Global Business 4th Edition By Mike Peng – Test Bank

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Chapter 5 Trading Internationally
TRUEFALSE
1. Trade deficit occurs when a nation exports more than it imports.
(A) True
(B) False
Answer : (B)
2. Both exporting and importing are taken into account when calculating balance of trade.
(A) True
(B) False
Answer : (A)
3. The theory of mercantilism viewed international trade as a zero-sum game.
(A) True
(B) False
Answer : (A)
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.
(A) True
(B) False
Answer : (B)
5. The theory of absolute advantage is categorized as a classical theory of international trade.
(A) True
(B) False
Answer : (A)
6. The basic concept of protectionism and mercantilism is the same.
(A) True
(B) False
Answer : (A)
7. Economist Adam Smith proposed the theory of comparative advantage.
(A) True
(B) False
Answer : (B)
8. The Heckscher-Ohlin theory proposed that nations will develop comparative advantage based on
their locally abundant factors.
(A) True
(B) False
Answer : (A)
9. The concept of opportunity cost is crucial to the theory of comparative advantage.
(A) True
(B) False
Answer : (A)
10. The product life cycle theory is the first dynamic theory to account for changes in the patterns of
trade over time.
(A) True
(B) False
Answer : (A)
11. Government intervention in international trade was proposed by the factor endowment theory.
(A) True
(B) False
Answer : (B)
12. The strategic trade theory was mainly proposed for low capital-investment industries.
(A) True
(B) False
Answer : (B)
13. Strategic trade theory advocates mercantilist policy for all industries.
(A) True
(B) False
Answer : (B)
14. The product life cycle theory is popularly known as the “diamond” theory.
(A) True
(B) False
Answer : (B)
15. The theory of national competitive advantage of industries does not take domestic demand
conditions into account.
(A) True
(B) False
Answer : (B)
16. Factor endowments is one of the four interacting aspects of the theory of national competitive
advantage of industries.
(A) True
(B) False
Answer : (A)
17. Classical theories are based on the assumption of perfect resource mobility.
(A) True
(B) False
Answer : (A)
18. Classical theories assume no foreign exchange complications.
(A) True
(B) False
Answer : (A)
19. The theory of national competitive advantage of industries assumes that comparative advantage
always resides in the lead innovation nation.
(A) True
(B) False
Answer : (B)
20. The product life cycle theory explains patterns of trade based on factor endowments.
(A) True
(B) False
Answer : (B)
21. The absolute advantage theory is considered as the forerunner of the free trade movement.
(A) True
(B) False
Answer : (A)
22. In the context of tariff barriers, net losses that occur in an economy as a result of tariffs are
known as deadweight costs.
(A) True
(B) False
Answer : (A)
23. Deadweight costs occur in an economy as a result of VER.
(A) True
(B) False
Answer : (B)
24. In the context of tariff barriers, deadweight = total inefficiency – net gain.
(A) True
(B) False
Answer : (A)
25. Subsidies are nontariff barriers.
(A) True
(B) False
Answer : (A)
26. In the context of NTBs, VERs are government payments to domestic firms.
(A) True
(B) False
Answer : (B)
27. Local content requirements require a certain proportion of the value of the goods made in one
country to originate from that country.
(A) True
(B) False
Answer : (A)
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.
(A) True
(B) False
Answer : (B)
29. Antidumping duties are a type of tariff barrier.
(A) True
(B) False
Answer : (B)
30. The infant industry argument demands lesser government intervention in international trade.
(A) True
(B) False
Answer : (B)
31. One of the arguments against free trade is the necessity to safeguard domestic industries.
(A) True
(B) False
Answer : (A)
32. Antidumping duties are levied on a country’s exports.
(A) True
(B) False
Answer : (B)
33. Political arguments against free trade focus on protectionism and infant industries.
(A) True
(B) False
Answer : (B)
34. Trade embargoes are a means of trade intervention.
(A) True
(B) False
Answer : (A)
35. Environmental and social responsibility can be used as political arguments to initiate trade
intervention against certain countries.
(A) True
(B) False
Answer : (A)
MULTICHOICE
36. A trade _____ is an economic condition in which a nation imports more than it exports.
(A) deficit
(B) surplus
(C) embargo
(D) VER
Answer : (A)
37. 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
Answer : (D)
38. 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
Answer : (D)
39. The _____ theory viewed international trade as a zero-sum game.
(A) comparative advantage
(B) mercantilism
(C) strategic trade
(D) national competitive advantage of industries
Answer : (B)
40. 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
Answer : (C)
41. 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.
Answer : (B)
42. 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
Answer : (A)
43. Which of the following is a modern trade theory?
(A) Comparative advantage
(B) National competitive advantage
(C) Mercantilism
(D) Absolute advantage
Answer : (B)
44. 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.
Answer : (D)
45. 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
Answer : (B)
46. 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
Answer : (D)
47. 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
Answer : (C)
48. 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
Answer : (C)
49. 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
Answer : (C)
50. 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
Answer : (A)
51. 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.
Answer : (A)
52. 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
Answer : (B)
53. 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
Answer : (C)
54. 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
Answer : (D)
55. 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.
Answer : (A)
56. Which theory is based on the notion that competitive advantage is dependent 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
Answer : (D)
57. 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.
Answer : (A)
58. 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
Answer : (C)
59. Deadweight costs are net losses that occur when _____ are imposed.
(A) import tariffs
(B) import quotas
(C) voluntary export restraints
(D) local content requirements
Answer : (A)
60. 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
Answer : (A)
61. Import quotas are a type of _____.
(A) tariff barrier
(B) nontariff barrier
(C) voluntary export restraint
(D) antidumping duty
Answer : (B)
62. _____ are government payments to domestic firms.
(A) Tariffs
(B) Subsidies
(C) Quotas
(D) Trade embargoes
Answer : (B)
63. _____ are restrictions on the quantity of imports.
(A) VERs
(B) Import quotas
(C) Subsidies
(D) Antidumping duties
Answer : (B)
64. _____ are the most direct denial of absolute or comparative advantage.
(A) Quotas
(B) Tariffs
(C) Local content requirements
(D) Subsidies
Answer : (A)
65. 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.
Answer : (D)
66. _____ 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
Answer : (B)
67. 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
Answer : (B)
68. _____ 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
Answer : (A)
69. 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
Answer : (D)
70. _____ are politically motivated trade sanctions against foreign countries to signal displeasure.
(A) Trade embargoes
(B) VERs
(C) Subsidies
(D) Antidumping duties
Answer : (A)
ESSAY
71. Briefly explain the strengths and weaknesses of the absolute advantage and comparative
advantage trade theories.
Graders Info :
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.
72. Briefly explain the classical theory of mercantilism.
Graders Info :
Mercantilism is a theory that suggests that the wealth of the world is fixed and that a nation that
exports more and imports less will be richer. According to the theory, international trade is a zero-
sum game. It is the direct intellectual ancestor of modern-day protectionism, which is the idea that
governments should actively protect domestic industries from imports and vigorously promote
exports.
73. Discuss the characteristics of the modern trade theories.
Graders Info :
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 policy advice 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.
74. Elaborate on Michael Porter’s “diamond” theory.
Graders Info :
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.
75. Briefly elaborate on any three nontariff barriers (NTBs).
Graders Info :
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.
76. Discuss the economic arguments against free trade.
Graders Info :
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.
77. Discuss the political arguments against free trade.
Graders Info :
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.
78. What are the few factors that determine the success and failure of firms’ exports around the
globe?
Graders Info :
The two core perspectives lead to two answers. Fundamentally, the various economic theories
underpin the resource-based view, suggesting that successful exports are valuable, unique, and
hard-to-imitate products generated by certain firms from a nation. However, the political realities
stress the explanatory and predictive power of the institution-based view: As rules of the game,
institutions-such as laws and regulations promoted by various special interest groups-can protect
certain domestic industries, firms, and individuals; erect trade barriers; and make the nation as a
whole worse off.

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