Global Business 2nd Edition by Mike Peng - Test Bank

Global Business 2nd Edition by Mike Peng – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5—Trading Internationally

 

TRUE/FALSE

 

1. The theory of mercantilism viewed international trade as a win-win game.

 

ANS:  F                    PTS:   1                    DIF:    Easy               REF:   p. 129

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

 

2. Trade deficit occurs when a nation exports more than it imports.

 

ANS:  F                    PTS:   1                    DIF:    Easy               REF:   p. 128

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

 

3. Whether a country has a trade surplus or deficit leads to the country’s balance of trade.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   p. 128

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence

 

4. Mercantilism suggests that self-sufficiency is the best for a country.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   p. 129

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence

 

5. The theory of absolute advantage was advocated by French statesman Jean Baptist Colbert.

 

ANS:  F                    PTS:   1                    DIF:    Easy               REF:   p. 130

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence

 

6. The theory of absolute advantage espouses that the economic advantage one nation enjoys is superior to another nation.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   p. 130

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence

 

7. The theory of comparative advantage states that even if a country does not have absolute advantage in production, the country can still profitably specialize if the country is relatively more efficient.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 132

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

 

8. A country has a comparative advantage when that country can be more efficient than any other country in the production of any good or service.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        REF:   p. 132

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

9. Absolute and comparative advantages come from economic differences.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        REF:   p. 132

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

10. Mercantilism is the direct intellectual ancestor of modern-day protectionism.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   p. 129

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

11. Adam Smith proposed the theory of comparative advantage.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        REF:   p. 132

OBJ:   5.2                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

12. Opportunity cost refers to the cost of pursuing one activity at the expense of another activity, given the alternatives.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 132

OBJ:   5.2                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

13. Factor endowment theory is a proposition that nations will develop comparative advantage based on their locally abundant factors.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 134

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

14. Mercantilism, absolute advantage, and comparative advantage are examples of modern theories.

 

ANS:  F                    PTS:   1                    DIF:    Easy               REF:   p. 135

OBJ:   5.2                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

15. Product life cycle theory was developed by American economist Raymond Vernon in 1966.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 136

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

16. Product life cycle theory is the first dynamic theory to account for changes in the patterns of trade over time.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 136

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

17. Strategic trade is the first theory to incorporate dynamic changes in patterns of trade.

 

ANS:  F                    PTS:   1                    DIF:    Difficult         REF:   p. 136

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

18. Strategic trade theory suggests that strategic intervention by governments in certain industries can improve the odds for international success.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 136

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

19. First-mover advantages are enjoyed by first entrants and not shared with late entrants.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 136

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

20. National competitive advantage of industries is the most recent, most complex, and most realistic among various theories.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 139

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

21. According to absolute advantage theory, by specializing and trading, each nation produces more and consumes more.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 141

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence

 

22. Based on the mercantilism theory, the wealth of all trading nations and the world increases.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        REF:   p. 141

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

 

23. Factor endowments, domestic demand, firm strategy, structure and rivalry, and related and supporting industries are aspects of strategic trade theory.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        REF:   p. 141

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

24. Government payments to domestic firms to produce a competitive advantage are subsidies.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 145

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Operations Management

 

25. Administrative policy is a superficial policy to show that exporting countries voluntarily agree to restrict their exports.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        REF:   p. 146

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

26. Bureaucratic rules that make it harder to import foreign goods are defined as administrative policies.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 146

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

27. Import quota is a type of nontariff barriers.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 146

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

28. Foreign policy objectives are often sought through trade intervention.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 148

OBJ:   5.3                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

29. Trade embargo is politically motivated trade sanction against foreign countries to signal displeasure.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 148

OBJ:   5.3                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

30. Political arguments against free trade state infant industry can not be protected under free trade.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   p. 147

OBJ:   5.3                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

 

31. The United States runs a trade deficit with all its major trading partners-Canada, the EU, Japan, and Mexico.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 149

OBJ:   5.4                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

 

32. Classical theorists and their modern-day disciples argue that the United States and India trade by tapping into each other’s comparative advantages.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 149

OBJ:   5.4                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

 

33. Indian innovation can reduce the price of US software exports and curtail the wage of the US IT worker.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        REF:   p. 149

OBJ:   5.4                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

 

34. Managers should monitor and nurture current comparative advantages of certain locations and take advantage of new locations.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   p. 151

OBJ:   5.4                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

35. Managers need not be politically active to appreciate the gains from trade.

 

ANS:  F                    PTS:   1                    DIF:    Easy               REF:   p. 152

OBJ:   5.4                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence

 

MULTIPLE CHOICE

 

1. ____ occurs when a nation imports more than it exports.

a.	Trade deficit
b.	Trade surplus
c.	Balance of trade
d.	Trade embargo

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   p. 128

OBJ:   5.1                 NAT:  AACSB: Tier 1 Diversity; Tier 2 Strategy

 

2. The aggregation of importing and exporting by both sides leads to a:

a.	Balance of trade
b.	Trade surplus or deficit
c.	Different nation’s trade
d.	Both a balance of trade and a trade surplus or deficit

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   p. 128

OBJ:   5.1                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

3. Although the American movies are the best in the world, ____ limit the market share of American movies to protect their domestic movies.

a.	Canada
b.	France
c.	South Korea
d.	All of these answers

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   p. 129

OBJ:   5.1                 NAT:  AACSB: Tier 1 Diversity; Tier 2 Environmental Influence

 

4. Widely practiced during the 1960s and 1700s, ____ viewed international trade as a zero-sum game.

a.	Protectionism
b.	Theory of mercantilism
c.	Classical trade theories
d.	Free trade

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        REF:   p. 129

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

5. The idea that governments should actively protect domestic industries from imports and vigorously promote exports represents:

a.	Theory of absolute advantage
b.	Theory of mercantilism
c.	Protectionism
d.	Modern trade theories

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        REF:   p. 129

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

6. The theory of absolute advantage is:

a.	The idea that free market forces should determine how much to trade with little government intervention.
b.	The economic advantage one nation enjoys that is absolutely superior to other nations.
c.	The idea that governments should actively protect domestic industries from imports and vigorously promote exports.
d.	The belief that held that the wealth of the world was fixed and that a nation that exported more and imported less would enjoy the net inflows of gold and silver and thus become richer.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   p. 130

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

7. The relative advantage in one economic activity that one nation enjoys in comparison with other nations is known as:

a.	Theory of comparative advantage
b.	Theory of absolute advantage
c.	Free-trade advantage
d.	Theory of nations advantage

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        REF:   p. 132

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

8. British economist ____ developed a theory of absolute advantage.

a.	Adam Smith
b.	David Ricardo
c.	Michael Porter
d.	Bertil Ohlin

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   p. 132

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

9. The classical theory/ies ____ have evolved over approximately 300 to 400 years, up to the beginning of the 20^th century.

a.	Mercantilism
b.	Absolute advantage
c.	Competitive advantage
d.	All of these answers

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   p. 135

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

10. American economist Raymond Vernon divided the world into:

a.	Lead innovation nations
b.	Other developed nations
c.	Developing nations
d.	All of these answers

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   p. 136

OBJ:   5.2                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

11. An economic theory that accounts for changes in the patterns of trade over time is known as:

a.	Strategic trade theory
b.	First-mover advantage theory
c.	Product life cycle theory
d.	Strategic trade policy

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        REF:   p. 136

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

12. The factor endowment theory is identified as:

a.	Theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success.
b.	Economic theory that accounts for changes in the patterns of trade over time.
c.	Proposition that nations will develop comparative advantage based on their locally abundant factors.
d.	Theory that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond.”

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   p. 134

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

13. ____ is the extent to which different countries possess various factors of production such as labor, land, and technology.

a.	Absolute advantage
b.	Comparative advantage
c.	Factor endowment
d.	Product lifecycle

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   p. 134

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

14. The policy to assist strategic advantage is known as:

a.	Strategic trade policy
b.	“Diamond” policy
c.	Heckscher-Ohlin policy
d.	Free trade policy

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   p. 138

OBJ:   5.2                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

15. Factor endowments were noted by:

a.	Michael Porter
b.	Heckscher-Ohlin
c.	Adam Smith
d.	Raymond Vernon

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   p. 134

OBJ:   5.2                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

16. The national competitive advantage of industries depends on:

a.	Country factor endowments and firm strategy, structure, and rivalry
b.	Domestic demand conditions
c.	Related and supporting industries
d.	All of these answers

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   p. 139

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

17. The birth of modern economics and the forerunner of the free trade movement are strengths and influences of:

a.	Absolute advantage
b.	Comparative advantage
c.	National competitive advantage
d.	Mercantilism

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   p. 141

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

18. Which of the following is a classical theory?

a.	Product life cycle
b.	National competitive advantage
c.	Strategic trade
d.	Absolute advantage

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   p. 135

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

19. Which of the following is the first theory to incorporate dynamic changes in patterns of trade:

a.	Strategic trade
b.	Mercantilism
c.	Product life cycle
d.	Absolute advantage

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   p. 135

OBJ:   5.2                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

20. Which of the following is the strength of a comparative advantage?

a.	It defeats mercantilism, at least intellectually.
b.	It provides direct policy advice.
c.	It explains patterns of trade based on factor endowments.
d.	It positively incorporates the role of governments in trade.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   p. 137

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

21. ____ are government payments to domestic firms.

a.	Tariffs
b.	Subsidies
c.	Quotas
d.	Trade embargoes

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   p. 138

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

22. Which of the factors is not in the Porter’s diamond model?

a.	Country factor endowments
b.	Related and supporting industries
c.	Domestic demand conditions
d.	Foreign demand conditions

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   p. 139

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

23. As a major tariff barrier, a(an) ____ is a tax imposed on imports.

a.	Import tariff
b.	Export tariff
c.	Deadweight costs
d.	NTBs

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   p. 141

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Operations Management

 

24. Which of the theories assumes perfect resource mobility?

a.	Absolute advantage theory
b.	Comparative advantage theory
c.	Mercantilism theory
d.	All of these answers

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   p. 143

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Operations Management

 

25. Deadweight costs are net losses that occur when ____ are imposed.

a.	Import tariffs
b.	Import quotas
c.	Voluntary export restraints
d.	Local content requirements

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   p. 143

OBJ:   5.2                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

26. ____ discourages imports by placing taxes on imported goods.

a.	Nontariff barrier
b.	Tariff barrier
c.	Import quota
d.	Antidumping duty

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        REF:   p. 145

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Group Dynamics

 

27. NTBs (nontariff barriers) include:

a.	Subsidies, import quotas
b.	Export restraints, local content requirements
c.	Administrative policies, antidumping duties
d.	All of these answers

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   p. 146

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Group Dynamics

 

28. Import quota is a kind of:

a.	Tariff barriers
b.	Nontariff barriers
c.	Voluntary export restraints
d.	Antidumping duty

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        REF:   p. 146

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Group Dynamics

 

29. A superficial policy to show that exporting countries voluntarily agree to restricts their exports is known as:

a.	Voluntary export restraints
b.	Local content requirements
c.	Administrative policies
d.	Antidumping duties

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   p. 146

OBJ:   5.3                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Operations Management

 

30. ____ are rules stipulating that a certain proportion of the value of the goods made in one country must originate from that country.

a.	Voluntary export restraints
b.	Local content requirements
c.	Import quotas
d.	Tariffs

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               REF:   p. 146

OBJ:   5.3                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Operations Management

 

31. ____ are restrictions on the quantity of imports for specific periods of time.

a.	Export restraints
b.	Import quotas
c.	Local content requirements
d.	Antidumping duties

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        REF:   p. 146

OBJ:   5.3                 NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

32. Political arguments against free trade’s ability to advance a nation’s political, social, and environmental agenda, regardless of possible economic gains from trade, include:

a.	National security and consumer perception
b.	Foreign policy and environmental and social responsibility
c.	Foreign policy and national security
d.	National security, consumer perception, foreign policy, and environmental and social responsibility

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   p. 147

OBJ:   5.3                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

33. Young domestic firms that need government protection are in the:

a.	Infant industry
b.	Mature industry
c.	Standard industry
d.	Declining industry

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        REF:   p. 147

OBJ:   5.3                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

34. One of the ____ is about service trade and high skill jobs in high technology such as IT.

a.	The classical theories versus new realities debate
b.	The trade deficit versus trade surplus debate
c.	Trade embargoes
d.	The infant industry argument

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        REF:   p. 149

OBJ:   5.4                 NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

35. What determines the success and failure of a firm’s exports around the globe?

a.	Discovering and leveraging the comparative advantage of world-class locations
b.	Monitoring and nurturing the current comparative advantage of certain locations combined with taking advantage of new locations
c.	Being politically active to demonstrate, safeguard, and advance the gains from international trade
d.	All of these answers

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   p. 152

OBJ:   5.5                 NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

ESSAY

 

1. Discuss the characteristics of the modern theories of international trade.

 

ANS:

Product life cycle theory is an economic theory that accounts for changes in the patterns of trade over time. Comparative advantage first resides in the lead innovation nation, which exports to other nations. Production migrates to other advanced nations and then developing nations in different product life cycle stages. This theory is the first theory to incorporate dynamic changes in patterns of trade. Its weakness is that the United States may not always be the lead innovation nation.

Strategic trade theory suggests that strategic intervention by governments in certain industries can enhance their odds for international success. Strategic intervention by governments may help domestic firms reap first-mover advantages in certain industries. First-mover firms, aided by governments, may have better odds at winning internationally. Strategic trade theory provides direct policy advice, is more realistic, and positively incorporates the role of governments in trade.

The theory of national competitive advantage of industries is that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond.” The four aspects are: 1) factor endowments, 2) domestic demand, 3) firm strategy, structure, and rivalry, and 4) related and supporting industries. This theory is the most recent, most complex, and most realistic among various theories. The weakness is the theory has not been comprehensively tested, and that overseas demand may stimulate the competitiveness of certain industries.

 

PTS:   1                    DIF:    Difficult         REF:   p. 143             OBJ:   5.2

NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

2. Compare and contrast absolute advantage and comparative advantage trade theories.

 

ANS:

The economic advantage one nation enjoys that is absolutely superior to other nations summarizes the theory of absolute advantage. Nations should specialize in economic activities in which they have an absolute advantage and trade with others. By specializing and trading, each nation produces more and consumes more. Therefore, the wealth of trading nations and the world overall increases. Its strengths are in being the birth of modern economics, serving as the forerunner of the free trade movement, and defeating mercantilism, at least intellectually.

The weakness of the theory is that when one nation is inferior to another, the theory is unable to provide any advice, and when there are many nations, it may be difficult to find an absolute advantage. To compensate, the theory of relative advantage us that there may be one economic activity that one nation can enjoy in comparison with other nations. Nations should specialize in economic activities in which they have a comparative advantage and trade with others. This theory’s strengths are that it offers more realistic guidance to nations interested in trade but having no absolute advantage and explains patterns of trade based on factor endowments.

 

PTS:   1                    DIF:    Moderate       REF:   p. 141             OBJ:   5.2

NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

3. Discuss the national competitive advantage of industries.

 

ANS:

This theory focuses on why certain industries within a nation are competitive internationally. Porter argues that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond.”

First, he starts with factor endowments, which refer to the natural and human resource repertoires noted by Heckscher-Ohlin theory. Second, tough domestic demand propels firms to scale new heights. Third, domestic firm strategy, structure, and rivalry in one industry play a huge role in its international success or failure. Finally, related and supporting industries provide the foundation upon which key industries can excel. It is the most recent, complex, and most realistic among various theories. As a multilevel theory, it directly connects research on firms, industries, and nations.

The theory weaknesses are that it has not been comprehensively tested and that overseas demand may stimulate the competitiveness of certain industries.

 

PTS:   1                    DIF:    Moderate       REF:   p. 139             OBJ:   5.2

NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

4. Identify the strengths and influences of the classical theories of international trade.

 

ANS:

Mercantilism is a forerunner of modern-day protectionism, which is the idea that governments should actively protect domestic industries from imports and vigorously promote exports. Absolute advantage is identified as the birth of modern economics, a forerunner of the fee trade movement, which defeats mercantilism, at least intellectually. Comparative advantage gives guidance that is more realistic to nations interested in trade but having no absolute advantage. This theory explains patents of trade based on factor endowments.

 

PTS:   1                    DIF:    Easy               REF:   p. 129-134      OBJ:   5.2

NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

5. Define three Non-Tariff Barriers and explain their implications.

 

ANS:

Answers will vary.

 

Non-tariff barriers include subsidies, import quotas, export restraints, local content requirements, administrative policies, and antidumping duties. Subsidies are government payments to domestic firms to produce competitive advantage. Import quotes are restrictions on the quantity of imports for specific period. Import quotes are worse than tariffs because with tariffs, foreign goods can still be imported if tariffs are paid. Voluntary export restraints were developed to show that on the surface, exporting countries voluntarily agree to restrict their exports. Local content requirements require a certain proportion of the value of the goods made in one country to originate from that country. Administrative policies refer to bureaucratic rules that make it harder to import foreign goods. Antidumping duties are costs levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business). Trade barriers reduce or eliminate international trade.

 

PTS:   1                    DIF:    Moderate       REF:   p. 145-146      OBJ:   5.3

NAT:  AACSB: Tier 1 Communication; Tier 2 Strategy

 

6. Discuss the political arguments against free trade.

 

ANS:

Political arguments include national security, consumer protection, foreign policy, and environmental and social responsibility. National security is often invoked to protect defense -related industries. Many nations fear that if they rely on arms imports, their national security may be compromised if there are political or diplomatic disagreements between them and the arms-producing nation.

Consumer protection has frequently been used as an argument for nations to erect trade barriers. Foreign policy objectives are often sought through trade intervention. Trade embargoes are politically motivated trade sanctions against foreign countries to signal displeasure. Environmental and social responsibility can be used as political arguments to initiate trade intervention against certain countries.

 

PTS:   1                    DIF:    Moderate       REF:   p. 147-148      OBJ:   5.3

NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy

 

What determines the success and failure of a firm’s exports around the globe?

 

ANS:

The success of a firm’s exports around the globe is determined by discovering and leveraging comparative advantages of world-class locations. Managers needs to constantly monitor and nurture the current comparative advantage of certain locations and take advantage of new locations. The manager who fails to realize the departure of comparative advantage from certain locations is likely to fall behind. Managers need to be politically active to demonstrate, safeguard, and advance the gains from international trade. They often fail to realize that free trade is not free; it requires constant efforts and sacrifices to demonstrate and advance the gains from such trade.

 

PTS:   1                    DIF:    Moderate       REF:   p. 152             OBJ:   5.5

NAT:  AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

 

8. Discuss the economic arguments against free trade.

 

ANS:

There are two prominent economic arguments against free trade: (1) the need to protect domestic industries and (2) the need to shield infant industries.

The oldest and most frequently used economic argument against free trade is the urge to protect domestic industries, firms, and jobs from allegedly “unfair” foreign competition¾in short, protectionism. Critics against free trade argue that Young domestic firms need government protection. Otherwise, they stand no chance of surviving and will be crushed by mature foreign rivals. It is thus imperative that governments level the playing field by assisting infant industries. While this argument is sometimes legitimate, governments and firms have a tendency to abuse it. Some protected infant industries may never grow up and continue to request subsidies.

 

PTS:   1                    DIF:    Moderate       REF:   p. 146-147      OBJ:   5.3

NAT:  AACSB: Tier 1 Analytic; Tier 2 Strategy