Unit 2 - International Trade and Investment Theories

Question 1

Three International Trade and Investment Theories (CIM)

Answer 1

1. Classical Country-Based Trade Theories
2. International Investment Theories
3. Modern Firm-Based Trade Theories

Question 2

FOUR Classical Country-Based Trade Theories (MARC)

Answer 2

1. Mercantilism
2. Absolute Advantage
3. Relative Factor Endowment
4. Comparative Advantage

Question 3

A sixteenth-century economic philosophy which maintains that a country’s wealth is measured by its holding of GOLD and SILVER.

Answer 3

Mercantilism

Question 4

A country’s goal should be to increase the holdings of gold and silver by promoting exports and discouraging imports.

Answer 4

Mercantilism

Question 5

This theory is developed by Adam Smith.

Answer 5

Absolute Advantage

Question 6

This theory suggests that a country’s wealth should export those goods and services for which it is more productive than other countries are and import those goods and services for which other countries are more productive than it is.

Answer 6

Absolute Advantage

Question 7

It is a theory developed by David Ricardo, an early 19th century British economist.

Answer 7

Comparative Advantage

Question 8

It states that a country should produce and export those goods and services for which it is relatively more productive than other countries are and import those goods and services for which other countries are relatively more productive than it is.

Answer 8

Comparative Advantage

Question 9

It incorporates the concept of opportunity cost.

Answer 9

Comparative Advantage

Question 10

It is the value of what us given up.

Answer 10

Opportunity Cost

Question 11

• Also known as Heckscher-Ohlin Theory
• Developed by Eli Heckscher and Bertil Ohlin

Answer 11

Relative Factor Endowments

Question 12

This theory states that a country will have a comparative advantage in producing products that intensively use resources it has in abundance.

Answer 12

Relative Factor Endowments

Question 13

FOUR Modern Firm-Based Trade Theories (CPGP)

Answer 13

1. Country Similarity Theory
2. Product Life Cycle Theory
3. Global Strategic Rivalry Theory
4. Porter’s National Competetive Advantage

Question 14

This theory suggests that most trade in manufactured goods should be between countries with similar per capita income and that intraindustry trade in manufactured goods should be common.

Answer 14

Country Similarity Theory

Question 15

It is the trade between two countries of goods produced by the same industry.

Answer 15

Intraindustry

Question 16

It is the trade or exchange of goods produced by one industry in country A for goods produced by a different industry in country B.

Answer 16

Interindustry

Question 17

It is a theory developed in the 1960s by Raymond Vernon of the Harvard Business School.

Answer 17

Product Life Cycle Theory

Question 18

It is a theory that traces the roles of innovation, market expansion, comparative advantage, and strategic responses of global rival in international production, trade, and investment decisions.

Answer 18

Product Life Cycle Theory

Question 19

Stages of Product Life Cycle Theory

Answer 19

Stage 1 - New Product Stage
Stage 2 - Maturing Product Stage
Stage 3 - Standardized Product Stage

Question 20

Stages of Product Life Cycle Theory

Answer 20

Stage 1 - New Product Stage
Stage 2 - Maturing Product Stage
Stage 3 - Standardized Product Stage

Question 21

It is the stage where the firm develops and introduces an innovative product in response to a perceived need in the domestic market.

Answer 21

Stage 1 - New Product Stage

Question 22

It is the stage where demand for the product expands dramatically as consumers recognizes its values.

Answer 22

Stage 2 - Maturing Product Stage

Question 23

It is the stage where the innovating firm builds new factories to expand its capacity and satisfy domestic and foreign demand for the product.

Answer 23

Stage 2 - Maturing Product Stage

Question 24

It is the stage where the market for the product stabilizes.

Answer 24

Stage 3 - Standardized Product Stage

Question 25

It is the stage where the product becomes more of a commodity and firms are pressured to lower their manufacturing costs as much as possible by shifting production to facilities in countries with low labor costs.

Answer 25

Stage 3 - Standardized Product Stage

Question 26

It is developed in the 1980s by economists Paul Krugman and Kelvin Lancaster.

Answer 26

Global Strategic Rivalry Theory

Question 27

It is the theory where firms struggle to develop some sustainable competitive advantage, which they can then exploit to dominate the global marketplace.

Answer 27

Global Strategic Rivalry Theory

Question 28

The following are ways firms do to obtain competitive advantage: FOUR

Answer 28

1. Owning Intellectual Property
2. Investing in Research and Development
3. Achieving Economies of Scale (produced) or Scope (sells)
4. Exploiting the experience curve

Question 29

It is the theory where Porter believes that success in international trade comes from the interaction of four country-and-firm-specific elements.

Answer 29

Porter’s National Competitive Advantage

Question 30

What are the four country-and-firm-specific elements in Porter’s National Competitive Advantage?

Answer 30

1. Factor conditions
2. Demand conditions
3. Related and supporting industries and firm strategy
4. Structure and rivalry

Question 31

THREE International Investment Theories

Answer 31

1. Ownership Advantage
2. Internalization Theory
3. Dunning’s Eclectic Theory

Question 32

This theory suggests that a firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI.

Answer 32

Ownership Advantages

Question 33

This theory suggests that FDI is more likely to occur when the costs of negotiating, monitoring, and enforcing a contract with a second firm are high.

Answer 33

Internalization Theory

Question 34

This theory combines ownership advantage, location advantage, and intenalization advantage to form a unified theory of FDI.

Answer 34

Dunning’s Eclectic Theory