Chapter 5

Question 1

Exporting:

Answer 1

Selling abroad

Question 2

Importing:

Answer 2

Buying from abroad

Question 3

Trade in goods (merchandise trade):

Answer 3

Sale of physical goods across national borders

Question 4

Trade in service:

Answer 4

Sale of intangibles across national borders

Question 5

Trade deficit:

Answer 5

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

Question 6

Trade surplus:

Answer 6

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

Question 6

Balance of trade:

Answer 6

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

Question 7

Classic trade theories:

Answer 7

The major theories of international trade advanced before mid-20th
century; mercantilism, absolute advantage, comparative advantage and factor endowments

Question 8

Modern trade theories:

Answer 8

The major theories of international trade advanced in the second half of
the 20th century: product life cycle, strategic trade and national competitive advantage

Question 9

Theory of mercantilism:

Answer 9

A theory that holds that the wealth of the world (measured in gold and
silver) is fixed and that a nation that exports more and imports less would enjoy the net inflows of
gold and silver thus become Richter

Question 10

Free trade:

Answer 10

Trade unheated by trade barriers

Question 11

Theory of absolute advantage:

Answer 11

A theory that suggests that under fire trade, each nation gains by
specialising in economic activities in which it has absolute advantage

Question 12

Absolute advantage:

Answer 12

The economic advantage one nations enjoys due to higher productivity in an
economic activity

Question 13

The theory of comparative advantage:

Answer 13

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

Question 14

Comparative advantage:

Answer 14

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

Question 15

Opportunity cost:

Answer 15

Given the alternatives (opportunities), the cost of pursuing one activity at the
expense of another activity

Question 16

Resource (factor) endowments:

Answer 16

The extent to which different countries possess various resources
(factors), such as labour, land and technology

Question 17

Factor endowment theory (or Heckscher-Ohlin theory):

Answer 17

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

Question 18

Product life cycle theory:

Answer 18

A theory that accounts for changes in patterns of trade over time by
focusing on product life cycles
- Innovations originate in the US
- Products follow a three stage path
1) New Product Stage
2) Maturing Product Stage
3) Standardized Product Stage
- Production gradually shifts from developed to developing countries

Question 19

Strategic trade theory:

Answer 19

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

Question 20

First mover advantage:

Answer 20

Advantages that first entrants enjoy and don’t share with late entrants

Question 21

Strategic trade policies:

Answer 21

Government subsidies inspired by strategic trade theory

Question 22

Theory of national competitive advantage of industries (or ‘diamond’ model):

Answer 22

A theory that suggests that the competitive advantage of certain industries in different nations depends off four aspects that form a ‘diamond’
1) Factor Conditions
2) Demand Conditions
3) Related and Supporting Industries
4) Firm Strategy, Structure, and Rivalry

Question 23

Michel Porter: National competitive advantage is created through opportunities and pressures created by:

Answer 23

• resource endowments in terms of natural and Human Resources
• sophistication and scale of domestic demand
• strategies, structure and rivalry of domestic competitors
• availability of related and supporting industries

Question 24

Resource mobility:

Answer 24

The ability to move resources from one part of a business to another

Question 25

Transportation costs:

Answer 25

The costs incurred moving products from one country to another

Question 26

Protectionism:

Answer 26

Government policies designed to protect a domestic industry from foreign competition

Question 27

Import tariff:

Answer 27

A tax imposed on imports

Question 28

Deadweight loss:

Answer 28

Net losses that occur in an economy as the result of tariffs Deadweight loss = Loss to consumer − Gains to farmers − Tariff revenues to government

Question 29

Non-tariff barriers (NTBs):

Answer 29

Government policies designed to protect a domestic industry from foreign competition

Question 30

Subsidies:

Answer 30

Government payments to (domestic) firms

Question 31

Import quotas:

Answer 31

Restrictions on the quantity of imports

Question 32

Anti-dumping duties:

Answer 32

Cost levied on imports that have been ‘dumped’ (selling below cost to ‘unfairly’ drive domestic firms out of business)

Question 33

Public procurement:

Answer 33

Units of government buying products or services

Question 34

Local content requirements:

Answer 34

A requirement that value added is created locally

Question 35

Infant industry argument:

Answer 35

The argument that temporary protection of young industry may help them to attain international competitiveness in the long run

Question 36

Trade embargoes:

Answer 36

Politically motivated trade sanctions against foreign countries to signal displeasure

Question 37

Big trading countries of international trade

Answer 37

* The USA and China are the biggest exporters and importers of goods.

Question 38

Appreciate how economic and political institutions influence international trade

Answer 38

* The net impact of various tariffs and NTBs is that the whole nation is worse off while certain special interest groups (such as certain industries, firms and regions) benefit. * Economic arguments against free trade centre on (1) protection from ‘unfair’ competition, (2) infant industries and (3) unequal distribution of cost and benefits. * Political arguments against free trade focus on (1) national security, (2) consumer protection, (3) foreign policy and (4) environmental and social responsibility.