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Chapter 5—Trading Internationally

TRUE/FALSE

1. Trade deficit occurs when a nation exports more than it imports.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 5 OBJ: LO: 5-1 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

2. Both exporting and importing are taken into account when calculating balance of trade.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 6 OBJ: LO: 5-1 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

3. The theory of mercantilism viewed international trade as a zero-sum game.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

4. By trying to be self-sufficient and producing a wide range of goods, mercantilist policies help
sustain the wealth of a nation in the long run.

ANS: F PTS: 1 DIF: Difficulty: Moderate


REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

5. The theory of absolute advantage is categorized as a classical theory of international trade.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

6. The basic concept of protectionism and mercantilism is the same.

ANS: T PTS: 1 DIF: Difficulty: Moderate


REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

7. Economist Adam Smith proposed the theory of comparative advantage.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

8. The Heckscher-Ohlin theory proposed that nations will develop comparative advantage based on
their locally abundant factors.

ANS: T PTS: 1 DIF: Difficulty: Moderate


REF: p. 12 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

9. The concept of opportunity cost is crucial to the theory of comparative advantage.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 12 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

10. The product life cycle theory is the first dynamic theory to account for changes in the patterns of
trade over time.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 13 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

11. Government intervention in international trade was proposed by the factor endowment theory.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 14 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

12. The strategic trade theory was mainly proposed for low capital-investment industries.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 14 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

13. Strategic trade theory advocates mercantilist policy for all industries.

ANS: F PTS: 1 DIF: Difficulty: Moderate


REF: p. 15 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

14. The product life cycle theory is popularly known as the “diamond” theory.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 17 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

15. The theory of national competitive advantage of industries does not take domestic demand
conditions into account.

ANS: F PTS: 1 DIF: Difficulty: Moderate


REF: p. 17 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

16. Factor endowments is one of the four interacting aspects of the theory of national competitive
advantage of industries.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 17 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

17. Classical theories are based on the assumption of perfect resource mobility.

ANS: T PTS: 1 DIF: Difficulty: Moderate


REF: p. 18 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

18. Classical theories assume no foreign exchange complications.

ANS: T PTS: 1 DIF: Difficulty: Moderate


REF: p. 18 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

19. The theory of national competitive advantage of industries assumes that comparative advantage
always resides in the lead innovation nation.

ANS: F PTS: 1 DIF: Difficulty: Moderate


REF: p. 19 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

20. The product life cycle theory explains patterns of trade based on factor endowments.

ANS: F PTS: 1 DIF: Difficulty: Moderate


REF: p. 19 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

21. The absolute advantage theory is considered as the forerunner of the free trade movement.

ANS: T PTS: 1 DIF: Difficulty: Moderate


REF: p. 19 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

22. In the context of tariff barriers, net losses that occur in an economy as a result of tariffs are known
as deadweight costs.

ANS: T PTS: 1 DIF: Difficulty: Moderate


REF: p. 20 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

23. Deadweight costs occur in an economy as a result of VER.

ANS: F PTS: 1 DIF: Difficulty: Moderate


REF: p. 20 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

24. In the context of tariff barriers, deadweight = total inefficiency - net gain.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 20 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge
25. Subsidies are nontariff barriers.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 22 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

26. In the context of NTBs, VERs are government payments to domestic firms.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 22 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

27. Local content requirements require a certain proportion of the value of the goods made in one
country to originate from that country.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 23 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

28. In the context of NTBs, administrative policies require a certain proportion of the value of the
goods made in one country to originate from that country.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 23 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

29. Antidumping duties are a type of tariff barrier.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 24 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

30. The infant industry argument demands lesser government intervention in international trade.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 24 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

31. One of the arguments against free trade is the necessity to safeguard domestic industries.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 24 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

32. Antidumping duties are levied on a country’s exports.

ANS: F PTS: 1 DIF: Difficulty: Easy


REF: p. 24 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

33. Political arguments against free trade focus on protectionism and infant industries.
ANS: F PTS: 1 DIF: Difficulty: Easy
REF: pp. 24-25 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

34. Trade embargoes are a means of trade intervention.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 25 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

35. Environmental and social responsibility can be used as political arguments to initiate trade
intervention against certain countries.

ANS: T PTS: 1 DIF: Difficulty: Easy


REF: p. 25 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

MULTIPLE CHOICE

1. A trade _____ is an economic condition in which a nation imports more than it exports.
a. deficit
b. surplus
c. embargo
d. VER
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 5 OBJ: LO: 5-1 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

2. Protectionism is similar to mercantilism as they both advocated _____.


a. dividing the nations of the world into three
categories based on its innovation capabilities
b. developing comparative advantages based on
a nation’s locally abundant factors
c. specializing in economic activities in which a
nation can have an absolute advantage
d. government involvement in international
trade
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

3. By trying to be self-sufficient and producing a wide range of goods, _____ policies reduce the
wealth of a nation in the long run.
a. absolute advantage
b. laissez faire
c. free trade
d. mercantilist
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

4. The _____ theory viewed international trade as a zero-sum game.


a. comparative advantage
b. mercantilism
c. strategic trade
d. national competitive advantage of industries
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

5. The _____ principle advocated that governments should actively protect domestic industries from
imports and vigorously promote exports.
a. comparative advantage
b. absolute advantage
c. protectionism
d. factor endowment
ANS: C PTS: 1 DIF: Difficulty: Easy
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

6. Which of the following ideas is closely linked to the theory of absolute advantage?
a. All international trade must be closely
regulated by governments.
b. Free market forces should determine how
much to trade with minimal government
intervention.
c. Governments should actively protect
domestic industries from imports and
vigorously promote exports.
d. Nations should specialize in economic
activities in which they have comparative
advantage.
ANS: B PTS: 1 DIF: Difficulty: Moderate
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

7. Which of the following is a classical theory of international trade?


a. Comparative advantage theory
b. Product life cycle theory
c. Strategic trade theory
d. National competitive advantage of industries
theory
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

8. Which of the following is a modern trade theory?


a. Comparative advantage
b. National competitive advantage
c. Mercantilism
d. Absolute advantage
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

9. Which of the following is true of the absolute advantage theory of international trade?
a. It emphasizes relative advantage in one
economic activity that one nation enjoys in
comparison with other nations.
b. It divides the countries of the world into three
categories based on innovation.
c. It advocates extensive government
intervention in international trade.
d. It was the first theory that advocated free
trade.
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

10. The _____ theory is based on the assumption that the wealth of the world is fixed.
a. product life cycle
b. mercantilism
c. strategic trade
d. national competitive advantage of industries
ANS: B PTS: 1 DIF: Difficulty: Moderate
REF: p. 8 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension
11. Which of the following trade theories divides the nations of the world into three categories?
a. National competitive advantage of industries
b. Strategic trade
c. Factor endowment
d. Product life cycle
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 12 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

12. In which of the following ways is the theory of comparative advantage linked to the Heckscher-
Ohlin theory?
a. Sustainability of wealth in the short run
b. Dynamic changes in the patterns of trade over
time
c. Dependency on a nation’s locally available
abundant factors
d. Extent to which government influences
international trade
ANS: C PTS: 1 DIF: Difficulty: Moderate
REF: p. 12 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension
C
13. Factor endowment is _____.
a. the amount of change that patterns of trade
undergo over time
b. the degree to which the government allows
free trade to exist in its international trade
c. the extent to which different countries
possess various factors of production
d. the cost of pursuing one activity at the
expense of another given alternative activity
ANS: C PTS: 1 DIF: Difficulty: Moderate
REF: p. 12 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

14. Which of the following was the first international trade theory to account for changes in the
patterns of trade over time?
a. Comparative advantage theory
b. Absolute advantage theory
c. Product life cycle theory
d. Factor endowment theory
ANS: C PTS: 1 DIF: Difficulty: Easy
REF: pp. 12-13 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

15. Which theory suggests that nations will develop comparative advantages based on their locally
abundant factors?
a. Heckscher-Ohlin theory
b. Absolute advantage theory
c. Comparative advantage theory
d. Strategic trade theory
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 12 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

16. Which of the following describes the maturing stage in the product life cycle theory?
a. The demand and ability to produce the
product grow in developed nations.
b. The product is commoditized.
c. The production of the product moves to low-
cost developing nations.
d. The production of a product commanding a
price premium will be concentrated in the
lead innovation nation.
ANS: A PTS: 1 DIF: Difficulty: Moderate
REF: p. 14 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

17. In the third stage of the product life cycle theory, the _____.
a. demand and ability to produce the product
grow in developed nations
b. product is standardized
c. lead innovation nation starts exporting more
and importing less
d. production of a product commanding a price
premium will be concentrated in the lead
innovation nation
ANS: B PTS: 1 DIF: Difficulty: Moderate
REF: p. 14 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

18. The _____ theory advocates government intervention in highly capital-intensive, high entry-
barrier industries in which domestic firms may have little chance without government assistance.
a. product life cycle
b. laissez faire
c. strategic trade
d. absolute advantage
ANS: C PTS: 1 DIF: Difficulty: Easy
REF: p. 14 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

19. Which of the following assumptions are present in the classical theories of international trade?
a. Different produces have different product life
cycles
b. Transportation costs should underpin foreign
trade
c. Resource mobility is not easy to achieve
d. No complications in foreign exchange
transactions
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 18 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

20. Which of the following describes resource mobility as assumed by the classical theories of
international trade?
a. It is the assumption that a resource used in
producing a product for one industry can be
shifted and put to use in another industry.
b. It is the notion that countries should share
their resources freely with other countries.
c. It is the expectation that all resource-based
transactions will have no foreign exchange
complications.
d. It is the assertion that all resources of a nation
should be directly controlled by the
government.
ANS: A PTS: 1 DIF: Difficulty: Moderate
REF: p. 18 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

21. Which theory is based on the notion that competitive advantage is dependant on the four
interacting aspects of factor endowments, domestic demand, firm strategy, and related and
supporting industries?
a. Strategic trade theory
b. Product life cycle theory
c. Comparative advantage theory
d. National competitive advantage of industries
theory
ANS: D PTS: 1 DIF: Difficulty: Easy
REF: p. 19 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

22. Which of the following is true of the strategic trade theory?


a. It provides direct policy advice.
b. It advocates complete deregulation of
international trade.
c. It explains patterns of trade based on factor
endowments.
d. It is the first theory to account for dynamic
changes in trade patterns.
ANS: A PTS: 1 DIF: Difficulty: Moderate
REF: p. 19 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

23. The theory of comparative advantage _____.


a. reduces the wealth of the nation in the short
run
b. provides direct policy advice
c. explains patterns of trade based on factor
endowments
d. was the first theory to incorporate dynamic
changes in patterns of trade
ANS: C PTS: 1 DIF: Difficulty: Moderate
REF: p. 19 OBJ: LO: 5-2 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

24. Deadweight costs are net losses that occur when _____ are imposed.
a. import tariffs
b. import quotas
c. voluntary export restraints
d. local content requirements
ANS: A PTS: 1 DIF: Difficulty: Moderate
REF: p. 20 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

25. In the context of tariff barriers, deadweight costs = _____.


a. total inefficiency - net gain
b. net loss - net gain
c. total inefficiency - net loss
d. total inefficiency - net gain - net loss
ANS: A PTS: 1 DIF: Difficulty: Moderate
REF: p. 20 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

26. Import quotas are a type of _____.


a. tariff barrier
b. nontariff barrier
c. voluntary export restraint
d. antidumping duty
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 22 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

27. _____ are government payments to domestic firms.


a. Tariffs
b. Subsidies
c. Quotas
d. Trade embargoes
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 22 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

28. _____ are restrictions on the quantity of imports.


a. VERs
b. Import quotas
c. Subsidies
d. Antidumping duties
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 22 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

29. _____ are the most direct denial of absolute or comparative advantage.
a. Quotas
b. Tariffs
c. Local content requirements
d. Subsidies
ANS: A PTS: 1 DIF: Difficulty: Moderate
REF: p. 22 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

30. Which of the following is true of voluntary export restraints?


a. It is an extra tax imposed by a country on its
exports.
b. It is an example of a tariff barrier.
c. It is a government payment to domestic firms.
d. It is an export quota levied by a country on
the quantity of its exports.
ANS: D PTS: 1 DIF: Difficulty: Easy
REF: p. 22 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

31. _____ are rules stipulating that a certain proportion of the value of the goods made in one country
must originate from that country.
a. Voluntary export restraints
b. Local content requirements
c. Import quotas
d. Trade embargoes
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 23 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

32. In the context of NTBs, _____ are bureaucratic rules that make it harder to import foreign goods.
a. VERs
b. administrative policies
c. local content requirements
d. deregulation policies
ANS: B PTS: 1 DIF: Difficulty: Easy
REF: p. 23 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

33. _____ are tariffs levied on imports sold below costs to drive domestic firms out of business.
a. Antidumping duties
b. Import quotas
c. Local content requirements
d. Voluntary export requirements
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 24 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge
34. Which of the following can be considered as an economic argument against free trade?
a. National security
b. Foreign policy
c. Consumer protection
d. Infant industry
ANS: D PTS: 1 DIF: Difficulty: Moderate
REF: p. 24 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension

35. _____ are politically motivated trade sanctions against foreign countries to signal displeasure.
a. Trade embargoes
b. VERs
c. Subsidies
d. Antidumping duties
ANS: A PTS: 1 DIF: Difficulty: Easy
REF: p. 25 OBJ: LO: 5-3 NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge

ESSAY

1. Briefly explain the strengths and weaknesses of the absolute advantage and comparative
advantage trade theories.

ANS:
The economic advantage one nation enjoys that is absolutely superior to other nations
summarizes the theory of absolute advantage. By specializing and trading, each nation produces
more and consumes more. Therefore, the wealth of all trading nations, and the world overall,
increases. This theory serves as the forerunner of the free trade movement, and defeats
mercantilism, at least intellectually. However, when one nation is inferior to another, the theory is
unable to provide any advice; and when there are many nations, it may be difficult to find an
absolute advantage.
The theory of comparative advantage advocates the relative advantage in one economic activity
that one nation can enjoys in comparison with other nations. The theory offers more realistic
guidance to nations interested in trade but having no absolute advantage and explains patterns of
trade based on factor endowments. However, this theory assumes that comparative advantage and
factor endowments do not change over time.

PTS: 1 DIF: Difficulty: Moderate REF: p. 19


OBJ: LO: 5-2 NAT: BUSPROG: Analytic KEY: Bloom's:
Comprehension

2. Briefly explain the classical theory of mercantilism.

ANS:
According to the theory of mercantilism, international trade is a zero-sum game and governments
should protect domestic industries and promote exports. However, this theory was debated on
aspects of inefficient allocation of resources and reduction in the wealth of the nation in the long
run.

PTS: 1 DIF: Difficulty: Easy REF: p. 9


OBJ: LO: 5-2 NAT: BUSPROG: Analytic KEY: Bloom's: Knowledge

3. Discuss the characteristics of the modern trade theories.

ANS:
The product life cycle theory accounts for changes in the patterns of trade over time by focusing
on product life cycles. It explains that comparative advantage first resides in the lead innovation
nation, which exports to other nations. Production migrates to other advanced nations and then
developing nations in different product life cycle stages. This theory is the first theory to
incorporate dynamic changes in patterns of trade.
The strategic trade theory suggests that strategic intervention by governments in certain industries
can enhance their odds for international success. This theory provides direct policy advice, is
more realistic, and positively incorporates the role of governments in trade.
The theory of national competitive advantage of industries suggests that the competitive
advantage of certain industries in different nations depends on four aspects that form a
"diamond." The four aspects are: 1) factor endowments, 2) domestic demand, 3) firm strategy,
structure, and rivalry, and 4) related and supporting industries. This theory is the most recent,
most complex, and most realistic among various theories.

PTS: 1 DIF: Difficulty: Moderate REF: p. 19


OBJ: LO: 5-2 NAT: BUSPROG: Analytic KEY: Bloom's:
Comprehension

4. Elaborate on Michael Porter’s “diamond” theory.

ANS:
The “diamond” theory focuses on why certain industries within a nation are competitive
internationally. The four aspects to this theory are (1) factor endowments, (2) domestic demand,
(3) firm strategy, structure, and rivalry, and (4) related and supporting industries.
Factor endowments refer to the natural and human resource repertoires. Tough domestic demand
propels firms to scale new heights. Domestic firm strategy, structure, and rivalry in one industry
play a huge role in its international success or failure. Related and supporting industries provide
the foundation upon which key industries can excel.
This theory is the most recent, complex, and most realistic among various theories. As a
multilevel theory, it directly connects research on firms, industries, and nations. However, this
theory has not been comprehensively tested. Some critics argue that the “diamond” theory places
too much emphasis on domestic conditions.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 17-18


OBJ: LO: 5-2 NAT: BUSPROG: Analytic KEY: Bloom's:
Comprehension

5. Briefly elaborate on any three nontariff barriers (NTBs).

ANS:

Non-tariff barriers include subsidies, import quotas, export restraints, local content requirements,
administrative policies, and antidumping duties. Subsidies are government payments to domestic
firms. Import quotas are restrictions on the quantity of imports and are the most straightforward
denial of absolute or comparative advantage. Voluntary export restraints are international
agreements indicating that exporting countries voluntarily agree to restrict their exports. Local
content requirements require a certain proportion of the value of the goods made in one country to
originate from that country. Administrative policies refer to bureaucratic rules that make it harder
to import foreign goods. Antidumping duties are tariffs levied on imports that have been
"dumped" (selling below costs to "unfairly" drive domestic firms out of business). Trade barriers
reduce or eliminate international trade.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 22-23


OBJ: LO: 5-3 NAT: BUSPROG: Analytic KEY: Bloom's:
Comprehension

6. Discuss the economic arguments against free trade.

ANS:
The oldest and most frequently used economic argument against free trade is the urge to protect
domestic industries, firms, and jobs from allegedly "unfair" foreign competition.
Another argument is the infant industry argument, according to which, if domestic firms are as
young as “infants,” in the absence of government intervention, they stand no chances of surviving
and will be crushed by mature foreign rivals. While this argument is sometimes legitimate,
governments and firms have a tendency to abuse it. Some protected infant industries may never
grow up.

PTS: 1 DIF: Difficulty: Moderate REF: p. 24


OBJ: LO: 5-3 NAT: BUSPROG: Analytic KEY: Bloom's:
Comprehension

7. Discuss the political arguments against free trade.

ANS:
Political arguments against free trade include national security, consumer protection, foreign
policy, and environmental and social responsibility. National security is often invoked to protect
defense-related industries. Many nations fear that if they rely on arms imports, their national
security may be compromised if there are political or diplomatic disagreements between them and
the arms-producing nation.
Consumer protection has frequently been used as an argument for nations to erect trade barriers.
Foreign policy objectives are often sought through trade intervention. Trade embargoes are
politically motivated trade sanctions against foreign countries to signal displeasure.
Environmental and social responsibility can be used as political arguments to initiate trade
intervention against certain countries.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 24-25


OBJ: LO: 5-3 NAT: BUSPROG: Analytic KEY: Bloom's:
Comprehension

8. What are the few factors that determine the success and failure of firms’ exports around the
globe?

ANS:
The core perspectives include discovering and leverage comparative advantage of world-class
locations, monitoring and nurturing the current comparative advantage of certain locations, and
taking advantage of new locations, being politically active to demonstrate, safeguard, and
advance the gains from international trade.

PTS: 1 DIF: Difficulty: Moderate REF: p. 28


OBJ: LO: 5-5 NAT: BUSPROG: Analytic KEY: Bloom's:
Comprehension

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