Global Business 3rd Edition Mike Peng – Test Bank

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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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. _____ 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

 

  1. _____ 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

 

  1. _____ 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

 

  1. 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

 

  1. _____ 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

 

  1. 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

 

  1. _____ 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

 

  1. 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

 

  1. _____ 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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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