Global Business Today 5Th Canadian Edition By Charles W. L. Hill - Test Bank

Global Business Today 5Th Canadian Edition By Charles W. L. Hill – Test Bank

 

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Sample Questions Are Posted Below

 

Chapter 05

International Trade Theories

 

 

Multiple Choice Questions

1. According to the opening case study, what is the world’s largest free trade zone?
   A.The EU
   B. NAFTA
   C. The TPP
   D. China
   E. India

 

Accessibility: Keyboard Navigation
Difficulty: Easy

2. Which of the following international trade scholars was the first to explain why unrestricted free trade is beneficial to a country?
   A.Adam Smith
   B. Bertil Ohlin
   C. Eli Heckscher
   D. Paul Krugman
   E. David Ricardo

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Topic: 05-02 An Overview of Trade Theory

3. __________ 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.
   A.Autonomous trade
   B. Free trade
   C. Clear commerce
   D. Unencumbered commerce
   E. NAFTA

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Topic: 05-02 An Overview of Trade Theory

4. Propagated in the 16^th and 17^th centuries, __________ advocated that countries should simultaneously encourage exports and discourage imports.
   A.ethnocentrism
   B. capitalism
   C. collectivism
   D. nationalism
   E. mercantilism

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Topic: 05-02 An Overview of Trade Theory

5. The theory of __________ was advanced by Adam Smith.
   A.absolute advantage
   B. capitalism
   C. similar opportunity
   D. mercantilism
   E. comparative advantage

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Topic: 05-02 An Overview of Trade Theory

6. Which of the following statements accurately characterizes mercantilism?
   A.It is a new but largely discredited doctrine
   B. It is a new, highly credible doctrine
   C. It is an old yet highly credible doctrine
   D. It is an old and largely discredited doctrine
   E. It still influences many governments

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

7. __________, the first theory of international trade, principal assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce.
   A.Collectivism’s
   B. Mercantilism’s
   C. Capitalism’s
   D. Economic conservatism’s
   E. Market capitalism

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

8. The main tenet of mercantilism was that it was in a country’s best interest to maintain a(n):
   A.export and import trade balance
   B. import trade embargo
   C. export trade surplus
   D. export trade deficit
   E. large reserve of gold

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

9. The flaw with mercantilism was that it viewed trade as a __________.
   A.zero-sum game
   B. economic necessity
   C. non essential economic activity
   D. threat to a government’s independence
   E. luxury for consumers

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

10. _______ is 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 encourage exports and discourage imports
    C. Imports should be limited by tariffs and quotas
    D. Exports should be subsidized
    E. Local manufacturing companies should be protected from foreign competition

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

11. According to David Hume, if England had a balance-of-trade surplus with France, the resulting inflow of gold and silver would:
    A.have no effect on England’s economic conditions
    B. increase the money supply and cause inflation in England
    C. England’s prices would fall
    D. France’s prices would rise
    E. increase the wealth of the monarchy

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

12. A situation in which a gain by one party results in a loss by another is called a(n) __________.
    A.transfer of wealth
    B. unbalanced scorecard
    C. zero-sum game
    D. positive-sum game
    E. transaction

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

13. Hagelstam observed that in most trade negotiations, the approach of individual negotiating countries has been to press for trade _______ in areas where their own comparative competitive advantages are the strongest, and to resist _______ in areas where they are less competitive and fear that imports would replace domestic production.
    A.socialization; liberalization
    B. capitalization; socialization
    C. liberalization; liberalization
    D. capitalization; capitalization
    E. equality; growth

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

14. Which of the following is a situation in which all countries can benefit, even if some benefit more than others?
    A.Near equivalent-result game
    B. Positive-sum game
    C. Balanced scorecard
    D. Zero-sum game
    E. Economic progression

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

15. In his 1776 landmark book, The Wealth of Nations, __________ attacked the mercantilist assumption that trade is a zero-sum game.
    A.Geert Hofstede
    B. Max Weber
    C. Michael Porter
    D. Adam Smith
    E. David Ricardo

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

16. Which of the following international management scholars first argued that countries differ in their ability to produce goods efficiently?
    A.David Ricardo
    B. Eli Heckscher
    C. Michael Porter
    D. Adam Smith
    E. Raymond Vernon

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

17. 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 strictly domestic sales
    B. trade these goods for the goods produced by other countries
    C. sell these goods to the highest domestic or international bidder
    D. prohibit the import of these goods from other countries
    E. stockpile these goods until international demand increases

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

18. __________ basic argument, articulated through the theory of absolute advantage, is that a country should never produce goods at home that it can buy at a low cost from another country.
    A.David Ricardo’s
    B. Michael Porter’s
    C. Bertil Ohlin’s
    D. Adam Smith’s
    E. John Vernon’s

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

19. _______ is a situation in which one country is more efficient at producing a product than any other country.
    A.Absolute advantage
    B. Relative advantage
    C. Comparative advantage
    D. Pertinent advantage
    E. Favourable factor endowment

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

20. 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
    E. Michael Porter

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-08 Comparative Advantage

21. A situation in which a country specializes in producing the goods it produces most efficiently and buys the products it produces less efficiently from other countries, even if it could produce the good more efficiently itself is referred to as:
    A.comprehensive advantage
    B. pertinent advantage
    C. comparative advantage
    D. absolute advantage
    E. inherent advantage

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-08 Comparative Advantage

22. The theory of comparative advantage, advanced by __________, is the intellectual basis of the modern argument for unrestricted free trade.
    A.Michael Porter
    B. David Ricardo
    C. Bertil Ohlin
    D. Adam Smith
    E. Wassily Leontief

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-08 Comparative Advantage

23. _______ is the basic message of the theory of comparative advantage.
    A.Potential world production is greater with unrestricted free trade than it is with restricted trade.
    B. Potential world production is not significantly affected by trade policy.
    C. Potential world production is greater with restricted trade.
    D. 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 products less efficiently from other countries, unless this means buying goods from other countries that it could produce more efficiently itself.
    E. None of these answers is correct.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-09 The Gains from Trade

24. In terms of explaining why some countries export automobiles, consumer electronics, and machine tools, while other countries export chemicals, watches, and jewellery, David Ricardo’s theory of comparative advantage offer an explanation in terms of
    A.international differences in intellectual capital.
    B. international differences in labour productivity.
    C. the interplay between the proportions in which the factors of production (such as land, labour, and capital) are available in different countries and the proportions in which they are needed for producing particular goods.
    D. the cultural histories of the exporting nations.
    E. the geographic location of potential trading partners.

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-09 The Gains from Trade

25. To an even greater degree than the theory of absolute advantage, the theory of __________ suggests that trade is a positive-sum game in which all gain.
    A.total advantage
    B. mercantilism
    C. comparative advantage
    D. paradoxical advantage
    E. eclectic paradigm

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-09 The Gains from Trade

26. Ricardo’s theory of comparative advantage suggests that consumers in all nations can consume more if there are
    A.trade restrictions on services only.
    B. no trade restrictions.
    C. severe trade restrictions.
    D. trade restrictions on manufactured goods only.
    E. restrictions on currencies.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-09 The Gains from Trade

27. The theory of comparative advantage
    A.provides a strong rationale for encouraging international trade.
    B. provides a strong rationale for discouraging international trade.
    C. neither encourages nor discourages international trade.
    D. provides a weak rationale for discouraging international trade.
    E. is considered wrong by many.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-09 The Gains from Trade

28. One of the limitations to the theory of comparative advantage is that it assumes:
    A.inflation
    B. constant returns to scale
    C. new government regulations and higher taxes.
    D. new product development
    E. excessive transportation costs

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-10 Qualifications and Assumptions

29. One of the limitations to the theory of comparative advantage is that resources do not always move easily from one economic activity to another and the process creates:
    A.inflation
    B. friction and human suffering
    C. new government regulations and higher taxes
    D. new product development
    E. excessive transportation costs and retraining concerns

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-11 Trade and Extensions of the Ricardian Model

30. Governments often ease the transition toward free trade by _______ those who lose their jobs as a result.
    A.offering welfare to
    B. creating new jobs for
    C. giving government jobs to
    D. putting up temporary trade barriers
    E. helping to retrain

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-11 Trade and Extensions of the Ricardian Model

31. Which of these occurs if an economy is opened to trade?
    A.Free trade might increase the efficiency with which a country uses its resources.
    B. Economies of small-scale production would not be available as trade expands the size of the total market available to domestic firms.
    C. Free trade would decrease a country’s stock of resources as increased supplies of labour and capital from abroad become available for use within the country.
    D. Domestic producers would be stimulated to look for new ways to increase their productivity.
    E. Prices for consumer goods may increase

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-11 Trade and Extensions of the Ricardian Model

32. Dynamic gains in both the stock of a country’s resources and the efficiency with which resources are utilized will cause a country’s PPF to:
    A.shift inward
    B. shift outward
    C. make no appreciable change
    D. no longer be influential
    E. reflect new technologies

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-11 Trade and Extensions of the Ricardian Model

33. The Paul Samuelson critique looks at what happens when a rich country enters into a(n) _____ with a poor country.
    A.small scale production
    B. free trade agreement
    C. technology transfer
    D. government policy change
    E. increase in employment

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-11 Trade and Extensions of the Ricardian Model

34. _______ argued that comparative advantage rises from differences in national factor endowments.
    A.Heckscher and Ohlin
    B. Smith
    C. Sachs and Warner
    D. Ricardo
    E. Porter

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

35. Swedish economists, __________ and __________, advanced a theory of trade that argued that comparative advantage arises from differences in national factor endowments.
    A.Durbin; Coles
    B. Heckscher; Ohlin
    C. Delhomme; Rivette
    D. Mouton; Penn
    E. Borg; Abba

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

36. Which theory predicts that countries will export those goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce?
    A.Heckscher-Cormier
    B. Ricardo-Ohlin
    C. Heckscher-Ohlin
    D. Carrier-Roller
    E. Smith-Ricardo

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

37. Which of the following statements is a fair comparison of the Heckscher-Ohlin theory and the Ricardo theory (i.e. comparative advantage) of free trade?
    A.both theories argues that the pattern of international trade is determined by currency exchange rates
    B. the Heckscher-Ohlin theory argues that the pattern of international trade is determined by trade endowments, while the Ricardo theory argues that the pattern of international trade is determined by differences in productivity
    C. both theories argue that the pattern of international trade is determined by differences in productivity
    D. the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in productivity, while the Ricardo theory argues that the pattern of international trade is determined by trade endowments
    E. the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in demand conditions, while the Ricardo theory argues that the pattern of international trade is determined by national competitive advantages

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

38. Most economists, according to the textbook, prefer the Heckscher-Ohlin theory to Ricardo’s theory (i.e. comparative advantage) because which of the following two factors?
    A.It makes fewer simplifying assumptions and it has been subjected to many empirical tests
    B. It has been subjected to many empirical tests and it has stood the test of time
    C. It makes fewer simplifying assumptions and it has been acknowledged by the World Trade Organization as the better of the two theories
    D. It has been acknowledged as the better of the two theories by the World Trade Organization, and it has stood the test of time
    E. Ricardo’s theory is almost 200 years old, while Heckscher-Ohlin’s theory is quite modern

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

39. The Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in:
    A.productivity
    B. political interests
    C. factor endowments
    D. national priorities
    E. first mover advantages

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

40. The Heckscher-Ohlin theory has a(n) _______ appeal.
    A.political
    B. commonsense
    C. economic
    D. cost efficiency
    E. historical

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

41. Contrary to what the Heckscher-Ohlin theory would predict, the United States has been a primary importer rather than an exporter of capital goods. This phenomenon is referred to as the __________ paradox.
    A.Theler
    B. Leontief
    C. Cormier
    D. Ricardo
    E. Porter

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-13 The Leontief Paradox

42. What is a possible explanation for observing the Leontief paradox?
    A.The Leontief paradox makes perfect sense.
    B. The U.S. has a special advantage in producing new products or goods made with innovative technologies.
    C. Other countries don’t have the technologies that the U.S. has.
    D. Labour costs are much lower in developing countries.
    E. For many products the market size is much larger in India and China.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-13 The Leontief Paradox

43. One early response to the failure of the Heckscher-Ohlin theory to explain the observed pattern of international trade was the __________.
    A.theory of rising costs
    B. product life-cycle theory
    C. theory of comparative advantage
    D. theory of cultural constraints
    E. the Leontief Paradox

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-14 The Product Life-Cycle Theory

44. Which of the following choices correctly matches a scholar with the theory that he or she proposed?
    A.Adam Smith/Comparative Advantage
    B. David Ricardo/New Trade
    C. Raymond Vernon/Product Life Cycle
    D. Eli Heckscher/Absolute Advantage
    E. Michael Porter/Factor Endowment

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-14 The Product Life-Cycle Theory

45. Who initially proposed the product life-cycle theory in the mid-1960s?
    A.Cormier
    B. Heckscher
    C. Vernon
    D. Smith
    E. Porter

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-14 The Product Life-Cycle Theory

46. Vernon’s product life-cycle theory was based on the observation that for most of the 20^th century a very large proportion of the world’s new products had been developed by U.S. firms and sold first in the __________ market.
    A.Japanese
    B. Western European
    C. U.S.
    D. Canadian
    E. South American market

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-15 Evaluating the Product Life-Cycle Theory

47. As the market in the U.S. and other advanced nations matures, the product becomes more standardized and price becomes:
    A.governmentally regulated
    B. greater
    C. unimportant
    D. the main competitive weapon
    E. more differentiated

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-15 Evaluating the Product Life-Cycle Theory

48. _______ theory of international trade suggests that the production of products is likely to switch from advanced countries to developing countries over time.
    A.New trade
    B. Comparative advantage
    C. Heckscher-Ohlin
    D. Product life-cycle
    E. Competitive advantage

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-15 Evaluating the Product Life-Cycle Theory

49. According to the textbook, historically the product-life-cycle theory is an:
    A.accurate explanation of international trade patterns for manufactured goods but not for services
    B. accurate explanation of international trade patterns
    C. accurate explanation of international trade patterns in some countries but not in others
    D. inaccurate explanation of international trade patterns
    E. accurate explanation of international travel and transportation volumes

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-15 Evaluating the Product Life-Cycle Theory

50. _______ is/are unit cost reductions associated with a large scale of output.
    A.Product life-cycle
    B. Economies of scale
    C. Learning effects
    D. First-mover advantage
    E. Late-mover volumes

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-16 The New Trade Theory

51. Because of substantial economies of scale, the __________ theory argues that in many industries there are increasing returns to specialization.
    A.Leontief’s paradox
    B. product life-cycle
    C. new trade
    D. Heckscher-Ohlin
    E. Porter

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-16 The New Trade Theory

52. The __________ theory argues that due to the presence of substantial scale economies, world demand will support only a few firms in many industries.
    A.Heckscher-Ohlin
    B. Leontief’s paradox
    C. product life-cycle
    D. new trade
    E. Porter

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-16 The New Trade Theory

53. Which theory of international trade directly explains why there are only two to three producers of airlines in the world today?
    A.absolute advantage
    B. new trade
    C. comparative advantage
    D. product life cycle
    E. mercantilism

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-16 The New Trade Theory

54. The economic and strategic advantages that accrue to early entrants in an industry are called:
    A.first-mover advantages
    B. initial-class advantages
    C. early-entrant advantages
    D. first-stage benefits
    E. initial-entrant advantage

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-18 Economies of Scale, First-Mover Advantages, and the Pattern of Trade

55. The new trade theorists argue that the United States leads in exports of commercial jet aircraft not because it is better endowed with the factors of production required to manufacture aircraft, but because:
    A.U.S. built commercial jet aircraft have the best safety record
    B. the U.S. commercial jet aircraft industry has a lower wage rate than foreign competitors
    C. the World Trade Organization has given preferential treatment to the U.S. commercial jet aircraft industry
    D. one of the first movers in the industry was DeHavilland
    E. one of the first movers was Boeing

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-18 Economies of Scale, First-Mover Advantages, and the Pattern of Trade

56. According to the new trade theorists, because early entrants are able to gain __________, the early entrants into an industry may get a lock on the world market that discourages subsequent entry.
    A.high brand awareness
    B. highly skilled employees
    C. high legitimacy
    D. economies of scale
    E. market penetration

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-18 Economies of Scale, First-Mover Advantages, and the Pattern of Trade

57. Economies of scale increases the efficiency of resource utilization, therefore increasing what?
    A.costs
    B. capital
    C. factor endowments
    D. productivity
    E. profitability

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-18 Economies of Scale, First-Mover Advantages, and the Pattern of Trade

58. New trade theorists stress the role of the following three variables in giving firm first-mover advantages?
    A.availability of capital, entrepreneurship, and favourable government policies
    B. entrepreneurship, favourable foreign exchange rates, and innovation
    C. luck, entrepreneurship, and innovation
    D. modernization, luck, and the availability of capital
    E. availability of capital, low labour costs and innovation

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-19 Implications of New Trade Theory

59. Which 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?
    A.Balanced trade
    B. Heckscher-Olin
    C. New trade
    D. Product life-cycle
    E. National competitive advantage

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-19 Implications of New Trade Theory

60. The theory of __________, developed by Michael Porter, focuses on 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.
    A.new trade
    B. absolute advantage
    C. comparative advantage
    D. national competitive advantage
    E. factor endowments

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-21 National Competitive Advantage: Porter’s Diamond

61. Which of the following two theories justify some limited and selective government intervention to support the development of certain export-oriented industries?
    A.The theory of national competitive advantage and the Heckscher-Ohlin theory
    B. The theory of absolute advantage and the new trade theory
    C. The Heckscher-Ohlin theory and theory of comparative advantage
    D. The theory of mercantilism and the Heckscher-Ohlin theory
    E. The new trade theory and theory of national competitive advantage

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-21 National Competitive Advantage: Porter’s Diamond

62. In 1990, who published the results of an intensive research effort that attempted to determine why some nations succeed and others fail in international competition?
    A.Eli Heckscher
    B. Michael Porter
    C. Bertil Ohlin
    D. Raymond Vernon
    E. Wassily Leontief

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-21 National Competitive Advantage: Porter’s Diamond

63. Porter’s thesis was that four broad attributes of a nation shape the environment in which local firms compete, and that these attributes promote or impede the creation of competitive advantage. All of the following is/are attributes except:
    A.factor endowments
    B. customs
    C. firm strategy, structure, and rivalry
    D. related and supporting industries
    E. demand conditions

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-21 National Competitive Advantage: Porter’s Diamond

64. _______, according to Michael Porter, are a nation’s position in factors of production such as skilled labour or the infrastructure necessary to compete in a given industry.
    A.Demand endowments
    B. Factor endowments
    C. Factor competencies
    D. Demand conditions
    E. National resources

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-22 Factor Endowments

65. Porter argued that in regard to factor endowments, __________ factors are the most significant for competitive advantage in his study dealing with the competitive advantage of nations.
    A.standard
    B. basic
    C. advanced
    D. complementary
    E. exclusive

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-22 Factor Endowments

66. Unlike the naturally endowed basic factors, advanced factors are a product of investment by all of the following except
    A.companies.
    B. governments.
    C. demographics.
    D. individuals.
    E. none of these answers is correct.

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-22 Factor Endowments

67. In his study dealing with the competitive advantage of nations, Porter argued that in regard to demand conditions, a nation’s firms’ gain competitive advantage if their domestic consumers are __________ and __________.
    A.unpretentious; passive
    B. modest; passive
    C. exacting; unpretentious
    D. sophisticated; demanding
    E. fractious; unsatisfied

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-23 Demand Conditions

68. Who argued that successful industries within a country tend to be grouped into “clusters” of related industries?
    A.Porter
    B. Vernon
    C. Ricardo
    D. Heckscher
    E. Sachs

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-24 Related and Supporting Industries

69. The conditions governing how companies are created, organized, and managed and the nature of domestic rivalry is referred to as
    A.relating and supporting industries.
    B. demand conditions.
    C. factor endowments.
    D. firm strategy, structure, and rivalry.
    E. corporate regulations.

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-25 Firm Strategy, Structure, and Rivalry

70. Domestic rivalry creates pressure to do all of the following except:
    A.to innovate.
    B. to reduce costs.
    C. to improve employee relations.
    D. to invest in upgrading advanced factors.
    E. to improve efficiency

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-25 Firm Strategy, Structure, and Rivalry

71. _______, by its choice of policies, can detract from or improve national advantage.
    A.A company
    B. Government
    C. A market
    D. Individuals.
    E. Shareholders

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-25 Firm Strategy, Structure, and Rivalry

72. Porter argues that the presence of all components is usually required for the “diamond” to boost:
    A.international recognition.
    B. competitive performance.
    C. corporate social responsibility.
    D. employee morale.
    E. national export surpluses.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-26 Evaluating Porter’s Theory

73. We would expect Porter’s model to predict _______, if he is correct.
    A.currency exchange rates
    B. membership in the World Trade Organization
    C. the pattern of international trade
    D. factor endowments
    E. trade costs

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-26 Evaluating Porter’s Theory

 

True / False Questions

74. Propagated in the 16^th and 17^th centuries, mercantilism advocated that countries should discourage both imports and exports.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Topic: 05-02 An Overview of Trade Theory

75. Free trade is 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.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Topic: 05-02 An Overview of Trade Theory

76. The great strength of the theories of Smith, Ricardo, and Heckscher-Ohlin is that they identify the specific benefits of international trade.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-01 Explain why nations trade with each other.
Topic: 05-04 The Pattern of International Trade

77. The first theory of international trade emerged in England in the mid-16^th century. Referred to as the theory of comparative advantage, its principle assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

78. The flaw with mercantilism was that it viewed trade as a zero-sum gain.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

79. A situation in which a gain by one country results in a loss by another is a positive-sum game.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism

80. When a country is more efficient than any other country in producing a product, it has an absolute advantage in the production of that product.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

81. In his 1776 landmark book, The Wealth of Nations, Adam Smith supported the mercantilist assumption that trade is a zero-sum game.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

82. Smith’s basic argument was that a country should never produce goods at home that it can buy at a lower cost from other countries.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

83. Ricardo’s theory of competitive advantage says that it is logical for a country to specialize in the product of goods that it produces most efficiently and to export goods that it produces less efficiently.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-08 Comparative Advantage

84. The theory of absolute advantage suggests that trade is a positive-sum game in which all can gain to an even greater degree than the theory of comparative advantage.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-09 The Gains from Trade

85. The potential world production is greater with unrestricted free trade than it is with restricted free trade is the basic message of the theory of comparative advantage.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-09 The Gains from Trade

86. When a movement toward a free trade regime occurs, the pain is a long-term phenomenon, while the gains from trade, once the transition has been made, are both insignificant and short-term.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-10 Qualifications and Assumptions

87. Like Ricardo’s theory, the Heckscher-Ohlin theory argues that free trade is beneficial. Unlike Ricardo’s theory, however, the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments, rather than differences in productivity.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

88. The Heckscher-Ohlin theory would predict that the United States should be a primary importer of capital goods.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

89. Because it makes fewer simplifying assumptions, and it has been subjected to many empirical tests, most economists prefer the Heckscher-Ohlin theory to Ricardo’s theory.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

90. The Heckscher-Ohlin theory has been one of the least influential in international economics.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

91. The product life-cycle 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.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-14 The Product Life-Cycle Theory

92. Raymond Vernon’s theory of the Product Life-Cycle was based on the observation that for most of the 20^th century a very large proportion of the world’s new products were developed by U.S. firms and sold first in the U.S. market.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-14 The Product Life-Cycle Theory

93. The new trade theorists argue that in those industries where the existence of substantial economies of scale imply that the world market will profitable support only a few firms, countries may export certain products simply because they have a firm that was an early entrant into that industry.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-16 The New Trade Theory

94. Economies of scale increases the efficiency of resource utilization, but do not affect productivity.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-18 Economies of Scale, First-Mover Advantages, and the Pattern of Trade

95. According to Porter, the four broad attributes of a nation that shape the environment in which local firms compete and that promote or impede the creation of competitive advantage are demand conditions, firm strategy, structure, and rivalry, factor endowments, and relating and supporting industries.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-21 National Competitive Advantage: Porter’s Diamond

96. A firm should invest in upgrading advanced factors of production because it is in the best interest of business for a firm, according to Porter’s theory.
    TRUE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-22 Factor Endowments

97. In sum, Porter’s argument is that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, domestic demand conditions, related and supporting industries, and degree of government support.
    FALSE

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-26 Evaluating Porter’s Theory

 

Short Answer Questions

98. When does free trade occur?

Free trade occurs when 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.

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Topic: 05-02 An Overview of Trade Theory

99. What is meant by the term “free trade? Was Adam Smith an advocate or critic of free trade? Is free trade compatible with the concept of mercantilism? Explain your answer.

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. This concept was supported by Adam Smith, who argued that the “invisible hand” of the market mechanism, rather than government policy, should determine what a country imports and what it exports. The concept of mercantilism is not compatible with the concept of free trade. The main tenet of mercantilism is that it is in a country’s best interests to maintain a trade surplus by exporting more than it imports. Consistent with this belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade.

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-06 Mercantilism
Topic: 05-07 Absolute Advantage

100. Describe Adam Smith’s concept of absolute advantage.

According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade those goods for the goods produced by other countries. For instance, during Smith’s time, England had an absolute advantage in the production of textiles, and France had an absolute advantage in the production of wine. According to the concept of absolute advantage, it then only makes sense for England to produce textiles (and export them to France), and France to produce wine (and export it to England). Smith’s basic argument, therefore, was that a country should never produce goods at home that it can buy at a lower cost from other countries. Moreover, Smith argued that by specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-02 Distinguish the different theories that explain trade flows between nations.
Topic: 05-07 Absolute Advantage

101. Describe the Heckscher-Ohlin theory of international trade. Is the Heckscher-Ohlin theory consistent with the notion of free trade? Why or why not?

The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Thus, the Heckscher-Ohlin theory attempts to explain the pattern of international trade that we see in the world economy. The Heckscher-Ohlin theory is consistent with the notion of free trade. It also has commonsense appeal, and there are many examples of international commerce that are supportive of the theory.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

102. While diamonds are mined all over the world, including in Canada, the diamond trade is centered on Antwerp Belgium in an area known as the Diamond Quarter, or the Square Mile. Diamonds are cut and polished in lower wage countries such as India (which accounts for about 90% of all diamond cutting and polishing) but they are traded in Antwerp. There are almost 4,000 dealers, brokers and financial intuitions serving this industry, all located in an area of only several blocks. Antwerp has been the centre of the diamond industry for several centuries since Lodewyk van Berken, a Flemish jeweler invented a device for polishing diamonds around the year 1450.
     How does the Heckscher-Ohlin theory help to explain this scenario?

The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. In Antwerp, such factors include labour (skilled in the diamond business) and capital (money for financing, brokers for trading).

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-12 Heckscher-Ohlin Theory

103. Describe the central tenant of the product life-cycle theory.

Proposed by Raymond Vernon, the product life-cycle theory suggests that early in their life cycle, most new products are produced in an exported from the country in which they were developed. As a new product becomes widely accepted internationally, production starts in other countries. As a result, the theory suggests, the product may ultimately be exported back to the country of its innovation.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-14 The Product Life-Cycle Theory

104. Describe the new trade theory. How does the new trade theory help us to understand why the United States is dominant in the world market for commercial aircraft exports?

The 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. In such industries, firms that enter the market first build a competitive advantage that is difficult to challenge. Thus, the observed pattern of trade between nations may in part be due to the ability of firms to capture first-mover advantages.
This theory helps us understand why the United States is dominant in the world market for commercial aircraft exports. American firms such as Boeing were first movers in the world market in the commercial aircraft industry. As a result, Boeing and to a lesser extent other American firms built a competitive advantage that has subsequently been difficult for firms from countries with equally favourable factor endowments to challenge.

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-16 The New Trade Theory

105. Describe what is meant by first-mover advantages?

First mover advantages are the economic and strategic advantages that accrue to early entrants into an industry. Because they are able to gain economies of scale, early entrants may get a lock on the world market that discourages subsequent entry. In other words, the ability of first-movers to reap economies of scale creates a barrier to entry. In the commercial aircraft industry, for example, the fact that Boeing and Airbus are already in the industry and have achieved substantial economies of scale effectively discourages new entrants.

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-03 Express why many economists believe that unrestricted (free) trade between nations will raise the economic welfare of all countries that participate in a free trade system.
Topic: 05-18 Economies of Scale, First-Mover Advantages, and the Pattern of Trade

106. In an extensive study that was published in a book entitled The Competitive Advantage of Nations, Michael Porter concluded that four broad attributes of a nation shape the environment in which local firms compete, and that these attributes promote or impede the creation of competitive advantage. Identify and describe the four attributes advanced by Porter. What did Porter conclude from his analysis?

The four attributes identified by Porter are as follows:

Factor Endowments: A nation’s position in factors of production such as skilled labour or the infrastructure necessary to compete in a given industry.
Demand Conditions: The nature of home demand for the industry’s product or service.
Related or Supporting Industries: The presence or absence in a nation of supplier industries and related industries that are internationally competitive.
Firm Strategy, Structure, and Rivalry: The conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
Porter speaks of these four attributes as constituting the diamond. He argues that firms are most likely to succeed in industries or industry segments where the diamond is most favourable.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-21 National Competitive Advantage: Porter’s Diamond

107. While diamonds are mined all over the world, including in Canada, the diamond trade is centered on Antwerp Belgium in an area known as the Diamond Quarter, or the Square Mile. Diamonds are cut and polished in lower wage countries such as India (which accounts for about 90% of all diamond cutting and polishing) but they are traded in Antwerp. There are almost 4,000 dealers, brokers and financial intuitions serving this industry, all located in an area of only several blocks. Antwerp has been the centre of the diamond industry for several centuries since Lodewyk van Berken, a Flemish jeweler invented a device for polishing diamonds around the year 1450.
     Michael Porter considered four factors of production in developing his theory of international trade. These four factors help determine the difference in production between different countries. Describe and explain the four factors. Explain which factor would be more important in this scenario.

The four attributes identified by Porter are as follows:

Factor Endowments: A nation’s position in factors of production such as skilled labour or the infrastructure necessary to compete in a given industry.
Demand Conditions: The nature of home demand for the industry’s product or service.
Related or Supporting Industries: The presence or absence in a nation of supplier industries and related industries that are internationally competitive.
Firm Strategy, Structure, and Rivalry: The conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
Diamonds would most likely be more affected by Factor Endowments such as education and the availability of skilled labour. They would also be more likely to be influenced by the Related or Supporting industry factors such as brokers and fiancé firms.

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-21 National Competitive Advantage: Porter’s Diamond

108. In the first years of the expansion of NAFTA to include Mexico many companies had compelling reasons for opening a plant in Mexico. The Mexican government was enticing some businesses with incentives such as no taxes and free land. What international trade theory could justify this action? Explain.

Porter’s National Competitive Advantage does argue that governments can affect the effectiveness of various factors by employing a variety of policy tools. For example, in terms of advanced factors of endowment the government could subsidize education.

 

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-21 National Competitive Advantage: Porter’s Diamond

109. While diamonds are mined all over the world, including in Canada, the diamond trade is centered on Antwerp Belgium in an area known as the Diamond Quarter, or the Square Mile. Diamonds are cut and polished in lower wage countries such as India (which accounts for about 90% of all diamond cutting and polishing) but they are traded in Antwerp. There are almost 4,000 dealers, brokers and financial intuitions serving this industry, all located in an area of only several blocks. Antwerp has been the centre of the diamond industry for several centuries since Lodewyk van Berken, a Flemish jeweler invented a device for polishing diamonds around the year 1450.
     Which of Michael Porter’s four factors of production would help explain why the diamond cutting industry is now centered in India?

Factor Endowments: A nation’s position in factors of production such as cheap but skilled labour would explain this.

 

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 05-04 Summarize the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
Topic: 05-22 Factor Endowments

110. Globalization is described as the creation of a single world market. You can see evidence of globalization in every store, and in most products. You can also see it in the shifting of labour intensive industry to low wage cost countries. As Canadians we are generally in support of free trade. Using appropriate trade theories explain why freer trade is particularly beneficial to Canada and to our trading partners.

This requires the student to understand how important trade is to the Canadian economy. We are very dependent on free trade, as the more barriers to trade the lower the volume of trade. It also means that the theory of comparative advantage is very attractive to any arguments and the fundamental argument we might make with our trading partners. A variation of this argument would be to use Heckscher-Ohlin. The student could also argue that Porter’s national competitive advantage, also supports freer trade as the four factors determine the type of activity that is most appropriate for a given country. It also allows the government to intervene in improving the conditions.

 

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 05-05 Demonstrate the important implications that international trade theory holds for business practice.
Topic: 05-27 Implications for Business