42.
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 the countries protect the jobs that are available to their citizens.
C.
It gives countries access to products that they cannot produce.
D.
It allows the governments to exert more control on businesses.
Countries can benefit from exchanging goods that they can produce efficiently to obtain
products that they cannot produce.
43.
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.
international differences in labor productivity
D.
late mover advantage that certain countries and firms possess
David Ricardo’s theory of comparative advantage offers an explanation in terms of
international differences in labor productivity.
44.
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
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.
45.
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.
A.
Heckscher-Ohlin theory
B.
Smith’s theory
C.
Ricardo’s theory
D.
New trade theory
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.
46.
Country A exports electronic goods from 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
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.
47.
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 determine nations’ dominance
on 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.
Michael Porter’s theory of national competitive advantage attempts to explain why
particular nations achieve international success in particular industries. In addition to
factor endowments, Porter points out the importance of country factors such as domestic
demand and domestic rivalry in explaining a nation’s dominance in the production and
export of particular products.
48.
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?
A.
Comparative advantage theory
B.
Ricardo’s theory
C.
New trade theory
D.
Heckscher-Ohlin theory
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 export-oriented industries.
49.
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.
The main tenet of mercantilism was that it was 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.
50.
Which of the following is a major 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 to maintain a negative trade balance.
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.
51.
A country has an absolute advantage in the production of a product when it _____.
A.
has the capability to produce the product within its boundaries
B.
is more 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
A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it.
52.
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
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.
53.
Country A can produce product X, but it can also buy it at a cheap rate 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.
Smith’s basic argument is that a country should never produce goods at home that it can
buy at a lower cost from other countries.
54.
According to Ricardo’s theory of comparative advantage, a country should produce goods
_____.
A.
for which it has access to raw materials
B.
that it produces most efficiently
C.
that have the highest domestic demand
D.
for which it has an absolute 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.
55.
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 trade surplus to succeed in global trade.
D.
Global production is greater with free trade than it is with restricted trade.
The basic message of the theory of comparative advantage is that potential world
production is greater with unrestricted free trade than it is with restricted trade.
56.
The theory of comparative advantage provides strong rationale for supporting the idea of
_____.
A.
business nationalism
B.
free trade
C.
protectionism
D.
governmental intervention in trade
The theory of comparative advantage suggests that trade is a positive-sum game in which
all countries that participate realize economic gains. As such, this theory provides a strong
rationale for encouraging free trade.
57.
Diminishing returns to specialization occurs when _____.
A.
each additional unit is produced with lesser number of laborers
B.
a nation’s gross domestic product declines for a few years
C.
production possibility frontier appears as a rectangle
D.
more units of resources are required to produce each additional unit
Diminishing returns to specialization occurs when more units of resources are required to
produce each additional unit.
58.
Which of the following is a major limitation of the simple Ricardian model of comparative
advantage?
A.
The model ignores the principle of diminishing marginal returns.
B.
The model recommends excessive governmental intervention in trade.
C.
The outcome of the model suggested by Ricardo is a zero-sum game.
D.
The model is against the idea of engaging in free trade with nations.
Diminishing returns show that it is not feasible for a country to specialize to a great extent.
Ricardian model ignores this principle of diminishing returns.
59.
What will happen, according to Paul Samuelson’s critique, if a rich country enters into a
free trade agreement with a poor country?
A.
Both the countries will incur losses due to the exchanges between them.
B.
The productivity of the poor country will decline rapidly.
C.
The poor country will rapidly improve its productivity.
D.
Both the countries will garner benefits from the exchanges between them.
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.
60.
Which of the following arguments supports the Paul Samuelson’s critique?
A.
A rich country cannot produce net gains by engaging in free trade with a poor country.
B.
Governmental intervention will reduce the likeliness of countries’ economic success.
C.
Countries should attempt to specialize in the production of goods and services.
D.
Trade is a positive-sum game in which all countries that participate realize economic
gains.
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.
61.
Which of the following terms refers to the extent to which a country is gifted with such
resources as land, labor, and capital?
A.
Current accounts
B.
Factor endowments
C.
National balance
D.
National accounts
Factor endowments refer to the extent to which a country is endowed with such resources
as land, labor, and capital.
62.
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
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.
63.
Which of the following is the reason why most economists prefer Heckscher-Ohlin theory
to Ricardo’s theory?
A.
Heckscher-Ohlin stresses on the differences in productivity between nations.
B.
Ricardo’s theory considers factor endowments to describe national competitiveness.
C.
Heckscher-Ohlin theory makes fewer simplifying assumptions.
D.
Ricardo’s theory considers the law of marginal returns.
Most economists prefer the Heckscher-Ohlin theory to Ricardo’s theory because it makes
fewer simplifying assumptions.
64.
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.
65.
Identify the theory that argues that advanced nations have an incentive to develop a new
offering 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
The theory argues that the wealth of such advanced countries as the United States gives
them an incentive to develop new consumer goods. Such nations always develop new
products.
66.
Country X, a poor 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
The theory argues that the wealth of such advanced countries as the United States gives
them an incentive to develop new consumer goods. The theory also argues that new
products are always introduced in developed nations.
67.
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.
Vernon’s argument that most new products are developed and introduced in the United
States seems ethnocentric and increasingly dated.
68.
Which of the following terms refers to the unit cost reductions associated with large sized
outputs?
A.
Absolute advantage of production
B.
Economies of scale
C.
Constant marginal returns
D.
Diminishing marginal returns
Economies of scale are unit cost reductions associated with a large scale of output.