is greater than the value of its
exports.
10) Mercantilism views competition for the world’s wealth as a positive-sum game.
11) According to Adam Smith, international trade should be restricted by tariffs and quotas in
order to give a country an absolute advantage.
12) The theory of absolute advantage destroys the mercantilist idea that international trade is a
zero-sum game.
13) The theory of absolute advantage measures a nation’s wealth by the standard of living of its
people.
14) Economist David Ricardo developed the theory of comparative advantage.
15) The ability of a nation to produce a good more efficiently than any other nation is called its
comparative advantage.
16) The theories of comparative advantage and absolute advantage assume that countries are
driven only by the maximization of production and consumption.
17) The theories of comparative and absolute advantage assume that specialization in the
production of one particular good results in efficiency gains.
18) Factor proportions theory states that factors in great supply relative to demand will be more
costly than factors in short supply relative to demand.
19) Factor proportions theory states that a country will produce and export those goods that
require resources abundantly available within the country.
20) The factor proportions theory of international trade was developed by Wassily Leontief.
21) In the maturing product stage of the international product life cycle theory, production
facilities are introduced in countries with the highest demand.
22) An absolute advantage is the economic and strategic advantage gained by being the first
company to enter an industry.
23) National competitive advantage theory states that a nation’s competitiveness in an industry
depends on the capacity of the industry to innovate and upgrade.
24) According to Michael Porter, advanced factors account for the sustained competitive
advantage a country enjoys in a product.
25) Companies that belong to a nation’s internationally competitive industries exist in isolation
from supporting industries.
26) ________ refers to the purchase, sale, or exchange of goods and services across national
borders.
A) Domestic trade
B) Foreign direct investment
C) International trade
D) Mercantilism
27) The importance of trade for a nation can be measured by ________.
A) examining the amount of wealth acquired by the national government through restrictive
trade policies
B) the living standards of people involved in only trade activities
C) the number of acquired territories the nation has that serves as sources of inexpensive raw
materials
D) examining the volume of its trade relative to its total output
28) Most of the world merchandise trade is composed of trade in ________.
A) minerals
B) services
C) manufactured goods
D) agricultural products
29) A majority of the total world merchandise trade occurs among ________.
A) middle-income and low-income economies
B) high-income economies
C) newly industrialized countries
D) emerging markets
30) The smallest portion of the total world trade comprises trade between ________.
A) high-income and middle-income nations
B) low-income and middle-income nations
C) developed countries
D) First World member countries
31) The danger of trade dependency is that ________.
A) it often leads to the exploitation of developed countries
B) political turmoils in a country might affect all dependent countries
C) the countries involved in trade often get into rivalry over trade tariff issues
D) it is difficult to end trade activities with current trade partners and find new trade partners
32) ________ says that nations should accumulate financial wealth, usually in the form of gold,
by encouraging exports and discouraging imports.
A) Absolute advantage theory
B) Factor proportions theory
C) Mercantilism
D) Communism
33) The measures of a nation’s well-being other than the financial wealth accumulated through
exports are irrelevant according to ________.
A) mercantilism
B) absolute advantage theory
C) factor proportions theory
D) new trade theory
34) Which of the following was a prominent mercantilist nation?
A) U.S.
B) China
C) Britain
D) Japan
35) One of the major pillars upon which the practice of mercantilism rested was ________.
A) economies of scale
B) pricing mechanism
C) excessive imports
D) trade surpluses
36) The condition that results when the value of a nation’s exports is greater than the value of its
imports is called ________.
A) a trade deficit
B) a trade surplus
C) mercantilism
D) dumping
37) The condition that results when the value of a country’s imports is greater than the value of
its exports is called ________.
A) a trade deficit
B) economies of scale
C) a break-even point
D) absolute advantage
38) According to mercantilism, the accumulation of national wealth depended on the ________.
A) increase in a nation’s trade surplus
B) increase in a nation’s trade deficit
C) expansion of a nation’s total value of trade
D) expansion of a nation’s total volume of trade
39) Which of the following statements is incorrect with regard to the importance of colonies for
mercantilist nations?
A) They served as sources of inexpensive raw materials.
B) They served as markets for higher-priced finished goods.
C) They served as a source of military protection.
D) They served as a source of profits for mercantilist powers.
40) Nations following the theory of ________ believed that the world’s wealth was limited and
that a nation could increase its share of the pie only at the expense of its neighbors.
A) absolute advantage
B) comparative advantage
C) mercantilism
D) factor proportions
41) Today, countries seen by others as trying to maintain a trade surplus and expand their
national treasures at the expense of other nations are accused of practicing ________.
A) totalitarianism
B) anti-mercantilism
C) social stratification
D) economic nationalism
42) Another term for neomercantilism is ________.
A) new trade
B) free trade
C) economic nationalism
D) political nationalism
43) Which of the following refers to the ability of a nation to produce a good more efficiently
than any other nation?
A) mercantilism
B) comparative advantage
C) absolute advantage
D) neomercantilism
44) Who proposed the theory of absolute advantage?
A) David Ricardo
B) Adam Smith
C) Bertil Ohlin
D) Raymond Vernon
45) Adam Smith believed that ________.
A) governments should determine trade flows
B) market forces should determine trade flows
C) international trade should be restricted by tariffs and quotas
D) countries should produce most goods themselves and trade as little as possible
46) The theory of absolute advantage measures a nation’s wealth by determining the ________.
A) amount of gold it has on reserve
B) quantity of minerals it has on reserve
C) total trade volume in the country
D) living standards of its people
47) The theory of absolute advantage destroys the mercantilist idea that international trade is a
________.
A) positive-sum game
B) zero-sum game
C) negative-sum game
D) win-win game
48) Which of the following is true about the theory of absolute advantage?
A) The theory accepts the mercantilist idea that international trade is a zero-sum game.
B) The theory approves the objective of national governments to acquire wealth through
restrictive trade policies.
C) The theory emphasizes that nations should open their doors to trade so that people can obtain
more goods at cheaper rates.
D) The theory measures a nation’s wealth by how much gold and silver it has on reserve.
49) When there are gains to be had by both countries that are party to an exchange, international
trade is considered a(n) ________.
A) positive-sum game
B) equal-sum game
C) negative-sum game
D) zero-sum game
50) When a country is not able to produce a good more efficiently than other nations, but
produces the good more efficiently than it does any other good, it is said to have a(n) ________.
A) absolute advantage
B) resource advantage
C) first-mover advantage
D) comparative advantage
51) The theory of comparative advantage was proposed by ________.
A) David Ricardo
B) Adam Smith
C) Bertil Ohlin
D) Raymond Vernon
52) To complete his business bookkeeping work each month, a business owner spends about 20
hours and in the process, has to give up $900 in income. If he hired a bookkeeper to do the work,
the job would be completed in 15 hours and would cost him $600. Should the owner hire the
bookkeeper or continue to do the work himself?
A) He should hire the bookkeeper because the bookkeeper has an absolute advantage in
completing the books.
B) He should do the bookkeeping himself because he has an absolute advantage in completing
the books.
C) He should hire the bookkeeper only if the bookkeeper agrees to give him a discount on the
service price.
D) He should hire the bookkeeper only if the bookkeeper is willing to complete the work in 12
hours.
53) Country A produces a ton of coffee using one unit of resources. Country B produces two tons
of coffee using one unit of resources. Which of the following is true regarding Country A and
Country B?
A) Country A has an absolute advantage in producing coffee.
B) Country B has an absolute advantage in producing coffee.
C) Neither Country A nor Country B has an absolute advantage in producing coffee.
D) Both Country A and Country B have an absolute advantage in producing coffee.
54) According to the theory of ________, trade is beneficial even if one country is less efficient
in the production of two goods, as long as it is less inefficient in the production of one of the
goods.
A) absolute advantage
B) mercantilism
C) comparative advantage
D) factor proportions
55) Which of the following statements is true regarding the assumptions of the absolute and
comparative advantage theories?
A) The theories assume that there are many number of countries engaged in the production and
consumption of just two goods.
B) The theories assume that there are additional costs for transporting traded goods from one
country to another.
C) The theories assume labor to be the only resource used in the production process.
D) The theories assume that specialization in the production of one particular good results in
gains in efficiency.
56) Which of the following is an assumption made by the comparative advantage theory?
A) maximization of production and consumption
B) government interference and control in trade activities
C) creation of trade deficits
D) creation of trade surpluses
57) Both absolute and comparative advantage theories assume that ________ is the only resource
used in the production process.
A) land
B) labor
C) capital
D) equipment
58) The ________ theory states that countries produce and export goods that require resources
available in abundance and import goods that require resources in short supply.
A) new trade
B) absolute advantage
C) international product life cycle
D) factor proportions
59) The focus of factor proportions theory is on the ________.
A) productivity of the production process
B) cost-effectiveness of the production process
C) use of depleting production factors
D) use of expensive production factors
60) Factor proportions theory was developed by ________.
A) Smith and Ricardo
B) Ricardo and Ohlin
C) Heckscher and Ohlin
D) Heckscher and Smith
61) Factor proportions theory differs from the theory of comparative advantage in that the focus
of factor proportions theory is on the ________.
A) usage of the most abundant factors of production, while the focus of the comparative
advantage theory is on the productivity of the production process
B) accumulation of financial wealth in the form of gold by encouraging imports and
discouraging exports, while the comparative advantage theory focuses on usage of the most
abundant factors of production
C) productivity of the production process, while the comparative advantage theory focuses on
maximization of production and consumption
D) minimization of trade surpluses, whereas the comparative advantage theory focuses on the
mercantilist idea that international trade is a zero-sum game
62) The Leontief paradox describes evidence ________.
A) in support of the predictions of the mercantilist theory
B) contrary to the predictions of the factor proportions theory
C) that the assumptions of international product life cycle theory are invalid
D) that the assumptions of the new trade theory are invalid
63) The international product life cycle theory was developed by ________.
A) Milton Friedman
B) Karl Marx
C) Michael Porter
D) Raymond Vernon
64) The international product life cycle theory was put forth for ________.
A) service goods
B) abundant resources
C) manufactured goods
D) natural resources
65) The ________ theory states that a country’s export eventually becomes its import.
A) competitive advantage
B) factor proportions
C) international product life cycle
D) new trade
66) During which of the following stages of the international product life cycle theory does high
purchasing power and buyer demand in an industrialized nation encourage a company to design
and introduce a product concept?
A) product decline stage
B) new product stage
C) maturing product stage
D) standardized product stage
67) During which stage of the international product life cycle theory does demand rise and
remain sustained for a fairly lengthy period of time?
A) product decline stage
B) new product stage
C) maturing product stage
D) standardized product stage
68) During which stage of the product life cycle are companies looking for low-cost production
bases in developing nations to supply a growing worldwide market?
A) product decline stage
B) new product stage
C) maturing product stage
D) standardized product stage
69) In the ________ of the international product life cycle, competition from other companies
selling similar products pressures companies to lower prices in order to maintain sales levels.
A) product decline stage
B) new product stage
C) maturing product stage
D) standardized product stage
70) A product’s components are manufactured in a country that can produce them at a very low
cost while maintaining its quality. These components are then assembled in another country
where productivity in assembly is high. This process resembles the theory of ________.
A) comparative advantage
B) mercantilism
C) the international product life cycle
D) factor proportions
71) Much production in the world today closely resembles what is predicted by the ________.
A) new trade theory
B) international product life cycle
C) theory of comparative advantage
D) theory of factor proportions