Chapter 5 - International Trade Theories

Question 1

Shaped the economic policy of many nations for the past 50 years.

Answer 1

International Trade Theory

Question 2

The driver behind the creation of World Trade Organization and regional trading blocks.

Answer 2

International Trade Theory

Question 3

Benefits of trade emerging from theories:

Answer 3

1) Allows a country to specialize in the manufacture and export of products
2) Importing products that can be produced more efficiently in other countries
3) Interdependence among nations
4) Free trade
5) Regional economic balance

Question 4

7 trade theories:

Answer 4

1) Zero-sum game
2) Absolute advantage
3) Comparative advantage
4) Factor endowment
5) The product-life cycle
6) The new trade theory
7) National competitive advantage

Question 5

An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports.

Answer 5

Mercantilism

Question 6

Maintain trade surplus through government intervention.

Answer 6

Mercantilism

Question 7

When a country is more efficient than any other country producing it.

Answer 7

Absolute Advantage

Question 8

Ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

Answer 8

Absolute Advantage

Question 9

Proposed in 1776, Adam Smith’s theory was the first to explain why unrestricted free trade is beneficial to a country.

Answer 9

Absolute Advantage

Question 10

Refers to an economy’s ability to produce goods and services at a lower opportunity cost than that of trade partners.

Answer 10

Comparative Advantage

Question 11

Gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

Answer 11

Comparative Advantage

Question 12

The value of the next-highest-valued alternative use of that resource.

Answer 12

Opportunity Cost

Question 13

Argues that comparative advantage arises not just by differences in labour productivity but due to the differences in national factor endowments such as land, labour and capital.

Answer 13

Heckscher–Ohlin Theory

Question 14

Predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.

Answer 14

Heckscher–Ohlin Theory

Question 15

Suggests early in their life cycle, most new products are produced and exported from the country they were first produced in but as the product is widely accepted internationally production starts in other countries.

Answer 15

Product Life Cycle Theory

Question 16

Raymond Vernon’s theory.

Answer 16

Product Life Cycle Theory

Question 17

Pointed out that the ability of firms to attain economies of scale might have important implications for international trade.

Answer 17

New Trade Theory

Question 18

Paul Krugman’s theory.

Answer 18

New Trade Theory

Question 19

Determines that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage.

Answer 19

National Competitive Advantage

Question 20

Michael Porter’s theory.

Answer 20

National Competitive Advantage

Question 21

4 broad attributes of a nation:

Answer 21

1) Firm strategy, structure, and rivalry
2) Demand conditions
3) Related and supporting industries
4) Factor endowments

Question 22

2 variables that can influence national diamond:

Answer 22

1) Chance
2) Government

Question 23

It makes sense for a firm to disperse its productive activities to those countries where they can be performed most efficiently.

Answer 23

Location

Question 24

Firms that establish this with regard to the production of a particular new product may subsequently dominate global trade in that product.

Answer 24

First-Mover

Question 25

Has a pivotal role in international trade and can promote free trade or trade restrictions.

Answer 25

Policy