Version 1 1
Student name:__________
TRUE/FALSE – Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1) International trade includes exports, imports, and foreign direct investment.
⊚ true
⊚ false
2) Nearly 60 percent of global output is now destined for international trade.
⊚ true
⊚ false
3) The proportion of world trade coming from North America, Latin America, Africa, and
the Middle East has decreased since 1983.
⊚ true
⊚ false
4) Currently, the United States is the largest exporter in the world.
⊚ true
⊚ false
5) Thanks in part to communication advancements, international trade has stabilized and
become evenly distributed across all countries of the world.
⊚ true
⊚ false
6) The development of expanded regional trade agreements, such as the Association of
Southeast Asian Nations, Mercosur, and the EU, can substantially alter the level and proportion
of trade flows within and across regions.
⊚ true
⊚ false
Version 1 2
7) The first formulation of international trade theory, by Adam Smith, was motivated by
political considerations.
⊚ true
⊚ false
8) The central idea of mercantilism is based on the specialization of goods and services as a
way for a company to distinguish itself from others.
⊚ true
⊚ false
9) The theory of absolute advantage suggests that under free, unregulated trade, each nation
should specialize in producing those goods it can produce most efficiently, based on naturally
occurring endowments such as minerals.
⊚ true
⊚ false
10) According to the theory of comparative advantage, international trade can still be a
positive-sum game that benefits both countries having an absolute advantage over one another.
⊚ true
⊚ false
11) Currency devaluation helps a nation avoid losing markets and regain competitiveness in
world markets.
⊚ true
⊚ false
12) The international product life-cycle theory may have its greatest usefulness in explaining
trade and investment behavior when international firms introduce their new products in home
markets first.
⊚ true
⊚ false
Version 1 3
13) The predictable decline in the average cost of producing each unit of output as a
production facility gets larger and output increases is known as the experience curve.
⊚ true
⊚ false
14) Michael Porter claims that at least 10 types of variables can influence a firm’s ability to
gain competitive advantage.
⊚ true
⊚ false
15) Portfolio investment is the purchase of sufficient stock in a firm to obtain significant
management control.
⊚ true
⊚ false
16) The proportion of the outstanding stock of foreign direct investment accounted for by the
United States declined by two-thirds over the past 20 years.
⊚ true
⊚ false
17) The vast proportion of outward FDI, about two-thirds, originates from the developed
countries.
⊚ true
⊚ false
18) The majority of the world’s outward FDI has been in the form of imports and exports.
⊚ true
⊚ false
Version 1 4
19) Internalization theory suggests that when an organization has superior knowledge, it may
obtain a better price by selling it to the open market.
⊚ true
⊚ false
20) The dynamic capability theory states that for a firm to invest overseas, it must have three
kinds of advantages: ownership specific, internalization, and location specific.
⊚ true
⊚ false
MULTIPLE CHOICE – Choose the one alternative that best completes the statement or
answers the question.
21) The volume of international trade in services exports in 2017, worldwide, was
A) $5.4 trillion.
B) $8.5 trillion.
C) $12.3 trillion.
D) $18.8 trillion.
22) When examining the volume of international trade, how are goods and services currently
represented?
A) Exports of goods and services quadrupled between 1990 and 2013.
B) Exports of services grew faster than trade in merchandise for the last 20 years.
C) There are fewer goods traded than services.
D) Goods and services have reached equal levels of trading volumes.
23) What percentage of global output is now bound for international trade?
Version 1 5
A) 10 percent
B) Less than 5 percent
C) almost 50 percent
D) 60 percent
24) Since 1983, the proportion of world trade coming from the United States has
A) increased by 20 percent.
B) tripled.
C) decreased overall.
D) not changed.
25) The proportion of merchandise exports from Asia has ________ since 1983.
A) increased by 20 percent
B) tripled
C) seen an overall decline
D) almost doubled
26) Since 1980, the United States proportion of world trade in commercial services has
A) not changed.
B) increased one-third.
C) decreased overall.
D) Increased more than fivefold.
27) Overall, what has occurred with the dollar volume of service exports worldwide?
Version 1 6
A) The dollar volume of exports has maintained a low, but consistent, rate.
B) Service exports have decreased with the advent of competition.
C) There has been an absolute increase.
D) There has been no change.
28) The rapid expansion of world exports since 1980 demonstrates that
A) businesspeople can expect to meet lower levels of competition in their domestic
markets.
B) domestic business cannot compete with cheap imports.
C) the opportunity to increase sales by exporting is a viable growth strategy.
D) jobs will inevitably decline in developed countries due to import competition.
29) In examining the volume of international trade, the proportion of world exports and
imports accounted for by the 10 largest exporting and importing nations in 2016
A) was less than 10 percent.
B) was approximately 25 percent.
C) exceeded 50 percent.
D) was approximately one-third.
30) Which country ranked the highest in 2016 in terms of merchandise exports?
A) United Kingdom
B) India
C) China
D) United States
31) A major portion of the exports from developing countries go to ________ countries, and
this proportion has been ________.
Version 1 7
A) developed; increasing
B) developing; increasing
C) developed; decreasing
D) developing; decreasing
32) World trade is dominated with exchanges _______
A) among nonbordering countries.
B) between geographic regions.
C) between state-owned enterprises.
D) within geographic regions.
33) NAFTA and other treaties are the main reasons that most of Canada’s exports go to
A) Mexico.
B) the European Union.
C) Asia.
D) the United States.
34) When considering where to export, advantages to managers of focusing on a nation that
is already a sizable purchaser of goods coming from the home country include the fact that
A) the cultures of the two countries should be relatively similar and compatible.
B) the climate for foreign direct investment in the importing nation is relatively
favorable.
C) export and import regulations are not insurmountable.
D) the two countries are part of the same regional trade agreement.
35) When considering where to export, advantages to managers of focusing on a nation that
is already a sizable purchaser of goods coming from the home country include all of the
following EXCEPT
Version 1 8
A) the business climate in these importing nations is already relatively favorable.
B) import channel members (merchants, banks, and customs brokers) are experienced in
handling import shipments from the exporter’s area.
C) satisfactory transportation facilities have already been established.
D) the cultures of the two countries should be relatively similar and compatible.
36) Mexico and Canada are major U.S. trading partners because they have the benefit of
lower freight charges and shorter delivery times. Why do these benefits exist for these two
nations?
A) They established these parameters in the NAFTA agreement.
B) They share a border with the United States.
C) They source production materials from China.
D) They have established economies of scale for goods and services.
37) Which country currently exports the most to the United States?
A) Indonesia
B) Canada
C) Mexico
D) China
38) The three largest markets for American exports of goods in 2017 were
A) Japan, the United Kingdom, and China.
B) Japan, Mexico, and the United Kingdom.
C) Canada, Mexico, and China.
D) Canada, Japan, and the United Kingdom.
39) The three nations that exported the largest amount of goods to the United States in 2017
were
Version 1 9
A) China, Canada, and Mexico.
B) China, Mexico, and the United Kingdom.
C) China, Japan, and Saudi Arabia.
D) Canada, Mexico, and Japan.
40) Which countries have become more important trading partners to the United States as
suppliers of electronic products?
A) Canada and Mexico.
B) China and Canada.
C) Germany and the United Kingdom
D) China and Malaysia
41) When the value of imports into a nation exceeds the value of its exports, that nation is
experiencing a(n)
A) economy of scale.
B) fixed market.
C) competitive advantage.
D) trade deficit.
42) Government administrations get concerned when the number and value of imports into
the country are greater than the value of the country’s exports. In other words, the administration
is concerned about
A) product differentiation.
B) a trade deficit.
C) absolute advantage.
D) economies of scale.
Version 1 10
43) Some countries send out buying missions to other countries in order to find products to
import because their exports are exceeding the value of their imports. In other words, the nations
are experiencing a(n)
A) economy of scale.
B) absolute advantage.
C) trade surplus.
D) product differentiation.
44) Nations encounter a trade surplus when the value of
A) exports exceeds the value of imports.
B) imports and exports doesn’t change.
C) imports exceeds the value of exports.
D) imports and exports is balanced.
45) In 2016, what was included in the five largest categories of U.S. goods exported to
China?
A) furniture
B) grains
C) toys
D) soft goods
46) In 2016, what was the included in the five largest categories of U.S. goods imported from
China?
A) aircraft
B) grains
C) automobiles
D) footwear
Version 1 11
47) Supporters of mercantilism would agree that
A) accumulation of precious metals is an activity essential to a nation’s welfare.
B) industrial development is the primary source of a nation’s wealth.
C) trade policies that generally benefited consumers and emerging industrialists should
be promoted.
D) more than one nation can maintain a comparative advantage.
48) Mercantilists believed that
A) merchants should import goods to raise the level of living.
B) governments should lower import duties.
C) a nation should have an export surplus in order to accumulate precious metals.
D) a nation should produce goods for which there is a comparative advantage.
49) Who advocated the early attempt to develop an international trade theory in response to
the practice of mercantilism?
A) David Ricardo
B) Raymond Vernon
C) Stefan Linder
D) Adam Smith
50) Adam Smith argued against mercantilism by claiming that
A) governments, not market forces, should determine the directions, volume, and
composition of international trade.
B) a nation could trade advantageously if it had a comparative advantage.
C) market forces, not government controls, should determine direction, volume, and the
composition of international trade.
D) customers’ tastes are affected by income levels.
Version 1 12
51) The capability of one nation to produce more of a good or service than another country
for the same or lower cost of inputs is a(n)
A) comparative advantage.
B) absolute advantage.
C) mercantilist advantage.
D) trade surplus.
52) The United States can produce more wheat for the same or lower costs than many other
countries. This is an example of
A) a trade surplus.
B) economies of scale.
C) absolute advantage.
D) mercantilism.
53) If Ecuador has an absolute advantage in coffee and Argentina in wheat, then, according to
trade theory
A) Ecuador should focus production on coffee and trade for other goods.
B) Ecuador would do well to produce its own wheat rather than import it from Bolivia.
C) Argentina should focus on producing coffee and trade for wheat.
D) there will be a perfect trade balance between the two countries.
54) A market situation in which there is a sufficiently large number of well-informed buyers
and sellers of a homogeneous product such that no individual participant has enough power to
determine the price of the product, resulting in a marketplace that is efficient in production and
allocation of products is known as
Version 1 13
A) absolute advantage.
B) mercantilism.
C) trade deficit.
D) perfect competition.
55) A country ________ when it decides to use its resources to produce only the product in
which it has an absolute advantage.
A) monopolizes
B) specializes
C) rejects trade
D) globalizes
56) A nation having absolute disadvantages in the production of two goods with respect to
another nation has a(n) ___________ in the production of the good in which its absolute
disadvantage is less.
A) comparative advantage
B) absolute advantage
C) mercantilist advantage
D) competitive advantage
57) According to the theory of comparative advantage, trade can benefit
A) the exporting country involved in a trade.
B) neither country involved in a trade.
C) both countries involved in a trade.
D) the importing country involved in a trade.
58) According to the theory of comparative advantage, a nation
Version 1 14
A) should produce the goods for which its absolute disadvantage is less.
B) can gain from trade if it is equally inefficient in producing two goods.
C) must have an absolute advantage in at least one good to gain from trade.
D) should strive to produce trade surpluses to acquire supplies of precious metals.
59) A nation that is struggling to remain competitive in the world market may decide to
reduce the value of the country’s currency relative to other currencies. This process is called
currency
A) surplus.
B) deficit.
C) customization.
D) devaluation.
60) How are exchange rates used in international trade?
A) Exchange rates are used to convert from foreign to domestic currency.
B) Exchange rates indicate which products create an absolute advantage for trading
partners.
C) Exchange rates are used to devalue property in exchange for goods.
D) Exchange rates set the costs of labor.
61) Theory based on ________ states that international and interregional differences in
production costs occur because of differences in the supply of production factors.
A) comparative advantage
B) absolute advantage
C) mercantilist advantage
D) resource endowments
62) What is an example of a resource endowment that a nation possesses?
Version 1 15
A) government
B) land
C) religion
D) universities
63) The theory of resource endowment explains
A) why France sends cosmetics, wine, and clothing to Chile.
B) that a nation will trade goods that can be produced with the production factor that is
most abundant.
C) why an automobile can be made either by hand or by a capital-intensive process.
D) that a nation less efficient in producing a good has a comparative advantage.
64) The theory of overlapping demand explains
A) how international trade in manufactured goods will be linked to gross national
income.
B) why companies will add excess capacity to their production systems.
C) the existence of similar preferences and demands among countries with similar
income levels.
D) where competitive clusters will occur.
65) The theory of overlapping demand suggests that
A) international trade in services will be more common between countries with high and
low relative levels of labor costs.
B) countries with similar geography will have similar demand traits.
C) trade wars will usually occur between countries that have similar levels of income.
D) international trade in manufactured goods will be more common between countries
with similar levels of income.
Version 1 16
66) Natalie purchases Open Source bottled water from France because it is derived from
natural springs and the store brand doesn’t say where it comes from. What is influencing
Natalie’s purchase decision?
A) a trade surplus
B) product differentiation
C) overlapping demand
D) economies of scale
67) Product differentiation refers to the
A) availability of a variety of goods in a single product category.
B) the ability of one country to produce a product that another country cannot produce.
C) the existence and demand for similar products among nations.
D) unique differences companies build into their products.
68) The international product life cycle is used to
A) explain how international trade in manufactured goods will be linked to gross
national income.
B) show that a nation will trade goods that can be produced with the production factor
that is most abundant.
C) explain the role of innovation in trade patterns.
D) explain why mercantilism failed.
69) According to the international product life cycle, which country has the largest
population of high-income consumers and as a result, competition for patronage is intense?
A) Canada
B) China
C) Japan
D) the United States
Version 1 17
70) What is the second stage in the international product life cycle theory?
A) The United States innovates and exports.
B) Foreign competition appears in export markets.
C) Import competition appears in the United States.
D) Foreign production begins.
71) Green Fields Coffee Co. introduced its line of herbal coffees to the international market
two years ago. They were well received and now foreign competitors are starting to appear.
Which stage of the product life cycle theory is the company currently in?
A) Stage 1
B) Stage 2
C) Stage 3
D) Stage 4
72) Easy Play Audio/Video Corp. has been selling audio and video equipment to the
international market for six years. Recently, the company decided to drop its line of televisions
because the United States is importing televisions at a lower cost than the company can make
their television. Which stage of the product life cycle theory is the company currently in?
A) Stage 1
B) Stage 2
C) Stage 3
D) Stage 4
73) Which statement describes economies of scale?
Version 1 18
A) They refer to the rising scale on which efficiency improves as a result of cumulative
experience and learning.
B) They are the predictable decline in the average cost of producing each unit of output
as a production facility gets larger and output increases.
C) They are only relevant to manufacturing industries.
D) They occur due to the presence of abundance resource endowments within a nation.
74) Five years ago it cost Bernie’s Bikes Inc. about $52 dollars to build a single bike. Today,
it only costs the company about $31 because they have automated the process and are able to
purchase component parts in larger quantities.What allowed the company to reduce the price to
build a bike?
A) product differentiation
B) trade surplus
C) economies of scale
D) trade deficit
75) The experience curve refers to
A) the rising scale on which efficiency improves as a result of cumulative experience
and learning.
B) the predictable decline in the average cost of producing each unit of output as a
production facility gets larger and output increases.
C) the stage in the product life cycle where companies export products for the first time.
D) the lack of a suitable workforce to complete a task.
76) What is one of the reasons suggested by Alfred Marshall for why firms tend to cluster
together on a geographic basis?
Version 1 19
A) Production costs decline as facilities get larger.
B) Efficiency improves as the result of cumulative experience.
C) Competition will not enter the market.
D) Technological information can be readily shared.
77) Which element is included in Porter’s diamond model of national advantage?
A) demand conditions
B) export conditions
C) social conditions
D) supply conditions
78) Which element in Porter’s diamond model of national advantage distinguishes between
the land a company owns and the transportation systems available for it to use?
A) competitive conditions
B) export conditions
C) factor conditions
D) supply conditions
79) Which of the elements in Porter’s diamond model of national advantage takes into
consideration the sophistication of a company’s customers?
A) export conditions
B) factor conditions
C) demand conditions
D) government
80) Which of the elements in Porter’s diamond model of national advantage takes into
consideration companies that locate near the suppliers they need to produce their product?
A) related and supporting industries
B) demand conditions
C) firm strategy, structure, and rivalry
D) factor conditions
81) According to Porter, the four variables he believes influence a firm’s ability to gain a
competitive advantage create a
A) virtuous circle.
B) consistent triangle.
C) reliable square.
D) redundant cone.
82) The two components of foreign investment include portfolio investment and
A) exporting.
B) importing.
C) government tariffs.
D) direct investment.
83) Deals that do not result in a foreign investor obtaining at least ________ of the
shareholdings are classified as portfolio investments.
A) 25 percent
B) 100 percent
C) 50 percent
D) 10 percent
84) At the beginning of 2018, the value of the outstanding stock of foreign direct investment
of all nations totaled more than