Global Environment Ch 5

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Mercantilism, as advocated in the 16th and 17th centuries, believed that countries should simultaneously encourage both imports and exports.

FALSE

Largely discredited and primitive, mercantilism still influences the trade policies of many countries.

TRUE

Free trade refers to a situation where a government, through quotas or duties, attempts to influence what its citizens can buy from another country, or what they can produce and sell to another country.

FALSE

David Ricardo's theory of comparative advantage was the first to explain why unrestricted free trade is beneficial to a country

FALSE ADAM SMITH ABSOLUTE ADVANTAGE

According to Adam Smith, market mechanism, rather than government policy, should determine a country's imports and exports

TRUE

The theories of Smith, Ricardo, and Heckscher-Ohlin failed to identify the specific benefits of international trade

FALSE

Smith, Ricardo, and Heckscher-Ohlin suggest that a country's economy would gain only if its citizens buy products that are made in that country

FALSE

Limits on imports are often in the interests of domestic consumers, but not domestic producers.

FALSE

During the 1980s, economists such as Paul Krugman developed what has come to be known as the new trade theory

TRUE

The first theory of international trade that emerged in England asserted that gold and silver were the mainstays of national wealth and essential to vigorous commerce.

TRUE

The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus

TRUE

Zero-sum game refers to a situation in which an economic gain by one country results in an economic loss by another

TRUE

If a country is more efficient than any other country in the production of a product, it has what is known as relative advantage in the production of that product

FALSE (ABSOLUTE ADVANTAGE)

In his book, "The Wealth of Nations," Adam Smith supported the mercantilist assumption that trade is a zero-sum game.

FALSE

According to Adam Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries.

TRUE

Ricardo's theory of comparative advantage says that it is logical for a country to specialize in the production of goods that it produces most efficiently and to export goods that it produces less efficiently

FALSE

The basic message of the theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade.

TRUE

Advocates of free trade rely on Ricardo's theory of comparative advantage as a major intellectual weapon

TRUE

Paul Samuelson argued that contrary to the standard interpretation, in certain circumstances, the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor country

TRUE

Embracing a free trade regime for an advanced economy often implies that the country will produce less of some labor-intensive goods and more of some knowledge-intensive goods

TRUE

The simplistic model of the comparative advantage theory used in the text assumes that trade changes a country's stock of resources and the efficiency with which it utilizes those resources

FALSE

Ricardo's theory leads us to expect that despite the short-term adjustment costs associated with adopting a free trade regime, trade would seem to produce a greater economic growth and higher living standards in the long run.

TRUE

Factor endowments refer to the extent to which free trade impacts the national wealth of a country

FALSE

When the impact of differences of technology on productivity is controlled for, Heckscher-Ohlin theory gains predictive power

TRUE

Most economists prefer Ricardo's theory to the Heckscher-Ohlin theory because it makes fewer simplifying assumptions

FALSE

Raymond Vernon's theory of the product life-cycle was based on the observation that for most of the 20th century, a very large proportion of the world's new products were developed by foreign nations and sold first in the U.S. market

FALSE

According to the product life cycle theory, as demand for a product starts to grow in other advanced countries, potential for exports from the U.S. will gradually be limited

TRUE

Viewed from an Asian or European perspective, Vernon's argument that most new products are developed and introduced in the United States seems ethnocentric

TRUE

The new trade theory began to emerge in the 1970s when a number of economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade

TRUE

The new trade theory suggests that a country may predominate in the export of a good simply because it was lucky enough to have one or more pioneering firms to produce that good.

TRUE

Porter argues that an absence of domestic rivalry is vital to the creation and persistence of international competitive advantage in an industry

FALSE

According to Porter, both advanced factors and basic factors are equally significant for competitive advantage

FALSE

According to Michael Porter, factor endowments can be affected by subsidies, policies toward capital markets, and policies toward education

TRUE

The individual firm should invest substantial financial resources in trying to build a first-mover advantage, even if that means several years of losses before a new venture becomes profitable.

TRUE

According to Porter's theory of national competitive advantage, a firm should invest in upgrading advanced factors of production because it is in the best interest of business for a firm to do so

TRUE

Which of the following is best identified as the absence of government-imposed barriers to the free flow of goods and services between countries?
A. Free trade
B. Mercantilism
C. Socialism
D. Absolute advantage

A

David Ricardo advanced the:
A. new trade theory.
B. product life-cycle theory.
C. comparative advantage theory.
D. absolute advantage theory.

C

David Ricardo's theory of comparative advantage attempts to rationalize why some countries export automobiles, consumer electronics, and machine tools, while other countries export chemicals, watches, and jewelry. This rationalization is best explained in terms of:
A. absolute advantage with reference to natural resources.
B. international differences in labor productivity.
C. the proportions in which the factors of production are available.
D. the cultural histories of the exporting nations.

B

Climate and natural resource endowments explain all of the following happening, EXCEPT:
A. Brazil exporting coffee.
B. Switzerland exporting watches.
C. China exporting crawfish.
D. Saudi Arabia exporting oil.

B

The argument for _____ is that both import controls and export incentives are self-defeating and result in wasted resources.
A. protectionism
B. subsidies
C. mercantilism
D. unrestricted free trade

D

Propagated in the 16th and 17th centuries, _____ advocated that countries should simultaneously encourage exports and discourage imports.
A. ethnocentrism
B. capitalism
C. collectivism
D. mercantilism

D

Which of the following statements most accurately captures the main tenet of mercantilism?
A. It is in a country's best interests to not export products to less developed countries.
B. It is in a country's best interests to import products even if they are most efficiently produced at home.
C. It is in a country's best interests to import less specialized goods than to attempt to make them at home.
D. It is in a country's best interests to maintain a trade surplus.

D

Considered to be the first theory of international trade, the principal assertion of _____ was that gold and silver were the mainstays of national wealth and essential to vigorous commerce.
A. collectivism
B. mercantilism
C. capitalism
D. open market system

B

Which of the following is NOT consistent with the central beliefs of mercantilism?
A. Government should intervene to achieve a surplus in the balance of trade.
B. Policies should be put in place to minimize exports and maximize imports.
C. Imports should be limited by tariffs and quotas.
D. Exports should be subsidized.

B

Mercantilists saw no virtue in _____.
A. a large volume of trade
B. protectionism
C. tariffs and quotas
D. subsidizing exports

A

An inconsistency in the mercantilist doctrine, as pointed out by David Hume, is that:
A. it indirectly helped increase volume of a country's imports.
B. it presented a crude case for exclusion of government in matters pertaining to exports and imports.
C. no country could sustain a surplus on the balance of trade.
D. it was not backed by either sound political principles or social ideologies.

C

The flaw with mercantilism was that it viewed trade as a:
A. zero-sum game.
B. mutually beneficial activity.
C. positive-sum game.
D. threat to a nation's sovereignty.

A

A situation in which gains by all parties can be achieved is called a:
A. level playing field.
B. zero-sum game.
C. positive-sum game.
D. trade surplus.

C

Neo-mercantilists equate _____ with economic power and economic power with
_____.
A. international trade; corruption
B. political power; balance-of-trade surplus
C. imports; regional dominance
D. absolute advantage; trade monopoly

B

A country intentionally keeps its currency value low against the currency of another in order to sell more goods to the latter. This can be viewed as a(n) _____ policy.
A. inflationist
B. totalitarian
C. neo-mercantilist
D. capitalist

C

Which of the following theories of international trade was advanced by Adam Smith?
A. Theory of absolute advantage
B. Theory of comparative advantage
C. New trade theory
D. Product life-cycle theory

A

A country is said to have a(n) _____ in the production of a product when it is more efficient than any other country in producing that product.
A. comparative advantage
B. relative advantage
C. consumer advantage
D. absolute advantage

D

According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then:
A. retain these goods for strict domestic sales.
B. trade these goods for goods produced by other countries.
C. sell these goods to maintain a trade surplus.
D. prohibit the import of these goods from other countries.

B

The different combinations of goods that a country, say Ghana, could produce are represented by the line GG' in Figure 5.1. This is referred to as Ghana's _____.
A. production possibility frontier
B. hypothetical trade barrier
C. import-export differentiator
D. resource conversion indicator

A

According to Adam Smith's theory of absolute advantage, a country that has an absolute advantage in the production of all goods:
A. enjoys the greatest benefits of international trade.
B. might go on to become the dominant country in the production of those goods.
C. will grow to be the biggest economic power.
D. might derive no benefits from international trade.

D

In his 1817 book entitled "Principles of Political Economy," _____ introduced the theory of comparative advantage.
A. Adam Smith
B. David Ricardo
C. Raymond Vernon
D. Max Weber

B

Country "A" specializes in producing beef more efficiently than any other country. It buys wheat, which it produces less efficiently than beef, from country "B," even though it produces wheat more efficiently itself. This situation is referred to as:
A. comprehensive advantage.
B. first advantage.
C. comparative advantage.
D. absolute advantage.

C

To an even greater degree than the theory of absolute advantage, _____ suggests that trade is a positive-sum game in which all participating countries fetch economic gains.
A. the Heckscher-Ohlin theory
B. mercantilism
C. the theory of comparative advantage
D. Leontief's paradox

C

_____ theory suggests that consumers in all nations can consume more if there are no restrictions on trade.
A. Porter's
B. Vernon's
C. Samuelson's
D. Ricardo's

D

Which of the following is one of the unrealistic assumptions that the simple Ricardian model of comparative advantage used in the text is based on?
A. There are many countries and many more goods in the world.
B. Each country has a fixed stock of resources.
C. Free trade changes the efficiency with which a country uses its resources.
D. Differences in the prices of resources in different countries exist.

B

The simple model of comparative advantage used in the text is based on assuming away:
A. the effects of trade on income distribution within a country.
B. constant returns to scale.
C. that all resources can move freely from the production of one good to another.
D. that free trade does not change the efficiency with which the countries use their resources.

A

_____ argued that contrary to the standard interpretation, in certain circumstances, the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor nation.
A. Raymond Vernon
B. Andrew Warner
C. Paul Samuelson
D. Jeffery Sachs

C

In comparative advantage, the assumption is that resources can move freely from production of one good to another. Why is this assumption unrealistic?
A. The process of shifting resources from one good to another eliminates human suffering.
B. The benefit of free trade is much lesser compared to the cost of shifting resources.
C. The process of moving resources causes friction and human suffering.
D. There are regulations that prohibit such movement.

C

The units of resources required to produce a good are assumed to remain unchanged no matter where one is on a country's production possibility frontier. This is known as:
A. zero-sum game.
B. positive-sum game.
C. constant returns to specialization.
D. diminishing returns to specialization.

C

Diminishing returns to specialization occurs when:
A. natural resources begin to run out owing to pollution.
B. more units of resources are required to produce each additional unit.
C. the cost of producing goods reduces substantially with increase in number of goods produced.
D. the quality of resources comes down as a result of producing more goods.

B

It is more realistic to assume diminishing returns to specialization when evaluating the theory of comparative advantage. This is because:
A. there exist differences in the prices of resources in different countries.
B. resources can move freely from the production of one good to another within a country.
C. not all resources are of the same quality.
D. different goods use resources in the same proportions.

C

The comparative advantage theory is considered to have ignored which of the following statements?
A. Constant returns to specialization implies a concave Production Possibility Frontier.
B. Constant returns to specialization suggests that the gains from specialization are likely to be exhausted before specialization is complete.
C. It is feasible for a country to specialize to a point where the resulting gains from trade are outweighed by diminishing returns.
D. Different goods use different resources in different proportions.

D

Dynamic gains in both the stock of a country's resources and the efficiency with which resources are utilized will:
A. cause the country's PPF to be in a bell-shaped curve.
B. enable the country to produce more goods than it did before the introduction of free trade.
C. cause a country's PPF to shift inward.
D. enable the country to achieve constant returns to specialization

B

What was Samuelson's criticism of free trade?
A. He argued that dynamic gains lead to a universally beneficial outcome for all countries.
B. He argued that offshoring service jobs that were traditionally mobile will increase the market clearing wage rate.
C. He argued that free trade has historically been beneficial only to third world countries.
D. A rich country importing cheap goods from a poor country may not make up for the wage losses in the rich country.

D

According to Samuelson, the ability to offshore service jobs that traditionally were not internationally mobile, coupled with rapid advances in communications technology and the productivity of foreign labor due to better education have an effect on middle-class wages in the United States that can be similar to:
A. mass inward migration into the United States.
B. improvement in the standard of living in the United States.
C. better employability of United States labor.
D. a substantial hike in the market clearing wage rate

A

One of the rebuttals of Samuelson's critique of the free trade model is that:
A. the United States' ability to achieve constant returns to specialization is unparalleled.
B. the strict immigration policies of the United States help insulate the economy from inward migration.
C. introducing trade barriers may in fact be beneficial for the United States to some extent.
D. developing nations are unlikely to upgrade the skill level of their workforce rapidly enough.

D

_____ and _____ created a measure of how "open" to international trade an economy was and then looked at the relationship between "openness" and economic growth for a sample of more than 100 countries from 1970 to 1990.
A. Ricardo; Smith
B. Warner; Sachs
C. Porter; Vernon
D. Samuelson; Ohlin

B

In general, economic studies on the relationship between trade and economic growth suggest that:
A. countries open to international trade display higher growth rates than those that close their economies to trade.
B. comparative advantage theory does not hold much relevance in the modern world of international trade and open economies.
C. modern economic trends tend to be influenced more by the absolute advantage theory than the comparative advantage theory.
D. with the onset of free trade, rich countries are showing better dynamic gains in the efficiency with which resources are used.

A

According to the Heckscher-Ohlin theory, the pattern of international trade is determined by differences in:
A. labor productivity.
B. efficiency.
C. factor endowments.
D. management practices.

C

The United States has an abundance of arable land, but faces a shortage of low-cost labor. In contrast, China excels in the production of labor-intensive goods, such as footwear and textiles. According to the Heckscher-Ohlin theory:
A. United States will import textiles and footwear from China and export agricultural goods.
B. China will invest more than United States in the production of agricultural goods to exploit its population advantage.
C. United States and China will import agricultural goods and textiles respectively to exploit the comparative advantage.
D. the migration of Chinese laborers to United States will increase exponentially to bridge the shortage in cheap labor.

A

Nations have varying factor endowments, and different factor endowments explain differences in _____.
A. labor productivity
B. efficiency of processes
C. factor mobility
D. factor costs

D

The difference between Ricardo's theory and the Heckscher-Ohlin theory is that they attributed the rise of comparative advantage to differences in _____ and _____, respectively.
A. abundance of resources; education
B. economic systems; political ideologies
C. availability of labor; efficiency of production
D. productivity; factor endowments

D

Which theory 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?
A. Warner-Sachs
B. Wacziarg-Welch
C. Heckscher-Ohlin
D. Frankel-Romer

C

According to the text, most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because:
A. it makes fewer simplifying assumptions.
B. it predicts real-world international trade patterns with greater accuracy.
C. Ricardo's theory is less accurate due to the Leontief paradox.
D. Ricardo's theory is too complicated to be applied to real-world scenarios

A

U.S. exports were less capital-intensive than U.S. imports, despite the relative abundance of capital in the country. This phenomenon runs contrary to what the Heckscher-Ohlin theory would predict and is termed the _____ paradox.
A. Zeno
B. Leontief
C. Russell
D. Simpson

B

What is a possible explanation for the Leontief paradox?
A. U.S. imports goods that heavily use skilled labor and innovative entrepreneurship.
B. U.S. has a special advantage in producing new products made with innovative technologies.
C. U.S. exports heavy manufacturing products that use large amounts of capital.
D. U.S. has a strong absolute advantage over all other foreign nations because of its advantageous factor endowments.

B

One of the drawbacks of the Heckscher-Ohlin theory, even though it makes sound theoretical sense, is that:
A. it does not explain the differences in national factor endowments.
B. it argues that comparative advantage arises from differences in the countries' labor productivity.
C. it lacks common sense appeal.
D. it is a relatively poor predictor of real-world international trade patterns

D

One of the key assumptions of the Heckscher-Ohlin theory is that:
A. technologies are the same across countries.
B. differences in the prices of resources in different countries do not exist.
C. resources can move freely from the production of one good to another within a country.
D. trade has no effect on income distribution in a country.

a

aymond Vernon proposed the product life cycle in the mid-1960s. Vernon argued that two factors gave U.S. firms a strong incentive to develop new consumer products. These two factors were _____ and _____.
A. innovation; number of industries
B. size of the U.S. market; lack of competition
C. wealth; size of the U.S. market
D. entrepreneurial spirit; low-cost U.S. labor

C

Vernon's product life-cycle theory was based on the observation that for most of the 20th century, a very large proportion of the world's new products had been developed by U.S. firms and sold first in the _____ market.
A. Asian
B. Western European
C. U.S.
D. global

C

According to the product life-cycle theory, the high cost of U.S. labor gave U.S. firms an incentive to:
A. lower costs of services to offset a fall in demand.
B. develop cost-saving process innovations.
C. invite foreign direct investment in domestic industries.
D. embrace and promote open market capitalism.

B

Vernon argues that pioneering firms kept production facilities closer to the market and centers of decision making because:
A. of the uncertainty and risks inherent in introducing new products.
B. they believed that foreign production facilities were inferior in technical skills.
C. they believed that U.S. labor costs were much lower than those in foreign markets.
D. earlier U.S. governments were critical of outsourcing production to other countries.

A

According to Vernon, which of the following factors obviates the need for pioneering U.S. firms to look for low-cost production sites in other countries?
A. There is less uncertainty and risks inherent in introducing new products.
B. The demand for most new products tends to be based mainly on price.
C. U.S. labor costs were relatively low compared to global standards.
D. Firms can charge relatively high prices for new products.

D

Vernon argues that early in the life cycle of a typical new product, while demand is starting to grow rapidly in the United States, demand in other advanced countries:
A. remains limited to high income groups.
B. necessitates imports to the United States.
C. necessitates outsourcing of production to low-cost locations.
D. raises costs of production in the United States.

A

Vernon predicts that as the demand for a new product starts to grow in other advanced countries:
A. it becomes worthwhile for firms to invest in low-cost domestic labor in the United States.
B. they deem it worthwhile to invest in production facilities in the United States.
C. it is not worthwhile for firms in those countries to start producing the new product.
D. the potential for exports from the U.S. begins to get limited.

D

Vernon theorizes that as the market in the U.S. and other advanced nations matures, the product becomes more standardized and price becomes:
A. governmentally regulated.
B. higher.
C. unimportant.
D. the main competitive weapon.

D

Historically, the product life-cycle theory seems to be an accurate explanation of:
A. international trade patterns.
B. the growth of innovation in U.S. firms.
C. the Leontief paradox.
D. the current labor advantages in the U.S.

A

The relevance of the product life-cycle theory in the modern world seems more limited because:
A. many countries have increasingly invested in the U.S. labor market over the past century.
B. with the diminishing strength of the U.S. dollar, it loses the ability to generalize trade globally.
C. it holds true only for the brief U.S. dominance of the global economy.
D. historically, it has provided inaccurate explanations of international trade patterns.

C

Compared to the comparative advantage theory, the product life-cycle theory:
A. fails to predict the possibility of globally dispersed production.
B. is increasingly relevant to explaining trade patterns in the modern world.
C. makes a lot of simplifying assumptions.
D. explains the current labor advantages in the U.S.

A

The _____ theory began to emerge in the 1970s when some economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade.
A. balanced trade
B. Heckscher-Ohlin
C. new trade
D. product life-cycle

C

_____ are unit cost reductions associated with a large scale of output.
A. Comparative advantages
B. Factor endowments
C. Economies of scale
D. Diminishing returns

C

Because of substantial economies of scale, the new trade theory argues that trade can:
A. increase the variety of goods available to consumers.
B. increase the average costs of goods.
C. enable the global market to support a wide range of enterprises.
D. inhibit first-mover advantages in all products.

A

The _____ theory states that in those industries where the output required to attain economies of scale represents a significant proportion of total world demand, the global market may be able to support only a small number of enterprises.
A. Heckscher-Ohlin
B. comparative advantage
C. product life-cycle
D. new trade

D

The ability to spread fixed costs over a large volume, and the ability of large-volume producers to utilize specialized employees and equipment that are more productive than less-specialized employees and equipment, are both sources of:
A. first-mover disadvantages.
B. economies of scale.
C. conflict in international trade.
D. rising production costs.

B

The new trade theory points out that through its impact on economies of scale, trade can:
A. reduce the volume of the goods produced.
B. decrease the variety of goods available to consumers.
C. decrease the average costs of goods.
D. inhibit first-mover advantages in all industries.

C

Assuming a world without trade, in industries where economies of scale are important, both the variety of goods that a country can produce and the scale of production are limited by the _____.
A. size of the market
B. monetary system
C. purchasing power parity
D. strength of the currency

A

If a national market is small, there may not be enough demand to enable producers to realize _____ for certain products.
A. adequate supply
B. economies of scale
C. cheap labor
D. low volumes

B

According to new trade theory, which of the following could be a result of the economies of scale that may be achieved by individual firms as the size of the market expands due to trade?
A. Each nation can produce a wider variety of goods, minimizing its imports.
B. Each nation can simultaneously decrease the variety of goods available to its consumers and raise the costs of those goods.
C. Each nation may specialize in producing a narrower range of products, importing goods that it does not make.
D. Each nation can attain self-sufficiency in most products and eliminate exports.

C

According to the new trade theory, how does trade offer an opportunity for mutual gain even when countries do not differ in their resource endowments or technology?
A. Trade results in a contraction of the size of the markets of individual firms.
B. Trade allows for production of products at higher prices.
C. Trade affords realization of scale economies.
D. Trade allows countries to attain self-sufficiency in the production of all goods.

C

One of the themes in new trade theory is that the pattern of trade we observe in the world economy may be the result of _____ and _____.
A. competitive advantage; technological advancement
B. heterogeneous world market; globalization
C. economies of scale; first-mover advantages
D. liberal immigration policies; better standards of living

C

The economic and strategic advantages that accrue to early entrants in an industry are called:
A. first-mover advantages.
B. comparative advantages.
C. pioneering advantages.
D. early-bird advantages.

A

Which of the following is an advantage that first-movers enjoy?
A. Increasing returns to specialization
B. A positive-sum game due to lack of competition
C. Capture scale economies ahead of later entrants
D. Absolute advantage and higher efficiency

C

According to the new trade theory, countries whose firms establish a(n) _____ advantage with regard to the production of a particular new product may subsequently dominate global trade in that product.
A. comparative
B. absolute
C. first-mover
D. constant return

C

One of the implications of the new trade theory is that:
A. it predicts the U.S. dominating the world market for consumer goods.
B. nations may benefit from trade irrespective of resource endowments or technology.
C. U.S. switches from being an importer of products to an exporter owing to lowering of labor costs.
D. it accurately predicts the evolution of globally dispersed production.

B

) According to the new trade theory, the dominance of America and Europe in the trade of mid-sized and large aircraft is largely a product of:
A. the nascent world market for private jets owned by individuals.
B. lack of technological advancement elsewhere to compete with the leaders.
C. the unpredictability of supply and demand patterns endemic to the aviation industry.
D. first-mover advantages afforded by the industry.

D

The new trade theory is at variance with the _____ theory, which suggests that a country will predominate in the export of a product when it is particularly well endowed with those factors used intensively in its manufacture.
A. Heckscher-Ohlin
B. product life-cycle
C. comparative advantage
D. Ricardo-Sraffa

A

With regard to first-mover advantages and international trade, a study by Harvard business historian Alfred Chandler suggests the existence of first-mover advantages is an important factor in explaining:
A. the dominance of firms from certain nations in specific industries.
B. the economic hardships faced by former colonies of the West.
C. the superiority enjoyed by developing countries like India and China in producing goods that require highly-skilled labor.
D. the decline of United States' share in world output.

A

The most contentious implication of the new trade theory is perhaps the argument that it generates for _____ and _____.
A. free trade; laissez faire
B. entrepreneurship; innovation
C. luck; entrepreneurship
D. government intervention; strategic trade policy

D

The new trade theory diverts from its advocacy of free trade by:
A. suggesting that first-mover advantages influence domination of certain countries in specific industries.
B. suggesting that nations benefit even in absence of resource endowments and technology.
C. indirectly suggesting an economic rationale for a proactive trade policy.
D. stressing the role of luck, entrepreneurship, and innovation in giving a firm first-mover advantages.

C

Which of the following theorists published the results of an intensive research effort that attempted to determine why some nations succeed and others fail in international competition, in addition to, proposing an explanation in the form of a "diamond" of four national attributes?
A. Alfred Chandler
B. Raymond Vernon
C. Andrew Warner
D. Michael Porter

D

Which of the following best describes the essential task of Porter's 1990 study of national competitive advantage?
A. How do nations leverage their resources efficiently to gain absolute advantage?
B. Why does a nation achieve international success in a particular industry?
C. How do countries gain first-mover advantages?
D. What are the international trade patterns in evidence in the modern world?

B

Porter suggested four attributes making up the "diamond" consist of factor endowments, relating and supporting industries, firm strategy, structure, and rivalry, and:
A. nature of competition.
B. first-mover advantages.
C. constant returns to specialization.
D. demand conditions.

D

According to Porter's diamond, a nation's position in elements of production such as skilled labor or the infrastructure necessary to compete in a given industry is best referred to as:
A. capitalization.
B. demand conditions.
C. factor endowments.
D. optimization.

C

Porter's thesis was that four broad attributes of a nation shape the environment in which local firms compete, and that these attributes promote or impede the creation of competitive advantage. All of the following are attributes EXCEPT:
A. factor endowments.
B. first-mover advantages.
C. firm strategy, structure, and rivalry.
D. relating and supporting industries.

B

Porter maintains that two additional variables can influence the "diamond" of attributes in important ways. These two variables are _____ and ______.
A. entrepreneurship; strategic trade policies
B. innovation; entrepreneurship
C. absolute advantage; PPF
D. chance; government

D

Which of the following factor endowments would be classified as a basic factor by Michael Porter?
A. Communication
B. Research facilities
C. Natural resources
D. Skilled labor

C

Which of the following factor endowments would be classified as an advanced factor by Michael Porter?
A. Demographics
B. Climate and location
C. Natural resources
D. Skilled labor

D

Porter argued that in terms of factor endowments, _____ factors are the most significant for competitive advantage.
A. constant
B. basic
C. advanced
D. complementary

C

Japan is a country that is at a disadvantage in terms of natural resources but it has achieved economic success by investing in education, thereby building a vital pool of skilled labor and technological know-how. This reflects Porter's argument that:
A. competitive advantage is largely a product of basic factors.
B. basic factors can be upgraded by nations, while advanced factors are endowed by nature.
C. an initial advantage in basic factors is vital to competitive advantage.
D. advanced factors are the most significant for competitive advantage.

D

According to Porter, the characteristics of _____ are particularly important in shaping the attributes of domestically made products and in creating pressures for innovation and quality.
A. international customers
B. the U.S. market
C. foreign investment
D. home demand

D

Porter argues that a nation's firms gain competitive advantage if their domestic consumers are:
A. sophisticated and demanding.
B. price insensitive and trusting.
C. accommodating and flexible.
D. nationalist and protective of their domestic industries.

A

Sophisticated and demanding local customers in Scandinavia helped push Nokia of Finland and Ericsson of Sweden to invest in cellular phone technology long before demand for cellular phones took off in other developed nations. This underscores Porter's point about how:
A. home demand plays an important role in upgrading competitive advantage.
B. upgrading basic factors can help countries gain competitive advantage.
C. basic factors are the most significant for competitive advantage.
D. international trade can help firms gain competitive advantage.

A

Technological leadership in the U.S. semiconductor industry provided the basis for U.S. success in personal computers and several other technically advanced electronic products. Similarly, Switzerland's success in pharmaceuticals is closely related to its previous international success in the technologically related dye industry. These instances illustrate the attribute of national competitive advantage identified by Porter as:
A. national investment in basic factors of production.
B. the presence of sophisticated and knowledgeable local customers.
C. the presence of suppliers or related industries that are internationally competitive.
D. the international demand for a locally produced product.

C

_____ occurs when employees move between firms within a region and when national industry associations bring employees from different companies together for regular conferences or workshops.
A. Domestic competition
B. Organizational restructuring
C. Management friction
D. Knowledge flow

D

Porter noted the predominance of engineers in top management at German and Japanese firms and a predominance of people with finance backgrounds leading many U.S. firms. He argued that the dominance of finance in U.S. firms led to a relative loss of U.S. competitiveness in some engineering-based industries. Thus, Porter illustrates how different nations _____, which are instrumental in their building national competitive advantage.
A. upgrade their basic factors
B. have different trade policies
C. are characterized by different management ideologies
D. have varying levels of government interference

C

Porter, in his model of competitive advantage, suggested that there is a strong association between _____ and the creation and persistence of competitive advantage in an industry.
A. investment
B. vigorous domestic rivalry
C. eliminating competition
D. the availability of a captive market

B

Who argued that successful industries within a country tend to be grouped into "clusters" of related industries?
A. Michael Porter
B. Raymond Vernon
C. David Ricardo
D. Eli Heckscher

A

Porter argues that the presence of _____ component(s) is usually required for "Porter's diamond" to boost national competitive advantage.
A. at least two
B. all four
C. at least three
D. at least one

B

Does Porter's model of competitive advantage predict the pattern of international trade that we observe in the real world?
A. Yes, Porter's model has been supported by detailed empirical testing.
B. We do not know because Porter's theory has not been subjected to detailed empirical testing.
C. No, Porter's model has failed to stand the test of time and is dated.
D. Yes, Porter's model stands out as the one single theory that best predicts international trade.

B

If a company were to draw from the ideas proposed in the various theories of international trade, from a profit perspective, how would it go about selecting locations for its businesses?
A. It would concentrate its productive activities mostly in developing countries.
B. It would concentrate its productive activities in its home country.
C. It would disperse its productive activities to those countries where they can be performed most efficiently.
D. It would disperse its productive activities across all countries that serve as its market.

C

Preempting the available demand, gaining cost advantages related to volume, building an enduring brand ahead of later competitors, and, consequently, establishing a long-term sustainable competitive advantage, are all examples of:
A. monopolistic practices.
B. comparative advantages.
C. absolute advantages.
D. first-mover advantages.

D

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