UNIT 1

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32/59415/15210488.cw/index.html

Question 1
Which trade theory holds that nations can increase their economic well-being by
specializing in the production of goods they produce more efficiently than anyone
else?
The theory of absolute advantage.
The international product life cycle theory.
The theory of comparative advantage.
The factor endowment theory.
Question 2.
Which theory holds that nations should produce those goods for which it has the
greatest relative advantage?
The theory of absolute advantage.
The factor endowment theory.
The theory of relative advantage.
None of the above.

End of Question 2

Question 3.

Which of the following holds that a government can improve the economic wellbeing of a country by encouraging exports and discouraging imports without a
reliance on previous metals?

Quotas.
Neo-mercantilism.
Mercantilism.
The Leontief paradox.

End of Question 3

Question 4.
In country A, it takes 10 labor hours to produce cloth and 20 labor hours to produce
grain. In country B, it takes 20 labor hours to produce cloth and 10 labor hours to
produce grain. Which country should produce grain?

A.
Both A and B should produce grain.
B.
No country should produce grain.

End of Question 4

Question 5.
In North, it takes 50 labor hours to produce cloth and 100 hours to produce grain. In
South, it takes 200 labor hours to produce cloth and 200 hours to produce grain.
Which of the following statements is true?

South has an absolute advantage in the production of grain.

North should produce grain.
North has a comparative advantage in the production of cloth.
South has an absolute advantage in the production of both cloth and grain.

End of Question 5

Question 6.
In country X, it takes 50 labor hours to produce cloth and 100 hours to produce
grain. In country Y, it takes 200 labor hours to produce cloth and 200 hours to
produce grain. At what price would X start to be willing to trade with Y?

More than half a unit of cloth per unit of grain.

More than a quarter unit of cloth per unit of grain.
More than a quarter unit of grain per unit of cloth.

More than half a unit of grain per unit of cloth.

End of Question 6

Question 7.
Which of the following theories holds that countries will produce and export
products that use large amounts of production factors that they have in abundance?

Mercantilism.
The theory of absolute advantage.
The factor endowment theory.
None of the above.

End of Question 7

Question 8.
Vernon's international product life cycle theory:

helps explain why a product that begins as a nation export often ends up
becoming an import.
helps explain the movement from absolute advantage to comparative
advantage.
extends the concept of comparative advantage by bringing into consideration
the endowment and cost of factors of production.
shows why the United States, surprisingly, exports relatively more laborintensive goods and imports capital-intensive goods.

End of Question 8

Question 9.
Which of the following products have moved through the IPLC and are now in the
standardized product stage?

Televisions.
DVD players.
Computer memory cards.
All of the above.

End of Question 9

Question 10.
Which of the following factors influence trade?

Government.
The stage of development of a product.
The relative price of factors of productions.
All of the above.

End of Question 10

Question 11.
If the price of the Japanese Yen declines considerably against the British Pound:

British goods are relatively cheaper for Japanese consumers.

it is always because of British government interference.
Japanese goods are relatively cheaper for British consumers.
it is always because of Japanese government interference.

End of Question 11

Question 12.
If a Japanese firm sold $10 billion of machinery in US and the US dollar declined
against the Japanese currency:

the Japanese company will make sure that the difference is paid back to its
affiliate.
the Japanese firm will report less revenue (in terms of Yen) than if the US
dollar had remained stable.
the Japanese firm will report more revenue (in terms of Yen) than if the US
dollar had remained stable.
the Japanese company will move funds to the home country.

End of Question 12

Question 13.
Which of the following is not a reason to erect trade barriers?

Encourage local production.

Protect local jobs.
Promote import activity.

Reduce reliance on foreign suppliers.

End of Question 13

Question 14.
Which of the following countries is not a member of OPEC?

Afghanistan.
Venezuela.
Iran.
Iraq.

End of Question 14

Question 15.
A company of the US has excess products that it does not want to sell into the US
market because it will bring down the domestic price and instead sells it at another
country at below the cost of production. What is this called?

Dumping.
International trade
Countervailing.
None of the above.

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Which of the following countries is the largest exporter of flowers amongst African
countries?

Kenya
Ethiopia
Zimbabwe
Egypt

End of Question 1

Question 2.
The "Silk Route" connected Roman traders to which of the following civilizations?

Indian
China

Mesopotamia
Egyptian

End of Question 2

Question 3.
Which of the following economists introduced the doctrine of laissez-faire?

Eli Heckscher
Bertil Ohlin
David Ricardo
Adam Smith

End of Question 3

Question 4.
The classical theory does not consider differences in

transportation costs
customer wants
prices
technology

End of Question 4

Question 5.
The Leontief paradox stated that

USAs exports and imports both were capital-intensive

USAs exports and imports both were labour-intensive
USAs exports were capital-intensive and imports were labour-intensive
USAs exports were labour-intensive and imports were capital-intensive

End of Question 5

Question 6.
How many attributes does Porters Diamond consist of?

3
4
6
5

End of Question 6

Question 7.
Delhi-based organization Dev Bhumi is an initiative by retail giant

Walmart
Metro
Carrefour
Big Bazaar

End of Question 7

Question 8.
"Bhagwa" is an Indian variety of

kiwi
orange
mango
pomegranate

End of Question 8

Question 9.
Which of the following US companies has signed multiple deals in China?

DuPont
Exxon
General Electric
Walmart

End of Question 9

Question 10.
Paul Krugman is credited with the

factor proportions theory

law of factor price equalization
new trade theory
product life cycle theory

http://web.heuet.edu.cn/jpk/jxtj/TIF_05.htm

International Trade Theory

Multiple Choice Questions
WHY IS THE UNDERSTANDING OF INTERNATIONAL TRADE THEORY USEFUL TO
MANAGERS IN INTERNATIONAL BUSINESS?
1.

Trade theory helps managers and governmental policymakers focus on all of the following questions
EXCEPT:
a. whether to own production rather than buy from others (moderate, page 142)
b. what products to export
c. how much to trade
d. with whom to trade

2.

Which of the following best describes the two general types of theories about trade that pertain to
international business?
a. democratic and communist
b. descriptive and prescriptive (moderate, page 142)
c. market and command
d. ethical and unethical

3.

Which of the following types of trade theories poses questions of how much, which products, and
with whom a country will trade in the absence of restrictions?

a.
b.
c.
d.
4.

participative theories
democratic theories
descriptive theories (moderate, page 142)
communist theories

______________ trade theories help companies determine where to locate their production facilities
because, in the absence of governmental trade restrictions, exports of given products will move
from lower-cost to higher-cost production locations.
a. Democratic and communist
b. Market and command
c. Ethical and unethical
d. Descriptive and prescriptive (moderate, page 142)

EXPLAIN THE ARGUMENTS FOR AND AGAINST MERCANTILISM AND NEOMERCANTILISM.

5.

______________ held that a countrys wealth was measured by its holding of treasure, which
usually meant its gold.
a. Mercantilism (moderate, page 143)
b. Absolute advantage
c. Comparative advantage
d. Country size

6.

According to which of the following theories should countries export more than they import and, if
successful, receive gold from countries that run deficits?
a. absolute advantage
b. mercantilism (moderate, page 143)
c. comparative advantage
d. country size

7.

A favorable balance of trade indicates which of the following?

a. A country is importing more than it is exporting.
b. The country is importing products and services it cannot produce itself.
c. A country is exporting more than it is importing. (moderate, page 144)
d. The country is growing economically.

8.

A country that practices ______________ attempts to run an export surplus to achieve a social or
political objective.
a. consumer sovereignty
b. competitive surplusing
c. absolute surplusing
d. neomercantilism (moderate, page 144)

WHAT IS THE DIFFERENCE BETWEEN ABSOLUTE ADVANTAGE AND COMPARATIVE

ADVANTAGE?
9.

Which of the following theories holds that different countries produce some goods more efficiently
than others; thus, global efficiency can increase through free trade?
a. absolute advantage (moderate, page 144)
b. mercantilism

c. comparative advantage
d. country size
10.

Specialization, according to the theory of absolute advantage, enables countries to increase their
efficiency for all of the following reasons EXCEPT:
a. labor can become more skilled by repeating the same tasks
b. developing countries reduce their dependence on former colonizing countries (difficult,
page 145)
c. labor does not lose time by switching from the production of one kind of product to another
d. long production runs provide incentives for the development of more effective working
methods

11.

The theory of _______________ indicates that there may still be global efficiency gains from trade
if a country specialized in those products it can produce more efficiently than other products
regardless of whether other countries can produce those same products even more efficiently.
a. mercantilism
b. absolute advantage
c. comparative advantage (moderate, page 147)
d. country size

12.

According to the theory of comparative advantage, a country should:

a. be self sufficient if it can produce all products more efficiently than other countries can.
b. export more than it imports.
c. export goods requiring short production runs if it is a relatively small country.
d. specialize in producing products it can produce more efficiently regardless of whether
other countries have an absolute advantage in their production. (difficult, page 147)

WHAT ASSUMPTIONS UNDERLIE THE THEORIES OF SPECIALIZATION IN INTERNATIONAL

TRADE? WHAT ARE THE LIMITATIONS OF THESE ASSUMPTIONS?
13.

_______________ is NOT a valid assumption of absolute and comparative advantage.

a. Full employment (moderate, page 149)
b. Process technology
c. Product technology
d. Competitive advantage

14.

An assumption that underlies theories of specialization in international trade is that:

a. countries without an absolute advantage in a product should specialize in transporting products.
b. resources are domestically mobile from the production of one product to another.
(difficult, page 150)
c. resources are internationally mobile from the production of one product to another.
d. producers and countries have objectives other than economic efficiency.

15.

If it costs more to transport goods internationally than is saved through specialization, then:
a. the advantages of trade are positively correlated.
b. countries will import transportation services.
c. the advantages of trade are negated. (moderate, page 150)
d. companies will divert resources to the development of more efficient transportation.

WHY ARE LARGER COUNTRIES USUALLY LESS DEPENDENT ON INTERNATIONAL TRADE

THAN SMALL COUNTRIES ARE?

16.

Bigger countries, as opposed to smaller countries, tend to:

a. export a larger portion of their output and import a larger part of their consumption.
b. have lower transport costs for foreign trade.
c. have less variety of resources.
d. export a smaller portion of output and import a smaller part of consumption. (difficult,
page 151)

17.

According to which of the following theories would countries with large land areas be more apt to
have varied climates and an assortment of natural resources than smaller countries would, thus
making them more self-sufficient?
a. country size (moderate, page 151)
b. mercantilism
c. absolute advantage
d. comparative advantage

18.

_______________ make(s) it more likely that small countries will trade internationally because
their costs of getting products over their borders are worth the effort.
a. Technological cost
b. Transport costs (moderate, page 151)
c. Labor costs
d. Political costs

EXPLAIN THE LOGIC OF THE FACTOR PROPORTIONS THEORY.

19.

According to the _______________, factors in relative abundance are cheaper than factors in
relative scarcity.
a. theory of mercantilism
b. theory of absolute advantage
c. factor-proportions theory (moderate, page 152)
d. theory of comparative advantage

20.

Which of the following theories indicates that differences in countries endowments of labor
compared to their endowments of land or capital explain differences in the cost of production
factors?
a. mercantilism
b. absolute advantage
c. comparative advantage
d. factor-proportions (moderate, page 152)

21.

Factor-proportions theory holds that if labor were abundant in comparison to land and capital, then:
a. labor costs would be low relative to land and capital costs. (moderate, page 152)
b. labor costs would be high relative to land and capital costs.
c. labor has immigrated from abroad.
d. it is the result of using labor-saving technology.

HOW DO TECHNOLOGICAL COMPLEXITIES COMPLICATE MANAGERS USE OF FACTOR

PROPORTIONS THEORY TO DETERMINE WHERE TO LOCATE THEIR PRODUCTION?

22.

The factor-proportions analysis becomes more complicated when:

a. labor is homogeneous.
b. the same products can be produced by different methods. (moderate, page 152)
c. product life cycles are short.
d. companies depend primarily on export markets.

23.

According to the factor-proportions theory, if Canada produces wheat with a capital-intensive

method, it does so because of its:
a. abundance of high-cost capital relative to labor cost.
b. cold climate that shortens growing seasons.
c. abundance of low-cost capital relative to labor cost. (moderate, page 152)
d. free trade agreement with the United States and Mexico.

24.

According to the factor-proportions theory, if India produces wheat with a labor-intensive method, it
is because of its:
a. abundance of capital relative to labor.
b. government subsidies to train labor.
c. import restrictions on wheat.
d. abundance of low-labor relative to low-cost capital. (moderate, page 152)

IN

WHAT TYPE OF COUNTRY ARE

PRODUCED? WHY?

25.

Most new products are produced in and exported from:

a. high-income industrial countries. (moderate, page 153)
b. middle-income developing countries.
c. lesser developed countries.
d. developing countries.

26.

Almost all new technology that results in new products and production methods originates in which
of the following?
a. developing countries
b. industrial countries (moderate, page 153)
c. very poor countries
d. very populated countries

27.

Which of the following is NOT a factor affecting the development of most new technology in
industrial countries as opposed to developing countries?
a. competition
b. demanding consumers
c. high unemployment (moderate, page 153)
d. high incomes

NEW

PRODUCTS

MORE

LIKELY TO

BE

HOW AND WHY DOES PRODUCTION SHIFT FROM ONE COUNTRY TO ANOTHER AS MANY
PRODUCTS GO THROUGH THEIR LIFE CYCLES?
28.

According to the _______________, the production location for many products moves from one
country to another as they go from introduction through decline.

a.
b.
c.
d.

factor-proportions theory
theory of mercantilism
theory of absolute advantage
the product life cycle theory of trade (moderate, page 153)

29. According to the product life cycle theory, developing countries have their best production
advantage in:
a. highly standardized products. (moderate, page 153)
b. new products.
c. products in their growth stage.
d. products with rapidly changing technologies.
30.

The introduction stage of the international product life cycle is marked by all of the following
EXCEPT:
a. innovation in response to observed need
b. innovating country becoming the net importer (moderate, page 153)
c. exporting by the innovative country
d. evolving product characteristics

31.

The production of a product in the introduction stage of the international product life cycle is most
likely to occur in:
a. developing countries.
b. very poor countries.
c. industrial countries. (moderate, page 153)
d. very populated countries.

WHY DOES MOST WORLD TRADE OCCUR AMONG COUNTRIES WITH SIMILAR
CHARACTERISTICS?
32.

Most trade theories emphasize that differences among countries create a basis for trade. These
differences are based on all of the following EXCEPT:
a. climate
b. factor endowment
c. innovative capability
d. country culture (moderate, page 157)

33.

The fact that so much trade takes place among industrial countries is due to the growing importance
of _______________ as opposed to _______________ in world trade.
a. acquired advantage, natural advantage (difficult, page 157)
b. natural advantage, acquired advantage
c. absolute advantage, acquired advantage
d. neomercantilism, mercantilism

34.

The fact that so much trade takes place among industrial countries is due to the growing importance
of ____________ as opposed to __________in world trade.
a. minerals, agricultural products
b. new and differentiated manufactured products, commodities (difficult, page 157)
c. strategic trade policy, laissez-faire trade policy
d. neomercantilism, mercantilism

35.

The _______________ says that once a company has developed a new product in response to
observed market conditions in the home market, it will turn to markets it sees as most similar to
those at home.
a. factor-proportions theory
b. theory of mercantilism
c. country-similarity theory (moderate, page 157)
d. theory of absolute advantage

36.

The amount of trade between two countries is positively affected by all of the following EXCEPT:
a. differentiated product characteristics
b. cultural similarity
c. favorable political relations with each other
d. similarities in natural resource endowments (moderate, page 158)

WHY DO MANY DEVELOPING COUNTRIES WORRY ABOUT EXCESS DEPENDENCE IN

WORLD TRADE?
37.

In a situation of _____________, a country would have no reliance on other countries for any
goods, services, or technologies.
a. independence (easy, page 159)
b. dependence
c. interdependence
d. congruence

38.

The development of trade relationships on the basis of mutual need is known as:
a. independence.
b. interdependence. (moderate, page 159)
c. dependence.
d. intradependence.

39.

Many developing countries worry about excess dependence on a single trading partner because:
a. they may not become industrialized as easily.
b. the trading partner is usually another developing country.
c. they are vulnerable to political and economic occurrences in the trading partner
country. (difficult, page 159)
d. market potential is lower for a single partner than for multiple partners.

40.

Many developing countries worry about excess dependence on a single commodity for export
earnings because:
a. it makes them more dependent on a single trading partner.
b. they cannot use earnings to buy a wide variety of imports.
c. such dependence uses their factor endowments inefficiently.
d. the commodities supply or demand problems have too adverse an effect on the
economy. (difficult, page 159)

WHAT IS A STRATEGIC TRADE POLICY?

41.

When government policy is directed toward improving the export competitiveness of a specific
industry, this policy is a:
a. strategic trade policy. (easy, page 160)
b. favorable balance of trade.

c. independence theory.
d. factor proportions theory.

42.

A strategic trade policy involves promoting:

a. self-sufficiency in production of military equipment.
b. development of industries that are competitive in export markets. (difficult, page 160)
c. favorable balances of trade for political reasons.
d. less dependence on commodities for export earnings.

43.

A government may upgrade its countrys export competitiveness through all of the following
EXCEPT:
a. education.
b. providing infrastructure.
c. persuading domestic customers to accept mediocre quality products and services.
(moderate, page 160)
d. promoting a highly competitive environment.

WHAT PROBLEMS HAVE EXISTED WHEN

DEVELOPMENT OF SPEICIFIC INDUSTRIES?

COUNTRIES

HAVE

TARGETED

THE

44.

Which of the following statements is FALSE regarding strategic trade policy?

a. A country may target an industry for which global demand never reaches expectations.
b. There has been a tendency for too many countries to identify the same industries, so excessive
competition has led to inadequate returns.
c. When relative conditions change in an industry, relative capabilities change as well.
d. It has usually resulted in significantly large payoffs. (difficult, page 162)

45.

When governments target a specific industry to make that industry internationally competitive:
a. they often encounter competition from industries in other countries whose governments
have also supported their development. (difficult, page 162)
b. critics claim that the gap between rich and poor grows.
c. they should emphasize small-scale production methods.
d. they have usually improved export earnings substantially.

46.

When governments target a specific industry to make that industry internationally competitive:
a. critics claim that the gap between rich and poor grows.
b. they sometimes target an industry for which global demand never reaches
expectations. (difficult, page 162)
c. they should emphasize small-scale production methods.
d. they have usually improved export earnings substantially.

WHAT ARE THE FOUR CONDITIONS IN THE PORTER DIAMOND? WHAT ARE THE
LIMITATIONS OF THE PORTER DIAMOND IN EXPLAINING COUNTRIES COMPETITIVE
ADVANTAGES?
47.

According to the Porter diamond, which of the following is NOT one of the four conditions that is
important for competitive superiority?
a. demand conditions
b. factor endowment conditions

c. country culture (moderate, page 163)

d. related and supporting industries

48.

Which of the following is FALSE regarding the limitations of the Porter diamond in explaining
countries competitive advantage?
a. The existence of the four favorable conditions does not guarantee that an industry will develop
in a given locale.
b. Companies in a country with favorable conditions may not try to compete in some industries
because they prefer to specialize in the production of other products.
c. A limitation of the Porter diamond concerns the increased ability of companies to gain market
information, production factors, and supplies from abroad.
d. The absence of any of the four conditions from the Porter diamond domestically will
prevent companies and industries from becoming globally competitive. (difficult, page
163)

49.

Which of the following does NOT describe a limitation of the Porter diamond?
a. Companies need to react only to domestic rivals, as foreign-based rivals do not pose a
threat to the local industry. (difficult, page 163)
b. Foreign rather than domestic demand conditions have spurred much of the recent growth for
many companies.
c. Domestic factor conditions can be augmented by foreign production factors.
d. If related and supporting industries are not available locally, materials and components are now
more easily brought in from abroad.

WHAT STRATEGIC ADVANTAGES MAY COMPANIES GAIN BY ENGAGING IN IMPORTING

AND EXPORTING?
50.

Which of the following is FALSE regarding the strategic advantages of exports?

a. Companies may export to utilize their capacities more fully than is possible by selling only
domestically.
b. By exporting and selling more, companies usually increase the cost per unit that they
produce. (difficult, page 165)
c. Many companies that are not the leaders in their domestic markets may be more active in
seeking export sales in order to counter the leaders domestic volume advantage.
d. By exporting and selling more, the market leader may garner cost advantages over its
competitors that even discourage the entry of other companies in the industry.

51.

Which of the following is NOT an additional cost that companies often encounter when exporting?
a. product adaptation
b. management time
c. product extension (moderate, page 165)
d. inventory increases

52.

Which of the following is FALSE regarding the strategic advantages of importing?

a. An importer might be able to spread its operating risk by developing alternative suppliers.
b. The importing company may gain access to new foreign products that complement its existing
lines, giving the importer more to sell.

c. If international procurement of supplies and components lowers costs or improves the quality
of finished products, the procuring company may then be better able to combat import
competition for the finished products.
d. The strategic advantages of importing far outweigh the strategic advantages of
exporting. (difficult, page 166)

Essay Questions
51.

In a short essay, discuss why the understanding of international trade theory

is useful to managers in international business.

Answer
Trade in goods and services is one of the means by which countries are linked
economically. Authorities in all countries wrestle with the questions of what,
how much, and with whom their country should import and export. Once they
make decisions, officials enact policies to achieve the desired results. These
policies have an impact on business because they affect which countries can
produce given products more efficiently and whether countries will permit
imports to compete against their domestically-produced goods and services. In
turn, a countrys policies influence which products companies might export to
given countries, as well as what and where companies can produce in order to
sell in the give countries.
(moderate, page 142)

52.

In a short essay, discuss the theory of mercantilism, and discuss favorable and
unfavorable balances of trade as it applies to international business.

Answer
a. Mercantilism held that a countrys wealth was measured by its holdings of
treasure, which usually meant gold. According to the theory, countries
should export more than they import and, if successful, receive gold from
countries that run deficits. To export more than they imported,
governments imposed restrictions on most imports, and subsidized
production of many products that could otherwise not compete in domestic
or export markets.
b. A favorable balance of trade indicates that a country is exporting more
than it is importing. An unfavorable balance of trade indicates that a
country is importing more than it is exporting, which is known as a deficit.
However, it is not necessarily beneficial to run a trade surplus nor is it
necessarily disadvantageous to run a trade deficit. A country that is running
a surplus, or favorable balance of trade, is, for the time being, importing
goods and services of less value that those it is exporting. In effect, the
surplus country is granting credit to the deficit country. If that credit cannot
eventually buy sufficient goods and services, the so-called favorable trade
balance actually may turn out to be disadvantageous for the country with
the surplus.
(moderate, page 143)
53.

What is the difference between absolute advantage and comparative

advantage?
Answer
Absolute advantage holds that different countries produce some goods more
efficiently than other countries; thus, global efficiency can increase through
free trade. Based on this theory, Adam Smith questioned why the citizens of
any country should have to buy domestically-produced goods when they could
buy those goods cheaper abroad. But what happens when one country can
produce all products at an absolute advantage? In 1817, David Ricardo
examined this question and expanded on Adam Smiths theory of absolute
advantage to develop the theory of comparative advantage. Ricardo reasoned
that there may still be global efficiency gains from trade if a country specializes
in products that it can produce more efficiently than other productsregardless
of whether other countries can produce those same products even more
efficiently.
(moderate, page 144)

54.

In a short essay, discuss the theory of absolute advantage and the reasons a
countrys efficiency improves based on this theory.

Answer
The theory of absolute advantage holds that different countries produce some
goods more efficiently than other countries; thus, global efficiency can increase
through free trade. Developed by Adam Smith, the theory of absolute
advantage says the real wealth of a country consists of the goods and services
available to its citizens. Smith reasoned that if trade were unrestricted, each
country would specialize in those products that gave it a competitive
advantage. Each countrys resources would shift to the efficient industries
because the country could not compete in the inefficient ones.
Through specialization, countries could increase their efficiency because of
three reasons:
a. labor could become more skilled by repeating the same tasks
b. labor would not lose time in switching from the production of one kind of
product to another
c. long production runs would provide incentives for the development of
more effective working methods
(moderate, page 144)
55.

In a short essay, discuss the theory of acquired advantage, and provide

examples that support your answer.
Answer
Countries that produce manufactured goods and services competitively have
an acquired advantage, usually in either product or process technology. An
advantage in product technology is a countrys ability to produce a unique
product or one that is easily distinguished from those of competitors. For
example, Denmark exports silver tableware, not because there are rich Danish
silver mines but because Danish companies have developed distinctive
products. An advantage in process technology is a countrys ability to produce
a homogeneous product (one not easily distinguished from that of competitors)
efficiently. For example, Japan has exported steel in spite of having to import
iron and coal, the two main ingredients necessary for steel production. A
primary reason for Japans success is that its steel mills encompass new laborsaving and material-saving processes.
(easy, page 145)

56.

What assumptions underlie the theories of specialization in international

trade? What are the limitations of these assumptions?
Answer
The assumptions that underlie the theories of specialization in international
trade include: (1) full employment, (2) economic efficiency objective, (3)

division of gains, (4) two countries; two commodities, (5) transport costs, (6)
mobility, (7) statics and dynamics, and (8) services.
The limitations of the assumptions are as follows:
a. Full employment when countries have many unemployed or unused
resources, they may seek to restrict imports to employ or use idle
resources.
b. Economic efficiency objective countries may pursue objectives other
than output efficiency. They may avoid overspecialization because of the
vulnerability created by changes in technology.
c. Division of gains if a country perceives a trading partner is gaining too
large a share of benefits, they may forgo absolute gains for themselves so
as to prevent relative losses.
d. Two countries, two commodities two countries trading only two
commodities is unrealistic.
e. Transport costs if it costs more to transport the goods than is saved
through specialization, then the advantages of trade are negated.
f. Mobility that assumption that resources can move domestically from the
production of one good to another, and at no cost, is not completely valid.
g. Statics and dynamics the relative conditions that give countries
advantages or disadvantages in the production of given products are
dynamic, not static as the theories view countries advantages.
h. Services an increasing portion of world trade is in services, and the
theories deal with commodities.
(difficult, page 149)
57.

In a short essay, discuss the factors that contribute to the effects of the
Heckscher-Ohlin theory.
Answer
The factor-proportions theory said that differences in countries endowments
of labor compared to their endowments of land or capital explained differences
in the cost of production factors. Heckscher and Ohlin proposed that if labor
were abundant in comparison to land and capital, labor costs would be
relatively low compared to land and capital costs. These relative factor costs
would lead countries to excel in the production and export of products that
used their abundant, and therefore cheaper, production factors.
(easy, page 152)

58.

In a short essay, discuss the theory of country size, citing the factors that
differentiate this theory.
Answer

a.

The theory of country size says that countries with large land areas are
more apt to have varied climates and an assortment of natural resources
than smaller countries would, thus making them more self-sufficient.
Although the theory of absolute advantage ignores transport costs in trade,
these costs affect large and small countries differently. Normally, the
farther the distance, the higher the transport costs. The average distance
between production location and markets is higher for the international
trade of large countries. Transport costs make it more likely that small
countries will trade internationally because their costs of getting products
over their borders are worth the effort.
b. Although land area is the most obvious way of measuring a countrys size,
countries also can be compared on the basis of economic size. Countries
with large economies and high per-capita incomes are more likely to
produce goods that use technologies requiring long production runs. This is
because these countries develop industries to serve their large domestic
markets, which in turn tend to be competitive in export markets. In
industries where long production runs are important for gaining competitive
advantages, companies tend to locate their production in few countries,
using these locations as sources of exports to other countries. Where long
production runs are unimportant, companies are more apt to minimize
exporting. Instead, they produce in most countries where they sell.
(moderate, page 151)
59.

How do technological complexities complicate managers use of factor

proportions theory to determine where to locate their production?
Answer
The factor-proportions analysis becomes more complicated when the same
product can be produced by different methods, such as with labor or
capital. Canada produces wheat with a capital-intensive method because of its
abundance of low-cost capital relative to labor. In contrast, India produces
wheat by using a much smaller number of machines in comparison to its
abundant and cheap labor. In the final analysis, managers must compare the
cost in each locale based on the type of production that will minimize costs
there.
(easy, page 153)

60.

In what type of country are new products more likely to be produced? Why?
Answer
Companies develop new products because there is an observed need and
market for them. This means that a U.S. company is more apt to develop a
new product for the U.S. market, as would a French company for the French
market, and so on. At the same time, almost all new technology that results in

new products and production methods originates in industrial countries

because of a combination of factorscompetition, demanding consumers, the
availability of scientists and engineers, and high incomes.
(easy, page 153)

61.

In a short essay, discuss in detail the various stages of the international

product life cycle.
Answer
The international product life cycle theory of trade states that certain kinds of
products go through a continuum, or cycle, that consists of four stages
introduction, growth, maturity, and decline. The location of production to serve
world markets will shift internationally depending on the stage of the cycle.
a.

Introduction Most new products are produced in and exported from the
high-income industrial countries because of their combined demand
conditions and labor skills. Many reasons account for the dominant position
of industrial countries, including competition, demanding consumers, the
availability of scientists and engineers, and high incomes. Early production
also generally occurs in a domestic location so the company can obtain
rapid market feedback, as well as save transport costs.
b. Growth As sales of the new product grow, competitors enter the market.
At the same time, demand is likely to grow substantially in foreign markets,
particularly in other industrial countries. In fact, demand may be sufficient
to justify producing in some foreign markets to reduce or eliminate
transport charges, but the output at this stage is likely to stay almost
entirely in the foreign country with the additional manufacturing unit. The
original producing country will also increase its exports in this stage but
lose certain key export markets in which competitors commence local
production.
c. Maturity In this stage, worldwide demand begins to level off, although it
may be growing in some countries and declining in others. There is often a
shake-out of producers such that product models become highly
standardized, making cost an important competitive weapon. Longer
production runs become possible for foreign plants, which in turn reduce
per-unit cost for their output. The lower per-unit costs create demand in
emerging markets.
d. Decline As a product moves to the decline stage, those factors occurring
during the mature stage continue to evolve. The markets in industrial
countries decline more rapidly than those in emerging markets as affluent
customers demand newer products. By this time, market and cost factors

have dictated that almost all production is in emerging markets, which

export to the declining or small-niche markets in industrial countries. In
other words, the country in which the innovation first emerged and
exported from then becomes the importer.
(moderate, page 154)
62.

In a short essay, discuss the country similarity theory, citing factors that lead
similar countries to trade with each other.
Answer
Observations of trade patterns reveal that most of the worlds trade occurs
among countries that have similar characteristics, specifically among
industrial, or developed, countries. For example, the United States is the
worlds largest trader, and eight of its ten largest trading partners are either
industrialized or newly industrialized countries. Globally, eleven of the twelve
largest traders are industrialized or newly industrialized countries. Overall
trade patterns seem to be at odds with the traditional theories that emphasize
country-by-country differences. The country-similarity theory says that once a
company has developed a new product in response to observed market
conditions in the home market, it will turn to markets it sees as most similar to
those at home. In addition, markets in industrial countries can support products
and their variations. Thus, companies from different countries produce different
product models, and each may gain some markets abroad.
(moderate, page 157)

63.

In a short essay, list and discuss the various degrees of dependence as it

relates to international business.
Answer
a. Independence In a situation of independence, a country would have no
reliance on other countries for any goods, services, or technologies.
However, because all countries need to trade, no country has complete
economic independence from other countries. In a situation of
independence, a disadvantage is that it hinders a countrys ability to
borrow and adapt technologies already in existence. Such borrowing and
adaptation can add significantly to a countrys economic growth. In most
countries, governmental policy has focused on achieving the advantage of
independence without depriving its citizens.
b. Interdependence One way a country limits its vulnerability to foreign
changes is through interdependence, the development of trade
relationships on the basis of mutual need. Such interdependence
sometimes spurs international companies to pressure their governments to

sustain trade relations. For example, about a third of world trade is

intracompany tradethat is, companies export components and finished
products between their foreign and home-country facilities. Any trade
cessation would adversely affect these companies.
c. Dependence Many developing countries have decried their dependence
because they rely so heavily on the sale of one primary commodity and/or
on one country as a customer and supplier. Because the emerging
economies have low levels of production, they tend to be much more
dependent on a given industrial country than the industrial country is
dependent on them.
(moderate, page 159)
64.

In a short essay, discuss the two basic approaches to government policy that
support strategic trade policy.
Answer
The two basic approaches to government policy are to alter conditions that
will affect industry in general and to alter conditions that will affect a targeted
industry. Regardless of whether a government takes a general or specific
approach, it may alter the competitive positions of specific companies and
production locations.
a.

The first approach means altering conditions that affect factor

proportions, efficiency, and innovation. A country may upgrade production
factors by improving human skills through education, providing
infrastructure, promoting a highly competitive environment so that
companies must make improvements, and inducing consumers to demand
a higher quality of products and services.
b. The second approach is to target specific industries. This approach has
usually resulted in only small payoffs, largely because governments find it
difficult to identify and target the right industries. Moreover, there has been
a tendency for too many countries to identify the same industries, so
excessive competition has led to inadequate returns.
(moderate, page 160)
65.

What are the four conditions in the Porter Diamond? What are the limitations
of the Porter Diamond in explaining countries competitive advantage?
Answer
Porters diamond shows that four conditions are important for competitive
superiority: (1) demand, (2) factor endowment, (3) related and supporting
industries, (4) and firm strategy.

The existence of the four favorable conditions does not guarantee that an
industry will develop in a given locale. Entrepreneurs may face favorable
conditions for many different lines of business. In fact, comparative advantage
theory holds that resource limitations may cause companies in a country not to
try to compete in some industries, even though an absolute advantage may
exist. A second limitation of the diamond concerns the increased ability of
companies to gain market information, production factors, and supplies from
abroad. At the same time, they face more competition from foreign production
and foreign companies. The absence of any of the four conditions from the
diamond domestically, therefore, may not inhibit companies and industries
from becoming globally competitive. (moderate, page 163)

66.

In a short essay, discuss the strategic advantages of exporting to and

importing from other countries.
Answer
Strategic advantages of exporting include the use of excess capacity, cost
reduction, greater profitability, and spreading risk.
a. Use of excess capacity Companies frequently have immediate or longterm output capabilities for which there is inadequate domestic demand.
b. Cost reduction A company can generally reduce its costs by 2030%
each time it doubles its output.
c. Greater profitability A producer might be able to sell the same product at
a greater profit abroad than at home. This might happen because the
competitive environment in the foreign market is different, possibly
because there the product is in a different stage of its life cycle.
d. Risk spreading By spreading sales over more than one foreign market, a
producer might be able to minimize the effects of fluctuations in demand.
Strategic advantages of importing may come from an importer because that
company is seeking out cheaper or better-quality supplies, components, or
products to use in its production facilities. Or a company may be seeking new
foreign products that complement its existing lines, giving the importer more to
sell. An importer may also be able to spread its operating risk. By developing
alternative suppliers, a company is less vulnerable to the dictates or fortunes
of any single supplier.
(moderate, page 164)