69.
Wal-Mart makes bulk purchases from its vendors and hence it is able to get better deals
than its competitors. This allows Wal-Mart to offer greater discounts to its customers. In
this case, Wal-Mart benefits from _____.
A.
first mover advantage
B.
constant marginal returns
C.
economies of scale
D.
absolute advantage of production
Economies of scale are unit cost reductions associated with a large scale of output. Here,
Wal-Mart is benefiting from the economies of scale.
70.
Company A entered the production of office software before its competitors. Because of
this, the company’s products are more familiar among and favored by customers. This
situation exemplifies the _____.
A.
first mover advantage
B.
diminishing marginal returns
C.
economies of scale
D.
constant marginal returns
First mover advantages are the economic and strategic advantages that accrue to early
entrants into an industry.
71.
Which of the following theories suggests that first mover advantage is significant in the
export of a good?
A.
Product life-cycle theory
B.
Ricardo’s theory
C.
New trade theory
D.
Theory of comparative advantage
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 firms among the first to produce that
good. Because they are able to gain economies of scale, the first movers in an industry
may get a lock on the world market that discourages subsequent entry.
72.
Which of the following theories stress the role of luck, entrepreneurship, and innovation in
the production and export of a good or service by the firms in a country?
A.
Product life-cycle theory
B.
Ricardo’s theory
C.
Theory of comparative advantage
D.
New trade theory
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 firms among the first to produce that
good. New trade theorists stress the role of luck, entrepreneurship, and innovation in
giving a firm first mover advantages.
73.
Which of the following is one of the four attributes present in Porter’s diamond?
A.
Economies of scale
B.
Factor endowments
C.
Structural innovation
D.
Procedural innovation
Porter theorizes four broad attributes of a nation shape the environment in which local
firms compete. These four factors are factor endowments, demand conditions, relating
and supporting industries, and firm strategy, structure, and rivalry.
74.
Which of the following is an example of a basic factor that a nation will possess as
proposed by Porter?
A.
Communication infrastructure
B.
Skilled labor
C.
Natural resources
D.
Technological knowledge
facilities, and technological know-how are examples of and advanced factors.
75.
Which of the following factors, according to Porter’s national Diamond, is most likely to
give a country competitive advantage over another country?
A.
Natural resources
B.
Climate
C.
Skilled labor
D.
Demographics
Factors such as communication infrastructure, sophisticated and skilled labor, research
facilities, and technological know-how are examples of and advanced factors. Porter
argues that advanced factors are the most significant for competitive advantage.
76.
Porter argues that a nation’s firms gain competitive advantage if _____.
A.
their domestic consumers lack technical awareness
B.
they function in a labor intensive market
C.
the country has abundant supply of unskilled workers
D.
their domestic consumers are demanding
Porter argues that a nation’s firms gain competitive advantage if their domestic consumers
are sophisticated and demanding.
77.
Textile industry in a nation is characterized by vigorous domestic rivalry. Which of the
following observations of this nation’s international competency is most likely to be true?
A.
The nation will have access to such basic factors of textile industry as natural
resources.
B.
The nation’s textile firms will have a competitive advantage in international trade.
C.
The domestic customers of the textile firms will be less demanding.
D.
The nation’s textile industry will lack the advanced factors that are necessary to be
internationally competent.
Porter’s second point is that there is a strong association between vigorous domestic
rivalry and the creation and persistence of competitive advantage in an industry. Vigorous
domestic rivalry induces firms to look for ways to improve efficiency, which makes them
better international competitors.
78.
A country’s balance-of-payments accounts keep track of the _____.
A.
basic factor endowments and advanced factor endowments that the nation possesses
B.
payments to and receipts from other countries for a particular time period
C.
income taxes paid by domestic firms and the spending on the firms
D.
total value of taxes paid by domestic firms and the spending on the firms
A country’s balance-of-payments accounts keep track of the payments to and receipts
from other countries for a particular time period.
79.
Which of the following balance-of-payment accounts records one-time changes in the
stock of assets?
A.
Capital account
B.
Current account
C.
Financial account
D.
Monetary account
The capital account records one-time changes in the stock of assets.
80.
Which of the following accounts records transactions that involve the purchase or sale of
assets?
A.
Capital account
B.
Current account
C.
Principal account
D.
Financial account
The financial account (formerly the capital account) records transactions that involve the
purchase or sale of assets.
Essay Questions
81.
Explain the concept of free trade.
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. Smith, who proposed free trade, argued that the invisible hand
of the market mechanism, rather than government policy, should determine what a country
82.
How does the Heckscher-Ohlin theory explain international trade?
The Heckscher-Ohlin theory emphasizes the interplay between the proportions in which
the factors of production (such as land, labor, and capital) are available in different
countries and the proportions in which they are needed for producing particular goods.
This explanation rests on the assumption that countries have varying endowments of the
various factors of production.
83.
Explain how the theories of trade differ in terms of their support to governmental
intervention.
The theories of Smith, Ricardo, and Heckscher-Ohlin form part of the case for unrestricted
free trade. The argument for unrestricted free trade is that both import controls and export
incentives (such as subsidies) are self-defeating and result in wasted resources. Both the
new trade theory and Porter’s theory of national competitive advantage can be interpreted
as justifying some limited government intervention to support the development of certain
84.
What is the main principle of mercantilism?
The main tenet of mercantilism is that it is in a country’s best interests to maintain a trade
surplus, to export more than it imported. By doing so, a country would accumulate gold
and silver and, consequently, increase its national wealth, prestige, and power.
85.
Identify a major flaw associated with mercantilism.
The flaw with mercantilism was that it viewed trade as a zero-sum game. A zero-sum
game is one in which a gain by one country results in a loss by another.
86.
Explain Smith’s theory of absolute advantage.
A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it.
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.
87.
Explain Ricardo’s theory of comparative advantage.
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 this means buying
goods from other countries that it could produce more efficiently itself.
88.
What are the assumptions that we make when we discuss a simple Ricardian model to
support free trade?
1. We have assumed a simple world in which there are only two countries and two goods.
2. We have assumed away transportation costs between countries.
3. We have assumed away differences in the prices of resources in different countries.
4. We have assumed that resources can move freely from the production of one good to
another within a country.
5. We have assumed constant returns to scale.
6. We have assumed that each country has a fixed stock of resources and that free trade
does not change the efficiency with which a country uses its resources.
7. We have assumed away the effects of trade on income distribution within a country.
specialization.
country’s production possibility frontier (PPF). Diminishing returns to specialization occurs
90.
Explain how the principle of diminishing returns weakens the Ricardian model.
Diminishing returns show that it is not feasible for a country to specialize to the degree
suggested by the simple Ricardian model outlined earlier. Diminishing returns to
specialization suggest that the gains from specialization are likely to be exhausted before
specialization is complete.
91.
Explain the dynamic gains that are generated by opening an economy to trade.
First, free trade might increase a country’s stock of resources as increased supplies of
labor and capital from abroad become available for use within the country.
Second, free trade might also increase the efficiency with which a country uses its
resources.
92.
Explain the Paul Samuelson’s critique.
Paul Samuelson’s critique looks at what happens when a rich country enters into a free
trade agreement with a poor country that rapidly improves its productivity after the
introduction of a free trade regime. Samuelson’s model suggests that in such cases, the
lower prices that the rich country’s consumers pay for goods imported from the poor
country following the introduction of a free trade regime may not be enough to produce a
net gain for the rich country’s economy if the dynamic effect of free trade is to lower real
wage rates in the rich country.
93.
What are factor endowments?
Factor endowments refer to the extent to which a country is endowed with such resources
as land, labor, and capital. Nations have varying factor endowments, and different factor
endowments explain differences in factor costs.
94.
Briefly explain Vernon’s product life-cycle theory.
Vernon’s theory was based on the observation that for most of the twentieth century a
very large proportion of the world’s new products had been developed by U.S. firms and
sold first in the U.S. market. To explain this, Vernon argued that the wealth and size of the
U.S. market gave U.S. firms a strong incentive to develop new consumer products.
95.
Identify a major disadvantage of the product life-cycle theory.
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. This is a major disadvantage of the product life-cycle theory.
96.
What are the sources of economies of scale?
Economies of scale are unit cost reductions associated with a large scale of output.
Economies of scale have a number of sources, including the ability to spread fixed costs
over a large volume, and the ability of large-volume producers to utilize specialized
employees and equipment that are more productive than less specialized employees and
equipment.
97.
What are first-mover advantages?
First-mover advantages are the economic and strategic advantages that accrue to early
entrants into an industry. The ability to capture scale economies ahead of later entrants,
and thus benefit from a lower cost structure, is an important first-mover advantage.
98.
Do you think a new trade theorist would stress the role of luck and entrepreneurship?
Explain.
Perhaps the most contentious implication of the new trade theory is the argument that it
generates for government intervention and strategic trade policy. New trade theorists
stress the role of luck, entrepreneurship, and innovation in giving firm first-mover
advantages.
99.
What are the four attributes that are discussed in Porter’s diamond?
The four factors are:
(1) Factor endowments — a nation’s position in factors of production such as skilled labor
or the infrastructure necessary to compete in a given industry.
(2) Demand conditions — the nature of home demand for the industry’s product or service.
(3) Relating and supporting industries — the presence or absence of supplier industries
100.
Explain how the rivalry within an industry affects international competence.
Porter’s second point is that there is a strong association between vigorous domestic
rivalry and the creation and persistence of competitive advantage in an industry. Vigorous
domestic rivalry induces firms to look for ways to improve efficiency, which makes them
better international competitors. Domestic rivalry creates pressures to innovate, to
improve quality, to reduce costs, and to invest in upgrading advanced factors. All this helps
to create world-class competitors.