CHAPTER 5

Alternative Theories of Trade

Multiple Choice Questions
1.

Which of the following is two-way trade in which the country both exports
and imports products that are the same or similar?
a. net trade
b. product differentiation trade
c. intra-industry trade
d. internal trade
ANSWER:
C

2.

Which of the following is the value of the difference between exports and
imports for a product?
a. product differentiation
b. net trade
c. intra-industry trade
d. constant returns to trade
ANSWER:
B

3.

Which of the following is not an example of intra-industry trade?

a. Europe exports Airbus airplanes and imports Boeing airplanes.
b. Americans export Jeeps and import Jaguars.
c. Japan exports cars and imports oil.
d. America exports films to the rest of the world and imports foreign films.
ANSWER:
C

4.

Which of the following statements about intra-industry trade is accurate?

(1)
(2)
(3)

Intra-industry trade occurs primarily between developed countries.

Intra-industry trade is less prevalent where trade barriers are low.
Intra-industry trade has become more prominent over the last 50 years.

a. (1) + (2)
b. (2) + (3)
c. (1) + (3)
d. (1) + (2) + (3)
ANSWER:
C
5.

Which of the following is the formula for the intra-industry trade (IIT) share?

6.

7.

8.

a. 1 (Sum of |X M|)
b. 1 (Sum of X + M)
c. 1 (Sum of |X M|/Sum of X + M)
d. X M
ANSWER:
C
Which of the following refers to the situation that arises when consumers view
products produced in an industry as similar, but not perfect substitutes for each
other?
a. product differentiation
b. net trade
c. intra-industry trade
d. constant returns to trade
ANSWER:
A
Assuming both long-run adjustments of factor inputs and constant factor input
prices, average cost does not change when the quantity of output changes with
_______.
a. internal scale economies
b. external scale economies
c. economies of scale
d. constant returns to scale
ANSWER:
D
Intraindustry trade can be explained in part by:
a. Adam Smiths principle of absolute advantage
b. Perfect competition in product markets
c. Diseconomies of large scale production
d.

Transportation costs between and within nations

ANSWER:

9.

If the expansion of the size of a firm is responsible for a decline in average

cost, then _______ are present.
a. internal scale economies
b. external scale economies
c. product differentiations
d. constant returns to scale
ANSWER:
A

10.

When the average cost of the typical firm declines as the output of the industry
within a geographic area increases we call that:
a. internal scale economies

b. external scale economies

c. product differentiations
d. constant returns to scale
ANSWER:
B
11.

12.

13.

14.

Which of the following is a market structure in which a large number of firms

compete vigorously with each other in producing and selling varieties of a basic
product?
a. oligopoly
b. monopoly
c. product differentiation
d. monopolistic competition
ANSWER:
D
If a global industry is dominated by a few large firms, we call that market
structure:
a. oligopoly
b. monopoly
c. product differentiation
d. monopolistic competition
ANSWER:
A
The market structure in which one firm dominates the global industry for a
good is called:
a. oligopoly
b. monopoly
c. product differentiation
d. monopolistic competition
ANSWER:
B
The Leontief paradox provided:
a. Support for the principle of absolute advantage
b. Support for the factor endowment model
c. Evidence against the factor endowment model
d. Evidence against the principle of absolute advantage

ANSWER:
15.

An individual firm in a monopolistically competitive market will produce

where marginal revenue is _______ the marginal cost and unit cost _______ as
the number of varieties in the market increases.
a. greater than; increases
b. equal to; increases
c. less than; decreases

d. greater than; decreases

ANSWER:
B
16.

In a monopolistically competitive market, as the number of varieties increases,

the price _______ because the demand for each variety becomes more
_______.
a. increases; elastic
b. decreases; inelastic
c. increases; inelastic
d. decreases; elastic
ANSWER:
D

17.

In a monopolitistically competitive market, as the number of varieties

increases, the price _______ and the unit cost _______.
a. increases; increases
b. increases; decreases
c. decreases; increases
d. decreases; decreases
ANSWER:
C

18.

Which of the following is the basis for trade in a monopolistically competitive

market?
a. scale economies
b. product differentiation
c. constant returns to scale
d. net trade
ANSWER:
B

19.

Which trade theory suggests that comparative advantage tends to shift from one nation to
another as a product matures?
a. Interindustry trade theory
b. Intraindustry trade theory
c. Product life cycle theory
d. Overlapping demand theory

ANSWER:
20.

Which of the following is not an effect of intra-industry trade with a

monopolistically competitive market?
a. There are considerable national gains that arise from trade because there is
an increase in the number of varieties of products available in the country.
b. There are national gains because the trade results in lower prices on
domestic varieties.

c. Total output of the domestic industry increases as a result of trade.

d. There are few shifts in production between industries that would affect
factor prices.
ANSWER:
C