Questions: International Trade Theory

Chapter 05 - International Trade Theory
Chapter 05
International Trade Theory
Questions
1. (p. 154) Countries such as the U.S should not participate in free trade because it leads to a
migration of jobs overseas and ultimately leads to lower living standards.
Difficulty: Medium
2. (p. 154) 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 is known as free trade.
Difficulty: Easy
3. (p. 155) According to the theories of Smith, Ricardo and Heckscher-Ohlin, if a country can
produce a product itself it should not import that product.
Difficulty: Medium
4. (p. 155) The theories of Smith, Ricardo and Heckscher-Ohlin tell us that a country's economy
may gain if its citizens buy certain products from other nations that could be produced at
home.
Difficulty: Medium
5-1
5. (p. 155) The Heckscher-Ohlin theory emphasizes the interplay between the proportions in
which the factors of production are available in different countries and the proportions in
which they are need for producing particular goods.
Difficulty: Medium
6. (p. 155) The Heckscher-Ohlin theory has proven to be a powerful explanation of world trade
patterns.
Difficulty: Medium
7. (p. 156) 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 only support a limited number of
firms.
Difficulty: Medium
8. (p. 156) Ricardo noted 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.
Difficulty: Hard
9. (p. 156) The theory of absolute advantage was the first theory of international trade.
Difficulty: Easy
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5-3
10. (p. 156) According to the theory of comparative advantage, it is in a country's best interest to
maintain a trade surplus and to export more than it imports.
Difficulty: Medium
11. (p. 157) When a gain by one country results in a loss by another, there is a zero-sum game.
Difficulty: Medium
12. (p. 160) Smith's theory of international trade suggests that when one country has an absolute
advantage in the production of all goods, the country might not derive any benefit from
international trade.
Difficulty: Medium
13. (p. 160) According to Ricardo, there may be cases when it makes sense for a country to buy
goods from another country that it can make more efficiently itself.
Difficulty: Hard
14. (p. 162) While popular in its time, Ricardo's theory is no longer a major intellectual weapon
for those who argue for free trade.
Difficulty: Medium
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15. (p. 162) Ricardo's theory of comparative advantage provides a strong rationale for
encouraging free trade.
Difficulty: Medium
16. (p. 162) the theory of comparative advantage suggests that trade is a positive-sum game in
which all countries that participate realize economic gains.
Difficulty: Medium
17. (p. 163) Political opposition to the adoption of a free trade regime typically comes from those
whose jobs are most at risk.
Difficulty: Medium
18. (p. 164) Because of diminishing returns, it is not feasible for a country to specialize to the
degree suggested by the simple Ricardian model.
Difficulty: Medium
19. (p. 166) In general, economic studies suggest that countries that adopt a more open stance
toward international trade enjoy higher growth rates than those who keep their economies
closed to trade.
Difficulty: Medium
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20. (p. 168) The Heckscher-Ohlin theory argues that free trade is not beneficial to most nations.
Difficulty: Easy
21. (p. 169) The Heckscher-Ohlin theory gains predictive power once the impact of differences
of technology on productivity is controlled for.
Difficulty: Medium
22. (p. 169) Ray Vernon suggested the wealth and size of the U.S. market gave U.S. firms a
strong incentive to develop new consumer products.
Difficulty: Medium
23. (p. 169) A central point in Vernon's product life cycle was that demand for new products
tends to be solely based on price factors.
Difficulty: Medium
24. (p. 170) Historically, the product life cycle theory seems to be an accurate explanation of
international trade patterns.
Difficulty: Hard
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25. (p. 170-171) Because a growing number of new products are now introduced simultaneously
in the U.S, Japan and the advanced European nations, Vernon's product life cycle is limited in
explaining world trade patterns.
Difficulty: Medium
26. (p. 172) Economies of scale are unit cost reductions associated with a large scale of output.
Difficulty: Easy
27. (p. 173) Trade is mutually beneficial, according to new trade theory, because it allows for the
specialization of production, the realization of scale economies and the production of a greater
variety of products at lower prices.
Difficulty: Medium
28. (p. 173) New trade theory suggests that nations may benefit from trade even when they do
not differ in resource endowments or technology.
Difficulty: Medium
29. (p. 174) New trade theory and the Heckscher-Ohlin theory are in complete agreement with
regard to world trade patterns.
Difficulty: Hard
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30. (p. 175) According to Porter, four broad attributes of a nation shape the environment in
which local firms compete include. These are supply conditions, factor endowments,
regulation and advanced factors.
Difficulty: Medium
31. (p. 175) Porter argues that favorable demand conditions will result in competitive advantage
unless the state of rivalry is sufficient to cause firms to respond to them.
Difficulty: Hard
32. (p. 176) Factor endowments lie at the center of the HeckscherOhlin theory.
Difficulty: Easy
33. (p. 176) According to Porter, the characteristics of home demand are particularly important
in shaping the attributes of domestically made products and in creating pressures for
innovation and quality.
Difficulty: Easy
34. (p. 177) Porter suggests that different nations are characterized by different management
ideologies, which either help them or do not help them to build national competitive
advantage.
Difficulty: Medium
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35. (p. 179) Porter's diamond of competitive advantage has proven to be a powerful predictor of
world trade patterns.
Difficulty: Medium
36. (p. 179) 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.
Difficulty: Easy
37. (p. 180) Assembly of electronic components is a relatively labor-intensive process requiring
only low-skilled labor and cost pressures are intense. As a result, final assembly may be
carried out in a country such as the United States.
Difficulty: Easy
38. (p. 180) According to the new trade theory, firms that establish a first-mover advantage with
regard to the production of a particular new product may subsequently dominate global trade
in that product.
Difficulty: Easy
5-10
39. (p. 180) The theories of international trade claim that promoting free trade is generally in the
best interests of an individual firm, although it may not always be in the best interest of a
country.
Difficulty: Medium
5-11
40. (p. 181) 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.
Difficulty: Easy
Multiple Choice Questions

41. (p. 154) Propagated in the 16th and 17th centuries, _____ advocated that countries should
simultaneously encourage exports and discourage imports.
A. Ethnocentrism
B. Capitalism
C. Collectivism
D. Mercantilism
Difficulty: Easy
42. (p. 154) According to _____, maintaining a laissez-faire stance toward trade is to the best
interests of a country.
A. The mercantilist philosophy
B. Adam Smith
C. Milton Friedman
D. John Stuart Mill
Difficulty: Medium
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43. (p. 154) Free trade

A. Formed the basis for the mercantilist philosophy
B. Is in direct contrast to the notion of the invisible hand as advocated by Smith
C. Refers to a situation where a government does not attempt to influence through quotas or
duties what its citizens can buy from another country
D. Rejects the laissez-faire stance toward trade and maintains that it is not in the best interests
of a country
Difficulty: Medium
44. (p. 154) This theory, proposed in 1776, was the first to explain why unrestricted free trade is
beneficial to a country.
A. Mercantilism
B. Heckscher-Ohlin
C. Comparative advantage
D. Absolute advantage
Difficulty: Medium
45. (p. 154) Which of the following scholars argued that the "invisible hand" of the market
mechanism, rather than government policy, should determine what a country imports and
what it exports?
A. Milton Friedman
B. John Stuart Mill
C. Carl Marx
D. Adam Smith
Difficulty: Hard
5-13
46. (p. 154) This theory, advanced by the 19th-century English economist David Ricardo, forms
the intellectual basis of the modern argument for unrestricted free trade.
A. Heckscher-Ohlin
B. Mercantilism
Difficulty: Medium
47. (p. 155) All of the following theories show why it is beneficial for a country to engage in
international trade even for products it is able to produce for itself, except
A. Mercantilism.
B. Heckscher-Ohlin
Difficulty: Hard
48. (p. 155) _____ suggests that international differences in labor productivity are key to
understanding patterns of international trade.
A. Mercantilism
B. Vernon
C. Michael Porter
D. David Ricardo
Difficulty: Hard
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49. (p. 155) This theory explains the observed patterns of international trade by emphasizing the
interplay between the proportions in which the factors of production are available in different
countries and the proportions in which they are needed for producing particular goods.
A. Mercantilism
B. Absolute advantage
C. Heckscher-Ohlin
D. Comparative advantage
Difficulty: Medium
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50. (p. 155) Which of the following is an assumption of the Heckscher-Ohlin theory?
A. Countries have varying endowments of the various factors of production
B. Gold and silver were the mainstays of national wealth and essential to vigorous commerce
C. It is in a country's best interests to maintain a trade surplus
D. Trade is a zero-sum game
Difficulty: Medium
51. (p. 155-156) The product life cycle theory was developed by
A. Adam Smith
B. David Ricardo
C. Raymond Vernon
D. Eli Heckscher
Difficulty: Hard
52. (p. 156) Identify the incorrect statement pertaining to Raymond Vernon's product life-cycle
theory.
A. Early in their life cycle, most new products are produced in and exported from the country
in which they were developed
B. As a new product becomes widely accepted internationally production starts in other
countries
C. A product in the early stage of the product life cycle is imported by the country where it
was innovated
D. A product may ultimately be exported back to the country of its original innovation
Difficulty: Hard
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53. (p. 156) Which theory stresses that in some cases countries specialize in the production and
export of particular products not because of underlying differences in factor endowments but
because in certain industries the world market can support only a limited number of firms?
A. Balanced trade
B. Heckscher-Olin
C. New trade
D. Product life cycle
Difficulty: Medium
54. (p. 156) The theory of _____, developed by Michael Porter, focuses on the importance of
country factors, in addition to factor endowments, such as domestic demand and domestic
rivalry in explaining a nation's dominance in the production and export of particular products.
A. New trade
D. National competitive advantage
Difficulty: Medium
55. (p. 156) The theory of _____ makes a crude case for government involvement in promoting
exports and limiting imports.
A. Mercantilism
B. Free trade
C. Absolute advantage
D. Comparative advantage
Difficulty: Medium
5-17
56. (p. 156) Identify the theory that can be interpreted as justifying some limited government
intervention to support the development of certain export-oriented industries.
A. Theory of national competitive advantage
B. Heckscher-Ohlin theory
C. Theory of comparative advantage
D. Theory of absolute advantage
Difficulty: Medium
57. (p. 156) According to the _____, U.S is a major player in the commercial jet aircraft industry
because U.S firms were first movers in the world market.
A. Product life cycle theory
B. Theory of mercantilism
C. New trade theory
D. Theory of absolute advantage
Difficulty: Hard
58. (p. 156) The main tenet of mercantilism was that it was in a country's best interest to
maintain a trade
A. Balance
B. Embargo
C. Surplus
D. Deficit
Difficulty: Medium
59. (p. 156) Under mercantilism, countries strived to maintain

A. High exports and low imports
B. Low exports and high imports
C. An inflow of gold and high imports
D. An outflow of gold, high exports
Difficulty: Medium
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60. (p. 157) When a government limits imports via tariffs and quotas and subsidizes exports in
order to maximize exports and minimize imports, the country is following
A. A mercantilist philosophy
B. The theory of absolute advantage
C. The theory of comparative advantage
D. The Heckscher-Ohlin theory
Difficulty: Hard
61. (p. 157) Mercantilism viewed trade as

A. A zero-sum game
B. An economic evil
C. A non essential economic activity
D. A threat to a government's independence
Difficulty: Easy
62. (p. 157) China, 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 is viewed by critics as following a
A. Zero-sum game
B. Neo-mercantilist policy
C. Positive-sum game
D. Free trade policy
Difficulty: Medium
5-19
63. (p. 157) According to Smith, countries should specialize in the production of goods for
which they have an absolute advantage and then
A. Retain these goods for strictly domestic sales
B. Trade these goods for the goods produced by other countries
C. Sell these goods to the highest domestic or international bidder
D. Prohibit the import of these goods from other countries
Difficulty: Medium
5-20
64. (p. 157) According to Adam Smith, if a country is more efficient than any other country in
producing a particular product, the country has a(n) ______ in the production of the product.
A. Absolute advantage
B. Comparative advantage
C. Relative advantage
D. Proportional advantage
Difficulty: Medium
65. (p. 158) The different combinations of two goods that an economy could efficiently produce
with limited productive resources can be referred to as a country's
A. Economic output
B. Efficiency graph
C. Productivity curve
D. Production possibility frontier
Difficulty: Medium
66. (p. 160) Trade produces net gains for all involved and hence is a
A. Zero-sum game
B. Balance of trade game
C. Positive-sum game
D. Equilibrium-gain game
Difficulty: Easy
5-21
67. (p. 160) According to the theory of _____, it makes sense for a country to specialize in
producing the goods it produces most efficiently and buy the products it produces less
efficiently from other countries, even if it could produce the good more efficiently itself.
A. Strategic trade
B. Pertinent advantage
Difficulty: Medium
5-22
68. (p. 162) What is the basic message of the theory of comparative advantage?
A. Countries are similar in their ability to produce goods efficiently
B. International trade is rarely beneficial to a country
C. Potential world production is greater with unrestricted free trade than it is with restricted
trade
Difficulty: Medium
69. (p. 162) A basic tenet of Ricardo's theory is that

A. Consumers in those countries with an absolute advantage in the production of all goods
might derive no benefits from international trade
B. Consumers in all nations can consume more if there are no restrictions on trade
C. Restrictions on trade help consumers in countries that lack an absolute advantage in the
production of a particular good
Difficulty: Medium
70. (p. 162) The comparative advantage model of trade assumed that a country's stock of
resource and the efficiency with which it utilizes those resources
A. Remains the same over time
B. Increases over time
C. Decreases with time
D. Follows a bell-shaped curve
Difficulty: Medium
5-23
71. (p. 163) Economist _____ argued that 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.
A. David Ricardo
B. Michael Porter
C. Adam Smith
D. Paul Samuelson
Difficulty: Hard
72. (p. 163) _____ means that the units of resources required to produce a good are assumed to
remain unvarying no matter where one is on a country's production possibility frontier.
A. Economies of scale
B. Law of diminishing returns
C. Constant returns to specialization
D. Zero-sum game
Difficulty: Easy
73. (p. 163) _____ occur(s) when more units of resources are required to produce each additional
unit.
B. Diminishing returns to specialization
C. A positive-sum game
D. Constant returns to specialization
Difficulty: Easy
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74. (p. 164) The simple comparative advantage model assumes constant returns to specialization.
However, it is more realistic to assume diminishing returns to specialization because of all of
the following reasons except
A. All resources are of the same quality
B. Different goods use resources in different proportions
C. As a country tries to increase its output of a certain good, it is more likely to draw on more
marginal resources whose productivity is not as great as those initially employed
D. If a country specializes to the degree suggested by the simple Ricardian model, the gains
from specialization are likely to be exhausted before specialization is complete
Difficulty: Medium
75. (p. 164) Which of these suggest that the gains from specialization are likely to be exhausted
before specialization is complete?
B. Diminishing returns to specialization
C. Economies of scope
D. Constant returns to specialization
Difficulty: Easy
76. (p. 164) Even if we relax the assumptions of the simple Ricardian model that there are
constant returns to scale and realistically assume diminishing returns to specialization, it can
still be concluded that
A. The benefits of unrestricted trade do not hold
B. Free trade is beneficial but the gains may not be as great as in a constant returns case
C. Governments should intervene in the market to bring about a zero-sum game
D. The benefits of free trade are comparatively much less than government regulated trade
Difficulty: Medium
5-25
77. (p. 164-165) The simple comparative advantage model assumes that trade does not change a
country's stock of resources or their utilization efficiency. If we relax this assumption to make
allowances for dynamic changes, all of the following become apparent except
A. Opening the economy to trade would be likely to generate dynamic gains
B. Free trade may increase the country's stock of resources.
C. Free trade might increase the efficiency with which the country uses its resources
D. Dynamic gains will cause the country's PPF to shift inward
Difficulty: Hard
78. (p. 165-66) According to the _____ model, when a rich country such as the U.S enters into a
free trade agreement with a poor country that rapidly experiences dynamic gains, the rich
country is likely to not have net gains.
A. Absolute advantage
B. Mercantilist
C. Heckscher-Ohlin
D. Samuelson
Difficulty: Medium
79. (p. 168) According to Heckscher and Ohlin, _____ meant the extent to which a country is
provided with such resources as land, labor and capital.
A. Factors of production
B. Economic facilitators
C. Factor endowments
D. Manufacturing factors
Difficulty: Easy
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80. (p. 168) Which theory predicts that countries will export those goods that make intensive use
of those factors that are locally abundant, while importing goods that make intensive use of
factors that are locally scarce?
A. Comparative advantage
C. Heckscher-Olin
D. Samuelson
Difficulty: Easy
81. (p. 168) Contrary to what the Heckscher-Ohlin theory would predict, the United States has
been a primary importer rather than an exporter of capital goods. This phenomenon is referred
to as the _____ paradox.
A. Zero-sum
B. Leontief
C. Empirical
D. Ricardo
Difficulty: Easy
82. (p. 169) This theory, initially proposed by Raymond Vernon, was based on the observation
that for most of the 20th 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.
A. Competitive advantage
B. Product life cycle
C. New trade
D. Strategic trade
Difficulty: Medium
5-27
83. (p. 169) Raymond Vernon argued that new products were developed by U.S. firms and first
sold in the U.S. market because
A. European competitors were not active in product R&D
B. American firms were able to take advantage of tax credits for product R&D
C. The wealth and size of the U.S market gave the firms an incentive to develop new products
D. The low cost of U.S. labor gave U.S. firms an incentive to develop costly process
innovations
Difficulty: Medium
84. (p. 170) During the _____ stage of Vernon's product life cycle, as the market in the United
States and other advanced nations matures, the product moves toward standardization and
price becomes important.
A. Initial
B. Early middle
C. Late middle
D. Late
Difficulty: Medium
85. (p. 170) According to the product life cycle theory, the locus of global production initially
switches from the U.S. to other advanced nations and then from those nations to developing
countries. The consequence of this trend for the pattern of world trade is that over time the
U.S.
A. Becomes the sole producer of a product
B. Switches from being an exporter of the product to being an importer of the product
C. Switches from being an importer of the product to being an exporter of the product
D. Becomes the sole consumer of the product
Difficulty: Medium
5-28
86. (p. 171) The product life cycle theory

A. Remains a relevant theory of explaining international trade in the modern world
B. Was useful for explaining the pattern of trade during the brief period of American global
dominance
C. Proved to be a poor explanation of world trade patterns during the 1960s and 1970s
D. Was a strong predictor of trade patterns during the 1800s
Difficulty: Easy
87. (p. 172) _____ suggests that when nations trade, each nation may be able to specialize in
producing a narrower range of products than it would in the absence of trade and through
trade, each nation can simultaneously increase the variety of goods available to its consumers
and lower the costs of those goods.
A. The product life cycle theory
B. Porter's diamond of competitive advantage
C. New trade theory
D. The theory of comparative advantage
Difficulty: Easy
88. (p. 173) A firm that captures scale economies ahead of later entrants and consequently
benefits from a lower cost structure has
A. An absolute advantage
B. A fixed advantage
C. A first mover advantage
D. A late mover advantage
Difficulty: Easy
5-29
89. (p. 174) According to the new trade theorists, because early entrants are able to gain _____,
the early entrants into an industry may get a lock on the world market that discourages
subsequent entry.
A. Zero-sum advantage
B. Highly skilled employees
C. Process expertise
D. Economies of scale
Difficulty: Medium
90. (p. 174) _____ argues that scale economies and first mover advantages help explain trade
patterns.
A. New trade theory
B. The theory of absolute advantage
C. The competitive advantage of nations
D. Heckscher-Ohlin theory
Difficulty: Easy
91. (p. 175) According to Porter all of the following are broad attributes of a nation that shape
the environment in which local firms compete, except
A. Factor endowments
B. Supply fluctuations
C. Relating and supporting industries
D. Firm strategy, structure and rivalry
Difficulty: Medium
92. (p. 180) According to Porter, which of the following is an example of an advanced factor?
A. Natural resources
B. Skilled labor
C. Location
D. Demographics
Difficulty: Easy
5-30
5-31
93. (p. 176) According to Porter, advanced factors

A. Include natural resources, climate, location and demographics
B. Are the least significant for competitive advantage
C. Are naturally endowed
D. Are a product of investment by individuals, companies and governments
Difficulty: Medium
94. (p. 177) Porter explains the U.S' loss of competitiveness in engineering-based industries
where manufacturing processes and product design issues are critical as a consequence of
A. Differing management ideologies
B. Differing factor endowments
C. Differing demand conditions
D. Chance
Difficulty: Hard
95. (p. 181) Identify the theory that suggests that it is in the best interest of business for a firm to
invest in upgrading advanced factors of production.
A. Theory of competitive advantage
B. Product life cycle theory
C. New trade theory
D. National competitive advantage theory
Difficulty: Medium
5-32
Essay Questions
96. (p. 154-155) What are the benefits of free trade?
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. Common sense suggests that some international trade is beneficial.
Theories by Smith, Ricardo and Heckscher-Ohlin suggest that a country's economy may gain
if its citizens buy certain products from other nations that could be produced at home. The
gains arise because international trade allows a country to specialize in the manufacture and
export of products that can be produced most efficiently in that country, while importing
products that can be produced more efficiently in other countries.
Difficulty: Medium
97. (p. 156-157) Discuss the mercantilist philosophy. What was the theory's main flaw?
Mercantilism was the first theory of international 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.
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. The flaw with
mercantilism was that it viewed trade as a zero-sum game in which a gain by one country
resulted in a loss by another country.
Difficulty: Medium
5-33
98. (p. 157-160) What was Adams Smith's contribution to the theory of why nations trade? What
is the theory of absolute advantage?
Adam Smith attacked the mercantilist philosophy in his 1776 landmark book, the Wealth of
Nations. Smith argued that countries differ in their ability to produce good efficiently. Smith
suggested that when a country was more efficient at producing a particular good than any
other country, the country had an absolute advantage in the production of that good.
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.
Smith's basic argument was that a country should never produce goods at home that it can buy
at a lower cost from other countries. 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.
Difficulty: Medium
99. (p. 160-162) How did David Ricardo extend Adam Smith's work? Explain the theory of
comparative advantage.
David Ricardo took Adam's Smith's theory of absolute advantage one step further by
exploring what might happen when one country has an absolute advantage in the production
of all goods. Smith's theory suggests that such a country might not benefit from trade,
however Ricardo suggested that it makes sense for a country to specialize in the production of
those goods that it produces most efficiently or has a comparative advantage in and to buy the
goods that it produces less efficiently from other countries. According to Ricardo, potential
world production is greater with unrestricted free trade than it is with restricted free trade.
Ricardo's theory remains a popular weapon for free trade supporters.
5-34
Difficulty: Medium
100. (p. 166-167) Discuss the link between trade and economic growth.
Research shows that in general, countries that adopt a more open stance toward international
trade enjoy higher growth rates than those that close their economies to trade. Higher growth
should in turn, raise income level and living standards.
Difficulty: Medium
101. (p. 168) Explain the Heckscher-Ohlin theory. What is the relationship between HeckscherOhlin's work and the theory of comparative advantage?
Heckscher and Ohlin suggested that comparative advantage arises from differences in national
factor endowments. The Heckscher-Ohlin theory predicts that countries will export those
goods that make intensive use of factors that are locally abundant, while importing goods that
make use of factors that are locally scarce. Thus, Heckscher and Ohlin suggest that free trade
is beneficial, but argue that the pattern of trade is determined by differences in factor
endowments, rather than differences in productivity.
Difficulty: Medium
102. (p. 168) What is the Leontief Paradox?

Wassily Leontief tested the Heckscher-Ohlin theory. Leontief postulated that since the U.S
was relatively abundant in capital compared to other nations, the U.S would be an exporter of
capital-intensive goods and an importer of labor-intensive goods. However, Leontief found
that U.S exports were less capital intensive than U.S imports. Because this result was at
variance with the predictions of Heckscher-Ohlin, it has become known as the Leontief
paradox.
Difficulty: Medium
5-35
103. (p. 169) Explain the product life cycle theory.

The product life cycle theory, proposed by Raymond Vernon in the mid-1960s, was based on
the observation that for most of the 20th 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. It suggests that
the wealth and size of the U.S market gave American firms a strong incentive to develop new
consumer products. Vernon argued that most new products were initially produced in the U.S.
According to Vernon, early in the life cycle of a product most new products are produced and
are exported from the country in which they were developed. As a new product becomes
widely accepted internationally, production starts in other countries. As a result, the theory
suggests, the product may ultimately be exported back to the country of its innovation.
Difficulty: Medium
104. (p. 170-171) Evaluate the product life cycle. How well does the theory hold up? What are the
theory's weaknesses?
When viewed historically, the product lie cycle theory appears to be an accurate explanation
of international trade patterns. However, from an Asian or a European perspective the theory
is ethnocentric. Many new products are now introduced in Japan or Europe or even
simultaneously in the U.S, Europe and Japan. In general, while Vernon's theory was useful for
explaining trade during the brief period of American dominance, it is not particularly relevant
in today's global economy.
Difficulty: Medium
105. (p. 172) What are economies of scale? Why are they important in understanding trade
patterns?
Economies of scale are unit cost reductions associated with a large volume of output.
Economies of scale are a major source of cost reductions in many industries. Because of the
need to achieve economies of scale, some global industries may only be able to support a
small number of firms. World trade patterns would reflect this phenomenon.
Difficulty: Easy
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106. (p. 172-173) Explain the new trade theory. What is the role of economies of scale in this
theory?
The new trade theory emerged in the 1970s when several economists suggested that
economies of scale might play a role in world trade. New trade theory suggests that (1)
through its impact on economies of scale, trade can increase the variety of goods available to
consumers and decrease average costs of those goods and (2) in those industries when the
output required to attain economies of scale represents a significant proportion of total world
demand, the global market may only be able to support a small number of enterprises.
Difficulty: Medium
107. (p. 173) Explain the connections between economies of scale, first-mover advantages and
trade patterns?
First mover advantages are the economic and strategic advantages that accrue to early entrants
into an industry. Because they are able to gain economies of scale, early entrants may get a
lock on the world market that discourages subsequent entry. In other words, the ability of
first-movers to reap economies of scale creates a barrier to entry. Countries may dominate in
the export of certain goods because economies of scale are important to their production and
because firms located in those countries were first to capture scale economies, giving them a
first mover advantage.
Difficulty: Medium
108. (p. 173-174) Discuss the implications of the new trade theory.
The new trade theory suggests that countries may benefit from trade even when they do not
differ in resource endowments or technology. Through trade, a country can specialize in the
production of certain products and achieve scale economies and thus, lower production costs
and trade for other products. Consumers should benefit from lower prices. New trade theory
also suggests that a company may dominate a certain industry simply because it got there
first. If the firm can achieve economies of scale, they may act as a barrier to entry to other
firms.
Difficulty: Medium
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109. (p. 174) Does new trade theory support the work of Heckscher and Ohlin? Is the theory at
variance with the theory of comparative advantage?
New trade theory does not support Heckscher and Ohlin's work. In fact, new trade theorists
argue that the U.S is a major exporter of commercial jet aircraft not because the country is
better endowed with the factors of production required to make a plane, but because Boeing,
an American firm, was one of the first movers in the industry. In contrast, the theory does
support the theory of comparative advantage.
Difficulty: Medium
110. (p. 174) Does new trade theory support government intervention and strategic trade policy?
Explain.
According to new trade theorists, luck, entrepreneurship and innovation are all important in
giving a firm first mover advantages. Therefore, new trade theory supports the notion of
government intervention on the basis that a government, through the judicious use of
subsidies, could increase the chances of its domestic firms becoming first movers in newly
emerging industries.
Difficulty: Medium
111. (p. 175) What are the four attributes identified by Porter as being important in determining
why a nation achieves success in a particular industry?
The four attributes identified by Porter include factor endowments; demand conditions or the
nature of home demand for the industry's product or service; related and supporting industries
or the presence or absence in a nation of supplier industries and related industries that are
internationally competitive and firm strategy, structure and rivalry or the conditions in the
nation governing how companies are created, organized and managed and the nature of
domestic rivalry.
Difficulty: Medium
5-38
112. (p. 176) What is the difference between basic factors and advanced factors in Porter's
Diamond?
Porter differentiates between factors of production. According to Porter, there are basic factors
such as natural resources, climate and demographics and advanced factors such as
infrastructure, skilled labor and research facilities. Advanced factors are a product of
investment by individuals.
Porter suggests that advanced factors are most important for competitive advantage.
Difficulty: Medium
113. (p. 176) Porter has stated that a nation's firms gain competitive advantage if their domestic
consumers are sophisticated and demanding. Explain this statement.
Firms are typically most sensitive to the needs of their closest customers. Therefore,
according to Porter, the characteristics of home country demand will shape the attributes of
domestically made products and create pressure for innovation and quality. Porter suggests
that if a nation's domestic consumers are sophisticated and demanding, the nation's firms will
gain a competitive advantage.
Difficulty: Medium
114. (p. 177-179) What is the role of government in Porter's theory?

According to Porter, government can influence each of the four main attributes of his model.
For example, factor endowments can be affected by subsidies or policies toward education,
domestic demand can be shaped through local product standards, regulations can influence
supporting and related industries and firm rivalry can be affected by tax policies and anti trust
regulations.
Difficulty: Medium
5-39
115. (p. 179-181) Discuss the implications of international trade theory for a firm.
The implications of trade theory for a firm are reflected in location implications, firms can
capitalize on the differences between countries by dispersing their production activities
around the globe to wherever a product can be produced the most efficiently; in first-mover
implications, it pays to invest substantial financial resources in trying to build a first mover
advantage and in policy implications, it is in the best interests of a firm to invest in upgrading
advanced factors of production and to lobby the government to adopt policies that have a
favorable impact on Porter's Diamond.
Difficulty: Medium
5-40

Questions: International Trade Theory

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Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Multiple Choice Questions

Chapter 05 - International Trade Theory

43. (p. 154) Free trade

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

59. (p. 156) Under mercantilism, countries strived to maintain

Chapter 05 - International Trade Theory

61. (p. 157) Mercantilism viewed trade as

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

69. (p. 162) A basic tenet of Ricardo's theory is that

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

86. (p. 171) The product life cycle theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

93. (p. 176) According to Porter, advanced factors

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

102. (p. 168) What is the Leontief Paradox?

Chapter 05 - International Trade Theory

103. (p. 169) Explain the product life cycle theory.

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

Chapter 05 - International Trade Theory

114. (p. 177-179) What is the role of government in Porter's theory?

Chapter 05 - International Trade Theory

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