Chapter 2

Question 1

How much of the global output is destined for trade?

Answer 1

Nearly 60 percent

Question 2

What country is the world’s largest exporter?

Answer 2

China

Question 3

What is the trend in trade direction?

Answer 3

More than half of exports if developing countries goes to developed countries while 2/3 of exports from developed economies goes to other developed countries.

Question 4

How has regionalization affected trade?

Answer 4

A larger percentage of trade is done within a region due to the increase in trade agreements. This affects how businesses outside these agreements will respond.

Question 5

What are advantages of knowing our nation’s major trade partners?

Answer 5

Business climate in importing nations is already favorable, regulations will be limited, less home objections to buying from trade partners, transportation facilities are already established, import chanel members will be familiar with imports, foreign currency will be available and foreign government is possibly more supportive.

Question 6

What countries are the top exporters to the US?

Answer 6

Canada, Mexico, Japan, Germany, the United Kingdom, Italy, France, Venezuela, Brazil, China, Singapore, South Korea, Taiwan, and India.

Question 7

What is a trade deficit?

Answer 7

The value by which the value of imports into a country exceeds the value of exports.

Question 8

What is a trade surplus?

Answer 8

That value by which the value of a nations exports exceeds the value of its imports.

Question 9

What is mercantilism?

Answer 9

An economic philosophy based on belief that a nation’s wealth was based on acquisition of treasure (usually precious medals) and that government policies should promote exports and discourage imports.

Question 10

What is the theory of absolute advantage?

Answer 10

The ability to produce more of a good than others at a lower cost.

Question 11

What is perfect competition?

Answer 11

A market situation in which there is a sufficiently large number of well-informed buyers and sellers of a homogenous product.

Question 12

What is David Ricardo’s theory of comparative advantage?

Answer 12

A nation that can produce a good at a lower cost than another nation has comparative/relative advantage in production of good where it cost the least.

Question 13

What is absolute advantage?

Answer 13

When one entity can produce more of one good than another.

Question 14

How are terms of trade determined?

Answer 14

The terms of trade is a point between two nations pre-trade price ratios for producing a specialized good respectively.

Question 15

What is currency devaluation and what is it effect?

Answer 15

It is a reduction in the value of a nation’s currency relative to others. This can effectively lower the price of a nation’s export.

Question 16

What are resource endowments?

Answer 16

Factors of production that one nation owns.

Question 17

What is the theory of overlapping demand?

Answer 17

The concept that nations with similar levels of per capita income will be more inclined to trade with each other.

Question 18

What is product differentiation and how does it relate to the overlapping demand theory?

Answer 18

It is unique features integrated into a product to increase demand for the product.

Question 19

What are the four stages of the international product life cycle?

Answer 19

Stage 1 - New innovations become popular in a country and are exported.

Stage 2 - Foreign production takes over and export growth diminishes.

Stage 3 - Foreign competition arises and original exporters scale back as they focus on innovation.

Stage 4 - Import competition arrives at the place of origin for the product.

Question 20

What is the economies of scale?

Answer 20

It is the predictable decline in average cost of producing each unit as the production facility grows.

Question 21

How do economies of scale and the experience curve affect trade?

Answer 21

They lower the cost of production and give producers the comparative advantage.

Question 22

What is Alfred Marshall’s theory why firms tend to cluster together on a geographic basis?

Answer 22

(1) the pooling of a common labor force can meet staffing requirements quickly, (2) specialized suppliers can coordinate with buyers, and (3) technological information can be shared easily.

Question 23

What is national competitiveness?

Answer 23

The ability to design, produce, distribute, or service products internationally while earning increasing returns on its resources.

Question 24

What are four variables that Michael Porter claims affects a firm’s competitiveness?

Answer 24

(1) Demand conditions - more complex demands creates higher-quality goods.
(2) Factor conditions - Inherited factors (land, location, etc.) and advanced factors (created from actions) can inspire growth.
(3) Related and Supporting Industries - Firms can pool resources and optimize production.
(4) Firm Strategy, Structure and Rivalry - Domestic competition and internationally driven companies can be more competitive as they look to the world.

Question 25

What is the difference between portfolio investments and foreign direct investments?

Answer 25

Foreign direct investments are purchases sufficient enough to control the firm while portfolio investments are primarily for return and nothing more.

Question 26

What’s the difference between a greenfield investment and a cross-border acquisition?

Answer 26

Greenfield investments establish new facilities while cross-border acquisitions are the purchases of existing businesses of another nation.

Question 27

What is the monopolistic advantage theory?

Answer 27

Theory that foreign direct investment is made by firms in industries with relatively few competitors.

Question 28

What is the oligopolistic theory?

Answer 28

An industry with a limited number of competing firms.

Question 29

What is the strategic behavior theory?

Answer 29

Theory suggesting that strategic rivalry results in companies imitating each other’s international investments to remain competitive.

Question 30

What is the internalization theory?

Answer 30

It is a theory that firm keeps information in-house and only transfers it to is subsidiaries in order to maximize returns.

Question 31

What is the eclectic theory of international production?

Answer 31

It is theory that company must have three kinds of advantages: ownership-specific advantages, location-specific advantages, and internalization advantage.

Question 32

What is the dynamic capability theory?

Answer 32

Theory that a firm must have both unique resources or knowledge and ability to create, sustain, and exploit these capabilities.