Unit 1- Part 1

I. TRUE/FALSE QUESTIONS
1. The purchase, sale, or exchange of goods and services across national borders is called domestic trade.
2. The trade theory that nations should accumulate financial wealth, usually in the form of gold, by
encouraging imports and discouraging exports is called mercantilism.
3. A trade deficit is the condition that results when the value of a nation’s exports is greater than the value
of its imports.
4. The ability of a nation to produce a good more efficiently than any other nation is called a comparative
advantage.
5. According to the comparative advantage theory, trade is still beneficial even if one country is less
efficient in the production of two goods, so long as it is less inefficient in the production of one of the
goods.
6. The theories of comparative and absolute advantages assume that countries are driven only by the
maximization of production and consumption.
7. According to the factor proportions theory, factors in great supply relative to demand will be more
costly than factors in short supply relative to demand.
8. In the maturing product stage, production facilities are introduced in the countries with the highest
demand.
9. According to the new trade theory, as a company increases the extent to which it specializes in the
production of a particular good, output rises because of gains in efficiency.
10. According to Porter, a nation’s competitiveness in an industry depends on the capacity of the industry
to innovate and upgrade

II. MULTIPLE CHOICE QUESTIONS

1. Which of these refers to the purchase, sale, or exchange of goods and services across national borders?
a. Domestic trade b. Foreign direct investment c. International trade d. Mercantilism
2. The trade theory that nations should accumulate financial wealth, usually in the form of gold, by
encouraging exports and discouraging imports is called
a. absolute advantage. b. mercantilism. c. comparative advantage. d. factor
proportions theory.
3. The condition that results when the value of a nation’s exports is greater than the value of its imports is
called
a. trade deficit. b. mercantilism. c. trade surplus. d. absolute advantage.
4. The condition that results when the value of a country’s imports is greater than the value of its exports
is called
a. trade deficit. b. mercantilism. c. trade surplus. d. absolute advantage.
5. Which of these refers to the ability of a nation to produce a good more efficiently than any other
nation?
 a. Mercantilism b. Comparative advantage c. Absolute advantage d. Zero-sum game
6. When there are gains to be had by both countries party to an exchange, international trade is considered
as a
a. positive-sum game b. zero-sum game c. negative-sum game d. comparative
advantage
7. Both absolute and comparative advantage theories assume that ___________ is the only kind of
resource for the production process.
a. land b. labor c. capital d. information
8. The comparative advantage theory focuses on which of the following?
a. Productivity b. Transportation c. Resources d. Trade surplus
9. Under the factor proportions theory, a nation’s resources are broken into all of these except
a. labor b. land c. information d. capital equipment.
10. During which stage of the product life cycle does the company keep the production volume low and
based in the home country?
a. Growth stage b. New product stage c. Maturing product stage d. Standardized
product stage
11. During which stage of the product life cycle does the company introduce production facilities in those
countries with the highest demand?
a. Innovation stage b. New product stage c. Maturing product stage d. Standardized
product stage
12. During which stage of the product life cycle are companies looking for low cost production bases in
developing nations?
a. Innovation stage b. New product stage c. Maturing product stage d. Standardized
product stage
13. National competitive advantage theory states that a nation’s competitiveness in an industry depends on
a. the capacity of the industry to innovate and upgrade. b. the level of government subsidy available.
c. first-mover advantage. d. neo-mercantilism.

III. SHORT- ANSWER QUESTIONS

1. The purchase, sale, or exchange of goods and services across national borders is called __________.
2. The trade theory that nations should accumulate financial wealth, usually in the form of gold, by
encouraging exports and discouraging imports is called __________.
3. ___________ is the condition that results when the value of a nation’s exports is greater than the value
of imports.
4. A condition that results when the value of a country’s imports is greater than the value of its exports is
called _________.
5. When a nation can only increase its share of wealth at the expense of its neighbors, it is called a ______
6. ___________ is the ability of a nation to produce a good more efficiently than any other nation.
7. ___________ argues that trade is still beneficial even if one country is less efficient in the production of
two goods, so long as it is less inefficient in production of one of its goods.
8. __________ states that countries produce and export goods that require resources that are abundant and
import goods that require resources in short supply.
9. The ___________ states that (1) there are gains to be had from specialization and increasing economies
of scale, (2) those companies first to enter a market can create barriers to entry, and (3) government
may have a role to play in assisting its home-based companies.
10. The economic and strategic advantage gained by being the first company to enter and industry is called
___________.
11. The ___________ theory states that a nation’s competitiveness in an industry depends on the capacity
of the industry to innovate and upgrade.