Chapter 06 International Trade Theory
True / False Questions
1.
Free trade refers to a situation where a government does not attempt to influence through
quotas or duties what its citizens can buy from another country.
TRUE
Free trade refers to a situation where a government does not attempt to influence through
quotas or duties what its citizens can buy from another country, or what they can produce
and sell to another country.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
2.
The theories of Smith and Ricardo show that countries should not engage in international
trade for products that it is able to produce for itself.
FALSE
The theories of Smith, Ricardo, and Heckscher-Ohlin show why it is beneficial for a
country to engage in international trade even for products it is able to produce for itself.
AACSB: Analytic
Blooms: Understand
Learning Objective: 06-01 Understand why nations trade with each other.
3.
David Ricardo’s theory of comparative advantage explains international trade in terms of
international differences in political environments.
FALSE
David Ricardo’s theory of comparative advantage explains international trade in terms of
international differences in labor productivity.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
4.
New trade theory 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.
TRUE
New trade theory stresses that in some cases countries specialize in the production and
export of particular products not because of underlying differences in factor endowments,
but because in certain industries the world market can support only a limited number of
firms.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
5.
Porter’s theory of national competitive advantage recommends unrestricted free trade
between countries.
FALSE
Porter’s theory of national competitive advantage can be interpreted as justifying some
limited government intervention to support the development of certain export-oriented
industries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
6.
Heckscher-Ohlin theory supports the case for unrestricted free trade between nations.
TRUE
The theories of Smith, Ricardo, and Heckscher-Ohlin support the case for unrestricted free
trade.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
7.
Mercantilism supports the idea that countries should export more than what they import.
TRUE
The main tenet of mercantilism was that it is in a country’s best interests to maintain a
trade surplus, to export more than it imported.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
8.
Mercantilist doctrine advocates unrestricted free trade between countries.
FALSE
Mercantilist doctrine advocated government intervention to achieve a surplus in the
balance of trade.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
9.
The principle of mercantilism views trade as a positive-sum game.
FALSE
The flaw with mercantilism was that it viewed trade as a zero-sum game.
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
10.
A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it.
TRUE
A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
11.
Adam smith argued that countries should specialize in the production of goods for which
they have an absolute advantage.
TRUE
According to 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Absolute Advantage
12.
According to Ricardo’s theory of comparative advantage, countries should produce all the
products for which they have an absolute advantage.
FALSE
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 buy the
goods that it produces less efficiently from other countries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
13.
According to Ricardo’s theory of comparative advantage, countries shall not produce a
good even if they have an absolute advantage in its production.
TRUE
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 buy the
goods that it produces less efficiently from other countries even if the country has an
absolute advantage over its production.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
14.
The theory of comparative advantage suggests that trade is a positive-sum game in which
all countries that participate realize economic gains.
TRUE
The theory of comparative advantage suggests that trade is a positive-sum game in which
all countries that participate realize economic gains.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Comparative Advantage
15.
Simple model of free trade assumed away transportation costs between countries.
TRUE
Simple model of free trade assumed away transportation costs between countries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
16.
Resources always move easily from one economic activity to another.
FALSE
Resources do not always move easily from one economic activity to another.
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
17.
The production possibility frontier will be parabolic if constant return to specialization is
observed.
FALSE
Constant returns to specialization mean that the units of resources required to produce a
good are assumed to remain constant no matter where one is on a country’s production
possibility frontier. Thus the production possibility frontier will be a straight line.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
18.
The production possibility frontier will be convex if constant return to specialization is
observed.
FALSE
Constant returns to specialization means that the units of resources required to produce a
good (cocoa or rice) are assumed to remain constant no matter where one is on a
country’s production possibility frontier (PPF). In this case, the PPF will be a straight line.
AACSB: Analytic
Blooms: Remember
19.
Diminishing returns show that it is feasible for a country to specialize to the degree
suggested by the simple Ricardian model.
FALSE
Diminishing returns show that it is not feasible for a country to specialize to the degree
suggested by the simple Ricardian model.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
20.
The simple comparative advantage model assumed that trade does not change a country’s
stock of resources or the efficiency with which it utilizes those resources.
TRUE
The simple comparative advantage model assumed that trade does not change a country’s
stock of resources or the efficiency with which it utilizes those resources.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
21.
According to Paul Samuelson’s critique, a poor country will rapidly improve its productivity
if a rich country enters into a free trade agreement with it.
TRUE
Paul Samuelson’s critique argues that when a rich country enters into a free trade
agreement with a poor country, there will be a dynamic gain in the efficiency with which
resources are used in the poor country. The poor country’s productivity will improve
rapidly.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
22.
Paul Samuelson’s critique argues that trade is a positive-sum game in which all countries
that participate realize economic gains.
FALSE
Paul Samuelson’s critique argues that when a rich country enters into a free trade
agreement with a poor country, only the poor country benefits from the relationship.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
23.
A rich country improves its productivity by engaging in free trade with a poor country. This
situation supports Paul Samuelson’s critique.
FALSE
Paul Samuelson’s critique argues that when a rich country enters into a free trade
agreement with a poor country, only the poor country benefits from the relationship.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: Comparative Advantage
24.
Factor endowments refer to the extent to which a country is gifted with such resources as
land, labor, and capital.
TRUE
Factor endowments refer to the extent to which a country is endowed with such resources
as land, labor, and capital.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
25.
The Heckscher-Ohlin theory predicts that countries will export those goods that make
intensive use of factors that are locally scarce.
FALSE
The Heckscher-Ohlin theory predicts that countries will export those goods that make
intensive use of factors that are locally abundant, while importing goods that make
intensive use of factors that are locally scarce.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
26.
Heckscher-Ohlin theory stresses that comparative advantage arises from differences in
productivity.
FALSE
Unlike Ricardo’s theory, however, the Heckscher-Ohlin theory argues that the pattern of
international trade is determined by differences in factor endowments, rather than
differences in productivity.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
27.
The Heckscher-Ohlin theory argues that the pattern of international trade is determined
by differences in factor endowments.
TRUE
The Heckscher-Ohlin theory argues that the pattern of international trade is determined
by differences in factor endowments.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
28.
Ricardo’s theory makes fewer simplifying assumptions compared to Heckscher-Ohlin
theory.
FALSE
Most economists prefer the Heckscher-Ohlin theory to Ricardo’s theory because it makes
fewer simplifying assumptions.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
29.
A capital intensive country exports products that are capital intensive. This is an example
of Leontief Paradox.
FALSE
The Leontief Paradox explains a deviation of the Heckscher-Ohlin theory. The given
situation follows the Heckscher-Ohlin theory.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
30.
A key assumption in the Heckscher-Ohlin theory is that technologies are the same across
countries.
TRUE
A key assumption in the Heckscher-Ohlin theory is that technologies are the same across
countries.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Heckscher-Ohlin Theory
31.
The product life-cycle theory argues that a large proportion of the world’s new products
had been developed by U.S. firms.
TRUE
The product life-cycle theory argues that a large proportion of the world’s new products
had been developed by U.S. firms.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
32.
The product life-cycle theory argues that the developing nations will not produce a product
if the product is highly standardized.
FALSE
The product life-cycle theory argues that the developing nations will produce a product
only when the product becomes highly standardized.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
33.
Some of the arguments made by the product life-cycle theory seems ethnocentric and
increasingly dated when viewed from an Asian or European perspective.
TRUE
Viewed from an Asian or European perspective, the theory’s argument that most new
products are developed and introduced in the United States seems ethnocentric and
increasingly dated.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: The Product Life-Cycle Theory
34.
Economies of scale are unit cost reductions associated with a large scale of output.
TRUE
Economies of scale are unit cost reductions associated with a large scale of output.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: New Trade Theory
35.
Companies that trade small volumes of product can benefit from economies of scale.
FALSE
Economies of scale are unit cost reductions associated with a large scale of output. This
means that companies that trade in large volumes benefit from the economies of scale.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: New Trade Theory
36.
Variety of goods that a country can produce is limited by the size of the market in
industries where economies of scale are important.
TRUE
In industries where economies of scale are important, both the variety of goods that a
country can produce and the scale of production are limited by the size of the market.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: New Trade Theory
37.
First-mover advantages are the economic and strategic advantages that accrue to early
entrants into an industry.
TRUE
First mover advantages are the economic and strategic advantages that accrue to early
entrants into an industry.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: New Trade Theory
38.
New trade theory suggests that nations cannot benefit from trade when they do not differ
in resource endowments or technology.
FALSE
New trade theory suggests that nations may benefit from trade even when they do not
differ in resource endowments or technology.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of
countries that participate in a free trade system.
Topic: New Trade Theory
39.
According to the new trade theory, firms that establish a first-mover advantage with
regard to the production of a particular new product may subsequently dominate global
trade in that product.
TRUE
According to the new trade theory, firms that establish a first-mover advantage with
regard to the production of a particular new product may subsequently dominate global
trade in that product.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Understand the important implications that international trade theory holds for business practice.
Topic: Implications for Managers
40.
The theories of international trade claim that promoting free trade is generally in the best
interests of an individual firm, although it may not always be in the best interest of a
country.
FALSE
The theories of international trade claim that promoting free trade is generally in the best
interests of a country, although it may not always be in the best interest of an individual
firm.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Understand the important implications that international trade theory holds for business practice.
Topic: Implications for Managers
Multiple Choice Questions
41.
Which of the following refers to a situation where a government does not attempt to
influence through quotas or duties what its citizens can buy from another country?
A.
Economic patriotism
B.
Protectionism
C.
Free trade
D.
Offshoring
Free trade refers to a situation where a government does not attempt to influence through
quotas or duties what its citizens can buy from another country, or what they can produce
and sell to another country.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory