Chapter 5

Question 1

Absolute advantage

Answer 1

The economic advantage one nation enjoys that is absolutely superior to other nations.

Question 2

Administrative policy

Answer 2

Bureaucratic rules that make it harder to import foreign goods

Question 3

Antidumping duty

Answer 3

Tariff levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business).

Question 4

Balance of trade

Answer 4

The aggregation of importing and exporting that leads to the country-level

Question 5

Classical trade theories

Answer 5

The major theories of international trade that were advanced before the 20th century, which consist of (1) mercantilism, (2) absolute advantage, and (3) comparative advantage.

Question 6

Comparative advantage

Answer 6

Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.

Question 7

Deadweight cost

Answer 7

Net losses that occur in an economy as a result of tariffs.

Question 8

Diamond theory

Answer 8

A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond.”

Question 9

Export

Answer 9

Selling abroad

Question 10

Factor endowment

Answer 10

The extent to which different countries possess various factors of production such as labor, land, and technology.

Question 11

Factor endowment theory (Heckscher-Ohlin theory)

Answer 11

A theory that suggests that nations will develop comparative advantages based on their locally abundant factors.

Question 12

First-mover advantage

Answer 12

Benefit that accrues to firms that enter the market first and that late entrants do not enjoy.

Question 13

Free trade

Answer 13

The idea that free market forces should determine how much to trade with little or no government intervention.

Question 14

Import

Answer 14

Buying from abroad.

Question 15

Import quota

Answer 15

Restrictions on the quantity of imports.

Question 16

Import tariff

Answer 16

A tax imposed on imports.

Question 17

Infant industry argument

Answer 17

The argument that if domestic firms are as young as “infants,” in the absence of government intervention, they stand no chances of surviving and will becrushed by mature foreign rivals.

Question 18

Local content requirement

Answer 18

Requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country.

Question 19

Merchandise (goods)

Answer 19

Tangible products being traded.

Question 20

Modern trade theories

Answer 20

The major theories of international trade that were advanced in the 20th century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries.

Question 21

Nontariff barrier (NTB)

Answer 21

Trade barriers that rely on nontariff means to discourage imports.

Question 22

Opportunity cost

Answer 22

Cost of pursuing one activity at the expense of another activity, given the alternatives (other opportunities).

Question 23

Product life cycle theory

Answer 23

A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles.

Question 24

Protectionism

Answer 24

The idea that governments should actively protect domestic industries from imports and vigorously promote exports.

Question 25

Resource mobility

Answer 25

Assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry.

Question 26

Services

Answer 26

Intangible services being traded.

Question 27

Strategic trade policy

Answer 27

Government policy that provides companies a strategic advantage in international trade through subsidies and other supports.

Question 28

Strategic trade policy

Answer 28

A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success.

Question 29

Subsidy

Answer 29

Government payments to domestic firms.

Question 30

Tariff barrier

Answer 30

Trade barrier that relies on tariffs to discourage imports.

Question 31

Theory of absolute advantage

Answer 31

A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage.

Question 32

Theory of comparative advantage

Answer 32

A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.

Question 33

Theory of mercantilism

Answer 33

A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer.

Question 34

Theory of national competitive advantage of industries

Answer 34

A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond.”

Question 35

Trade deficit

Answer 35

An economic condition in which a nation imports more than it exports.

Question 36

Trade embargo

Answer 36

Politically motivated trade sanction against foreign countries to signal displeasure.

Question 37

Trade surplus

Answer 37

An economic condition in which a nation exports more than it imports.

Question 38

Voluntary export restraint (VER)

Answer 38

International agreement that shows that exporting countries voluntarily agree to restrict their exports.