QUIZ CHAPTER 6

TRUE OR FALSE

1. As a trade theory, the strongest feature of mercantilism is that it views trade as a positive-sum game in
which all countries can benefit.

True; The flaw with mercantilism was that it viewed trade as a zero-sum game in which the size of the economic
pie was fixed. (A zero-sum game is one in which a gain by one country results in a loss by another.) It was left to
Adam Smith and David Ricardo to show the limitations of this approach and to demonstrate that trade is a
positive-sum game, or a situation in which all countries can benefit.

2. A country has an absolute advantage in the production of a product when it is more efficient than any
other country in producing it.

True; A country has an absolute advantage in the production of a product when it is more efficient than any other
country in producing it.

3. The Heckscher-Ohlin theory is considered the best predictor of real-world international trade patterns.

False; Economists prefer the Heckscher-Ohlin theory on theoretical grounds, but it is a relatively poor predictor of
real-world international trade patterns.

4. Heckscher-Ohlin theory stresses that comparative advantage arises from differences in productivity.

False; Unlike Ricardo’s theory, the Heckscher-Ohlin theory argues that the pattern of international trade is
determined by differences in factor endowments, rather than differences in productivity.

5. When economists talk about the gains from trade, they are referring to the net profits realized by
expanding one’s market for any given product.

False; When economists talk about the gains from trade, what they mean is that trade allows countries to
specialize in the production (and export) of goods and services that they can produce most efficiently, while
importing goods and services that they cannot produce so efficiently from other nations. By increasing the
efficiency of resource utilization in the global economy, economists theorize that international trade results in
greater economic growth and provides economic benefits to all countries that participate in a global trading
system.

6. Managed trade can be described as a situation in which issues related to trade—such as what can be
traded and in what quantities—are determined by market forces, government mandates, and
negotiated agreements.

True; Managed trade, where what can be traded, and how much, is determined not just by market forces, but also
by government mandates and negotiated agreements.

7. Adam Smith’s theory of absolute advantage implies that a laissez-faire stance toward trade is in the
best interests of a country.
True; Proposed in 1776, Adam Smith’s theory of absolute advantage was the first to explain why unrestricted free
trade is beneficial to a country. His arguments imply that a laissez-faire stance toward trade was in the best
interests of a country.

8. Porter’s theory of national competitive advantage recommends that government should never interfere
in free trade policies.

False; Both the new trade theory and Porter’s theory of national competitive advantage can be interpreted as
justifying some limited government intervention to support the development of certain export-oriented industries.

9. Mercantilist doctrine advocates unrestricted free trade between countries.

False; Mercantilist doctrine advocates government intervention to achieve a surplus in the balance of trade.

10. New trade theorists stress the role of luck, entrepreneurship, and innovation in giving a firm first-mover
advantages.

True; New trade theorists stress the role of luck, entrepreneurship, and innovation in giving a firm first-mover
advantages.

MULTIPLE CHOICE

1. Which theory would support the idea that by increasing the efficiency of resource utilization in the global
economy, international trade results in greater economic growth and provides economic benefits to all
countries that participate in a global trading system?
a. first-mover advantage
b. economies of scale
c. gains from trade
d. zero-sum game
When economists talk about the gains from trade, what they mean is that trade allows countries to specialize in
the production (and export) of goods and services that they can produce most efficiently, while importing goods
and services that they cannot produce so efficiently from other nations. By increasing the efficiency of resource
utilization in the global economy, economists theorize that international trade results in greater economic growth
and provides economic benefits to all countries that participate in a global trading system.
2. Country A exports electronic goods to Country B although there are no underlying differences in factor
endowments between the two countries. Which theory explains this anomaly?
a. comparative advantage theory
b. new trade theory
c. Ricardo’s theory
d. Smith’s theory
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.

3. One of the advantages of being the first mover in a market is

a. there is little risk involved.
b. the ability to benefit from a higher cost structure.
c. the ability to capture scale economies ahead of later entrants.
d. local governments are more favorable to the first movers.
First-mover advantages are the economic and strategic advantages that accrue to early entrants into an industry.
The ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure, is an
important first-mover advantage.
4. Which theory can be used to justify limited government intervention to support the development of
certain export-oriented industries?
a. Smith’s theory
b. Ricardo’s theory
c. new trade theory
d. Heckscher-Ohlin theory
Both the new trade theory and Porter’s theory of national competitive advantage can be interpreted as justifying
some limited government intervention to support the development of certain export-oriented industries.
5. David Ricardo’s theory of comparative advantage explains international trade in terms of the
a. varying proportions in the factors of production.
b. number of firms that the world market can support.
c. differences in productivity.
d. late-mover advantage that certain countries and firms possess.
The theories of Smith, Ricardo, and Heckscher-Ohlin help explain the pattern (or geography) of international trade
that we observe in the world economy. David Ricardo’s theory of comparative advantage offers an explanation in
terms of international differences in productivity.
6. A major benefit of engaging in free trade is that it
a. helps to reduce the financial volatility in global markets.
b. helps countries protect the jobs that are available to their citizens.
c. gives countries access to products that they cannot produce.
d. allows governments to exert more control on businesses.
Countries can benefit from exchanging goods that they can produce efficiently to obtain products that they cannot
produce.
7. Country A exports electronic goods to Country B although there are no underlying differences in factor
endowments between the two countries. Which theory explains this anomaly?
a. comparative advantage theory
b. new trade theory
c. Ricardo’s theory
d. Smith’s theory
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.
8. __________ argued that countries should specialize in the production of goods for which they have an
absolute advantage.
a. Paul Krugman
b. David Hume
c. David Ricardo
d. Adam Smith
According to Smith, countries should specialize in the production of goods for which they have an absolute
advantage and then trade these for goods produced by other countries.
9. What theory that supports the view that, in some cases, countries export because in certain industries the
world market can support only a limited number of firms?
a. Heckscher-Ohlin theory
b. Smith’s theory
c. Ricardo’s theory
d. new trade theory
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.
10. Which observation is consistent with Michael Porter’s theory of national competitive advantage?
a. Factors such as domestic demand and domestic rivalry explain nations’ dominance in production.
b. Countries should produce only those goods for which they have a comparative advantage.
c. Interplay between the factors of production cause international marketing decisions.
d. International differences in labor productivity determine nations’ supremacy in production.
Michael Porter’s theory of national competitive advantage attempts to explain why particular nations achieve
international success in particular industries. In addition to factor endowments, Porter points out the importance
of country factors such as domestic demand and domestic rivalry, and a network of local suppliers in explaining a
nation’s dominance in the production and export of particular products.