Chapter 6

Question 1

Trade theory helps government policymakers and firm manager focus on these questions:

Answer 1

• What products should we import & export?
• How much should we trade?
• With whom should we trade?

Question 2

Some trade theories prescribe that

Answer 2

government should influence trade patterns; others propose a laissez-faire treatment for free trade

Question 3

According to mercantilism

Answer 3

countries should export more than they import

Question 4

Favourable balance of trade (trade surplus)

Answer 4

indicates that a country is exporting more than it imports

Question 5

Unfavourable balance of trade (trade deficit)

Answer 5

indicates a country is importing more than it exports

Question 6

Neomercantilism

Answer 6

is the running of a favourable balance of trade to achieve some social or political objective

Question 7

Running a favourable balance of trade

Answer 7

is not necessarily beneficial

Question 8

A country that practices neomercantilism

Answer 8

attempts to run an export surplus to achieve a social or political objective

Question 9

Absolute advantage

Answer 9

holds that different countries produce different things more efficiently than others and that consumers should not have to buy domestically produced goods when they can buy them more cheaply abroad

Question 10

According to Adam Smith

Answer 10

a country’s wealth is based on available goods and services for its residents rather than on gold

Question 11

Specialization increases efficiency because

Answer 11

• labour skills improve
• less time is lost by not switching production
• it incentivizes better working methods

Question 12

Natural advantage

Answer 12

considers climate, natural resources, and labour force availability

Question 13

Acquired advantage

Answer 13

occurs through either product of process technology

Question 14

Free trade will bring

Answer 14

• specialization
• higher global output

Question 15

Gains from trade will occur

Answer 15

even in a country that has absolute advantage in all products, because the country must give up less efficient output to produce more efficient output

Question 16

Full employment is

Answer 16

not necessarily a valid assumption of absolute and comparative advantage

Question 17

Countries’ goals

Answer 17

may not be limited to economic efficiency

Question 18

Countries’ absolute and comparative advantages

Answer 18

can change

Question 19

Free trade advantages

Answer 19

apply to services as well as physical products

Question 20

Neither domestic labour mobility nor international labour immobility

Answer 20

is as great as implied by the free trade theories

Question 21

Theory of country size

Answer 21

countries with larger land masses usually depend less on trade than smaller ones

Question 22

Bigger countries (in terms of land mass) differ in several ways from smaller countries. They

Answer 22

• tend to export a smaller portion of output and import a smaller part of consumption
• have higher average transport costs for foreign trade

Question 23

Larger economies

Answer 23

are the biggest traders because they produce and consume more

Question 24

Factor proportions theory

Answer 24

differences in countries’ proportional endowments of labour, land, and capital explain differences in these endowments’ costs

Question 25

According to the factor proportions theory

Answer 25

countries have their best trade advantage when depending on their relatively abundant production factors

Question 26

Production factors, such as land and labour

Answer 26

are not homogeneous

Question 27

Companies may substitute

Answer 27

capital for labour, depending on the cost of each

Question 28

Countries with bigger markets

Answer 28

depend more on producing products requiring larger production runs

Question 29

Most new products

Answer 29

originate in developed countries

Question 30

Developed countries trade primarily with each other because they

Answer 30

- produce and consume more - emphasize technical breakthroughs in different industrial sectors

Question 31

Product differentiation

Answer 31

causes countries to conduct two-way trade in seemingly similar products

Question 32

Trading partners are affected by

Answer 32

- cultural similarity - political relations between countries - distance

Question 33

Product life cycle (PLC) theory of trade

Answer 33

1) introduction 2) growth 3) maturity 4) decline

Question 34

According to the PLC theory of trade

Answer 34

the production location for many products moves from one country to another depending on the stage in the product's life cycle

Question 35

The introduction stage in PLC is marked by

Answer 35

- innovation in response to observed need - exporting by the innovative country - evolving product characteristics

Question 36

Growth in PLC is characterized by

Answer 36

- increases in exports by the innovating country - more competition - increased capital intensity - some foreign production

Question 37

Maturity in PLC is characterized by

Answer 37

- a decline in exports from the innovating country - more product standardization - more capital intensity - increased competitiveness of price - production start-ups in emerging economies

Question 38

Decline in PLC is characterized by

Answer 38

- a concentration of production in developing countries - an innovating country becoming a net importer

Question 39

Not all products

Answer 39

conform to the dynamics of the PLC

Question 40

Diamond of national competitive advantage

Answer 40

a theory showing 4 features as important for competitive superiority: 1) demand conditions 2) factor conditions 3) related & supporting industries 4) firm strategy, structure & rivalry

Question 41

According to the diamond of national competitive advantage theory

Answer 41

companies development and maintenance of internationally competitive products depends on favourable - demand conditions - factor conditions - related and supporting industries - firm strategy, structure and rivalry

Question 42

Domestic existence of all conditions

Answer 42

- does not guarantee an industry will develop - is not necessary with globalization

Question 43

Factor mobility theory

Answer 43

focuses on why production factors move, the effects of that movement on transforming countries' factor endowments, and the impact of international factor mobility on trade

Question 44

People and capital move internationally to

Answer 44

- gain more income - flee adverse political situations

Question 45

Expatriate

Answer 45

a person who lives outside their native country

Question 46

Factor movements

Answer 46

alter factor endowments

Question 47

Brain drain

Answer 47

countries lose potential productive resources when educated people leave

Question 48

There are pressures for the most abundant factors

Answer 48

to move to areas of scarcity

Question 49

Factor mobility through foreign investment often

Answer 49

stimulates trade because of - the need for components - the parent company's ability to sell complementary products - the need for equipment for subsidiaries