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Student name:__________
1) Explain the concept of free trade.
2) How does the Heckscher-Ohlin theory explain international trade?
3) Explain how the theories of trade differ in terms of their support to governmental
intervention.
4) Explain Smith’s theory of absolute advantage.
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5) Explain Ricardo’s theory of comparative advantage.
6) Identify a major disadvantage of the product life-cycle theory.
7) Explain how the rivalry within an industry affects international competence.
8) What are the four attributes that are discussed in Porter’s diamond?
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9) What are the assumptions that we make when we discuss a simple Ricardian model to
support free trade?
10) Briefly differentiate between constant returns to specialization and diminishing returns to
specialization.
11) Explain how the principle of diminishing returns weakens the Ricardian model.
12) Explain the dynamic gains that are generated by opening an economy to trade.
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13) Explain Paul Samuelson’s critique.
14) Do you think a new trade theorist would stress the role of luck and entrepreneurship?
Explain.
15) _____ refers to a situation where a government does not attempt to influence through
quotas or tariffs what its citizens can buy from another country.
A) Fair trade
B) Trade theory
C) Free trade
D) Mercantilism
16) Identify the theory that supports the view that, in some cases, countries export for the
reason that the world market can support only a limited number of firms.
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A) Heckscher-Ohlin theory
B) Smith’s theory
C) Ricardo’s theory
D) new trade theory
17) Country A exports electronic goods to Country B although there are no underlying
differences in factor endowments between the two countries. Which of the following theories
explains this anomaly?
A) comparative advantage theory
B) new trade theory
C) Ricardo’s theory
D) Smith’s theory
18) Which of the following observations is consistent with Michael Porter’s theory of
national competitive advantage?
A) Factors such as domestic demand and domestic rivalry explain nations’ dominance in
production.
B) Countries should produce only those goods for which they have a comparative
advantage.
C) Interplay between the factors of production cause international marketing decisions.
D) International differences in labor productivity determine nations’ supremacy in
production.
19) Which of the following is a theory that can be used to justify limited government
intervention to support the development of certain export-oriented industries?
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A) Smith’s theory
B) Ricardo’s theory
C) new trade theory
D) Heckscher-Ohlin theory
20) Which of the following refers to a situation where a government does not attempt to
influence through quotas or tariffs what its citizens can buy from another country?
A) economic patriotism
B) protectionism
C) free trade
D) offshoring
21) Which of the following is a major benefit of engaging in free trade?
A) It helps to reduce the financial volatility in global markets.
B) It helps countries protect the jobs that are available to their citizens.
C) It gives countries access to products that they cannot produce.
D) It allows governments to exert more control on businesses.
22) David Ricardo’s theory of comparative advantage explains global trade in terms of the
A) first-mover advantage that certain countries and firms enjoy.
B) geographical differences between various countries.
C) opportunity cost.
D) late-mover advantage that certain countries and firms possess.
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23) Which of the following theories emphasizes the interplay between the proportions in
which the factors of production are available in different countries and the proportions in which
they are needed for producing particular goods?
A) Porter’s theory
B) Smith’s theory
C) Ricardo’s theory
D) Heckscher-Ohlin theory
24) _____ stresses that in some cases countries specialize in the production and export of
particular products because the world market can support only a limited number of firms.
A) New trade theory
B) Absolute advantage
C) The world market theory
D) Mercantilism
25) _____ supports the idea that countries should export more than they import.
A) Absolute advantage
B) Mercantilism
C) The world market theory
D) New trade theory
26) The principle of mercantilism views trade as a(n) _____ game.
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A) advantage
B) positive-sum
C) zero-sum
D) negative-sum
27) _____ argued that countries should specialize in the production of goods for which they
have an absolute advantage.
A) Paul Krugman
B) David Hume
C) David Ricardo
D) Adam Smith
28) According to Ricardo’s theory of comparative advantage, countries should
A) specialize in the production of those goods if they have lower opportunity cost.
B) specialize in the production of those goods that their competitors in the world market
currently have monopolies on.
C) produce all the products for which they have an absolute advantage.
D) produce only the products for which they have factors of production endowments..
29) The theory of comparative advantage suggests that trade is a _____ game in which all
countries that participate realize economic gains.
A) net-sum
B) positive-sum
C) zero-sum
D) negative-sum
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30) The Heckscher-Ohlin theory predicts that countries will
A) export those goods that make intensive use of factors that are locally scarce.
B) export those goods that make intensive use of factors that are locally abundant.
C) import those goods that make intensive use of factors that are locally abundant.
D) import those goods that make intensive use of factors that are available worldwide.
31) The _____ theory argues that the pattern of international trade is determined by
differences in factors of production endowments.
A) comparative advantage
B) Leontief Paradox
C) Heckscher-Ohlin
D) absolute advantage
32) A capital-intensive country exports products that are capital intensive. Which theory is
this an example of?
A) new trade
B) Leontief paradox
C) Porter’s diamond
D) Heckscher-Ohlin
33) The _____ argues that a large proportion of the world’s new products had been developed
by U.S. firms.
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A) product life-cycle theory
B) Porter’s diamond
C) new trade theory
D) Leontief paradox
34) _____ are unit cost reductions associated with a large scale of output.
A) Current account deficits
B) Economies of scale
C) Current account surpluses
D) Factor endowments
35) Which of the following is the main principle of mercantilism?
A) Protection of domestic industries is not essential for a nation’s welfare.
B) Government intervention is not required in global trade.
C) Countries should encourage absolute free trade.
D) It is in a country’s best interests to maintain a trade surplus.
36) Which of the following is a flaw associated with mercantilism?
A) Mercantilists do not support government intervention in trade.
B) Mercantilists view trade as a zero-sum game.
C) Mercantilists recommend policies to maximize imports.
D) Mercantilists recommend countries maintain a negative trade balance.
37) A country has an absolute advantage in the production of a product when it
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A) has the capability to produce the product within its boundaries.
B) is more productive and cost efficient than any other country in producing it.
C) has the largest domestic demand for the product.
D) has access to the raw materials needed to produce the product.
38) According to Adam Smith, a country should specialize in the production of a good when
it has
A) an absolute advantage in the production of the good.
B) a strong domestic demand for the good.
C) the ability to help country increase its national output.
D) the necessary raw materials for production.
39) Country A can produce product X, but it can also buy it at a cheaper price from Country
B. Which of the following courses of action is suitable in this situation according to Adam
Smith’s theory of absolute advantage?
A) Country A should import product X from Country B and it should not attempt to
produce it at home.
B) Country A should partly import the product and produce it domestically.
C) Country A should produce more of product X and should attempt to obtain an
absolute advantage for the product.
D) Country A should subsidize the production of product X to obtain an absolute
advantage over Country B.
40) According to Ricardo’s theory of comparative advantage, a country should produce goods
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A) for which it has access to raw materials.
B) that has lower opportunity cost.
C) that have the highest domestic demand.
D) for which it has an absolute advantage.
41) Which of the following is a statement that supports the theory of comparative advantage?
A) International trade is a zero-sum gain where one nation’s gain is another’s loss.
B) Domestic industries are at risk when a country engages in free trade.
C) A country should maintain a trade surplus to succeed in global trade.
D) Global production is greater with free trade than it is with restricted trade.
42) The theory of comparative advantage provides strong rationale for supporting the idea of
A) business nationalism.
B) free trade.
C) protectionist trade policies.
D) governmental intervention in trade.
43) Which of the following terms refers to a nation’s position in factors of production, such
as skilled labor or the infrastructure necessary to compete in a given industry?
A) current accounts
B) factor endowments
C) national balance
D) national accounts
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44) Identify the theory that predicts that countries will export those goods that make intensive
use of factors that are locally abundant.
A) theory of comparative advantage
B) Ricardo theory
C) new trade theory
D) Heckscher-Ohlin theory
45) Which of the following statements is true of the Leontief paradox?
A) It shows an anomaly that occurs when a nation has high domestic demand for a
product.
B) It explains the relationship between domestic demand and comparative advantage.
C) It disproved Ricardo’s theory of comparative advantage.
D) It raised questions about the validity of the Heckscher-Ohlin theory.
46) Identify the theory that argues that advanced nations have an incentive to develop new
consumer products and hence such nations always tend to create a good or service for the first
time.
A) absolute advantage
B) Ricardo
C) product life-cycle
D) Heckscher-Ohlin
47) Country X, a developed country, invents a revolutionary electronic product. The country
markets this new product in other poor countries to garner large profits. This occurrence is
against the idea of
A) product life-cycle theory.
B) Ricardo’s theory.
C) theory of absolute advantage.
D) theory of comparative advantage.
48) Professor Baldwin believes that early in the life cycle of a U.S. product, demand in other
advanced countries is limited to high-income groups. Consequently, it is seldom worthwhile for
firms in those countries to start producing the product. This view conforms to
A) the product life-cycle theory.
B) Ricardo’s theory.
C) the theory of absolute advantage.
D) the theory of comparative advantage.
49) Which of the following is a major disadvantage of the product life-cycle theory
introduced by Vernon?
A) The theory’s arguments seem ethnocentric and increasingly dated.
B) The theory failed to explain the dominance of developed nations.
C) The theory applies only when a poor nation invents a new product.
D) The theory cannot be used to explain the production of luxury products.
50) Which of the following terms refers to the unit cost reductions associated with increasing
output levels?
A) absolute advantage of production
B) economies of scale
C) constant marginal returns
D) diminishing marginal returns