Chapter Five International Trade Theory Group No.

Five
1. Propagated in the 16th and 17th centuries, _____ advocated that countries should
simultaneously encourage exports and discourage imports.
A. ethnocentrism
B. capitalism
C. collectivism
D. mercantilism
2. This theory explains the observed patterns of international trade by emphasizing the
interplay between the proportions in which the factors of production are available in different
countries and the proportions in which they are needed for producing particular goods.
A. Mercantilism
B. Absolute advantage
C. Heckscher-Ohlin
D. Comparative advantage
3. Identify the incorrect statement pertaining to Raymond Vernon's product life-cycle theory.
A. Early in their life cycle, most new products are produced in and exported from the country
in which they were developed.
B. As a new product becomes widely accepted internationally, production starts in other
countries.
C. A product in the early stage of the product life-cycle is imported by the country where it
was innovated.
D. A product may ultimately be exported back to the country of its original innovation.
4. The theory of _____, developed by Michael Porter, focuses on the importance of country
factors, in addition to factor endowments, 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
5. 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.
6. According to the theory of _____, it makes sense for a country to specialize in producing
the goods it produces most efficiently and buy the products it produces less efficiently from
other countries, even if it could produce the good more efficiently itself.
A. strategic trade
B. pertinent advantage
C. comparative advantage
D. absolute advantage

7. The simple comparative advantage model assumes constant returns to specialization.

However, it is more realistic to assume diminishing returns to specialization because of all of
the following reasons except:
A. all resources are of the same quality.
B. different goods use resources in different proportions.
C. as a country tries to increase its output of a certain good, it is more likely to draw on more
marginal resources whose productivity is not as great as those initially employed.
D. if a country specializes to the degree suggested by the simple Ricardian model, the gains
from specialization are likely to be exhausted before specialization is complete.
8. According to Porter, all of the following are broad attributes of a nation that shape the
environment in which local firms compete except:
A. factor endowments.
B. supply fluctuations.
C. relating and supporting industries.
D. firm strategy, structure, and rivalry.
9. Explain the connections between economies of scale, first-mover advantages, and trade
patterns.
10. With the aid of table/tables, explain the theory of absolute advantage and the theory of
comparative advantage.