Chapter 5

Question 1

Chapter 5 Title

Answer 1

Trading Internationally

Question 2

Export

Answer 2

Selling abroad

Question 3

Import

Answer 3

Buying from abroad

Question 4

Merchandise (goods)

Answer 4

Tangible products being traded

Question 5

Services

Answer 5

Intangible services being traded

Question 6

Trade deficit

Answer 6

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

Question 7

Trade surplus

Answer 7

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

Question 8

Balance of trade

Answer 8

The aggregation of importing and exporting leads to a country-level trade surplus or deficit

Question 9

Classical trade theories

Answer 9

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

Question 10

Modern trade theories

Answer 10

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

Question 11

Theory of mercantilism

Answer 11

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 12

Protectionism

Answer 12

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

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

Theory of absolute advantage

Answer 14

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

Question 15

Absolute advantage

Answer 15

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

Question 16

Theory of comparative advantage

Answer 16

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

Question 17

Comparative advantage

Answer 17

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

Question 18

Opportunity cost

Answer 18

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

Question 19

Factor endowment

Answer 19

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

Question 20

Factor endowment theory (Heckscher-Ohlin theory)

Answer 20

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

Question 21

Product life cycle theory

Answer 21

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

Question 22

Strategic trade theory

Answer 22

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

Question 23

First-mover advantage

Answer 23

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

Question 23

Theory of national competitive advantage of industries

Answer 23

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

Question 23

Strategic trade policy

Answer 23

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

Question 23

“Diamond” theory

Answer 23

A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond”
- Firm strategy, structure, and rivalry (top)
- Domestic demand conditions (right)
- Country factor endowments (left)
- Related and supporting industries (bottom)

Question 24

Resource mobility

Answer 24

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

Question 25

Tariff barrier

Answer 25

Trade barrier that relies on tariffs to discourage imports

Question 26

Import tariff

Answer 26

A tax imposed on imports

Question 27

Deadweight cost

Answer 27

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

Question 28

Nontariff barrier (NTB)

Answer 28

Trade barriers that rely on nontariff means to discourage imports

Question 29

Subsidy

Answer 29

Government payments to domestic firms

Question 30

Import quota

Answer 30

Restrictions on the quantity of imports

Question 31

Voluntary export restraint (VER)

Answer 31

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

Question 32

Local content requirement

Answer 32

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

Question 33

Administrative policy

Answer 33

Bureaucratic rules that make it harder to import foreign goods

Question 34

Antidumping duty

Answer 34

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

Question 35

Infant industry argument

Answer 35

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

Question 36

Trade embargo

Answer 36

Politically motivated trade sanctions against foreign countries to signal displeasure