Deck 5: International Trade Theory

Question 1

Largely discredited and primitive,mercantilism still influences the trade policies of many countries.

Answer 1

True
Explanation: Although mercantilism is an old and largely discredited doctrine,its echoes remain in modern political debate and in the trade policies of many countries.

Question 2

Zero-sum game refers to a situation in which an economic gain by one country results in an economic loss by another.

Answer 2

True
Explanation: A zero-sum game is one in which a gain by one country results in a loss by another.Mercantilism views trade as a zero-sum game.

Question 3

The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus.

Answer 3

True
Explanation: 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),thereby accumulating gold and silver and,consequently,increasing its national wealth,prestige,and power.

Question 4

In his book,"The Wealth of Nations," Adam Smith supported the mercantilist assumption that trade is a zero-sum game.

Question 5

Embracing a free trade regime for an advanced economy often implies that the country will produce less of some labor-intensive goods and more of some knowledge-intensive goods.

Question 6

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.

Question 7

The first theory of international trade that emerged in England asserted that gold and silver were the mainstays of national wealth and essential to vigorous commerce.

Question 8

Advocates of free trade rely on Ricardo's theory of comparative advantage as a major intellectual weapon.

Question 9

Ricardo's theory of comparative advantage says that it is logical for a country to specialize in the production of goods that it produces most efficiently and to export goods that it produces less efficiently.

Question 10

According to Adam 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.

Question 11

According to Adam Smith,market mechanism,rather than government policy,should determine a country's imports and exports.

Question 12

Paul Samuelson argued that contrary to the standard interpretation,in certain circumstances,the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor country.

Question 13

Limits on imports are often in the interests of domestic consumers,but not domestic producers.

Question 14

David Ricardo's theory of comparative advantage was the first to explain why unrestricted free trade is beneficial to a country.

Question 15

Free trade refers to a situation where a government,through quotas or duties,attempts to influence what its citizens can buy from another country,or what they can produce and sell to another country.

Question 16

If a country is more efficient than any other country in the production of a product,it has what is known as relative advantage in the production of that product.

Question 17

Mercantilism,as advocated in the 16^th and 17^th centuries,believed that countries should simultaneously encourage both imports and exports.

Question 18

Smith,Ricardo,and Heckscher-Ohlin suggest that a country's economy would gain only if its citizens buy products that are made in that country.

Question 19

During the 1980s,economists such as Paul Krugman developed what has come to be known as the new trade theory.

Question 20

The theories of Smith,Ricardo,and Heckscher-Ohlin failed to identify the specific benefits of international trade.

Question 21

The argument for _____ is that both import controls and export incentives are self-defeating and result in wasted resources.

A)protectionism
B)subsidies
C)mercantilism
D)unrestricted free trade

Question 22

David Ricardo advanced the:

A)new trade theory.
B)product life-cycle theory.
C)comparative advantage theory.
D)absolute advantage theory.

Question 23

According to Porter,both advanced factors and basic factors are equally significant for competitive advantage.

Question 24

The individual firm should invest substantial financial resources in trying to build a first-mover advantage,even if that means several years of losses before a new venture becomes profitable.

Question 25

Porter argues that an absence of domestic rivalry is vital to the creation and persistence of international competitive advantage in an industry.

Question 26

According to Michael Porter,factor endowments can be affected by subsidies,policies toward capital markets,and policies toward education.

Question 27

According to Porter's theory of national competitive advantage,a firm should invest in upgrading advanced factors of production because it is in the best interest of business for a firm to do so.

Question 28

Most economists prefer Ricardo's theory to the Heckscher-Ohlin theory because it makes fewer simplifying assumptions.

Question 29

The simplistic model of the comparative advantage theory used in the text assumes that trade changes a country's stock of resources and the efficiency with which it utilizes those resources.

Question 30

The 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 pioneering firms to produce that good.

Question 31

According to the product life cycle theory,as demand for a product starts to grow in other advanced countries,potential for exports from the U.S.will gradually be limited.

Question 32

Which of the following is best identified as the absence of government-imposed barriers to the free flow of goods and services between countries?

A)Free trade
B)Mercantilism
C)Socialism
D)Absolute advantage

Question 33

Climate and natural resource endowments explain all of the following happening,EXCEPT:

A)Brazil exporting coffee.
B)Switzerland exporting watches.
C)China exporting crawfish.
D)Saudi Arabia exporting oil.

Question 34

David Ricardo's theory of comparative advantage attempts to rationalize why some countries export automobiles,consumer electronics,and machine tools,while other countries export chemicals,watches,and jewelry.This rationalization is best explained in terms of:

A)absolute advantage with reference to natural resources.
B)international differences in labor productivity.
C)the proportions in which the factors of production are available.
D)the cultural histories of the exporting nations.

Question 35

24.When the impact of differences of technology on productivity is controlled for,Heckscher-Ohlin theory gains predictive power.

Question 36

Ricardo's theory leads us to expect that despite the short-term adjustment costs associated with adopting a free trade regime,trade would seem to produce a greater economic growth and higher living standards in the long run.

Question 37

Viewed from an Asian or European perspective,Vernon's argument that most new products are developed and introduced in the United States seems ethnocentric.

Question 38

The new trade theory began to emerge in the 1970s when a number of economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade.

Question 39

Factor endowments refer to the extent to which free trade impacts the national wealth of a country.

Question 40

Raymond Vernon's theory of the product life-cycle was based on the observation that for most of the 20th century,a very large proportion of the world's new products were developed by foreign nations and sold first in the U.S.market.

Question 41

In his 1817 book entitled "Principles of Political Economy," _____ introduced the theory of comparative advantage.

A)Adam Smith
B)David Ricardo
C)Raymond Vernon
D)Max Weber

Question 42

According to Smith,countries should specialize in the production of goods for which they have an absolute advantage and then:

A)retain these goods for strict domestic sales.
B)trade these goods for goods produced by other countries.
C)sell these goods to maintain a trade surplus.
D)prohibit the import of these goods from other countries.

Question 43

Which of the following statements most accurately captures the main tenet of mercantilism?

A)It is in a country's best interests to not export products to less developed countries.
B)It is in a country's best interests to import products even if they are most efficiently produced at home.
C)It is in a country's best interests to import less specialized goods than to attempt to make them at home.
D)It is in a country's best interests to maintain a trade surplus.

Question 44

A country is said to have a(n)_____ in the production of a product when it is more efficient than any other country in producing that product.

A)comparative advantage
B)relative advantage
C)consumer advantage
D)absolute advantage

Question 45

According to Adam Smith's theory of absolute advantage,a country that has an absolute advantage in the production of all goods:

A)enjoys the greatest benefits of international trade.
B)might go on to become the dominant country in the production of those goods.
C)will grow to be the biggest economic power.
D)might derive no benefits from international trade.

Question 46

Considered to be the first theory of international trade,the principal assertion of _____ was that gold and silver were the mainstays of national wealth and essential to vigorous commerce.

A)collectivism
B)mercantilism
C)capitalism
D)open market system

Question 47

Which of the following theories of international trade was advanced by Adam Smith?

A)Theory of absolute advantage
B)Theory of comparative advantage
C)New trade theory
D)Product life-cycle theory

Question 48

The flaw with mercantilism was that it viewed trade as a:

A)zero-sum game.
B)mutually beneficial activity.
C)positive-sum game.
D)threat to a nation's sovereignty.

Question 49

An inconsistency in the mercantilist doctrine,as pointed out by David Hume,is that:

A)it indirectly helped increase volume of a country's imports.
B)it presented a crude case for exclusion of government in matters pertaining to exports and imports.
C)no country could sustain a surplus on the balance of trade.
D)it was not backed by either sound political principles or social ideologies.

Question 50

Which of the following is one of the unrealistic assumptions that the simple Ricardian model of comparative advantage used in the text is based on?

A)There are many countries and many more goods in the world.
B)Each country has a fixed stock of resources.
C)Free trade changes the efficiency with which a country uses its resources.
D)Differences in the prices of resources in different countries exist.

Question 51

Mercantilists saw no virtue in _____.

A)a large volume of trade
B)protectionism
C)tariffs and quotas
D)subsidizing exports

Question 52

To an even greater degree than the theory of absolute advantage,_____ suggests that trade is a positive-sum game in which all participating countries fetch economic gains.

A)the Heckscher-Ohlin theory
B)mercantilism
C)the theory of comparative advantage
D)Leontief's paradox

Question 53

_____ theory suggests that consumers in all nations can consume more if there are no restrictions on trade.

A)Porter's
B)Vernon's
C)Samuelson's
D)Ricardo's

Question 54

A country intentionally keeps its currency value low against the currency of another in order to sell more goods to the latter.This can be viewed as a(n)_____ policy.

A)inflationist
B)totalitarian
C)neo-mercantilist
D)capitalist

Question 55

A situation in which gains by all parties can be achieved is called a:

A)level playing field.
B)zero-sum game.
C)positive-sum game.
D)trade surplus.

Question 56

Which of the following is NOT consistent with the central beliefs of mercantilism?

A)Government should intervene to achieve a surplus in the balance of trade.
B)Policies should be put in place to minimize exports and maximize imports.
C)Imports should be limited by tariffs and quotas.
D)Exports should be subsidizeD.

Question 57

Neo-mercantilists equate _____ with economic power and economic power with
_____.

A)international trade;corruption
B)political power;balance-of-trade surplus
C)imports;regional dominance
D)absolute advantage;trade monopoly

Question 58

Propagated in the 16th and 17th centuries,_____ advocated that countries should simultaneously encourage exports and discourage imports.

A)ethnocentrism
B)capitalism
C)collectivism
D)mercantilism

Question 59

The different combinations of goods that a country,say Ghana,could produce are represented by the line GG' in Figure 5.1.This is referred to as Ghana's _____.

A)production possibility frontier
B)hypothetical trade barrier
C)import-export differentiator
D)resource conversion indicator

Question 60

Country "A" specializes in producing beef more efficiently than any other country.It buys wheat,which it produces less efficiently than beef,from country "B," even though it produces wheat more efficiently itself.This situation is referred to as:

A)comprehensive advantage.
B)first advantage.
C)comparative advantage.
D)absolute advantage.

Question 61

In comparative advantage,the assumption is that resources can move freely from production of one good to another.Why is this assumption unrealistic?

A)The process of shifting resources from one good to another eliminates human suffering.
B)The benefit of free trade is much lesser compared to the cost of shifting resources.
C)The process of moving resources causes friction and human suffering.
D)There are regulations that prohibit such movement.

Question 62

It is more realistic to assume diminishing returns to specialization when evaluating the theory of comparative advantage.This is because:

A)there exist differences in the prices of resources in different countries.
B)resources can move freely from the production of one good to another within a country.
C)not all resources are of the same quality.
D)different goods use resources in the same proportions.

Question 63

One of the rebuttals of Samuelson's critique of the free trade model is that:

A)the United States' ability to achieve constant returns to specialization is unparalleled.
B)the strict immigration policies of the United States help insulate the economy from inward migration.
C)introducing trade barriers may in fact be beneficial for the United States to some extent.
D)developing nations are unlikely to upgrade the skill level of their workforce rapidly enough.

Question 64

According to the Heckscher-Ohlin theory,the pattern of international trade is determined by differences in:

A)labor productivity.
B)efficiency.
C)factor endowments.
D)management practices.

Question 65

_____ and _____ created a measure of how "open" to international trade an economy was and then looked at the relationship between "openness" and economic growth for a sample of more than 100 countries from 1970 to 1990.

A)Ricardo;Smith
B)Warner;Sachs
C)Porter;Vernon
D)Samuelson;Ohlin

Question 66

The units of resources required to produce a good are assumed to remain unchanged no matter where one is on a country's production possibility frontier.This is known as:

A)zero-sum game.
B)positive-sum game.
C)constant returns to specialization.
D)diminishing returns to specialization.

Question 67

The difference between Ricardo's theory and the Heckscher-Ohlin theory is that they attributed the rise of comparative advantage to differences in _____ and _____,respectively.

A)abundance of resources;education
B)economic systems;political ideologies
C)availability of labor;efficiency of production
D)productivity;factor endowments

Question 68

According to Samuelson,the ability to offshore service jobs that traditionally were not internationally mobile,coupled with rapid advances in communications technology and the productivity of foreign labor due to better education have an effect on middle-class wages in the United States that can be similar to:

A)mass inward migration into the United States.
B)improvement in the standard of living in the United States.
C)better employability of United States labor.
D)a substantial hike in the market clearing wage rate.

Question 69

Dynamic gains in both the stock of a country's resources and the efficiency with which resources are utilized will:

A)cause the country's PPF to be in a bell-shaped curve.
B)enable the country to produce more goods than it did before the introduction of free trade.
C)cause a country's PPF to shift inward.
D)enable the country to achieve constant returns to specialization.

Question 70

The United States has an abundance of arable land,but faces a shortage of low-cost labor.In contrast,China excels in the production of labor-intensive goods,such as footwear and textiles.According to the Heckscher-Ohlin theory:

A)United States will import textiles and footwear from China and export agricultural goods.
B)China will invest more than United States in the production of agricultural goods to exploit its population advantage.
C)United States and China will import agricultural goods and textiles respectively to exploit the comparative advantage.
D)the migration of Chinese laborers to United States will increase exponentially to bridge the shortage in cheap labor.

Question 71

Diminishing returns to specialization occurs when:

A)natural resources begin to run out owing to pollution.
B)more units of resources are required to produce each additional unit.
C)the cost of producing goods reduces substantially with increase in number of goods produced.
D)the quality of resources comes down as a result of producing more goods.

Question 72

Which 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?

A)Warner-Sachs
B)Wacziarg-Welch
C)Heckscher-Ohlin
D)Frankel-Romer

Question 73

Nations have varying factor endowments,and different factor endowments explain differences in _____.

A)labor productivity
B)efficiency of processes
C)factor mobility
D)factor costs

Question 74

According to the text,most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because:

A)it makes fewer simplifying assumptions.
B)it predicts real-world international trade patterns with greater accuracy.
C)Ricardo's theory is less accurate due to the Leontief paradox.
D)Ricardo's theory is too complicated to be applied to real-world scenarios.

Question 75

_____ argued that contrary to the standard interpretation,in certain circumstances,the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor nation.

A)Raymond Vernon
B)Andrew Warner
C)Paul Samuelson
D)Jeffery Sachs

Question 76

U.S.exports were less capital-intensive than U.S.imports,despite the relative abundance of capital in the country.This phenomenon runs contrary to what the Heckscher-Ohlin theory would predict and is termed the _____ paradox.

A)Zeno
B)Leontief
C)Russell
D)Simpson

Question 77

The comparative advantage theory is considered to have ignored which of the following statements?

A)Constant returns to specialization implies a concave Production Possibility Frontier.
B)Constant returns to specialization suggests that the gains from specialization are likely to be exhausted before specialization is complete.
C)It is feasible for a country to specialize to a point where the resulting gains from trade are outweighed by diminishing returns.
D)Different goods use different resources in different proportions.

Question 78

In general,economic studies on the relationship between trade and economic growth suggest that:

A)countries open to international trade display higher growth rates than those that close their economies to trade.
B)comparative advantage theory does not hold much relevance in the modern world of international trade and open economies.
C)modern economic trends tend to be influenced more by the absolute advantage theory than the comparative advantage theory.
D)with the onset of free trade,rich countries are showing better dynamic gains in the efficiency with which resources are useD.

Question 79

The simple model of comparative advantage used in the text is based on assuming away:

A)the effects of trade on income distribution within a country.
B)constant returns to scale.
C)that all resources can move freely from the production of one good to another.
D)that free trade does not change the efficiency with which the countries use their resources.

Question 80

What was Samuelson's criticism of free trade?

A)He argued that dynamic gains lead to a universally beneficial outcome for all countries.
B)He argued that offshoring service jobs that were traditionally mobile will increase the market clearing wage rate.
C)He argued that free trade has historically been beneficial only to third world countries.
D)A rich country importing cheap goods from a poor country may not make up for the wage losses in the rich country.