International Business, 14e (Daniels et al.)
Chapter 6 International Trade and Factor-Mobility Theory
1) Which of the following is NOT a reason that international trade theory is useful for managers to
understand?
A) Countries use trade theories to help them decide how to improve their competitive positions, such as
improving the quantity and quality of production factors.
B) Countries’ trade policies affect whether imports are allowed to compete against domestic production,
thus affecting where companies need to produce to serve given markets.
C) Countries use laissez-faire policies to intervene in the free movement of international trade, thus
affecting where companies can produce most efficiently.
D) Countries wrestle with the questions and set policies on what, with whom, and how much they
should import and export, thus affecting companies’ abilities to produce given products efficiently and
sell them into given markets.
2) Why should managers in international business understand international trade theories?
A) Countries’ trade policies, based on trade theories, influence which products companies might export
to given countries.
B) The understanding helps managers decide whether their companies should follow laissez-faire
management practices.
C) The theories help managers decide whether to use large-scale versus small-scale technologies for
serving their export markets.
D) The comprehension is useful when deciding whether to transfer managers abroad to manage foreign
operations.
3) Because all countries face the questions of what, how much, and with whom they should import and
export, international business managers should most likely ________.
A) identify their governments’ trade policies to determine if an invisible hand directs these decisions
B) understand the theories used to answer these questions because policies affect business operations
C) establish operations in small countries where they can exert more political influence
D) produce only nontradable goods that are less affected by government policies
4) All countries face the questions of what, how much, and with whom they should import and export.
How they answer these questions primarily affects whether ________.
A) nontradable goods become tradable
B) products go through a lengthy life cycle
C) companies adhere to laissez-faire export policies
D) a company’s present production location will be competitive
5) The trade theory that says a country should export more than it imports is known as ________.
A) mercantilism
B) absolute advantage
C) comparative advantage
D) import substitution
6) Under mercantilism, governments sought to influence trade by ________.
A) establishing bilateral trading agreements with other countries
B) limiting exports
C) limiting imports and subsidizing exports
D) encouraging the development of manufacturing in their colonies
7) Which of the following undesirable results will most likely occur for a country running a favorable
balance of trade?
A) higher unemployment
B) higher domestic interest rates
C) fewer funds to invest abroad
D) granting credit that may be risky
8) Neomercantilism describes the approach of countries that try to run a favorable balance of trade to
________.
A) build up gold reserves
B) achieve a social or political objective
C) lower their rates of inflation
D) buy raw materials more cheaply
9) According to Adam Smith’s theory of absolute advantage, specialization allows countries to increase
their efficiency for each of the following reasons EXCEPT ________.
A) labor could become more skilled by repeating the same tasks
B) transportation costs could be lowered by producing closer to markets
C) labor would not lose time in switching from the production of one kind of product to another
D) higher production would provide incentives for the development of more effective working methods
10) Which of the following is most likely a basis for a Jamaican natural advantage in international trade?
A) product technology developed by a Jamaican company
B) high literacy rates among Jamaican citizens
C) the use of English as the primary language
D) beautiful beaches and climate
11) As a leading exporter of luxury automobiles, Germany has built a strong reputation in engineering.
Germany’s trade most likely relies on a(n) ________.
A) outward immigration restriction
B) natural advantage
C) acquired advantage
D) neomercantilist policy
12) Assume the following conditions: In the United States it takes 5 units of resources to produce a ton
of potatoes and 10 to produce a ton of coal. In Canada it takes 6 units of resources to produce a ton of
potatoes and 9 to produce a ton of coal. According to the theory of absolute advantage, ________.
A) the United States should export potatoes to Canada and import coal from Canada
B) the United States should export coal to Canada and import potatoes from Canada
C) the United States should import both potatoes and coal from Canada, while concentrating on
production of more valuable goods
D) there would be no basis for trade
13) Comparative advantage differs from absolute advantage in that the former ________, whereas the
latter ________.
A) holds that countries should specialize their production; does not
B) holds that trade should be kept as nearly in balance as possible; says countries should seek a
favorable balance of trade
C) bases trade on natural advantages; bases trade on acquired advantage
D) states that there is a basis of trade even if one country can produce everything more efficiently than
another country; does not deal with this issue
14) The comparative advantage theory holds that a country will gain from trade ________.
A) when it exports products for which it has an acquired advantage and imports products for which
another country has a natural advantage
B) if it exports goods it can produce more efficiently than other countries and imports goods other
countries can produce more efficiently than it can
C) even though it can produce all goods more efficiently than other countries
D) if it exports products using its abundant production factors in exchange for products for which it has
scarce production factors
15) According to the theory of comparative advantage, a country gains from foreign trade even though it
may have an absolute advantage in the production of all products because ________.
A) the country will forego producing its less efficient output in order to produce its more efficient output
B) workers become more efficient through specialization
C) economies of scale will reduce cost
D) there will be more incentive to develop cost-saving technologies
16) Assume the following conditions: In the United States it takes 4 units of resources to produce a ton
of potatoes and 5 to produce a ton of coal. In Canada it takes 6 units of resources to produce a ton of
potatoes and 10 to produce a ton of coal. According to the theory of comparative advantage, ________.
A) there would be no basis for trade
B) the United States should import potatoes from Canada and export coal to Canada
C) the United States should export both potatoes and coal to Canada
D) the United States should export potatoes to Canada and import coal from Canada
17) Which of the following assumptions was made in the original theories of absolute and comparative
advantage?
A) Specialized labor seeks efficiency.
B) Labor resources are fully employed.
C) Countries pursue objectives other than economic efficiency.
D) Production networks enable countries to concentrate on particular functions.
18) The free trade theories of specialization primarily assume that ________.
A) specialization leads to unemployment, but production gains compensate for job losses
B) resources can move internationally from the production of one good to another
C) resources can move domestically from the production of one good to another
D) countries have objectives other than economic efficiency
19) The free trade theories of specialization primarily assume that ________.
A) domestic resources are unable to move from the production of one good to another
B) countries have objectives other than economic efficiency
C) specialization triggers unemployment
D) resources are immobile internationally
20) Nontradable goods are best defined as ________.
A) products and services for which exporting costs are excessive
B) factors of production that exceed safety regulations
C) goods used for national defense
D) products that comprise a portion of the inputs for finished products
21) Countries with varied climates and varied natural resources generally ________ than countries with
less varied climates and natural resources.
A) have lower per capita incomes
B) depend less heavily on trade
C) have more ethnic subgroups
D) have higher endowments of capital relative to labor
22) Countries with large land areas are generally less dependent on trade than countries with small land
areas because of ________.
A) highly restricted economic scales
B) self-sufficiency with natural resources
C) higher transportation costs related to foreign trade
D) the development of unique products that have a limited demand
23) Eight of the top 10 exporting and importing countries are countries with ________.
A) cheap labor forces
B) small land masses
C) natural advantages
D) developed economies
24) The trade theory that says countries should concentrate production on those products using their
most abundant production factors is the ________.
A) factor proportions theory
B) theory of comparative advantage
C) theory of absolute advantage
D) theory of nontradable goods
25) El Salvador has a population density of about 620 people per square mile and neighboring Honduras
a population density of about 115 people per square mile. According to the factor proportions theory of
trade, one would expect El Salvador’s exports to Honduras to ________.
A) have a lower labor-to-land ratio than its imports from Honduras
B) have a higher labor-to-land ratio than its imports from Honduras
C) embody more capital per square mile than its imports from Honduras
D) embody more capital per worker than its imports from Honduras
26) Tests to substantiate the factor proportions theory have had mixed results most likely because
________.
A) labor migration quickly outdates any studies
B) most countries have a favorable balance of trade
C) labor skills and education are not homogeneous
D) large and small countries have different trade policies
27) Most world trade takes place ________.
A) between developed countries and developing countries
B) among developed countries
C) among developing countries
D) between raw material exporters and manufacturing exporters
28) One way that developed countries specialize in order to gain acquired advantages is by ________.
A) allocating research efforts more heavily in specific sectors
B) emphasizing production in natural resource endowments
C) restricting imports to those in the service sector
D) subsidizing the transport of exports
29) Why is the United States both an exporter and importer of such products as vehicles and passenger
aircraft?
A) Buyers procure similar products for replacement parts.
B) Transportation costs and cultural differences limit exporters.
C) Companies differentiate products to appeal to different consumers.
D) Bilateral trading agreements require this interchange for a number of products.
30) Which of the following statements is most likely FALSE?
A) Developing countries trade mainly with developed countries.
B) Developed countries trade mainly with other developed countries.
C) Cultural similarity among countries enhances their trade with each other.
D) The greater the geographic distance between countries the greater the trade.
31) According to the product life cycle theory, production and sales are primarily domestic in the
introductory stage because ________.
A) businesses need quick market feedback
B) tariff reductions remain under negotiation
C) international transport costs are too high
D) international patents have not been approved
32) According to the PLC theory, at an early stage of a product’s life cycle the product is likely to be
made in a more ________ method than in its later stages.
A) capital-intensive
B) labor-intensive
C) land-intensive
D) low-cost
33) According to the PLC theory, what is the most likely reason that companies manufacture products in
locations with high labor rates during the introductory stage of a product’s life cycle?
A) Doing so allows use of long production runs using capital-intensive methods.
B) Many consumers are willing to pay high costs for the newest products.
C) Transportation costs are reduced by focusing on markets in developed countries.
D) Import restrictions prevent production in countries other than the ones making product innovations.
34) According to the PLC theory, developing countries have their best production advantage in which
stage of the product life cycle?
A) growth
B) maturity
C) decline
D) introduction
35) Which of the hypothetical new products, if successful, would most likely diffuse its production and
sales according to the product life cycle theory?
A) a Ferrari sports car selling for $200,000 to a niche, upper-end market
B) a Sony television that receives global transmissions without a satellite dish or cable connection,
introduced at a high price but targeted eventually for sale to a mass market
C) a new Diet Coca-Cola soft drink flavored with cranberries
D) a Kyocera plastic chip carrier, which is expected to be quickly obsolete because of innovations
36) All of the following are types of products that are usually exceptions to what is predicted by the
product life cycle theory EXCEPT ________.
A) trendy clothing
B) luxury items
C) differentiated products
D) consumer durables
37) Contrary to the product life cycle theory, there has been an increased tendency for companies to
________.
A) sell products only in their home markets throughout the cycle
B) produce and sell products in countries where counterfeiting is low
C) introduce new products simultaneously in domestic and foreign markets
D) sell new products in developing countries before expanding into developed countries
38) All of the following are features of the diamond of national advantage theory EXCEPT ________.
A) firm strategy, structure, and rivalry
B) strategic trade policy regulations
C) related and supporting industries
D) demand conditions
39) The diamond of national advantage would be best used to answer which of the following questions?
A) How do developed countries prevent the trade of blood diamonds?
B) How can developing countries create a significant trade surplus?
C) Why do specialized competitive advantages differ among countries?
D) Why do most innovative products originate in developed countries?
40) According to the diamond of national advantage theory, the domestic existence of all four conditions
best explains ________.
A) the essence of an industry’s development
B) the position of a product in its life cycle
C) where globally competitive firms develop and sustain themselves
D) why countries rely on abundant factor endowments
41) Costa Rica applied the concepts of the diamond of national advantage theory to help transform its
economy by ________.
A) building domestic demand for its products and services
B) looking globally to develop favorable conditions
C) following import substitution policies
D) concentrating on nontradable goods
42) Which of the following best supports a nation’s decision to implement a strategic trade (industrial)
policy?
A) The policies have usually resulted in big payoffs.
B) Governments, rather than entrepreneurs, should take the risks of developing new industries.
C) Consumer needs would otherwise not be met.
D) Government actions should target industries that are believed to give the country its best export
advantages.
43) A governmental strategic trade (industrial) policy is one that ________.
A) lessens dependence on foreign military goods
B) seeks reciprocal free trade agreements between developed and developing countries
C) targets the resources needed to support industries that seem to fit best with the country’s advantages
D) limits imports to encourage domestic production of what would otherwise be imported
44) Which of the following statements most likely undermines the arguments for a strategic trade
policy?
A) Entrepreneurs, rather than governments, should take business risks.
B) Developed countries have production lead time over developing countries.
C) If big companies can figure out what products to develop, so can governments.
D) Governments have limited resources, so industries with greater growth potential should be targeted.
45) Between now and 2050, countries undergoing a simultaneous population reduction and an increased
percentage of retirees in the population most likely will need more ________.
A) imports
B) immigrants
C) domestic products
D) favorable balances of trade
46) The most internationally mobile factor of production is ________.
A) labor
B) management
C) long-term capital
D) short-term capital
47) All the following are reasons for the lower international mobility of people than capital EXCEPT
which one?
A) The differences in economic return between countries are lower for people than for capital.
B) It is more expensive to move people than capital.
C) People may have to learn another language and adapt to a different culture.
D) International capital transfers have less cumbersome legal restrictions than international movements
of people.
48) All of the following are examples of international labor mobility EXCEPT ________.
A) a manager assigned by an MNE to work short-term abroad
B) a refugee who takes up employment in another country
C) a college student on a study abroad program
D) an illegal immigrant working in another country
49) Labor and capital mobility are intertwined because ________.
A) illegal workers sometimes pay large sums to people who smuggle them into another country
B) people cannot emigrate to another country unless they bring capital with them
C) companies receive tax benefits for hiring immigrants
D) immigrants bring an investment in human capital with them
50) Brain drain is a term that describes ________.
A) a country’s loss of educated, productive people
B) a nation’s shift from an emerging market to a developed economy
C) the exportation of high-technology products in exchange for low-technology products
D) the unauthorized use of patents, copyrights, and technology by the counterfeiting industry