International Economics, 7e (Gerber)
Chapter 5 Beyond Comparative Advantage
5.1 Introduction: More Reasons to Trade
1) Comparative advantage has mixed results when it comes to predicting a country’s trade
patterns. Which of the following is FALSE?
A) There are many potential products an economy might export that use the same comparative
advantage.
B) A large share of international trade is not based on comparative advantage.
C) Comparative advantage has proven completely incapable of predicting trade.
D) Comparative advantage is a dynamic concept, which means that the spread of technology,
improvement in skills, and learning-by-doing may alter a country’s comparative advantage over
time.
2) Comparative advantage cannot account for a significant portion of world trade.
5.2 Intraindustry Trade
1) Intraindustry trade refers to
A) international trade in products made within the same industry.
B) international trade in products made across different industries.
C) trade that occurs as a result of comparative advantage.
D) the exchange of dissimilar items.
2) Interindustry trade refers to
A) international trade in products made within the same industry.
B) domestic trade in products made within the same industry.
C) international trade in products made across different industries.
D) the exchange of similar items that are differentiated.
3) Intraindustry trade is characterized by what two features of the industry and market?
A) Diseconomies of scale and homogeneous products
B) Non-tariff barriers and large-scale foreign investment
C) Quota auctions and low effective rates of protection
D) Economies of scale and differentiated products
4) Intraindustry trade relies on
A) economies of scale.
B) the product cycle.
C) differences in factor endowments.
D) monopoly pricing.
5) One reason that a large share of the trade between high-income industrial economies is
intraindustry trade is because
A) it is more advantageous than interindustry trade.
B) high-income industrial economies produce in the first stage of the product cycle.
C) high-income industrial economies have dissimilar resource endowments in absolute terms.
D) it allows firms to take advantage of internal economies of scale.
6) An internal economies of scale is defined as
A) an industry with costs that fall for all firms.
B) a firm with falling costs over a specific level of output.
C) a firm with falling costs over a relatively large range of output.
D) a firm with falling costs over a relatively large range of output, but definite declining profits.
7) Which of the following is true about monopolistic competition?
A) One firm serves as the entire industry.
B) A small number of firms serve the entire market.
C) It is competition among many firms producing similar but differentiated products.
D) Firms do not have economies of scale.
8) Which of the following is FALSE about intraindustry trade?
A) Intraindustry trade creates gains from trade.
B) Intraindustry trade is due to comparative advantage.
C) Intraindustry trade may involve heightened competition and lower prices for consumers.
D) Intraindustry trade increases consumer choice.
9) Internal economies of scale means that
A) firms are experiencing lower average production costs due to a geographical concentration of
firms in their industry that make it cheaper and easier to hire highly specialized workers and
inputs.
B) firms will have lower profits after international trade begins, because costs will be higher than
when they just focused on the domestic market.
C) consumers will have less choices once trade begins, because firms will be squeezed out of the
market.
D) expanding the size of the market the firm serves reduces overall per unit costs, since the firm
can spread costs over more output.
10) Which of the following is NOT an example of intraindustry trade?
A) Trading Jeeps for Toyotas
B) Trading Boeing airplanes for Airbus airplanes
C) Trading Bush beer for Heineken beer
D) Trading oil for trucks
11) Which of the following is an example of intraindustry trade?
A) Trading peanut oil for tractors
B) Trading crude oil for automobiles
C) Trading Nokia smartphones for Apple iPhones
D) Trading jeans for cotton
12) Which of the following is NOT a likely result of intraindustry trade based on internal
economies of scale?
A) Job creation at domestic firms entering international trade
B) Lower prices for the domestic consumers of the product now being traded
C) Increased sales and lower per unit costs for the firm doing the exporting
D) Higher prices for the exported product
13) If trade in a particular good interindustry, the expansion of an industry in one country is
likely to lead to the ________ of that industry in the other country. If trade in that good is
intraindustry, expansion of the industry in one country is likely to lead to the ________ in the
other country.
A) decline, decline
B) decline, expansion
C) expansion, decline
D) expansion, expansion
14) An internal economy means that ________, while an external economy means that
________.
A) firm costs fall as firm output increases, firm costs fall as industry output increases
B) firm costs fall as industry output increases, firm costs fall as firm output increases
C) firm costs fall as firm output increases, firm costs rise as industry output increases
D) firm costs fall as industry output increases, firm costs rise as firm output increases
15) Interindustry trade is not based on comparative advantage since it consists of the export and
import of similar goods.
16) Economies of scale are an important determinant of comparative advantage-based trade.
17) If countries have similar factors of production and similar productivities, most of their trade
is likely to be intraindustry.
18) Intraindustry trade can lead to lower prices and job creation in both the exporting and the
importing nation.
19) Intraindustry trade tends to be more controversial than interindustry trade.
20) A substantial amount of trade between industrialized countries is intraindustry or intrafirm
trade rather than interindustry trade.
21) If countries have similar factor endowments and productivities, their trade is likely to be
interindustry.
22) Trading French wine for California wine is an example of intraindustry trade.
23) Intraindustry trade is characterized by what two features?
24) If countries have similar factor endowments and productivities, what type of trade are they
most likely to have?
25) If the United States and Canada trade hydro-powered electricity for Hollywood films, what
type of trade does this represent?
26) If the United States and Mexico trade Budweiser for Modelo beer, what type of trade does
this represent?
27) Which industry was first covered by a free trade agreement between Canada and the United
States?
28) Carefully explain why there are gains from intraindustry trade.
29) Describe the two sources of economies of scale and how these economies of scale lead to
intraindustry trade.
5.3 Trade and Geography
1) Under some circumstances, trade could stifle the development of new industries and reduce
global efficiency. All of the following describe conditions that could lead to that situation
EXCEPT
A) an initial head start gives a scale advantage to already existing firms in one country.
B) diseconomies of scale make it impossible for new firms to enter the market.
C) a location has a better-developed linkage between suppliers and producers, giving it a cost
advantage.
D) a historical accident, such as the shifting of airplane production to the United States to avoid
World War II bombings, causes firms in one location to have a competitive advantage.
2) Which of the following is FALSE?
A) Economies of scale may be internal, external, or both.
B) With internal economies of scale, the gains from trade include a wider selection of consumer
choices and lower prices.
C) With external economies of scale, the gains from trade are less certain since, in theory, they
can lock in production in a less efficient country and prevent the development of production in a
more efficient country.
D) Internal economies of scale lead firms to regionally concentrate their industry.
3) Which of the following is NOT a situation providing a potential advantage for Mexico that
makes it competitive compared to China in trade with the United States?
A) The product line requires quick turn-around time from or to delivery.
B) The need to manage a just-in-time inventory system
C) Wages are low and the production process is labor intensive.
D) The product is heavy and bulky relative to its final value.
4) Which of the following is FALSE?
A) Most of the maquiladora industry is located in the states of Mexico that border the United
States.
B) The maquiladora industry has not created much employment in Mexico because most of the
production is capital intensive.
C) The maquiladora industry accounts for more than half of Mexico’s exports today.
D) Growth in Mexico’s northern border cities , such as Tijuana and Ciudad Juarez, took off
almost a decade before NAFTA because of the maquiladora industry.
5) Which of the following is a reason why trade and geography are linked?
A) There are high costs of locating in large urban areas.
B) Many industries have no economies of scale.
C) Competition means that all firms want to locate near each other.
D) Some locations give access to pools of skilled labor or special resources.
6) In an industry where transportation costs are high and there are limited scale economies,
A) firms will locate close to the market.
B) firms will locate close to their input sources.
C) firms might locate in either area.
D) firms will locate where policy makers decide.
7) Most foreign investment is today is directed towards high-income countries because
A) there are tax breaks and subsidies available.
B) markets are larger, so transportation costs are minimized by producing near the market.
C) high-income countries are politically stable.
D) there are no economies of scale in low-income countries.
8) When there are external economies of scale in an industry
A) firm costs decrease as individual firms expand output.
B) firm costs decrease as the industry expands in size.
C) firms will generally increase their size.
D) firms must be located in different regions.
9) Concentration of industries can lead to external economies for all of the following reasons
EXCEPT
A) concentrated industries will not be competitive.
B) concentrated industries will attract a network of input suppliers.
C) concentrated industries will attract a deep pool of skilled labor.
D) concentrated industries will experience knowledge spillovers.
10) Most trade between Mexico and the United States is intrafirm.
11) Paul Krugman has stated that international trade is really about geography.
12) The geographical distribution of resources such as skilled labor has little effect on firm
location decisions.
13) To minimize costs, firms should have plants close to every market.
14) Concentration of firms in a particular region is likely to attract skilled labor to that area.
15) Trade can stifle the development of industries than might be more efficient than existing
ones.
16) Explain how concentration of industries in a particular region can lead to external
economies.
17) Is it possible that trade could prevent the development of new and more efficient industries?
18) Describe how Mexico’s manufacturing has changed location and type over time.
19) How can regional concentration of firms in an industry lead to external economies of scale?
Give examples of these types of industrial clusters in the United States. Are they always
beneficial?
5.4 Industrial Policy
1) Which of the following is NOT a problem in the implementation of industrial policies?
A) Choosing the industry to target
B) Knowing the optimum amount of resources to provide the targeted industry
C) The encouragement of rent seeking by firms in other industries
D) The benefits are captured only by domestic firms.
2) Market failures are less likely to occur whenever
A) private returns are greater than social returns.
B) social returns are greater than private returns.
C) the free market produces less than what is socially optimal.
D) new firms can easily attract start-up capital.
3) Which of the following is NOT a reason social returns might be greater than private returns?
A) Excess competition between firms
B) Knowledge spillovers
C) Spillovers from research and development
D) Capital market imperfections
4) If social returns to the production of a good are greater than private returns, then we can
conclude that relative to the social optimum, the good will be
A) overproduced and underpriced.
B) underproduced and overpriced.
C) overproduced and overpriced.
D) underproduced and underpriced.
5) If social returns to the production of a good are less than private returns, then we can conclude
that relative to the social optimum, the good will be
A) overproduced and underpriced.
B) underproduced and overpriced.
C) overproduced and overpriced.
D) underproduced and underpriced.
6) Suppose that the United States decided to subsidize a major research and development effort
by U.S. firms in the semiconductor industry. Under the current rules of the WTO and GATT, the
U.S. effort is
A) allowed as long as the subsidies are a small percent of the total cost.
B) allowed as long as the subsidies do not involve a direct payment to the industry.
C) not allowed.
D) allowed as long as the subsidies are for developing a “precompetitive” technology.
7) Suppose that the United States decided to subsidize a major competitive effort by the
semiconductor industry to bring to market the next generation computer chip. Under the current
rules of the WTO and GATT, the U.S. effort is
A) allowed as long as the subsidies are a small percent of the total cost.
B) allowed as long as the subsidies do not involve a direct payment to the industry.
C) not allowed.
D) allowed as long as the subsidies do not succeed in creating a new product.
8) WTO rules allow subsides
A) when there are external economies.
B) of “precompetitive” activities such as research.
C) when there are internal economies.
D) when there are positive externalities in production.
9) Which of the following is NOT a true statement about industrial policies?
A) Industrial policies can lead to the development of successful industries.
B) Not all industrial policies are successful.
C) Not all industrial policies are the best use of a nation’s resources.
D) Most industrial policies are legal under WTO rules.
10) Free market economies underproduce goods with positive externalities because
A) there are no benefits to the production of these goods.
B) the additional social benefits are not taken into account by the marketplace.
C) the additional social benefits cannot be measured.
D) the additional social benefits are too small to matter.
11) One problem with industrial policies is that
A) R&D only benefits the firm that conducts it.
B) governments usually target the wrong industries.
C) it is difficult to measure the extent of market failure.
D) it is not politically popular to support industries.
12) The United States does not use subsidies as part of its policies.
13) Industrial policies have not been effective in encouraging investment in clean energy.
14) Benefits of R&D spending to foreigners may be as much as 1/4 of the total value of the
spending.
15) Sound macroeconomic policies are less important than industrial policies in promoting
growth.
16) Explain what rent seeking is and how it may reduce the benefits of industrial policies.
17) Japan and Korea use or have used many industrial policies, and they are both considered to
be countries that have developed successfully. Does that mean that the industrial policies caused
their successful development?
18) Explain why industrial policies are controversial.