Global Business Today 10th Edition Hill Test Bank 1

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Hill GBT 10e
Chapter 06 Test Bank
True / False Questions
1. Mercantilism, propagated in the sixteenth and seventeenth centuries, advocated that countries
should simultaneously encourage both imports and exports.
FALSE
Propagated in the sixteenth and seventeenth centuries, mercantilism advocated that countries
should simultaneously encourage exports and discourage imports.
AACSB: Analytical Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Understand why nations trade with each other.
Topic: An Overview of Trade Theory
2. Although mercantilism is an old and largely discredited doctrine, its echoes remain in modern
political debate and in the trade policies of many countries.
TRUE
Although mercantilism is an old and largely discredited doctrine, its echoes remain in modern
political debate and in the trade policies of many countries.

Blooms: Remember
Difficulty: 1 Easy
6-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3. According to Adam Smith, market mechanism, rather than government policy, should
determine a country's imports and exports.
TRUE
Adam Smith argued that the invisible hand of the market mechanism, rather than government
policy, should determine what a country imports and what it exports.

Blooms: Remember
Difficulty: 1 Easy
4. New trade theory stresses that in some cases countries specialize in the production of
particular products because of underlying differences in factor endowments.
FALSE
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.

Blooms: Remember
Difficulty: 1 Easy
5. The first theory of international trade that emerged in England asserted that gold and silver
were the mainstays of national wealth and essential to vigorous commerce.
TRUE
The first theory of international trade, mercantilism, emerged in England in the mid-sixteenth
century and asserted that gold and silver were the mainstays of national wealth and essential
to vigorous commerce.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Summarize the different theories explaining trade flows between nations.
Topic: Mercantilism
6-2
6. The major advantage of mercantilism was that it viewed trade as a zero-sum game.
FALSE
The flaw with mercantilism was that it viewed trade as a zero-sum game. (A zero-sum game is
one in which a gain by one country results in a loss by another.)

Blooms: Remember
Difficulty: 1 Easy
Topic: Mercantilism
7. 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.

Blooms: Remember
Difficulty: 1 Easy
Topic: Absolute Advantage
8. According to Adam Smith, countries should specialize in the production of goods for which
they have an absolute advantage and then trade these for goods produced by other
countries.
TRUE
According to Adam Smith, countries should specialize in the production of goods for which
they have an absolute advantage and then trade these for goods produced by other countries.

Blooms: Remember
Difficulty: 1 Easy
6-3
9. According to the theory of comparative advantage, potential world production is greater with
unrestricted free trade than it is with restricted trade.
TRUE
The basic message of the theory of comparative advantage is that potential world production
is greater with unrestricted free trade than it is with restricted trade as consumers in all nations
can consume more if there are no restrictions on trade.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade between nations will raise the
economic welfare of countries that participate in a free trade system.
Topic: Comparative Advantage
10. The Nobel Prize-winning economist Paul Samuelson argued that contrary to the standard
interpretation, in certain circumstances the theory of comparative advantage predicts that a
rich country might actually be worse off by switching to a free trade regime with a poor nation.
TRUE
Nobel Prize winning economist Paul Samuelson argued that in certain circumstances, the
theory of comparative advantage predicts that a rich country might be worse off by switching
to a free trade regime with a poor nation.

Blooms: Remember
Difficulty: 1 Easy
11. Free trade is likely to increase a country's stock of resources and the efficiency with which it
utilizes those resources.
TRUE
Opening an economy to trade is likely to generate dynamic gains of two sorts. First, free trade
might increase a country's stock of resources as increased supplies of labor and capital from
abroad become available for use within the country. Second, free trade might also increase
the efficiency with which a country uses its resources.

Blooms: Remember
Difficulty: 1 Easy
6-4
12. Factor endowments refer to the extent to which free trade impacts the wealth of a country.
FALSE
Factor endowments refer to the extent to which a country is endowed with such resources as
land, labor, and capital.

Blooms: Remember
Difficulty: 1 Easy
Topic: Heckscher-Ohlin Theory
13. The Heckscher-Ohlin theory is 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.

Blooms: Remember
Difficulty: 1 Easy
14. Raymond Vernon's product life-cycle theory was based on the observation that for most of the
twentieth century a very large proportion of the world's new products were developed by the
firms situated in Germany and sold first in the German market.
FALSE
Raymond Vernon's product life-cycle theory was based on the observation that for most of the
twentieth century a very large proportion of the world's new products had been developed by
U.S. firms and sold first in the U.S. market.

Blooms: Remember
Difficulty: 1 Easy
Topic: The Product Life-Cycle Theory
6-5
15. According to the product life cycle theory, as demand for a product starts to grow in other
advanced countries, potential for exports from the United States will gradually increase.
FALSE
Over time, as demand for a new product starts to grow in other advanced countries, it
becomes worthwhile for foreign producers to begin producing for their home markets. In
addition, U.S. firms might set up production facilities in those advanced countries where
demand is growing. Consequently, production within other advanced countries begins to limit
the potential for exports from the United States.

Blooms: Remember
Difficulty: 1 Easy
16. According to the product life-cycle theory, the locus of global production initially switches from
developing countries to other advanced nations and then from those nations to the United
States.
FALSE
According to the product life-cycle theory, the locus of global production initially switches from
the United States to other advanced nations and then from those nations to developing
countries.

Blooms: Remember
Difficulty: 1 Easy
17. While Vernon's theory is useful for explaining the pattern of international trade in the modern
world, its relevance during the period of American global dominance seemed more limited.
FALSE
Vernon's theory may be useful for explaining the pattern of international trade during the
period of American global dominance, but its relevance in the modern world seems more
limited.

Blooms: Remember
Difficulty: 1 Easy
6-6
18. Factor endowments are unit cost reductions associated with a large scale of output.
FALSE
Economies of scale are unit cost reductions associated with a large scale of output. Factor
Endowments refer to a country's endowment with resources such as land, labor, and capital.

Blooms: Remember
Difficulty: 1 Easy
Topic: New Trade Theory
19. The new trade theory suggests that a country may predominate in the export of a good simply
because it was lucky enough to have one or more pioneering firms to produce that good.
TRUE
The new trade theory suggests that a country may predominate in the export of a good simply
because it was lucky enough to have one or more firms among the first to produce that good.
Because they are able to gain economies of scale, the first movers in an industry may get a
lock on the world market that discourages subsequent entry.

Blooms: Remember
Difficulty: 1 Easy
20. Porter argues that an absence of domestic rivalry is vital to the creation and persistence of
international competitive advantage in an industry.
FALSE
Porter argues that there is a strong association between vigorous domestic rivalry and the
creation and persistence of competitive advantage in an industry. Vigorous domestic rivalry
induces firms to look for ways to improve efficiency, which makes them better international
competitors.

Blooms: Remember
Difficulty: 1 Easy
Topic: National Competitive Advantage: Porter's Diamond
6-7
21. Michael Porter argues that advanced factors are the most significant for competitive
advantage.
TRUE
Michael Porter argues that advanced factors are the most significant for competitive
advantage. The benefits of investments in advanced factors of production by related and
supporting industries can spill over into an industry, thereby helping it achieve a strong
competitive position internationally. Unlike the naturally endowed basic factors, advanced
factors are a product of investment by individuals, companies, and governments.

Blooms: Remember
Difficulty: 1 Easy
22. According to Michael Porter, government can influence each of the four components of
Porter's diamond—either positively or negatively.
TRUE
Porter contends that government can influence each of the four components of Porter's
diamond—either positively or negatively. Factor endowments can be affected by subsidies,
policies toward capital markets, policies toward education, and so on.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 Explain the arguments of those who maintain that government can play a proactive role in promoting
national competitive advantage in certain industries.
23. Porter's theory has been subjected to detailed empirical testing and it is proven that it
accurately predicts international trade patterns.
FALSE
Porter's theory has not been subjected to detailed empirical testing. Much about the theory
rings true, but the same can be said for the new trade theory, the theory of comparative
advantage, and the Heckscher-Ohlin theory.

Blooms: Remember
Difficulty: 1 Easy
6-8
24. Individual firms should invest substantial financial resources in trying to build a first-mover
advantage, even if that means several years of losses before a new venture becomes
profitable.
TRUE
Individual firms should realize that it pays to invest substantial financial resources in trying to
build a first-mover or early-mover advantage even if that means several years of losses before
a new venture becomes profitable.

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05 Understand the important implications that international trade theory holds for business practice.
Topic: Focus on Managerial Implications
25. Porter's theory suggests that it is in the best interest of business for a firm to invest in
upgrading advanced factors of production.
TRUE
Porter's theory suggests that it is in the best interest of business for a firm to invest in
upgrading advanced factors of production; for example, to invest in better training for its
employees and to increase its commitment to research and development.

Blooms: Remember
Difficulty: 1 Easy
Multiple Choice Questions
6-9
26. Which of the following terms best represents a situation in which 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. free trade
B. positive-sum game
C. socialism
D. absolute advantage
E. zero-sum game
Free trade refers to a situation in which 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.

Blooms: Remember
Difficulty: 1 Easy
27. The government of Murinca 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. Which of the following terms best represents the situation in Murinca?
A. socialism
B. positive-sum game
C. free trade
E. zero-sum game
Free trade refers to a situation in which 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.

Blooms: Apply
Difficulty: 3 Hard
6-10
28. Sentoria is an island nation in the Pacific Ocean. Its geographical location is advantageous
since it has access to a variety of aquatic life forms and also a number of freshwater sources
that provide for fisheries. The lack of arable land drives local demand for seafood. The
competition in the domestic fishing industry is fierce and enables Sentoria to be one of the
major exporters of seafood. Which of the following theories of international trade best explains
Sentoria's dominance as an exporter of seafood?
A. new trade theory

B. product life-cycle theory
C. mercantilism
D. Heckscher-Ohlin theory
E. theory of national competitive advantage
Michael Porter developed a theory referred to as the theory of national competitive advantage.
This 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 in explaining a nation's dominance in
the production and export of particular products.

Blooms: Apply
Difficulty: 3 Hard
29. Which of the following factors is taken into consideration by David Ricardo's theory of
comparative advantage in order to explain the pattern of international trade?
A. absolute advantage of a country with reference to natural resources

B. proportions in which the factors of production are available
C. international differences in labor productivity
D. ability of firms to cope with late-mover disadvantages
E. ability of firms to capture first-mover advantages
The theories of Smith, Ricardo, and Heckscher-Ohlin help to explain the pattern 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 labor
productivity.

Blooms: Understand
6-11
30. Salcia is a country that depends heavily on domestic products. The Salcian government
decides on the products that can be imported and ensures that any product that can be
produced at home is not imported. A major part of Salcia's trade is concentrated on exporting
agricultural produce and textiles. Which of the following influences Salcia's approach to
international trade?
A. mercantilism
B. leontief's paradox
C. product life-cycle theory
D. new trade theory
E. neo-Ricardian trade theory
Mercantilism makes a crude case for government involvement in promoting exports and
limiting imports. The main tenet of mercantilism is that it is in a country's best interests to
maintain a trade surplus, to export more than it imports.

Blooms: Apply
Difficulty: 3 Hard
Topic: Mercantilism
31. The Republic of Marunia believes that it is in its best interests to maintain a trade surplus, to
export more than it imports. In so doing, the Republic of Marunia hopes to accumulate gold
and silver, and consequently, increase its national wealth, prestige, and power. Which of the
following influences the Republic of Marunia’s approach to international trade?
A. neo-Ricardian trade theory

B. leontief's paradox
C. product life-cycle theory
D. new trade theory
E. mercantilism
Mercantilism makes a crude case for government involvement in promoting exports and
limiting imports. The main tenet of mercantilism is that it is in a country's best interests to
maintain a trade surplus, to export more than it imports.

Blooms: Apply
Difficulty: 3 Hard
Topic: Mercantilism
6-12
32. The argument for unrestricted free trade is that both import controls and export incentives
A. help firms build a competitive advantage that is subsequently difficult to challenge.

B. help firms to capture first-mover advantages.
C. imply that a laissez-faire stance toward trade is in the best interests of a country.
D. are self-defeating and result in wasted resources.
E. are not in line with principles of mercantilism.
The theories of Smith, Ricardo, and Heckscher-Ohlin form part of the case for unrestricted free
trade. The argument for unrestricted free trade is that both import controls and export
incentives (such as subsidies) are self-defeating and result in wasted resources.

Blooms: Understand
33. Which of the following asserts that countries should simultaneously encourage exports and
discourage imports?
A. ethnocentrism
B. capitalism
C. collectivism
D. mercantilism
E. socialism
Propagated in the sixteenth and seventeenth centuries, mercantilism advocated that countries
should simultaneously encourage exports and discourage imports.

Blooms: Remember
Difficulty: 1 Easy
Topic: Mercantilism
6-13
34. Which of the following is in a country's best interests, according to the main tenet of
mercantilism?
A. importing products from developing rather than developed countries

B. importing products even if they are efficiently produced at home
C. importing less specialized goods rather than attempting to make them at home
D. minimizing exports and maximizing imports
E. maintaining a trade surplus
The main tenet of mercantilism was that it was in a country's best interests to maintain a trade
surplus, to export more than it imported. By doing so, a country would accumulate gold and
silver and, consequently, increase its national wealth, prestige, and power.

Blooms: Remember
Difficulty: 1 Easy
Topic: Mercantilism
35. Considered to be the first theory of international trade, the principal assertion of mercantilism
is that
A. countries differ in their ability to produce goods efficiently.

B. gold and silver are the mainstays of a country's wealth and essential to vigorous
commerce.
C. countries should specialize in the production of goods for which they have an absolute
advantage.
D. differences in labor productivity between nations underlie the notion of comparative
advantage.
E. resources can move freely from the production of one good to another within a nation.
The principal assertion of mercantilism was that gold and silver were the mainstays of national
wealth and essential to vigorous commerce. Gold and silver were the currency of trade
between countries; a country could earn gold and silver by exporting goods, whereas
importing goods from other countries would result in an outflow of gold and silver to those
countries.

Blooms: Remember
Difficulty: 1 Easy
Topic: Mercantilism
6-14
36. Which of the following is consistent with the central beliefs of mercantilism?
A. A country's government should intervene to achieve a surplus in the balance of trade.

B. A large volume of trade is essential regardless of whether it comes from imports or exports.
C. Trade is a positive-sum game in which all countries benefit from trading with each other.
D. A country that has an absolute advantage in the production of all goods derives no benefits
from international trade.
E. Potential world production is greater with unrestricted free trade than it is with restricted
trade.
surplus, to export more than it imported. By doing so, a country would accumulate gold and
silver and, consequently, increase its national wealth, prestige, and power. Consistent with this
belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the
balance of trade.

Blooms: Understand
Topic: Mercantilism
37. The Republic of Argonia, owing to its vast resources of arable land and fresh water, is an
agrarian nation. It exports agricultural products and in turn imports products that it does not
produce such as oil, machinery, computers, and electronic devices. The result is that it spends
more on imports than it gains from exports. Which of the following theories prohibits such
international trade?
A. new trade theory

B. product life-cycle theory
C. mercantilism
D. Heckscher-Ohlin theory
surplus, to export more than it imported. The mercantilists saw no virtue in a large volume of
trade. Rather, they recommended policies to maximize exports and minimize imports. To
achieve this, imports were limited by tariffs and quotas, while exports were subsidized.

Blooms: Apply
Difficulty: 3 Hard
Topic: Mercantilism
6-15
38. An inconsistency in the mercantilist doctrine, as pointed out by David Hume, is that
A. the volume of a country's imports increases as an indirect consequence of mercantilism.

B. the exclusion of government influence in matters pertaining to trade is not ideal.
C. in the long run, no country could sustain a surplus on the balance of trade.
D. it was not backed by either sound political principles or social ideologies.
E. trade is a zero-sum game rather than a positive-sum game as postulated by the theory.
The classical economist David Hume pointed out an inherent inconsistency in the mercantilist
doctrine in 1752. According to Hume, in the long run no country could sustain a surplus on the
balance of trade and so accumulate gold and silver as the mercantilists had envisaged.

Blooms: Understand
Topic: Mercantilism
39. A zero-sum game is a situation in which
A. the market mechanism determines what a country imports and what it exports.
B. a country engages in international trade even for products it is able to produce for itself.
C. an economic gain by one country results in an economic loss by another.
D. limits on imports are often in the interests of domestic producers, but not domestic
consumers.
E. one country has an absolute advantage in the production of all goods.
A situation in which gain by one of the parties results in loss by another is called a zero-sum
game. This is in contrast to a positive-sum game where all countries can benefit by trading
with each other.

Blooms: Remember
Difficulty: 1 Easy
Topic: Mercantilism
6-16
40. The trading policy of the country of Mesotania is that it should gain even when the gains are at
the expense of its trading partners. This is an example of
A. neo liberalism.
B. socialism.
C. zero-sum game.
D. communism.
E. comparative advantage.
A situation in which gain by one of the parties results in loss by another is called a zero-sum
game. This is in contrast to a positive-sum game where all countries can benefit by trading
with each other.

Blooms: Understand
Topic: Mercantilism
41. Neo-mercantilists equate political power with economic power and economic power with
A. corruption.
B. a balance-of-trade surplus.
C. regional dominance.
D. a trade monopoly.
E. capitalism.
The mercantilist doctrine is by no means dead in the modern world. Neo-mercantilists equate
political power with economic power and economic power with a balance-of-trade surplus.

Blooms: Remember
Difficulty: 1 Easy
Topic: Mercantilism
6-17
42. One of the criticisms against Sisira is that it deliberately keeps its currency value low against
the U.S. and other developed nations, and thus amasses a trade surplus and foreign
exchange reserves. According to this criticism, Sisira is acting as a
A. mercantilist.
B. neo-mercantilist.
C. regional dominator.
D. trade monopolist.
E. capitalist.
The mercantilist doctrine is by no means dead in the modern world. Neo-mercantilists equate

Blooms: Apply
Difficulty: 3 Hard
Topic: Mercantilism
43. Australia is a major producer of agricultural and dairy products and exports coffee, tea, spices,
and milk products to the United States. The United States is the world's third largest supplier
of machinery and exports heavy machinery to Australia. What explains the trade equation
between Australia and the United States?
A. Tariff barriers determine the flow of goods and services between nations.
B. Countries are simultaneously encouraging exports and discouraging imports.
C. First entrants to the industry ensure their nations have the first-mover advantages.
D. Nations with an absolute advantage in producing certain goods trade them for goods
produced by other countries.
E. Gold and silver are the mainstays of national wealth and essential to vigorous commerce.
According to Adam Smith, countries differ in their ability to produce goods efficiently. A country
has an absolute advantage in the production of a product when it is more efficient than any
other country in producing it. Smith demonstrates that, by specializing in the production of
goods in which each has an absolute advantage, both countries benefit by engaging in trade.

Blooms: Apply
Difficulty: 3 Hard
6-18
44. New Zealand is the largest exporter of dairy products to the United States. The United States
is the world's third largest supplier of machinery and exports heavy machinery to New
Zealand. What explains the trade equation between New Zealand and the United States?
A. Tariff barriers determine the flow of goods and services between nations.
B. Countries are simultaneously encouraging exports and discouraging imports.
C. First entrants to the industry ensure their nations have the first-mover advantages.
D. Nations with an absolute advantage in producing certain goods trade them for goods
produced by other countries.
E. Gold and silver are the mainstays of national wealth and essential to vigorous commerce.
According to Adam Smith, countries differ in their ability to produce goods efficiently. A country
has an absolute advantage in the production of a product when it is more efficient than any
other country in producing it. Smith demonstrates that, by specializing in the production of
goods in which each has an absolute advantage, both countries benefit by engaging in trade.

Blooms: Apply
Difficulty: 3 Hard
45. Cadmia and Rhodia specialize in the production of textiles and agricultural products
respectively. They are the best at their respective specializations. Cadmia trades textiles with
Rhodia in exchange for agricultural products. Which of the following is illustrated by this form
of trade between Cadmia and Rhodia?
A. product life-cycle theory

B. Heckscher-Ohlin theory
C. absolute advantage
D. mercantilism
than any other country in producing it. 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.

Blooms: Apply
Difficulty: 3 Hard
6-19
46. India is the largest exporter of information technology services to the U.S. In turn, the U.S.
exported $3 billion worth of aircraft to India. Which of the following is illustrated by this form of
trade between India and the U.S.?
A. product life-cycle theory

B. Heckscher-Ohlin theory
C. absolute advantage
D. mercantilism
than any other country in producing it. 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.

Blooms: Apply
Difficulty: 3 Hard
47. Palladia specializes in the production of beef and produces beef more efficiently than any
other country. It buys wheat, which it produces less efficiently than beef, from Rhodia, even
though it produces wheat more efficiently than Rhodia. Which of the following theories of
international trade supports Palladia's decision to buy wheat from Rhodia?
A. Samuelson critique
B. mercantilism
C. Ricardo's theory of comparative advantage
D. Adam Smith's theory of absolute advantage
E. Leontief paradox
According to Ricardo's theory of comparative advantage, 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 produces less efficiently from other countries, even if this means buying goods
from other countries that it could produce more efficiently itself.

Blooms: Apply
Difficulty: 3 Hard
6-20
48. India specializes in business process outsourcing and does this more efficiently than any other
country. It buys agricultural commodities, which it produces less efficiently than outsourcing
activities, from the U.S., even though it produces these agricultural commodities more
efficiently than the U.S. Which of the following theories of international trade supports India's
decision to buy agricultural commodities from the U.S.?
A. Samuelson critique
B. mercantilism
C. Ricardo's theory of comparative advantage
D. Adam Smith's theory of absolute advantage
E. Leontief paradox
According to Ricardo's theory of comparative advantage, 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 produces less efficiently from other countries, even if this means buying goods
from other countries that it could produce more efficiently itself.

Blooms: Apply
Difficulty: 3 Hard
49. Which of the following suggests that consumers in all nations can consume more if there are
no restrictions on trade?
A. Heckscher-Ohlin theory
B. mercantilism
C. Leontief's paradox
D. Ricardo's theory of comparative advantage
E. Samuelson critique
Ricardo's theory of comparative advantage suggests that consumers in all nations can
consume more if there are no restrictions on trade even if they lack an absolute advantage in
the production of any goods.

Blooms: Remember
Difficulty: 1 Easy
6-21
50. Which of the following suggests that trade is a positive-sum game in which all participating
countries fetch economic gains?
A. Heckscher-Ohlin theory
B. mercantilism
C. comparative advantage
D. Leontief's paradox
E. Samuelson critique
Ricardo's theory of comparative advantage suggests that consumers in all nations can
consume more if there are no restrictions on trade even if they lack an absolute advantage in
the production of any goods. In other words, to an even greater degree than the theory of
absolute advantage, the theory of comparative advantage suggests that trade is a positive-
sum game in which all countries that participate realize economic gains.

Blooms: Remember
Difficulty: 1 Easy
51. Argonia and Selenia have specialized in the production of industrial equipment and
pharmaceuticals respectively. Argonia exports industrial equipment to Selenia, which in turn
exports chemicals and medicines to Argonia. According to the theory of comparative
advantage, this mutually beneficial trade relationship best illustrates
A. the significance of trade barriers.

B. a positive-sum game.
C. a first-mover advantage.
D. the advantages of mercantilism.
E. a zero-sum game.
is greater with unrestricted free trade than it is with restricted trade. The theory of comparative
advantage suggests that trade is a positive-sum game in which all countries that participate
realize economic gains.

Blooms: Apply
Difficulty: 3 Hard
6-22
52. While the country of New Zafariland specializes in dairy products, its geographical neighbor,
Zwansea specializes in heavy machinery. New Zafariland exports dairy to Zwansea, which in
turn exports heavy machinery to New Zafariland. According to the theory of comparative
advantage, this mutually beneficial trade relationship best illustrates
A. the significance of trade barriers.

B. a positive-sum game.
C. a first-mover advantage.
D. the advantages of mercantilism.
E. a zero-sum game.
is greater with unrestricted free trade than it is with restricted trade. The theory of comparative
advantage suggests that trade is a positive-sum game in which all countries that participate
realize economic gains.

Blooms: Apply
Difficulty: 3 Hard
53. In Zombia, it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1
ton of rice. In South Curmudgea, it takes 40 resources to produce 1 ton of cocoa and 20
resources to produce 1 ton of rice. Zombia has a comparative advantage over South
Curmedgea in
A. both cocoa and rice.

B. cocoa.
C. rice.
D. both cocoa and rice if combined.
E. neither cocoa nor rice.
Although Zombia has an absolute advantage in the production of both rice and cocoa, it has a
comparative advantage only in the production of cocoa. Zombia can produce 4 times as much
cocoa as South Curmudgea, but only 1.5 times as much rice.

Blooms: Apply
Difficulty: 3 Hard
6-23
54. Consider two countries Daria and Atlantis. Daria is a major producer of wheat and rice while
Atlantis specializes in the production of fertilizers and manufacturing equipment. Engaging in
free trade benefits both countries since Daria is an agrarian nation and Atlantis lacks arable
land. This follows the theory of comparative advantage, and we can say that engaging in free
trade benefits all countries that participate in it. Which of the following is an inaccurate
assumption on which this conclusion is based?
A. We have assumed a simple world in which there are only two countries.
B. We have assumed the prices of resources and exchange rates in the two countries are
dynamic.
C. We have assumed there are barriers to the movement of resources from the production of
one good to another within the same country.
D. We have assumed that agrarian nations do not specialize in producing fertilizers.
E. We have assumed diminishing returns to specialization.
The conclusion that free trade is universally beneficial is a rather bold one to draw from such a
simple model as comparative advantage as we have unrealistically assumed:
1. a simple world in which there are only two countries and two goods. In the real world, there
are many countries and many goods.
2. no transportation costs between countries.
3. no differences in the prices of resources in different countries. We have said nothing about
exchange rates.
4. that resources can move freely from the production of one good to another within a country.
In reality, this is not always the case.
5. constant returns to scale. In reality, both diminishing and increasing returns to specialization
exist. The amount of resources required to produce a good might decrease or increase as a
nation specializes in production of that good.
6. that each country has a fixed stock of resources and that free trade does not change the
efficiency with which a country uses its resources. This static assumption makes no
allowances for the dynamic changes in a country's stock of resources and in the efficiency with
which the country uses its resources that might result from free trade.
7. no effects of trade on income distribution within a country.

Blooms: Apply
Difficulty: 3 Hard
6-24
55. In Zombia, it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1
ton of rice. In South Curmudgea, it takes 40 resources to produce 1 ton of cocoa and 20
resources to produce 1 ton of rice. Zombia has a comparative advantage over South
Curmedgea in cocoa. This follows the theory of comparative advantage, and we can say that
engaging in free trade benefits all countries that participate in it. Which of the following is an
inaccurate assumption on which this conclusion is based?
A. We have assumed constant returns to scale.

B. We have assumed the prices of resources and exchange rates in the two countries are
dynamic.
C. We have assumed there are barriers to the movement of resources from the production of
one good to another within the same country.
D. We have assumed that agrarian nations do not specialize in producing fertilizers.
E. We have assumed diminishing returns to specialization.
The conclusion that free trade is universally beneficial is a rather bold one to draw from such a
simple model as comparative advantage as we have unrealistically assumed:
1. a simple world in which there are only two countries and two goods. In the real world, there
are many countries and many goods.
2. no transportation costs between countries.
3. no differences in the prices of resources in different countries. We have said nothing about
exchange rates.
4. that resources can move freely from the production of one good to another within a country.
In reality, this is not always the case.
5. constant returns to scale. In reality, both diminishing and increasing returns to specialization
exist. The amount of resources required to produce a good might decrease or increase as a
nation specializes in production of that good.
6. that each country has a fixed stock of resources and that free trade does not change the
efficiency with which a country uses its resources. This static assumption makes no
allowances for the dynamic changes in a country's stock of resources and in the efficiency with
which the country uses its resources that might result from free trade.
7. no effects of trade on income distribution within a country.

Blooms: Apply
Difficulty: 3 Hard
6-25
56. Diminishing returns to specialization occur when
A. resources can move freely from the production of one good to another within a country.
B. more units of resources are required to produce each additional unit.
C. the cost of producing goods reduces substantially with increase in number of goods
produced.
D. the quality of resources comes down as a result of producing more goods.
E. the quality of goods produced per unit of resource begins to improve.
Diminishing returns to specialization occur when more units of resources are required to
produce each additional unit.

Blooms: Remember
Difficulty: 1 Easy
57. In Malopia, it takes 10 units of resources to increase its output of cocoa from 12 tons to 13
tons, but 11 units of resources to increase output from 13 tons to 14 tons, and 12 units of
resources to increase output from 14 tons and 15 tons, and so on. Malopia’s problem is an
example of
A. comparative advantage.
B. diminishing returns to specialization.
C. absolute advantage.
D. mercantilism.
E. Porter’s diamond model.
Diminishing returns to specialization occur when more units of resources are required to
produce each additional unit.

Blooms: Apply
Difficulty: 3 Hard
6-26
58. Which of the following is a reason for diminishing rather than constant returns to
specialization?
A. All resources are of the same quality.

B. Resources can shift from the production of one good to another seamlessly.
C. Each country has a fixed stock of resources.
D. Different goods use different resources in different proportions.
E. Trade does not affect the distribution of income within a country.
Constant returns to specialization means the units of resources required to produce a good
are assumed to remain constant no matter where one is on a country's production possibility
frontier (PPF). It is more realistic to assume diminishing returns to specialization as not all
resources are of the same quality and different goods use resources in different proportions.

Blooms: Understand
59. Which of the following statements best indicates Samuelson's criticism of free trade?
A. Dynamic gains lead to a universally beneficial outcome for all countries.

B. Offshoring service jobs that were traditionally mobile will increase the market clearing wage
rate.
C. Free trade has historically been beneficial only to developing countries.
D. By importing cheap goods from a poor country a rich country may not be able to produce a
net gain if the dynamic effect of free trade is to lower real wage rates in the rich country.
E. Trade changes a country's stock of resources and the efficiency with which it utilizes those
resources.
Paul Samuelson's model suggests that in certain cases, the lower prices that consumers in
rich countries pay for goods imported from poor countries following the introduction of a free
trade regime may not be enough to produce a net gain for the richer economy if the dynamic
effect of free trade is to lower real wage rates in the rich country.

Blooms: Understand
6-27
60. One of the rebuttals to Samuelson's critique of the free trade model is that
A. the United States' ability to achieve constant returns to specialization is unparalleled.

B. the strict immigration policies of the United States help insulate the economy from inward
migration.
C. introducing trade barriers may in fact be beneficial to developed nations to some extent.
D. developing nations are unlikely to upgrade the skill level of their workforce rapidly enough.
E. the developing nations are unlikely to run into diminishing returns in a near future.
While not questioning Samuelson's analysis, some economists note that developing nations
are unlikely to be able to upgrade the skill level of their workforce rapidly enough to give rise to
the situation in Samuelson's model. In other words, the countries will quickly run into
diminishing returns.

Blooms: Understand
61. Which of the following is true of the relationship between trade and economic growth?
A. Countries open to international trade display higher growth rates than those that close their
economies to trade.
B. Within a group of developing countries, closed economies grow faster than open
economies.
C. The Leontief paradox notes that adopting an open economy and embracing free trade
does not reward a nation with higher economic growth.
D. Free trade hampers economic growth and leads to lower living standards in the long run.
E. Free trade has historically benefited poor counties and hence trade barriers should be
introduced to protect rich countries from exploitation.
Many economic studies have looked at the relationship between trade and economic growth.
In general, these studies suggest that, as predicted by the standard theory of comparative
advantage, countries that adopt a more open stance toward international trade enjoy higher
growth rates than those that close their economies to trade.

Blooms: Understand
6-28
62. According to the Heckscher-Ohlin theory, the pattern of international trade is determined by
differences in
A. labor productivity.
B. diminishing returns.
C. factor endowments.
D. management practices.
E. trade barriers.
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.

Blooms: Remember
Difficulty: 1 Easy
63. Meitneria and Seaboria specialize in the production of heavy machinery and textiles
respectively. While Meitneria doesn't produce textiles, Seaboria is not as technologically
advanced as Meitneria. In this situation, according to the Heckscher-Ohlin theory
A. Meitneria will import textiles from Seaboria and export heavy machinery to it.
B. Meitneria will invest more than Seaboria in the production of textiles to exploit its
comparative advantage.
C. Meitneria and Seaboria will raise their trade barriers to protect their economies.
D. Seaboria will recruit experts from Meitneria to specialize in the production of heavy
machinery.
E. Meitneria will recruit workers from Seaboria to improve its standing in the textile industry.
Heckscher and Ohlin argued that comparative advantage arises from differences in national
factor endowments. Their theory predicts that countries will export those goods that make
intensive use of factors that are locally abundant, while importing goods that make intensive
use of factors that are locally scarce.

Blooms: Apply
Difficulty: 3 Hard
6-29
64. The difference between Ricardo's theory and the Heckscher-Ohlin theory is that the
Heckscher-Ohlin theory
A. makes more simplifying assumptions.

B. cannot be subjected to empirical tests.
C. actually predicts trade patterns with greater accuracy.
D. argues that the pattern of international trade is determined by differences in national factor
endowments.
E. suggests that trade is a positive-sum game in which all countries that participate realize
economic gains.
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.

Blooms: Understand
65. Which of the following predicts that countries will export those goods that make intensive use
of factors that are locally abundant, while importing goods that make intensive use of factors
that are locally scarce?
A. mercantilism
B. theory of absolute advantage
C. Heckscher-Ohlin theory
D. theory of comparative advantage
E. Samuelson's critique
The Heckscher-Ohlin theory predicts that countries will export those goods that make
use of factors that are locally scarce. Thus, the Heckscher-Ohlin theory attempts to explain the
pattern of international trade that we observe in the world economy.

Blooms: Remember
Difficulty: 1 Easy
6-30
66. The country of Dalima has long been a substantial exporter of agricultural goods, reflecting its
unusual abundance of arable land; in contrast, its continental neighbor, Bundeeza, has
excelled in the export of goods produced in labor-intensive manufacturing industries. The
export policies of the two countries is best explained by
A. mercantilism.
B. theory of absolute advantage.
C. Heckscher-Ohlin theory.
D. theory of comparative advantage.
E. Samuelson’s critique.
The Heckscher-Ohlin theory predicts that countries will export those goods that make
use of factors that are locally scarce. Thus, the Heckscher-Ohlin theory attempts to explain the
pattern of international trade that we observe in the world economy.

Blooms: Apply
Difficulty: 3 Hard
67. U.S. exports are less capital-intensive than U.S. imports, despite the relative abundance of
capital in the country. What is this phenomenon that runs contrary to the prediction of the
Heckscher-Ohlin theory called?
A. zero-sum game
B. Leontief paradox
C. positive-sum game
D. Samuelson's critique
E. first-mover advantage
Using the Heckscher-Ohlin theory, Wassily Leontief postulated that since the United States
was relatively abundant in capital compared to other nations, the United States would be an
exporter of capital-intensive goods and an importer of labor-intensive goods. However, he
found that U.S. exports were less capital intensive than U.S. imports and this has become
known as the Leontief paradox.

Blooms: Apply
Difficulty: 3 Hard
6-31
68. Which of the following is most likely an explanation for the Leontief paradox observed in the
case of the United States?
A. The United States imports goods that heavily use skilled labor and innovative
entrepreneurship.
B. The United States has a special advantage in producing new products made with
innovative technologies.
C. The United States exports heavy manufacturing products that use large amounts of capital.
D. The United States has a strong absolute advantage over other nations because of its
advantageous factor endowments.
E. The United States imports goods that make intensive use of factors that are locally
abundant.
One possible explanation of the Leontief paradox is that the United States has a special
advantage in producing new products or goods made with innovative technologies.

Blooms: Understand
69. On which of the following observations was Raymond Vernon's product life-cycle theory
based?
A. The wealth and size of the U.S. market gave U.S. firms a strong incentive to develop new
consumer products.
B. The high cost of U.S. labor gave U.S. firms an incentive to develop cost-saving process
innovations.
C. The United States developed a very large proportion of the world's new products for most
of the twentieth century and sold them first in the U.S. market.
D. The United States exports goods that heavily use skilled labor and imports heavy
manufacturing products that use large amounts of capital.
E. The United States has long been a substantial exporter of agricultural goods, reflecting in
part its unusual abundance of arable land.
Vernon's theory was based on the observation that for most of the twentieth century a very
large proportion of the world's new products had been developed by U.S. firms and sold first in
the U.S. market. To explain this, Vernon argued that the wealth and size of the U.S. market
gave U.S. firms a strong incentive to develop new consumer products.

Blooms: Remember
Difficulty: 1 Easy
6-32
70. According to the product life-cycle theory, the high cost of U.S. labor gave U.S. firms an
incentive to
A. lower costs of services to offset a fall in demand.

B. develop cost-saving process innovations.
C. invite foreign direct investment in domestic industries.
D. embrace and promote open market capitalism.
E. import new consumer products and export agricultural products.
Vernon's theory was based on the observation that for most of the twentieth century a very
large proportion of the world's new products had been developed by U.S. firms and sold first in
the U.S. market. In addition, the high cost of U.S. labor gave U.S. firms an incentive to develop
cost-saving process innovations.

Blooms: Remember
Difficulty: 1 Easy
71. Vernon argues that pioneering firms in the United States kept production facilities closer to the
market and centers of decision making because
A. of the uncertainty and risks inherent in introducing new products.

B. they believed that foreign production facilities were inferior in technical skills.
C. they believed that U.S. labor costs were much lower than those in foreign markets.
D. the U.S. government was critical of outsourcing production to other countries.
E. of the high trade barriers implemented by several Asian and European countries.
Just because a new product is developed by a U.S. firm and first sold in the U.S. market, it
does not follow that the product must be produced in the United States. It could be produced
abroad at some low-cost location and then exported back into the United States. Apparently,
pioneering firms believed it was better to keep production facilities close to the market and to
the firm's center of decision making, given the uncertainty and risks inherent in introducing
new products.

Blooms: Understand
6-33
72. According to Vernon, which of the following factors obviates the need for pioneering U.S. firms
to look for low-cost production sites in other countries?
A. The uncertainties and risks inherent in introducing new products are very low.
B. The demand for most new products tends to be based mainly on price.
C. U.S. labor costs are relatively low compared to global standards.
D. Firms can charge relatively high prices for new products.
E. The production of innovative products in other advanced countries limits the potential for
exports from the United States.
The demand for most new products tends to be based on nonprice factors. Consequently,
firms can charge relatively high prices for new products, which obviates the need to look for
low-cost production sites in other countries.

Blooms: Understand
73. Vernon argues that early in the life cycle of a typical new product, while demand is starting to
grow rapidly in the United States, demand in other advanced countries
A. remains limited to high-income groups.

B. necessitates production of that product in those countries.
C. necessitates outsourcing of production to low-cost locations.
D. raises the cost of production in the United States.
E. causes a shift in the position of the United States from that of an exporter to an importer.
Vernon argues that early in the life cycle of a typical new product, while demand is growing
rapidly in the United States, demand in other advanced countries is limited to high-income
groups. The limited initial demand in other advanced countries does not make it worthwhile for
firms in those countries to start producing the new product, but it does necessitate some
exports from the United States to those countries.

Blooms: Remember
Difficulty: 1 Easy
6-34
74. When a company in the country of the Republic of Congolia created a brand new high
technology product, the demand for the product in the Republic of Congolia was high but very
low or non-existent elsewhere. Thus the company decided not to locate manufacturing
facilities elsewhere and simply meet the small foreign demand via exports. The theory that
best explains the company’s policy is
A. product life cycle theory.

B. mercantilism.
C. the Leontief paradox.
D. Heckscher-Ohlin theory.
E. free trade theory.
Vernon argues that early in the life cycle of a typical new product, while demand is growing
rapidly in the United States, demand in other advanced countries is limited to high-income
groups. The limited initial demand in other advanced countries does not make it worthwhile for
firms in those countries to start producing the new product, but it does necessitate some
exports from the United States to those countries.

Blooms: Apply
Difficulty: 3 Hard
75. Vernon predicts that as the demand for a new product starts to grow in other advanced
countries, in the long run
A. the cost of labor in these advanced countries begins to increase.

B. it becomes profitable for foreign firms to invest in production facilities in the United States.
C. the firms in the United States begin to gain an absolute advantage.
D. it begins to limit the potential for exports from the United States.
E. the same product will begin to command a higher price.
Over time, demand for a new product starts to grow in other advanced countries. As it does, it
becomes worthwhile for foreign producers to begin producing for their home markets.
Consequently, production within other advanced countries begins to limit the potential for
exports from the United States.

Blooms: Remember
Difficulty: 1 Easy
6-35
76. Vernon theorizes that as the market in the United States and other advanced nations matures
A. it necessitates exports from the United States to those countries.

B. it is no longer worthwhile for foreign producers to produce for their home markets.
C. it obviates the need to look for low-cost production sites in other countries.
D. the product becomes more standardized, and price becomes the main competitive
weapon.
E. the resources used in production begin to become scarce.
As the market in the United States and other advanced nations matures, the product becomes
more standardized, and price becomes the main competitive weapon.

Blooms: Understand
77. According to Vernon, which of the following influences the movement of the locus of global
production from advanced countries to developing countries?
A. cost considerations
B. factor endowments
C. domestic competition
D. supporting industries
E. firm structure
As the market in the United States and other advanced nations matures, cost considerations
start to play a greater role in the competitive process. The locus of global production initially
switches from the United States to other advanced nations and then from those nations to
developing countries.

Blooms: Understand
6-36
78. According to the product life-cycle theory, the locus of global production initially switches from
the United States to other advanced nations and then from those nations to developing
countries. Which of the following is most likely to be a consequence of these trends?
A. U.S. imports become less capital-intensive than U.S. exports.

B. The pattern of international trade is affected by differences in factor endowments rather
than differences in productivity.
C. Over time, the United States switches from being an exporter of a product to an importer of
the product.
D. The wage rates in the United States decrease.
E. Developing nations fail to upgrade their skill levels to compete with advanced countries.
The consequence of the trends for the pattern of world trade, as determined by the product
life-cycle theory, is that over time the United States switches from being an exporter of the
product to an importer of the product as production becomes concentrated in lower-cost
foreign locations.

Blooms: Understand
79. Which of the following is a drawback of the product life-cycle theory?
A. Its relevance in the modern world seems limited.

B. It makes many simplifying assumptions.
C. It fails to explain the pattern of international trade during the period of American global
dominance.
D. It fails to explain what happens when a product's market in the United States and other
advanced nations matures.
E. It fails to account for diminishing returns.
The product life-cycle theory fails to account for globalization and integration of the world
economy, which are accompanied by globally dispersed production, with particular
components of a new product being produced in those locations around the globe where the
mix of factor costs and skills is most favorable (as predicted by the theory of comparative
advantage).

Blooms: Understand
6-37
80. Which of the following theories began to emerge when economists pointed out that the ability
of firms to attain economies of scale might have important implications for international trade?
A. comparative advantage
B. Heckscher-Ohlin
C. new trade
D. product life-cycle
E. absolute advantage
The new trade theory began to emerge in the 1970s when a number of economists pointed
out that the ability of firms to attain economies of scale might have important implications for
international trade.

Blooms: Remember
Difficulty: 1 Easy
81. Which of the following are unit cost reductions associated with a large scale of output?
A. comparative advantages
C. economies of scale
D. diminishing returns
E. absolute advantages
Economies of scale are unit cost reductions or cost advantages associated with a large scale
of output.

Blooms: Remember
Difficulty: 1 Easy
6-38
82 Intel spreads the huge fixed costs of developing new generation chips over the nearly 2 billion
chips it sells to computer makers. Intel benefits from
A. comparative advantages
D. diminishing returns
E. absolute advantages
Economies of scale are unit cost reductions or cost advantages associated with a large scale
of output.

Blooms: Apply
Difficulty: 3 Hard
83. New trade theory argues that, through its impact on economies of scale, trade can
A. increase the average costs of goods.

B. enable the global market to support a wide range of enterprises.
C. negatively affect the first-mover advantage for all products.
D. increase the variety of goods available to consumers.
E. prevent diminishing of returns and promote constant returns to specialization.
New trade theory argues that, through its impact on economies of scale, trade can increase
the variety of goods available to consumers and decrease the average costs of those goods.

Blooms: Remember
Difficulty: 1 Easy
6-39
84. Which of the following theories states that in those industries where the output required to
attain economies of scale represents a significant proportion of total world demand, the global
market may be able to support only a small number of enterprises?
A. Heckscher-Ohlin
B. comparative advantage
C. product life-cycle
D. new trade
E. absolute advantage
The new trade theory states that in those industries where the output required to attain
economies of scale represents a significant proportion of total world demand, the global
market may be able to support only a small number of enterprises.

Blooms: Remember
Difficulty: 1 Easy
85. The new trade theory states that
A. the locus of global production initially switches from the United States to other advanced
nations.
B. world trade in certain products may be dominated by countries whose firms were first
movers in their production.
C. differences in technology may lead to differences in productivity, which in turn drives
international trade patterns.
D. differences in labor productivity between nations underlie the notion of comparative
advantage.
E. a rich country might actually be worse off by switching to a free trade regime with a poor
nation.
According to the new trade theory, world trade in certain products may be dominated by
countries whose firms were first movers in their production.

Blooms: Understand
6-40
86. According to new trade theory, trade, through its impact on economies of scale, is most likely
to
A. reduce the volume of the goods produced.

B. decrease the variety of goods available to consumers.
C. decrease the average costs of goods.
D. inhibit first-mover advantages in all industries.
E. benefit only nations that differ in resource endowments or technology.
New trade theory argues that, through its impact on economies of scale, trade can increase
the variety of goods available to consumers and decrease the average costs of those goods.

Blooms: Understand
87. Which of the following is a result of certain products having small national markets, in the
absence of trade?
A. The variety of products available to consumers increases.

B. Limited demand for such products leads to non-realization of economies of scale.
C. Each nation will specialize in producing a narrower range of products than it would in the
presence of trade.
D. At low volumes of production, unit costs and prices would be lowered.
E. The first movers in an industry may get a lock on the world market that discourages
subsequent entry.
In the absence of trade, if a national market is small, there may not be enough demand to
enable producers to realize economies of scale for certain products.

Blooms: Understand
6-41
88. According to new trade theory, which of the following is most likely to be a result of market
expansion due to trade?
A. A wide variety of products is produced at greater unit costs than in the absence of trade.
B. As the variety of products increases, demand for individual products decreases, leading to
non-realization of economies of scale.
C. Each nation may specialize in producing a narrower range of products, importing goods
that it does not make.
D. The ability to capture first-mover advantages is restricted in a world that allows trade.
E. When countries do not differ in their resource endowments or technology, trade does not
offer mutual benefits.
As the size of the market expands due to trade, individual firms may be able to better attain
economies of scale. The implication is that each nation may be able to specialize in producing
a narrower range of products than it would in the absence of trade, yet by buying goods that it
does not make from other countries, each nation can simultaneously increase the variety of
goods available to its consumers and lower the costs of those goods.

Blooms: Understand
89. According to new trade theory, how does trade offer an opportunity for mutual gain when
countries do not differ in their resource endowments or technology?
A. Trade results in a contraction of the size of the markets of individual firms.

B. Trade allows for production of products at higher prices.
C. Trade increases the variety of goods available to consumers and lowers the costs of those
goods.
D. Trade allows countries to attain self-sufficiency in the production of all goods.
E. Trade guarantees first-mover advantages to all the countries that engage in trade.
As the size of the market expands due to trade, individual firms may be able to better attain
economies of scale. The implication, according to new trade theory, is that each nation may be
able to specialize in producing a narrower range of products, buying goods that it does not
make from other countries. Thus, each nation can simultaneously increase the variety of
goods available to its consumers and lower the costs of those goods—thus trade offers an
opportunity for mutual gain even when countries do not differ in their resource endowments or
technology.

Blooms: Understand
6-42
90. According to the new trade theory
A. the ability to capture first-mover advantages is restricted in a world that disallows trade.
B. differences in labor productivity between nations underlie the notion of comparative
advantage.
C. a country may predominate in the export of a good because it has firms that were among
the first to produce that good.
D. to ensure economic progress, countries should implement several trade barriers.
E. different goods use resources in different proportions and this leads to constant returns to
specialization.
The new trade theory suggests that a country may predominate in the export of a good simply
because it was lucky enough to have one or more firms among the first to produce that good.

Blooms: Understand
91. The economic and strategic advantages that accrue to early entrants in an industry are called
A. first-mover advantages.
B. comparative advantages.
C. absolute advantages.
D. economies of scale.
E. factor endowments.
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.

Blooms: Remember
Difficulty: 1 Easy
6-43
92. Airbus pioneered the development of the new superjumbo jet at a cost of $15 billion. It quickly
obtained contracts for much of the 400 units that are expected to be ordered in the next 20
years, thereby effectively shutting out its competitor, Boeing. Airbus benefits from
A. first-mover advantages.
B. comparative advantages.
C. absolute advantages.
D. economies of scale.
E. factor endowments.

Blooms: Apply
Difficulty: 3 Hard
93. Which of the following advantages is most likely to be enjoyed by a company as a part of the
first-mover advantages?
A. increasing returns to specialization

B. positive-sum game due to lack of competition
C. ability to capture scale economies ahead of later entrants
D. absolute advantage and higher efficiency
E. ability to specialize in the production of a particular product

Blooms: Understand
6-44
94. One of the suggestions of new trade theory is that
A. differences in technology leads to differences in productivity, which in turn, drives

B. nations may benefit from trade irrespective of resource endowments or technology.
C. the demand for most new products tends to be based on nonprice factors.
D. globally dispersed production reduces the production costs of mature products.
E. comparative advantage does not arrive from a difference in factor endowments but from a
difference in productivity.
The new trade theory suggests that nations may benefit from trade even when they do not
differ in resource endowments or technology.

Blooms: Understand
95. Which of the following creates a barrier to subsequent entries in an industry dominated by first
movers?
A. laissez-faire stance toward trade adopted by first movers

B. iImplementation of policies to maximize imports and minimize exports
C. specializing in the production of goods for which firms have a comparative advantage
D. ability of first movers to benefit from increasing returns
E. decrease in the variety of goods available to consumers and increase in the cost of existing
goods
Because they are able to gain economies of scale, the first movers in an industry may get a
lock on the world market that discourages subsequent entry. First movers' ability to benefit
from increasing returns creates a barrier to entry.

Blooms: Understand
6-45
96. The new trade theory is at variance with which of the following theories, which suggests that a
country will predominate in the export of a product when it is particularly well endowed with
those factors used intensively in its manufacture?
A. Heckscher-Ohlin
B. product life-cycle
C. comparative advantage
E. national competitive advantage
New trade theory is at variance with the Heckscher-Ohlin theory, which suggests that a
country will predominate in the export of a product when it is particularly well endowed with
those factors used intensively in its manufacture. The new trade theory suggests that a
country may predominate in the export of a good simply because it was lucky enough to have
one or more firms among the first to produce that good.

Blooms: Remember
Difficulty: 1 Easy
97. Which of the following is an empirically supported prediction of new trade theory?
A. Trade increases the specialization of production within an industry.

B. Nations benefit from trade only when they differ in factor endowments.
C. Government intervention and strategic trade policies are more likely to harm international
trade than is free trade.
D. The locus of global production initially switches from the United States to other advanced
nations.
E. Comparative advantage arises from differences in productivity and factor endowments.
The new trade theory is quite useful in explaining trade patterns. Empirical studies seem to
support the predictions of the theory that trade increases the specialization of production
within an industry, increases the variety of products available to consumers, and results in
lower average prices.

Blooms: Understand
6-46
98. Which of the following theories supports government intervention and strategic trade policy?
A. theory of absolute advantage

B. theory of comparative advantage
C. Heckscher-Ohlin theory
D. new trade theory
E. product life-cycle theory
Perhaps the most contentious implication of the new trade theory is the argument that it
generates for government intervention and strategic trade policy.

Blooms: Remember
Difficulty: 1 Easy
99. The new trade theory diverts from its advocacy of free trade by suggesting that
A. the price of a new product increases along with the increase in the popularity of the
product.
B. nations benefit from trade even in the absence of resource endowments and technology.
C. there is an economic rationale for a proactive trade policy.
D. the role of luck, entrepreneurship, and innovation is important in giving a firm first-mover
advantages.
E. market expansion leads to better realization of economies of scale.
By stressing first-mover advantages in certain industries, new trade theory provides a rationale
for government intervention to increase the chances of its domestic firms becoming first
movers in newly emerging industries, as the U.S. government apparently did with Boeing.

Blooms: Understand
6-47
100. Which of the following formed the crux of Porter's study of national competitive advantage?
A. identifying the various stages of the life cycle of a product

B. determining why a country achieves international success in a particular industry
C. determining how trade barriers affect the prices of products in the international market
D. determining how pre-industrialization theories predict international trade patterns
E. organizing the relationship between factor endowments and economies of scale
Like the work of the new trade theorists, Porter's work was driven by a belief that existing
theories of international trade told only part of the story. For Porter, the essential task was to
explain why a nation achieves international success in a particular industry.

Blooms: Understand
101. According to Porter's diamond, what are factor endowments?
A. position of a nation regarding the components of production necessary to compete in a

given industry
B. presence or absence of related industries that are internationally competitive
C. conditions governing how companies are created, organized, and managed and the nature
of domestic rivalry
D. nature of home demand for the industry's product or service
E. economic and strategic advantages that accrue to early entrants into an industry
Porter defines factor endowments, one of the four attributes of a nation that shape the
environment in which local firms compete, as a nation's position in factors of production such
as skilled labor or the infrastructure necessary to compete in a given industry.

Blooms: Remember
Difficulty: 1 Easy
6-48
102. Which of the following is true of the four attributes that make Porter's diamond?
A. Absence of any single attribute does not impact effectiveness of the diamond.
B. The effect of one attribute is contingent on the state of others.
C. The diamond is not a mutually reinforcing system.
D. Chance events, such as major innovations, do not affect Porter's diamond.
E. Only in the absence of one of the four attributes can government policies influence Porter's
diamond.
Porter theorizes that four broad attributes of a nation shape the environment in which local
firms compete, and these attributes constituting the diamond. The diamond is a mutually
reinforcing system in which the effect of one attribute is contingent on the state of others.

Blooms: Understand
103. Which of the following is one of the four factors included in Porter's diamond?
A. purchasing power parity

B. gross national income
D. firm strategy, structure, and rivalry
E. gross domestic product
The four factors in Porter's diamond are factor endowments, demand conditions, related and
supporting industries, and firm strategy, structure, and rivalry.

Blooms: Remember
Difficulty: 1 Easy
6-49
104. Which of the following factor endowments would be classified as a basic factor by Michael
Porter?
A. communication infrastructure
B. research facilities
C. natural resources
D. skilled labor
E. technological know-how
Porter recognizes hierarchies among factors, distinguishing between basic factors (e.g.,
natural resources, climate, location, and demographics) and advanced factors (e.g.,
communication infrastructure, sophisticated and skilled labor, research facilities, and
technological know-how).

Blooms: Remember
Difficulty: 1 Easy
105. Which of the following is true of factor endowments according to Porter?
A. Basic factors, unlike advanced factors, are the most significant for competitive advantage.
B. Basic factors can be upgraded by nations, while advanced factors are endowed by nature.
C. The initial advantage provided by advanced factors is extended by investment in basic
factors.
D. Disadvantages in basic factors can create pressures to invest in advanced factors.
E. Advanced factors include climate, location, and demographics.
The relationship between advanced and basic factors is complex. Basic factors can provide an
initial advantage that is subsequently reinforced and extended by investment in advanced
factors. Conversely, disadvantages in basic factors can create pressures to invest in advanced
factors.

Blooms: Understand
6-50
106. Which of the following components of Porter's diamond is particularly important in shaping the
attributes of domestically made products and in creating pressures for innovation and quality?
A. basic factor endowments

B. advanced factor endowments
C. firm strategy
D. demand conditions
E. supporting industries
The characteristics of home demand are particularly important in shaping the attributes of
domestically made products and in creating pressures for innovation and quality. Porter
argues that a nation's firms gain competitive advantage if their domestic consumers are
sophisticated and demanding and pressure local firms to meet high standards of product
quality and to produce innovative products.

Blooms: Understand
107. Porter argues that a nation's firms gain competitive advantage if their domestic consumers
are
A. sophisticated and demanding.

B. price insensitive and trusting.
C. accommodating and flexible.
D. nationalistic and protective of their domestic industries.
E. biased toward foreign products.
Porter argues that a nation's firms gain competitive advantage if their domestic consumers are
sophisticated and demanding. Such consumers pressure local firms to meet high standards of
product quality and to produce innovative products.

Blooms: Remember
Difficulty: 1 Easy
6-51
108. Porter, in his diamond model, suggested that there is a strong association between _____ and
the creation and persistence of competitive advantage in an industry.
A. trade barriers
B. vigorous domestic rivalry
C. purchasing power parity
D. the availability of a captive market
E. first-mover advantages
Porter asserts that there is a strong association between vigorous domestic rivalry and the
creation and persistence of competitive advantage in an industry. Vigorous domestic rivalry
induces firms to look for ways to improve efficiency, which makes them better international
competitors.

Blooms: Remember
Difficulty: 1 Easy
109. Which of the following was a pervasive finding of Porter's study?
A. Successful industries within a country tend to be grouped into clusters of related industries.
B. Trade increases the specialization of production within an industry.
C. The pattern of trade we observe in the world economy may be the result of first-mover
advantages.
D. Purchasing power parity of a country determines its demand conditions.
E. Differences in technology may lead to differences in productivity, which in turn, drives
One of the most pervasive findings of Porter's study was that successful industries within a
country tend to be grouped into clusters of related industries.

Blooms: Remember
Difficulty: 1 Easy
6-52
110. If a company were to draw from the ideas proposed in the various theories of international
trade, from a profit perspective, how would it go about selecting locations for its businesses?
A. It would concentrate its productive activities mostly in developing countries.

B. It would concentrate its productive activities in its home country.
C. It would disperse its productive activities to those countries where they can be performed
most efficiently.
D. It would disperse its productive activities across all countries that serve as its market.
E. It would concentrate its productive activities mostly in developed countries.
Underlying most of the theories is the notion that different countries have particular
advantages in different productive activities. Thus, from a profit perspective, it makes sense
for a firm to disperse its productive activities to those countries where, according to the theory
of international trade, they can be performed most efficiently.

Blooms: Understand
111. Which of the following helps a firm to preempt available demand, gain cost advantages related
to volume, and build an enduring brand ahead of later competitors?
A. monopolistic practices
B. comparative advantages
C. absolute advantages
D. first-mover advantages
E. mercantilism
For the individual firm, the clear message is that it pays to invest substantial financial
resources in trying to build a first-mover or early-mover advantage even if that means several
years of losses before a new venture becomes profitable. The idea is to preempt the available
demand, gain cost advantages related to volume, build an enduring brand ahead of later
competitors, and, consequently, establish a long-term sustainable competitive advantage.

Blooms: Remember
Difficulty: 1 Easy
Essay Questions
6-53
112. What is meant by the term free trade? Is free trade compatible with the concept of
mercantilism?
Free trade refers to the absence of government barriers to the free flow of goods and services
between countries. 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. 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 through policies to maximize exports and minimize imports. To achieve this,
imports were limited by tariffs and quotas, while exports were subsidized.

Blooms: Understand
Topic: Mercantilism
113. Mercantilism viewed trade as a zero-sum game. Discuss Adam Smith's and David Ricardo's
stand on this view. Also discuss the phenomenon of neo-mercantilism.
Mercantilism viewed trade as a zero-sum game, where a gain by one country results in a loss
by another. Adam Smith and David Ricardo demonstrated the shortsightedness of this
approach and argued that trade is a positive-sum game, or a situation in which all countries
can benefit. However, the mercantilist doctrine is by no means dead. Neo-mercantilists equate
Critics argue that many nations have adopted a neo-mercantilist strategy that is designed to
simultaneously boost exports and limit imports. For example, critics charge that China is
pursuing a neo-mercantilist policy, deliberately keeping its currency value low against the U.S.
dollar in order to sell more goods to the United States, and thus amass a trade surplus and
foreign exchange reserves.

Blooms: Understand
Topic: Mercantilism
6-54
114. Discuss 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.

Blooms: Understand
115. How does the theory of comparative advantage suggest that trade is a positive-sum game to a
greater degree than the theory of absolute advantage?
is greater with unrestricted free trade than it is with restricted trade. Ricardo's theory suggests
that consumers in all nations can consume more if there are no restrictions on trade. This
occurs even in countries that lack an absolute advantage in the production of any good. In
other words, to an even greater degree than the theory of absolute advantage, the theory of
comparative advantage suggests that trade is a positive-sum game in which all countries that
participate realize economic gains. As such, this theory provides a strong rationale for
encouraging free trade. So powerful is Ricardo's theory that it remains a major intellectual
weapon for those who argue for free trade.

Blooms: Understand
6-55
116. Discuss Paul Samuelson's critique of free trade.
Paul Samuelson's critique looks at what happens when a rich country—the United States—
enters into a free trade agreement with a poor country—China—that rapidly improves its
productivity after the introduction of a free trade regime. Samuelson's model suggests that in
such cases, the lower prices that U.S. consumers pay for goods imported from China following
the introduction of a free trade regime may not be enough to produce a net gain for the U.S.
economy if the dynamic effect of free trade is to lower real wage rates in the United States.
Samuelson goes on to note that he is particularly concerned about the ability to offshore
service jobs that traditionally were not internationally mobile. Recent advances in
communications technology have made this possible, effectively expanding the labor market
for these jobs to include educated people in places such as India, the Philippines, and China.
When coupled with rapid advances in the productivity of foreign labor due to better education,
the effect on middle-class wages in the United States, according to Samuelson, may be similar
to mass inward migration into the United States—it will lower the market clearing wage rate,
perhaps by enough to outweigh the positive benefits of international trade.

Blooms: Understand
117. Describe the Leontief paradox.
Using the Heckscher-Ohlin theory, Leontief postulated that since the United States was
relatively abundant in capital compared to other nations, the United States would be an
exporter of capital-intensive goods and an importer of labor-intensive goods. However, he
found that U.S. exports were less capital intensive than U.S. imports. Since this result was at
variance with the predictions of the Heckscher-Ohlin theory, it has become known as the
Leontief paradox.

Blooms: Remember
Difficulty: 1 Easy
6-56
118. Describe the shortcomings of the product life-cycle theory.
Viewed from an Asian or European perspective, the assertion of the product life-cycle theory
that most new products are developed and introduced in the United States seems ethnocentric
and increasingly dated. Although it may be true that during U.S. dominance of the global
economy (from 1945 to 1975), most new products were introduced in the United States, there
have always been important exceptions. With the increased globalization and integration of
the world economy, a growing number of new products are now introduced simultaneously in
the United States, Japan, and the advanced European nations. This may be accompanied by
globally dispersed production, with particular components of a new product being produced in
those locations around the globe where the mix of factor costs and skills is most favorable. In
sum, although Vernon's theory may be useful for explaining the pattern of international trade
during the brief period of American global dominance, its relevance in the modern world
seems more limited.

Blooms: Understand
119. Briefly describe new trade theory.
The new trade theory began to emerge in the 1970s when a number of economists pointed
out that the ability of firms to attain economies of scale might have important implications for
international trade. Economies of scale are unit cost reductions associated with a large scale
of output. New trade theory makes two important points: First, through its impact on
economies of scale, trade can increase the variety of goods available to consumers and
decrease the average costs of those goods. Second, in those industries where the output
required to attain economies of scale represents a significant proportion of total world demand,
the global market may be able to support only a small number of enterprises. Thus, world
trade in certain products may be dominated by countries whose firms were first movers in their
production.

Blooms: Understand
6-57
120. Outline the relationship between economies of scale, first-mover advantages, and the pattern
of trade as indicated by new trade theory.
One of the themes in new trade theory is that the pattern of trade we observe in the world
economy may be the result of economies of scale and first-mover advantages. 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. New trade theory argues that for
those products where economies of scale are significant and represent a substantial
proportion of world demand, the first movers in an industry can gain a scale-based cost
advantage that later entrants find almost impossible to match. Thus, the pattern of trade that
we observe for such products may reflect first-mover advantages. Countries may dominate in
the export of certain goods because economies of scale are important in their production and
because firms located in those countries were the first to capture scale economies, giving
them a first-mover advantage.

Blooms: Understand
121. Identify and briefly describe the four broad attributes that constitute Porter's diamond.
Porter theorizes that four broad attributes of a nation shape the environment in which local
firms compete, and these attributes promote or impede the creation of competitive advantage.
These attributes are: 1) Factor Endowments: A nation's position in factors of production such
as skilled labor or the infrastructure necessary to compete in a given industry. 2) Demand
Conditions: The nature of home demand for the industry's product or service. 3) Related and
Supporting Industries: The presence or absence in a nation of supplier industries and related
industries that are internationally competitive. 4) 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 favorable. He also argues that the diamond is a mutually
reinforcing system. The effect of one attribute is contingent on the state of others.

Blooms: Understand
6-58
122. Briefly explain how demand conditions shape the environment in which local firms compete.
Porter emphasizes the role home demand plays in upgrading competitive advantage. Firms
are typically most sensitive to the needs of their closest customers. Thus, the characteristics of
home demand are particularly important in shaping the attributes of domestically made
products and in creating pressures for innovation and quality. Porter argues that a nation's
firms gain competitive advantage if their domestic consumers are sophisticated and
demanding. Such consumers pressure local firms to meet high standards of product quality
and to produce innovative products.

Blooms: Understand
123. How does Porter's theory predict patterns in international trade? Do his predictions turn out to
be accurate in a real-world scenario?
According to Porter's model of international trade, countries should be exporting products from
those industries where all four components of the diamond are favorable, while importing in
those areas where the components are not favorable. However, we do not know if he is
correct. Porter's theory has not been subjected to detailed empirical testing. Much about the
theory rings true, but the same can be said for the new trade theory, the theory of comparative
advantage, and the Heckscher-Ohlin theory.

Blooms: Apply
Difficulty: 3 Hard
124. From a profit perspective based on the various international theories, how would a business
go about choosing locations for its various productive activities?
From a profit perspective, it makes sense for a firm to disperse its productive activities to those
countries where, according to the theory of international trade, they can be performed most
efficiently. The result is a global web of productive activities, with different activities being
performed in different locations around the globe depending on considerations of comparative
advantage, factor endowments, and the like. If the firm does not do this, it may find itself at a
competitive disadvantage relative to firms that do.

Blooms: Apply
Difficulty: 3 Hard
6-59
125. Discuss the policy implications of Porter's theory of national competitive advantage.
Porter's theory of national competitive advantage suggests that it is in the best interest of
business for a firm to invest in upgrading advanced factors of production; for example, to
invest in better training for its employees and to increase its commitment to research and
development. It is also in the best interests of business to lobby the government to adopt
policies that have a favorable impact on each component of the national diamond. Thus,
according to Porter, businesses should urge government to increase investment in education,
infrastructure, and basic research (since all these enhance advanced factors) and to adopt
policies that promote strong competition within domestic markets (since this makes firms
stronger international competitors, according to Porter's findings).

Blooms: Understand
6-60

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Solution Manual for Global Business Today 10th Edition

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Hill GBT 10e

Chapter 06 Test Bank

True / False Questions

AACSB: Analytical Thinking

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Multiple Choice Questions

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. new trade theory

AACSB: Analytical Thinking

A. absolute advantage of a country with reference to natural resources

AACSB: Analytical Thinking

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A. neo-Ricardian trade theory

AACSB: Analytical Thinking

A. help firms build a competitive advantage that is subsequently difficult to challenge.

AACSB: Analytical Thinking

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A. importing products from developing rather than developed countries

AACSB: Analytical Thinking

A. countries differ in their ability to produce goods efficiently.

AACSB: Analytical Thinking

A. A country's government should intervene to achieve a surplus in the balance of trade.

AACSB: Analytical Thinking

A. new trade theory

AACSB: Analytical Thinking

A. the volume of a country's imports increases as an indirect consequence of mercantilism.

AACSB: Analytical Thinking

39. A zero-sum game is a situation in which

AACSB: Analytical Thinking

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A. product life-cycle theory

AACSB: Analytical Thinking

A. product life-cycle theory