Incoterms 2010 and International Business - 101
Incoterms 2010 and International Business - Wild - Chapter 5 - QUIZ
Incoterms 2010 and International Business - 101
International Business: The Challenges of Globalization, 8th Edition, Wild & Wild
Incoterms 2010 and International Business - Wild - Chapter 5 - QUIZ
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International Business, 8e (Wild/Wild)
Chapter 5 International Trade Theory
1) ________ refers to the purchase, sale, or exchange of goods and services across national borders.
- A) Domestic trade
- B) Foreign direct investment
- C) International trade
- D) Mercantilism
Answer: C
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
2) The importance of trade for a nation can be measured by ________.
- A) examining the amount of wealth acquired by the national government through restrictive trade policies
- B) the living standards of people involved in only trade activities
- C) the number of acquired territories the nation has that serves as sources of inexpensive raw materials
- D) examining the volume of its trade relative to its total output
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
3) Most of the world merchandise trade is composed of trade in ________.
- A) minerals
- B) services
- C) manufactured goods
- D) agricultural products
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
4) A majority of the total world merchandise trade occurs among ________.
- A) middle-income and low-income economies
- B) high-income economies
- C) newly industrialized countries
- D) emerging markets
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
5) The smallest portion of the total world trade comprises trade between ________.
- A) high-income and middle-income nations
- B) low-income and middle-income nations
- C) developed countries
- D) First World member countries
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
6) The danger of trade dependency is that ________.
- A) it often leads to the exploitation of developed countries
- B) political turmoils in a country might affect all dependent countries
- C) the countries involved in trade often get into rivalry over trade tariff issues
- D) it is difficult to end trade activities with current trade partners and find new trade partners
Answer: B
Skill: Concept
Difficulty: Moderate
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
7) The condition that results when the value of a nation's exports is greater than the value of its imports is called ________.
- A) a trade deficit
- B) a trade surplus
- C) mercantilism
- D) dumping
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
8) The condition that results when the value of a country's imports is greater than the value of its exports is called ________.
- A) a trade deficit
- B) economies of scale
- C) a break-even point
- D) absolute advantage
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
Scenario: Better Mousetrap Inc.
Better Mousetrap Inc. is a manufacturing company that sells pest control products. Recently the company launched an innovative mousetrap with a unique design that has been selling well in the U.S. market. Senior Vice President Marc Wallace, even recommended expanding sales overseas in order to increase company revenues.
9) In reviewing his fulfillment process, Jack realizes that different customers opt for different types of shipping based on their preferences. Which of the following would most likely help Jack provide better shipping service to his customers?
- A) introduce overnight delivery but at a very high cost
- B) reduce costs by implementing a cheaper but slower delivery method
- C) implement a universal delivery method to capitalize on efficiency gains
- D) offer customers a choice of delivery methods with different speeds and costs
Answer: D
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
10) International trade is the purchase, sale, or exchange of goods and services across national borders.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
11) The value of trade passing through the borders of all countries exceeds the amount of goods and services they produce.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
12) Most of the world's merchandise trade is composed of trade in agricultural products.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
13) Trade in services tends to be relatively more important for the world's richest countries.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
14) When a country's currency is weak relative to other nations, domestic products are more expensive than imports.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
15) Trade deficit occurs when the value of a country's imports is greater than the value of its exports.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
16) According to Adam Smith, international trade should be restricted by tariffs and quotas in order to give a country an absolute advantage.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
17) Discuss the dangers of trade dependency.
Answer: The dangers of trade dependency become apparent when a nation experiences economic recession or political turmoil, which then also harms dependent nations. Trade dependency is a concern in Mexico, which for 30 years was a favorite destination for the investments of U.S. companies. Mexican factories assemble all sorts of products headed for the U.S. market, including refrigerators, mobile phones, and many types of garments. But a weak education system, corruption, an outdated infrastructure, and drug-related violence are forcing some companies to abandon Mexico for locations in Asia and Europe. This move has left many Mexicans unemployed. Although trade dependency was a blessing for Mexico for years, it is now feeling the pain as some companies shift jobs out of the country. The best way for Mexico to cope with its dependency on the United States is to improve its competitiveness and make it the preferred destination among all emerging markets.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
18) Describe the potential benefits of international trade. Why would a nation trading with a neomercantilist country be at a disadvantage?
Answer: The purchase, sale, or exchange of goods and services across national borders is called international trade. This is in contrast to domestic trade, which occurs between different states, regions, or cities within a country. In recent years, nations that embrace globalization are seeing trade grow in importance for their economies. One way to measure the importance of trade to a nation is to examine the volume of an economy's trade relative to its total output.
International trade is opening doors to new entrepreneurial opportunity across the globe. It also provides a country's people with a greater choice of goods and services. International trade is an important engine for job creation in many countries. The U.S. Department of Commerce calculates that, for every $1 billion increase in exports, 22,800 jobs are created in the United States. It is also estimated that 12 million U.S. jobs depend on exports and that these jobs pay on average from 13 to 18 percent more than those not related to international trade. Expanded trade benefits other countries similarly.
Nations dealing with a neomercantilist trading partner will be at a disadvantage because neomercantilist countries limit their imports. The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation's well-being, such as living standards or human development, are irrelevant. The practice of mercantilism rested upon three essential pillars: trade surpluses, government intervention, and colonialism.
The mercantilist and colonial policies greatly expanded the wealth of nations that implemented them. This wealth allowed nations to build armies and navies to control their far-flung colonial empires and to protect their shipping lanes from attack by other nations. It was a source of a nation's economic power that in turn increased its political power relative to other countries. Today, countries seen by others as trying to maintain a trade surplus and expand their national treasuries at the expense of other nations are accused of practicing neomercantilism or economic nationalism.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
19) Discuss the volume of international trade, and explain the role government and chance play in the growth of international trade.
Answer: The value and volume of international trade continues to increase. Today world merchandise exports are valued at more than $14 trillion, and service exports are nearly $3 trillion. Perhaps not surprisingly, the United States ranks first in commercial services exports and ranks third in merchandise exports (behind Germany and China). Most of world merchandise trade is composed of trade in manufactured goods. The dominance of manufactured goods in the trade of merchandise has persisted over time and will likely continue to do so. The reason is its growth is much faster than trade in the two other classifications of merchandise-mining and agricultural products. Although the importance of trade in services is growing for many nations, it tends to be relatively more important for the world's richest countries. Trade in services accounts for around 20 percent of total world trade.
Government and chance play a role in fostering the national competitiveness of industries in international trade. First, governments, by their actions, can often increase the competitiveness of firms and perhaps even entire industries. Governments of emerging markets could increase economic growth by increasing the pace of privatization of state-owned companies, for example. Privatization forces those companies to grow more competitive in world markets if they are to survive. Second, although chance events can help the competitiveness of a firm or an industry, it can also threaten it.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 5.1: Describe the benefits, volume, and patterns of international trade.
20) ________ says that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports.
- A) Absolute advantage theory
- B) Factor proportions theory
- C) Mercantilism
- D) Communism
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
21) The measures of a nation's well-being other than the financial wealth accumulated through exports are irrelevant according to ________.
- A) mercantilism
- B) absolute advantage theory
- C) factor proportions theory
- D) new trade theory
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
22) Which of the following was a prominent mercantilist nation?
- A) U.S.
- B) China
- C) Britain
- D) Japan
Answer: C
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
23) One of the major pillars upon which the practice of mercantilism rested was ________.
- A) economies of scale
- B) pricing mechanism
- C) excessive imports
- D) trade surpluses
Answer: D
Skill: Concept
Difficulty: Moderate
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
24) According to mercantilism, the accumulation of national wealth depended on the ________.
- A) increase in a nation's trade surplus
- B) increase in a nation's trade deficit
- C) expansion of a nation's total value of trade
- D) expansion of a nation's total volume of trade
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
25) Which of the following statements is incorrect with regard to the importance of colonies for mercantilist nations?
- A) They served as sources of inexpensive raw materials.
- B) They served as markets for higher-priced finished goods.
- C) They served as a source of military protection.
- D) They served as a source of profits for mercantilist powers.
Answer: C
Skill: Concept
Difficulty: Moderate
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
26) Nations following the theory of ________ believed that the world's wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbors.
- A) absolute advantage
- B) comparative advantage
- C) mercantilism
- D) factor proportions
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
27) Today, countries seen by others as trying to maintain a trade surplus and expand their national treasures at the expense of other nations are accused of practicing ________.
- A) totalitarianism
- B) anti-mercantilism
- C) social stratification
- D) economic nationalism
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
28) Another term for neomercantilism is ________.
- A) new trade
- B) free trade
- C) economic nationalism
- D) political nationalism
Answer: C
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
29) Trade between most nations is presently characterized by a certain degree of isolationism.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
30) Mercantilism states that nations should only concern themselves with accumulating financial wealth.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
31) Mercantilist countries used to amass wealth by acquiring less-developed territories around the world.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
32) Mercantilism views competition for the world's wealth as a positive-sum game.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
33) Explain mercantilism. What were its major flaws?
Answer: The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation's well-being, such as living standards or human development, are irrelevant. Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s. The most prominent mercantilist nations included Britain, France, the Netherlands, Portugal, and Spain.
How Mercantilism Worked-When navigation was a fairly new science, Europeans explored the world by sea and claimed the lands they encountered in the name of the European monarchy that financed their voyage. Early explorers landed in Africa, Asia, and the Americas, where they established colonies. Colonial trade was conducted for the benefit of mother countries, and colonies were generally treated as exploitable resources.
In recent times, former colonies have struggled to diminish their reliance on the former colonial powers. For example, in an effort to decrease their dependence on their former colonial powers, African nations are welcoming trade relationships with partners from Asia and North America. But because of geographic proximity, the European Union is still often preferred as a trading partner.
Flaws of Mercantilism-Despite its seemingly positive benefits for any nation implementing it, mercantilism is inherently flawed. Mercantilist nations believed that the world's wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbors–called a zero-sum game. The main problem with mercantilism is that, if all nations were to barricade their markets from imports and push their exports onto others, international trade would be severely restricted. In fact, trade in all nonessential goods would likely cease altogether. In addition, paying colonies little for their exports but charging them high prices for their imports impaired their economic development. Thus, their appeal as markets for goods was less than it would have been if they were allowed to accumulate greater wealth.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
34) Discuss the three essential pillars of the theory of mercantilism.
Answer: The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation's well-being, such as living standards or human development, are irrelevant. Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s. The most prominent mercantilist nations included Britain, France, the Netherlands, Portugal, and Spain. The practice of mercantilism rested upon three essential pillars: trade surpluses, government intervention, and colonialism.
Trade Surpluses-Nations believed they could increase their wealth by maintaining a trade surplus-the condition that results when the value of a nation's exports is greater than the value of its imports. In mercantilism, a trade surplus meant that a country was taking in more gold on the sale of its exports than it was paying out for its imports. A trade deficit is the opposite condition-one that results when the value of a country's imports is greater than the value of its exports. In mercantilism, trade deficits were to be avoided at all costs.
Government Intervention-Governments actively intervened in international trade to maintain a trade surplus. According to mercantilism, the accumulation of wealth depended on increasing a nation's trade surplus, not necessarily expanding its total value or volume of trade. The governments of mercantilist nations did this by either banning certain imports or imposing various restrictions on them, such as tariffs or quotas. At the same time, they subsidized industries based in the home country to expand exports. Governments also typically outlawed the removal of their gold and silver to other nations.
Colonialism-Mercantilist nations acquired territories (colonies) around the world to serve as sources of inexpensive raw materials and as markets for higher-priced finished goods. These colonies were the source of essential raw materials, including tea, sugar, tobacco, rubber, and cotton. These resources would be shipped to the mercantilist nation, where they were incorporated into finished goods such as clothing, cigars, and other products. These finished goods would then be sold to the colonies. Trade between mercantilist countries and their colonies were a huge source of profits for the mercantilist powers. The colonies received low prices for basic raw materials but paid high prices for finished goods.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.
35) Which of the following refers to the ability of a nation to produce a good more efficiently than any other nation?
- A) mercantilism
- B) comparative advantage
- C) absolute advantage
- D) neomercantilism
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
36) Who proposed the theory of absolute advantage?
- A) David Ricardo
- B) Adam Smith
- C) Bertil Ohlin
- D) Raymond Vernon
Answer: B
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
37) Adam Smith believed that ________.
- A) governments should determine trade flows
- B) market forces should determine trade flows
- C) international trade should be restricted by tariffs and quotas
- D) countries should produce most goods themselves and trade as little as possible
Answer: B
Skill: Concept
Difficulty: Moderate
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
38) The theory of absolute advantage measures a nation's wealth by determining the ________.
- A) amount of gold it has on reserve
- B) quantity of minerals it has on reserve
- C) total trade volume in the country
- D) living standards of its people
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
39) The theory of absolute advantage destroys the mercantilist idea that international trade is a ________.
- A) positive-sum game
- B) zero-sum game
- C) negative-sum game
- D) win-win game
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
40) Which of the following is true about the theory of absolute advantage?
- A) The theory accepts the mercantilist idea that international trade is a zero-sum game.
- B) The theory approves the objective of national governments to acquire wealth through restrictive trade policies.
- C) The theory emphasizes that nations should open their doors to trade so that people can obtain more goods at cheaper rates.
- D) The theory measures a nation's wealth by how much gold and silver it has on reserve.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
41) When there are gains to be had by both countries that are party to an exchange, international trade is considered a(n) ________.
- A) positive-sum game
- B) equal-sum game
- C) negative-sum game
- D) zero-sum game
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
42) When a country is not able to produce a good more efficiently than other nations, but produces the good more efficiently than it does any other good, it is said to have a(n) ________.
- A) absolute advantage
- B) resource advantage
- C) first-mover advantage
- D) comparative advantage
Answer: D
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
43) The theory of comparative advantage was proposed by ________.
- A) David Ricardo
- B) Adam Smith
- C) Bertil Ohlin
- D) Raymond Vernon
Answer: A
AACSB: Analytical thinking
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
44) To complete his business bookkeeping work each month, a business owner spends about 20 hours and in the process, has to give up $900 in income. If he hired a bookkeeper to do the work, the job would be completed in 15 hours and would cost him $600. Should the owner hire the bookkeeper or continue to do the work himself?
- A) He should hire the bookkeeper because the bookkeeper has an absolute advantage in completing the books.
- B) He should do the bookkeeping himself because he has an absolute advantage in completing the books.
- C) He should hire the bookkeeper only if the bookkeeper agrees to give him a discount on the service price.
- D) He should hire the bookkeeper only if the bookkeeper is willing to complete the work in 12 hours.
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
45) Country A produces a ton of coffee using one unit of resources. Country B produces two tons of coffee using one unit of resources. Which of the following is true regarding Country A and Country B?
- A) Country A has an absolute advantage in producing coffee.
- B) Country B has an absolute advantage in producing coffee.
- C) Neither Country A nor Country B has an absolute advantage in producing coffee.
- D) Both Country A and Country B have an absolute advantage in producing coffee.
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Moderate
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
46) According to the theory of ________, trade is beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.
- A) absolute advantage
- B) mercantilism
- C) comparative advantage
- D) factor proportions
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
47) Which of the following statements is true regarding the assumptions of the absolute and comparative advantage theories?
- A) The theories assume that there are many number of countries engaged in the production and consumption of just two goods.
- B) The theories assume that there are additional costs for transporting traded goods from one country to another.
- C) The theories assume labor to be the only resource used in the production process.
- D) The theories assume that specialization in the production of one particular good results in gains in efficiency.
Answer: C
Skill: Concept
Difficulty: Moderate
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
48) Which of the following is an assumption made by the comparative advantage theory?
- A) maximization of production and consumption
- B) government interference and control in trade activities
- C) creation of trade deficits
- D) creation of trade surpluses
Answer: A
Skill: Concept
Difficulty: Moderate
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
49) Both absolute and comparative advantage theories assume that ________ is the only resource used in the production process.
- A) land
- B) labor
- C) capital
- D) equipment
Answer: B
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
50) A product's components are manufactured in a country that can produce them at a very low cost while maintaining its quality. These components are then assembled in another country where productivity in assembly is high. This process resembles the theory of ________.
- A) comparative advantage
- B) mercantilism
- C) the international product life cycle
- D) factor proportions
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
51) Much production in the world today closely resembles what is predicted by the ________.
- A) new trade theory
- B) international product life cycle
- C) theory of comparative advantage
- D) theory of factor proportions
Answer: C
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
Scenario: Foodland and Drinkland
Two countries, Foodland and Drinkland, produce food and drinks. In Foodland, one resource unit produces 20 tons of food and one resource unit produces 10 tons of drinks. In Drinkland, one resource unit produces 12 tons of food and one resource unit produces 24 tons of drinks.
Food Drinks
Foodland 20 10
Drinkland 12 24
52) Based on the above scenario, which of the following statements is true?
- A) Foodland has an absolute advantage in producing food.
- B) Foodland has an absolute advantage in producing drinks.
- C) Drinkland has an absolute advantage in producing both food and drinks.
- D) Drinkland has an absolute advantage in producing food.
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
53) Which of the following statements is true of the above scenario?
- A) Foodland has a comparative advantage in producing drinks.
- B) Drinkland cannot trade with Foodland because trade is too expensive.
- C) Drinkland has an absolute advantage in producing drinks.
- D) Foodland should stop producing food and just produce drinks.
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
54) If these two countries were to gain from trading with each other, this would support the notion that trade is a ________.
- A) zero-sum game
- B) negative experience
- C) positive-sum game
- D) form of economic nationalism
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
55) A third country, Funland, also produces food and drinks. In Funland, one resource unit produces 8 tons of food and 6 tons of drinks. Which of the following is true about Funland, Foodland, and Drinkland?
- A) Funland has a comparative advantage in producing drinks.
- B) Funland has a comparative advantage in producing food.
- C) Funland has an absolute advantage in producing food.
- D) Funland has an absolute advantage in producing drinks.
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
56) The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
57) The theory of absolute advantage measures a nation's wealth by the standard of living of its people.
Answer: TRUE
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
58) Economist David Ricardo developed the theory of comparative advantage.
Answer: TRUE
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
59) The ability of a nation to produce a good more efficiently than any other nation is called its comparative advantage.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
60) The theories of comparative advantage and absolute advantage assume that countries are driven only by the maximization of production and consumption.
Answer: TRUE
Skill: Concept
Difficulty: Moderate
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
61) The theories of comparative and absolute advantage assume that specialization in the production of one particular good results in efficiency gains.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
62) Explain how the theory of absolute advantage conflicts with the theory of mercantilism.
Answer: The theory of mercantilism conflicts with another trade theory, the theory of absolute advantage. Scottish economist Adam Smith first put forth the trade theory of absolute advantage in 1776. The ability of a nation to produce a good more efficiently than any other nation is called an absolute advantage. In other words, a nation with an absolute advantage can produce a greater output of a good or service than other nations using the same amount of, or fewer, resources.
The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game. Instead, because there are gains to be had by both countries party to an exchange, international trade is a positive-sum game. The theory also calls into question the objective of national governments to acquire wealth through restrictive trade policies. It argues that nations should instead open their doors to trade so their people can obtain a greater quantity of goods more cheaply. The theory does not measure a nation's wealth by how much gold and silver it has on reserve but by the living standards of its people.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
63) Explain the theory of comparative advantage using an example, and describe its assumptions and limitations.
Answer: An English economist named David Ricardo developed the theory of comparative advantage in 1817. He proposed that, if one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good. In other words, trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.
For example, suppose that investor Warren Buffett has previously installed many hot tubs and can do the job in one week, twice as fast as the hot tub installer. Thus, Buffett now holds absolute advantages in both investing and hot tub installation. Although the professional installer is at an absolute disadvantage in both hot tub installation and investing, he is less inefficient in hot tub installation. Despite his absolute advantage in both areas, however, Buffett would still have to give up $200,000 (one week's pay) to take time off from investing to complete the work. Is this a wise decision? No. Buffett should hire the professional installer to do the work for $10,000. The installer earns money he would not earn if Buffett did the job himself. And Warren Buffett earns more money by focusing on his investing than he would save by installing the hot tub himself.
The theory of comparative advantage makes several important assumptions that limit real-world application of the theories. First, it is assumed that countries are driven only by the maximization of production and consumption. This is often not the case. Governments often get involved in international trade out of a concern for workers or consumers.
Second, the theories assume that there are only two countries engaged in the production and consumption of just two goods. This is obviously not the situation that exists in the real world. There currently are more than 180 countries and a countless number of products being produced, traded, and consumed worldwide.
Third, it is assumed that there are no costs for transporting traded goods from one country to another. In reality, transportation costs are a major expense of international trade for some products. If transportation costs for a good are higher than the savings generated through specialization, trade will not occur.
Fourth, the theories consider labor the only resource used in the production process because labor accounted for a large portion of the total production cost of goods at the time the theories were developed. Moreover, it is assumed that resources are mobile within each nation but cannot be transferred between nations. But labor, and especially natural resources, can be difficult and costly to transfer between nations.
Finally, it is assumed that specialization in the production of one particular good does not result in gains in efficiency. But we know that specialization results in increased knowledge of a task and perhaps even future improvements in how that task is performed. Thus, the amount of resources needed to produce a specific amount of a good should decrease over time.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
64) How does the theory of comparative advantage differ from the factor proportions theory? Include a description of the factor proportions theory in your answer.
Answer: An English economist named David Ricardo developed the theory of comparative advantage in 1817. He proposed that, if one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good. In other words, trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.
In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. The theory resulted from the research of two economists, Eli Heckscher and Bertil Ohlin, and is therefore sometimes called the Heckscher—Ohlin theory.
Factor proportions theory differs considerably from the theory of comparative advantage. The theory of comparative advantage states that a country specializes in producing the good that it can produce more efficiently than any other good. Thus, the focus of the theory (and absolute advantage as well) is on the productivity of the production process for a particular good. By contrast, factor proportions theory says that a country specializes in producing and exporting goods using the factors of production that are most abundant and thus cheapest-not the goods in which it is most productive.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 5.3: Detail the theories of absolute advantage and comparative advantage.
65) The ________ theory states that countries produce and export goods that require resources available in abundance and import goods that require resources in short supply.
- A) new trade
- B) absolute advantage
- C) international product life cycle
- D) factor proportions
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.4: Summarize the factor proportions theory of trade.
66) The focus of factor proportions theory is on the ________.
- A) productivity of the production process
- B) cost-effectiveness of the production process
- C) use of depleting production factors
- D) use of expensive production factors
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.4: Summarize the factor proportions theory of trade.
67) Factor proportions theory was developed by ________.
- A) Smith and Ricardo
- B) Ricardo and Ohlin
- C) Heckscher and Ohlin
- D) Heckscher and Smith
Answer: C
Skill: Concept
Difficulty: Easy
LO: 5.4: Summarize the factor proportions theory of trade.
68) Factor proportions theory differs from the theory of comparative advantage in that the focus of factor proportions theory is on the ________.
- A) usage of the most abundant factors of production, while the focus of the comparative advantage theory is on the productivity of the production process
- B) accumulation of financial wealth in the form of gold by encouraging imports and discouraging exports, while the comparative advantage theory focuses on usage of the most abundant factors of production
- C) productivity of the production process, while the comparative advantage theory focuses on maximization of production and consumption
- D) minimization of trade surpluses, whereas the comparative advantage theory focuses on the mercantilist idea that international trade is a zero-sum game
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.4: Summarize the factor proportions theory of trade.
69) The Leontief paradox describes evidence ________.
- A) in support of the predictions of the mercantilist theory
- B) contrary to the predictions of the factor proportions theory
- C) that the assumptions of international product life cycle theory are invalid
- D) that the assumptions of the new trade theory are invalid
Answer: B
Skill: Concept
Difficulty: Moderate
LO: 5.4: Summarize the factor proportions theory of trade.
70) Factor proportions theory states that factors in great supply relative to demand will be more costly than factors in short supply relative to demand.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.4: Summarize the factor proportions theory of trade.
71) Factor proportions theory states that a country will produce and export those goods that require resources abundantly available within the country.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.4: Summarize the factor proportions theory of trade.
72) The factor proportions theory of international trade was developed by Wassily Leontief.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 5.4: Summarize the factor proportions theory of trade.
73) Discuss the factor proportions theory and describe the evidence on this theory.
Answer: In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.
Factor proportions theory breaks a nation's resources into two categories: labor on the one hand, land and capital equipment on the other. It predicts that a country will specialize in products that require labor if the cost of labor is low relative to the cost of land and capital. Alternatively, a country will specialize in products that require land and capital equipment if their cost is low relative to the cost of labor.
Evidence on Factor Proportions Theory: The Leontief Paradox-Despite its conceptual appeal, factor proportions theory is not supported by studies that examine the trade flows of nations. The first large-scale study to document such evidence was performed by a researcher named Wassily Leontief in the early 1950s. Leontief tested whether the United States, which uses an abundance of capital equipment, exports goods requiring capital-intensive production and imports goods requiring labor-intensive production. Contrary to the predictions of the factor proportions theory, his research found that U.S. exports require more labor-intensive production than its imports. This apparent paradox between the predictions using the theory and the actual trade flows is called the Leontief paradox. Leontief's findings are supported by more recent research on the trade data of a large number of countries.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.4: Summarize the factor proportions theory of trade.
74) Explain the factor proportions theory and discuss why it is at odds with the new trade theory.
Answer: In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. Factor proportions theory says that a country specializes in producing and exporting goods using the factors of production that are most abundant and thus cheapest-not the goods in which it is most productive.
In contrast, the new trade theory states that (1) there are gains to be made from specialization and increasing economies of scale, (2) the companies first to market can create barriers to entry, and (3) government may play a role in assisting its home companies. Because the theory emphasizes productivity rather than a nation's resources, it is in line with the theory of comparative advantage but at odds with factor proportions theory.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 5.4: Summarize the factor proportions theory of trade.
75) The international product life cycle theory was developed by ________.
- A) Milton Friedman
- B) Karl Marx
- C) Michael Porter
- D) Raymond Vernon
Answer: D
Skill: Concept
Difficulty: Easy
LO: 5.5: Explain the international product life cycle theory.
76) The international product life cycle theory was put forth for ________.
- A) service goods
- B) abundant resources
- C) manufactured goods
- D) natural resources
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.5: Explain the international product life cycle theory.
77) The ________ theory states that a country's export eventually becomes its import.
- A) competitive advantage
- B) factor proportions
- C) international product life cycle
- D) new trade
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.5: Explain the international product life cycle theory.
78) During which of the following stages of the international product life cycle theory does high purchasing power and buyer demand in an industrialized nation encourage a company to design and introduce a product concept?
- A) product decline stage
- B) new product stage
- C) maturing product stage
- D) standardized product stage
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.5: Explain the international product life cycle theory.
79) During which stage of the international product life cycle theory does demand rise and remain sustained for a fairly lengthy period of time?
- A) product decline stage
- B) new product stage
- C) maturing product stage
- D) standardized product stage
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.5: Explain the international product life cycle theory.
80) During which stage of the product life cycle are companies looking for low-cost production bases in developing nations to supply a growing worldwide market?
- A) product decline stage
- B) new product stage
- C) maturing product stage
- D) standardized product stage
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.5: Explain the international product life cycle theory.
81) In the ________ of the international product life cycle, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels.
- A) product decline stage
- B) new product stage
- C) maturing product stage
- D) standardized product stage
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.5: Explain the international product life cycle theory.
Scenario: Better Mousetrap Inc.
Better Mousetrap Inc. is a manufacturing company that sells pest control products. Recently the company launched an innovative mousetrap with a unique design that has been selling well in the U.S. market. Senior Vice President Marc Wallace, even recommended expanding sales overseas in order to increase company revenues.
82) Wallace's executive team reviews the stages of the international product life cycle to understand better what to expect when the product is sold overseas. Since there is virtually no export market for the product at present, the product is most likely in which of the following stages of the international product life cycle?
- A) maturing product stage
- B) new product stage
- C) product decline stage
- D) standardized product stage
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.5: Explain the international product life cycle theory.
83) Wallace expects that markets abroad will soon become fully aware of the existence of the product and its benefits. Which of the following life cycle stages will the product be a part of during that period?
- A) maturing product stage
- B) product decline stage
- C) standardized product stage
- D) new product stage
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.5: Explain the international product life cycle theory.
84) Eventually, Wallace expects that domestic production of the mousetrap will cease altogether. This would happen in the ________ stage of the product life cycle.
- A) new product
- B) maturing product
- C) adapted product
- D) standardized product
Answer: D
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.5: Explain the international product life cycle theory.
85) In the maturing product stage of the international product life cycle theory, production facilities are introduced in countries with the highest demand.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5.5: Explain the international product life cycle theory.
86) Discuss the limitations of the international product life cycle theory. How well does the theory explain current trade patterns?
Answer: Raymond Vernon developed the international product life cycle theory at a time when most new products were being developed and sold first in the United States. One reason U.S. companies were strong globally in the 1960s was that their domestic production bases were not destroyed during the Second World War, as was the case in Europe (and to some extent Japan). In addition, during the war, the production of many durable goods in the United States, including automobiles, was shifted to the production of military transportation and weaponry. This laid the foundation for enormous postwar demand for new capital-intensive consumer goods, such as autos and home appliances. Furthermore, advances in technology that were originally developed with military purposes in mind were integrated into consumer goods. A wide range of new and innovative products like televisions, photocopiers, and computers met the seemingly insatiable appetite of consumers in the United States.
The theory seemed to explain world trade patterns quite well when the United States dominated world trade. But today the theory's ability to accurately depict the trade flows of nations is weak. The United States is no longer the sole innovator of products in the world. New products spring up everywhere as companies continue to globalize their research and development activities. Furthermore, companies today design new products and make product modifications at a very quick pace. The result is quicker product obsolescence and a situation in which companies replace their existing products with new product introductions. This is forcing companies to introduce products in many markets simultaneously to recoup a product's research and development costs before sales decline and the product is dropped. The theory has a difficult time explaining the resulting trade patterns.
In fact, older theories might better explain today's global trade patterns. Much production in the world today more closely resembles what is predicted by the theory of comparative advantage. For example, Boeing's components are made in countries that can produce them at a high level of productivity. Components are later assembled in a chosen location. This pattern resembles the theory of comparative advantage. Finally, the theory is challenged by the fact that more companies are operating in international markets from their inception. Many small companies are teaming up with companies in other markets to develop new products or production technologies. This strategy is particularly effective for small companies that would otherwise be unable to participate in international production or sales.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 5.5: Explain the international product life cycle theory.
87) Explain how both the international product life cycle theory and the new trade theory ultimately result in lower priced goods. Include a definition of "first mover advantage" in your answer.
Answer: The international product life cycle theory says that a company will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle.
In stage 1, the new product stage, the high purchasing power and demand of buyers in an industrialized country drive a company to design and introduce a new product concept. In stage 2, the maturing product stage, the domestic market and markets abroad become fully aware of the existence of the product and its benefits. Demand rises and is sustained over a fairly lengthy period of time. As exports begin to account for an increasingly greater share of total product sales, the innovating company introduces production facilities in the countries with the highest demand. Near the end of the maturity stage, the product begins generating sales in developing nations, and perhaps some manufacturing presence is established there.
In stage 3, the standardized product stage, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels. As the market becomes more price-sensitive, the company begins searching aggressively for low-cost production bases in developing nations to supply a growing worldwide market. Furthermore, as most production now takes place outside the innovating country, demand in the innovating country is supplied with imports from developing countries and other industrialized nations.
The pressure to lower prices also exists in the new trade theory. The new trade theory states that (1) there are gains to be made from specialization and increasing economies of scale, (2) the companies first to market can create barriers to entry, and (3) government may play a role in assisting its home companies.
First-Mover Advantage-According to the new trade theory, as a company increases the extent to which it specializes in the production of a particular good, output rises because of gains in efficiency. Regardless of the amount of a company's output, it has fixed production costs such as the cost of research and development and the plant and equipment needed to produce the product. The theory states that, as specialization and output increase, companies can realize economies of scale, thereby pushing the unit costs of production lower. That is why as many companies expand, they lower prices to buyers and force potential new competitors to produce at a similar level of output if they want to be competitive in their pricing.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 5.5: Explain the international product life cycle theory.
88) Which of the following is an argument offered by the new trade theory?
- A) It is in line with the factor proportions theory.
- B) There are gains to be made from specialization and increasing economies of scale.
- C) The companies first to market forgo the opportunities to create barriers to entry.
- D) Market forces alone play a role in assisting the home companies in a country.
Answer: B
Skill: Concept
Difficulty: Moderate
LO: 5.6: Outline the new trade theory and the first-mover advantage.
89) The new trade theory is mainly at odds with the ________ theory.
- A) international product life cycle
- B) comparative advantage
- C) national competitive advantage
- D) factor proportions
Answer: D
Skill: Concept
Difficulty: Easy
LO: 5.6: Outline the new trade theory and the first-mover advantage.
Scenario: Chuck Praeger, Global Entrepreneur
Chuck Praeger has made a name for himself by selling high-quality golf equipment to customers in Europe. He would like to expand his business into the Pacific Rim countries and has therefore, begun making inquiries into potential distributors.
90) Chuck is convinced that his golf equipment will sell itself. But he is preparing a special presentation for Asian customers because he wants to make a good first impression. As an expert in culture of the Pacific Rim countries, which of the following would be your most likely advice to Chuck?
- A) Be sure to have a tight legal contract ready, to avoid product piracy problems.
- B) Aggressive salesmanship is unlikely to work in Pacific Rim countries.
- C) Have plenty of English-language business cards to pass around because most Asians know English and like the language.
- D) Avoid the confusion introduced by third-party contacts.
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.6: Outline the new trade theory and the first-mover advantage.
91) Chuck believes that his business has grown because of his personal involvement in every step of the way. What advice do you offer Chuck as he continues to expand his business in new Asian markets?
- A) Contact distributors directly to avoid misunderstandings that can arise when using third-party contacts.
- B) Always stick to corporate settings when doing business to avoid misunderstandings that can arise in less formal environments.
- C) Protect your interests by insisting on detailed contracts from the start.
- D) Use proper intermediaries as required in Pacific Rim nations.
Answer: D
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.6: Outline the new trade theory and the first-mover advantage.
Scenario: Better Mousetrap Inc.
Better Mousetrap Inc. is a manufacturing company that sells pest control products. Recently the company launched an innovative mousetrap with a unique design that has been selling well in the U.S. market. Senior Vice President Marc Wallace, even recommended expanding sales overseas in order to increase company revenues.
92) Jack has always handled product returns on a case-by-case basis, but he is often unprepared to deal with too many cases of returns. Which of the following would most likely help Jack increase his repeat business?
- A) continuing with the current system, since it is already well-established
- B) accepting returns but crediting customer accounts slowly to discourage future returns
- C) planning for returns and giving prompt credits to customers
- D) avoiding receiving returns when possible to discourage the loss of revenue
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 5.6: Outline the new trade theory and the first-mover advantage.
93) National competitive advantage theory states that a nation's competitiveness in an industry depends on ________.
- A) the capacity of companies to create barriers to entry
- B) the capacity of the industry to innovate and upgrade
- C) the availability of government subsidies for industry development
- D) the availability of cheap factors of production in the nation
Answer: B
Skill: Concept
Difficulty: Moderate
LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.
94) According to the Porter diamond, which of the following is an example of an advanced factor?
- A) labor forces in the nation
- B) technological infrastructure in the nation
- C) climate in the nation
- D) natural resources in the nation
Answer: B
Skill: Concept
Difficulty: Easy
LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.
95) Which element of national competitive advantage theory divides resources into two groups: basic and advanced?
- A) demand conditions
- B) factor conditions
- C) related and supporting industries
- D) firm, strategy, structure, and rivalry
Answer: B
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.
96) An absolute advantage is the economic and strategic advantage gained by being the first company to enter an industry.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.
97) National competitive advantage theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.
98) According to Michael Porter, advanced factors account for the sustained competitive advantage a country enjoys in a product.
Answer: TRUE
Skill: Concept
Difficulty: Easy
LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.
99) Companies that belong to a nation's internationally competitive industries exist in isolation from supporting industries.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.
100) Explain how the national competitive advantage theory supports and builds upon the factor proportions theory.
Answer: The factor proportions theory is an international trade theory that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.
Factor proportions theory breaks a nation's resources into two categories: labor on the one hand, land and capital equipment on the other. It predicts that a country will specialize in products that require labor if the cost of labor is low relative to the cost of land and capital. Alternatively, a country will specialize in products that require land and capital equipment if their cost is low relative to the cost of labor.
The national competitive advantage theory supports and builds on the factor proportions theory, with "advanced factors." Michael Porter put forth a theory in 1990 to explain why certain countries are leaders in the production of certain products. The national competitive advantage theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. This theory identifies four elements present to varying degrees in every nation that form the basis of national competitiveness. The Porter diamond consists of (1) factor conditions; (2) demand conditions; (3) related and supporting industries; and (4) firm strategy, structure, and rivalry.
In terms of the first element, factor conditions, factor proportions theory considers a nation's resources, such as a large labor force, natural resources, climate, or surface features, as paramount factors in what products a country will produce and export. Porter acknowledges the value of such resources, which he terms basic factors, but he also discusses the significance of what he calls advanced factors.
Advanced factors include the skill levels of different segments of the workforce and the quality of the technological infrastructure in a nation. Advanced factors are the result of investments in education and innovation, including worker training and technological research and development. Whereas basic factors can be the initial spark for why an economy begins producing a certain product, advanced factors account for the sustained competitive advantage a country enjoys in that product.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.
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