Chapter 6 IB 201

Question 1

Mercantilisim

Answer 1

advocated that countries should simultaneously encourage exports and discourage imports

Question 2

Free Trade

Answer 2

refers to a situation in which government does not attempt to influence through quotes or duties what its citizens can buy from another country or what they can produce and sell to another country

Question 3

A country’s economy may __ if its citizens buy products from other nations that could be produced at home

Answer 3

gain

Question 4

The gain allows international trade allows a country to ___ in making and export of product while importing products that can be produce more efficiently in other countries

Answer 4

specialize

Question 5

Product Life-cycle theory

Answer 5

suggests most new products are produced in and exported from the country in which they were developed

Question 6

new trade theory

Answer 6

countries specialize in the production and export of particular products not because of underlying differences in factor endowments but because in certain industries the world market can support only a limited number of firms

Question 7

first-mover advantage

Answer 7

firms who enter first in the market ability to build a competitive advantage that will be hard to be challenged later on

Question 8

national competitive advantage

Answer 8

attempts to explain why particular nations achieve international success in particular industries

Question 9

Trade Theory and Government Policy

Answer 9

Mercantilism: makes a case for government involvement in promoting exports and limiting imports
○ Smith, Ricardo, and Heckscher-Ohlin: form part of the case for unrestricted free trade
○ New Trade theory & National Competitive Advantage: can be interpreted as justifying some limited government intervention to support the development of certain export-oriented industries

Question 10

Neo-mercantilism

Answer 10

equates political power with economic power, and economic power with a balance-of-trade surplus

Question 11

absolute advantage

Answer 11

when a country is more efficient than any other country at producing a good/service developed by smith

Question 12

basic theory

Answer 12

potential world production is greater with unrestricted free trade than it is with restrictive trade

Question 13

Three Assumptions of the comparative advantage model

Answer 13

1. Immobile resources
2. diminishing returns
3. dynamic effects of economic growth

Question 14

immobile resources

Answer 14

• don’t always shift easily from producing one good to another
• if one worker specializes in making in one good as an employer may be unemployed or find a less attractive job

Question 15

Constant returns to specialization

Answer 15

the units of resource required to produce a good are assumed to remain constant no matter where one is on a country PPF (production possibility frontier)

Question 16

Realistic assumptions of diminishing returns

Answer 16

1. not all resources are of the same quality
2. different goods use resources in different propositions

Question 17

Diminishing Returns show:

Answer 17

• not feasible for a country to specialize to the degree suggested by the Ricardian model
• suggest gains from specialization likely to be exhausted before specialization is complete

Question 18

Dynamic effects or economic growth

Answer 18

trade does not change a country’s stock of resources or efficiency with which it utilizes those resources

Question 19

2 sorts of dynamic gains

Answer 19

• free trade could increase a country’s stock of resources
• free trade could also increase efficiency with which a country uses its resources

Question 20

Heckscher-Ohlin theory

Answer 20

predicts countries will export goods make intensive use of the factor endowments rather than productivity

Question 21

Factor Endowments

Answer 21

the extent to which a country is endowed with such resources as land, labor, and capital

Question 22

Leontief Paradox

Answer 22

assumed since US relatively abundant in capital compared to other nations

Question 23

Economies of Scale

Answer 23

unit cost reductions associated with a large scale of output