1. Mercantilism, propagated in the sixteenth and seventeenth centuries, advocated that
countries should simultaneously encourage both imports and exports.
2. Although mercantilism is an old and largely discredited doctrine, its echoes remain in
modern political debate and in the trade policies of many countries.
3. Free trade refers to a situation in which a government, through quotas or duties, attempts
to influence what its citizens can buy from another country, or what they can produce and sell to
another country.
4. David Ricardo’s theory of comparative advantage was the first to explain why unrestricted
free trade is beneficial to a country.
5. According to Adam Smith, market mechanism, rather than government policy, should
determine a country’s imports and exports.
6. The theories of Smith, Ricardo, and Heckscher-Ohlin failed to identify the specific
benefits of international trade.
7. Smith, Ricardo, and Heckscher-Ohlin suggested that a country’s economy would gain only
if its citizens buy products that are made in that country.
8. Limits on imports are often in the interests of domestic consumers, but not domestic
producers.
9. New trade theory stresses that in some cases countries specialize in the production of
particular products because of underlying differences in factor endowments.
10. The first theory of international trade that emerged in England asserted that gold and
silver were the mainstays of national wealth and essential to vigorous commerce.
11. The main tenet of mercantilism was that it was in a country’s best interests to maintain a
trade surplus.
12. The major advantage of mercantilism was that it viewed trade as a zero-sum game.
13. A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it.
14. In his book, “The Wealth of Nations,” Adam Smith supported the mercantilist assumption
that trade is a zero-sum game.
15. According to Adam Smith, countries should specialize in the production of goods for
which they have an absolute advantage and then trade these for goods produced by other
countries.
16. According to Ricardo’s theory of comparative advantage, it makes sense for a country to
specialize in the production of those goods that it produces most efficiently and to import goods
that it produces less efficiently.
17. According to the theory of comparative advantage, potential world production is greater
with unrestricted free trade than it is with restricted trade.
18. Ricardo’s theory of comparative advantage is a major intellectual weapon for advocates
of free trade because it provides a strong rationale for encouraging free trade.
19. The Nobel Prize–winning economist Paul Samuelson argued that contrary to the standard
interpretation, in certain circumstances the theory of comparative advantage predicts that a rich
country might actually be worse off by switching to a free trade regime with a poor nation.
20. A certain amount of friction is involved when resources are required to move from one
economic activity to another.
21. Free trade is likely to increase a country’s stock of resources and the efficiency with
which it utilizes those resources.
22. Despite the short-term adjustment costs associated with adopting a free trade regime,
trade would seem to produce greater economic growth and higher living standards in the long
run.
23. Factor endowments refer to the extent to which free trade impacts the wealth of a
country.
24. Most economists prefer Ricardo’s theory to the Heckscher-Ohlin theory because it makes
fewer simplifying assumptions.
25. The Heckscher-Ohlin theory is the best predictor of real-world international trade
patterns.
26. When the impact of differences of technology on productivity is controlled for,
Heckscher-Ohlin theory gains predictive power.
27. 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.
28. According to the product life cycle theory, as demand for a product starts to grow in other
advanced countries, potential for exports from the U.S. will gradually increase.
29. 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 .
30. Viewed from an Asian or European perspective, Vernon’s argument that most new
products are developed and introduced in the United States seems ethnocentric and increasingly
dated.
31. While Vernon’s theory is useful for explaining the pattern of international trade in the
modern world, its relevance during the period of American global dominance seemed more
limited.
32. The new trade theory emerged from the thought that the ability of firms to attain
economies of scale might have important implications for international trade.
33. Factor endowments are unit cost reductions associated with a large scale of output.
34. The new trade theory suggests that a country may predominate in the export of a good
simply because it was lucky enough to have one or more pioneering firms to produce that good.
35. Porter argues that an absence of domestic rivalry is vital to the creation and persistence
of international competitive advantage in an industry.
36. Michael Porter argues that advanced factors are the most significant for competitive
advantage.
37. According to Michael Porter, the government can influence each of the four components
of Porter’s diamond—either positively or negatively.
38. Porter’s theory has been subjected to detailed empirical testing and it is proven that it
accurately predicts international trade patterns.
39. Individual firms should invest substantial financial resources in trying to build a first-
mover advantage, even if that means several years of losses before a new venture becomes
profitable.
40. Porter’s theory suggests that it is in the best interest of business for a firm to invest in
upgrading advanced factors of production.