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Chapter 7
MGT 302 Exam 2
| Question | Answer |
|---|---|
| Mercantilism | suggests that it is in a country’s best interest to maintain a trade surplus—to export more than it imports |
| Free trade | when the government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce or sel |
| International trade allows a country to | specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that could be produced more efficiently in other countries |
| The Heckscher-Ohlin theory emphasizes the interplay between the proportions in which | the factors of productions (land,labor,capital) are less available in different countries and the proportions in which they are needed for producing particular goods |
| the product life cycle theory suggests that early in their life, most products are | produced in and exported from the country in which they are developed. However, as the product becomes widely accepted globally, production starts in other countries, as a result the product may be exported back to the country it was developed |
| the new trade theory stresses that | certain industries can support only a limited number of firms. May be due to the ability of firms in a given market to capture first mover advantages |
| the Heckscher-Ohlin 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 |
| the mercantilist doctrine advocated | government intervention to achieve a surplus in the balance of trade. To achieve this, imports were limited by tariffs and quotas, while exports were subsudized |
| one inconsistency in the mercantilist doctrine in 1752 is that | exporting more than importing would result in an inflow of gold and silver which would swell the domestic money supply and generate inflation and lessen the price competitive advantage since goods will become more expensive. |
| the flaw with mercantilism was that it viewed trade as a | zero-sum game - one in which an economic gain in one country results in an economic loss by another |
| A country has absolute advantage in the production of a product when | when the country is more efficient than any other country at producing it |
| According to Smith, countries should _____ in the production of goods for which they have an ______ and then trade these goods for those produced by other countries | specialize ; absolute advantage |
| a production possibility frontier represents | the different combinations of a product/service a country can produce |
| Smith and Ricardo demonstrate that trade is not a zero-sum game as mercantilism think, it is instead a | positive-sum game - a situation in which all countries can benefit and this is demonstrated through specialization and trade since they produce net gains for all involved |
| According to Ricardo's theory of comparative advantage | countries should specialize in the production of those goods that it produces most efficiently and buy those goods that if produces less efficiently from other countries |
| Although a country has absolute advantage at producing a product, could it still benefit from trade? | yes, although a country has absolute advantage at producing two products, they might only have comparative advantage on one. By engaging in trade this country can buy the good it produces less efficiently and be able to specialize in the other good. |
| Comparative advantage arises from differences in national | factor endowments |
| factor endowment means | the extent to which a country is equipped with resources such as land, labor, and capital |
| Nations have varying factor endowments, and different factor endowments explain differences in | factor costs, specifically, the more abundant a factor, the lower its cost |
| the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in ____ while Ricardo's theory of comparative advantage argues that is by differences in _____ | factor endowments ; productivity |
| which theory is relatively a poor predictor of real world international trade patterns | the Heckscher-Ohlin theory, it is only goods on theoretical grounds |
| which theory predicts international trade patterns with greater accuracy | Ricardo's comparative advantage theory. Ex: the US exports commercial aircraft and imports textiles not because its factor endowments are especially suited to aircraft manufacture but because the US is more efficient at producing aircraft than textiles. |
| A key assumption in the Heckscher-Ohlin theory is that | technologies are the same across countries which is not the case. Differences in technology may lead to differences in productivity which in turn drives international trade patterns |
| according to what theory do mature industries tend to go out of the United States and into low-cost assembly locations | the product life cycle theory |
| Economies of scale involve | unit cost reductions associated with a large scale of output. So the larger the scale of output the lower the per unit costs. |
| companies can achieve economies of scale by | increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable |
| if a national market is small, there may not be enough demand to enable producers to realize _____ for certain products | economies of scale |
| A business's size is related to whether it can achieve an economy of scale for instance | larger companies have higher a higher chance of having economies of scale since it they have higher production levels, thus they have more cost savings as costs can be spread over a larger amount of goods. |
| larger chains having more cash in the bank and a greater number of customers, they are able to purchase a huge quantity of groceries from suppliers, resulting in a lower cost per unit, compared to the independent stores. This is an example of | economies of scale |
| Trade is mutually beneficial for any two countries involved since | it allows for the specialization of production, the realization of scale economies (lowers prices), producing greater variety of products, and lower prices. |
| what are the two themes of the new trade theory | economies of scale and first mover advantage |
| first mover advantages are | the economic and strategic advantages that accrue to early entrants into an industry |
| what is an important first mover advantage | the ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure. |
| new trade theory suggests that nations | benefit from trade even when they do not differ in resource endowments or technology |
| new trade theory also suggests that a country may predominate in the export of a good simply because | it was lucky enough to have one or more firms among the first to produce that good. |
| new trade theory explains trade patterns since it suggests that trade increases | the specialization of production within an industry and attain economies of scale which reduces costs and in turn prices |
| new trade theorists stress the role of luck, entrepreneurship, and innovation in giving a firm | first mover advantages |
| Porter theorizes that four broad attributes of a nation shape the environment in which local firms compete, and these attributes | promote or impede the creation of competitive advantage |
| According to Porter the first attribute of national competitive advantage is | factor endowments in which Porter distinguishes between basic factors (natural resources, climate, location, demographics) and advanced factors (communication infrastructure, skilled labor, research facilities, technological know-how). |
| According to Porter the second attribute of national competitive advantage is | demand conditions. The home-country demand for the industry's product or service plays a big role in upgrading competitive advantage. Having sophisticated and demanding consumers put pressure on a firm to meet high standards of product quality. |
| which is the most significant factor endowment for competitive advantage according to Porter? | advanced factor endowments which are a product of investment by companies, individuals, government which can upgrade a nation's advanced factors |
| According to Porter the third attribute of national competitive advantage is | the presence of suppliers or related industries that are internationally competitive. Ex: Swedish strength in fabricated steel products (e.g., ball bearings and cutting tools) has drawn on strengths in Sweden’s specialty steel industry. |
| According to Porter the fourth attribute of national competitive advantage is | the strategy, structure, and rivalry of firms within a nation. Different nations are characterized by different management ideologies, which either help them or not. While having domestic rivalry induces firms to look for ways to improve efficiency. |
| Porter argues that the diamond is mutually reinforcing system since | the effect of one attribute is contingent on the state of others. Ex: favorable demand conditions will not result in competitive advantage unless the state of rivalry is sufficient to cause firms to respond to them |
| if Porter is correct, we would expect his model to predict the pattern of international trade that we observe in the real world where | countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable. |
| what are the three main implications for international businesses | locations, first mover advantages, government policies |
| location is an important implication for international businesses because | countries have advantages in different productive activities and having a global web of productive activities in different locations depending on considerations of comparative advantage, factor endowments, etc, create competitive advantage for firms. |
| first mover advantages is another important implication for international businesses because | having it allows a firm to dominate global trade in that product. This is particularly true in industries where the global market can profitably support only a limited number of firms, such as the aerospace market. |
| government policies is another important implication for international businesses because | government can increase investment in advanced factors of endowment such as education infrastructure, basic research and adopt policies that increase competition within domestic markets because this makes firms stronger international competitors |
| the basic message of Ricardo's comparative advantage theory is that | potential world production is greater with unrestricted free trade, meaning consumers in all nations can consume more if there are no restriction to trade |
| by constant returns to specialization we mean | units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier (PPF) |
| It is more realistic to assume _____ returns to specialization. When more units of resources are required to produce each additional unit | diminishing |
| what is one of the reasons it is more realistically to assume diminishing returns to specialization | because not all resources have the same quality which results in requiring even more resources to produce an equal increase in output. To increase the output of a good would involve using resources whose productivity is not as great as those initially use |
| what is another reason it is more realistically to assume diminishing returns to specialization | is that different goods use resources in different proportions |
| Dynamic gains in both the stock of a country’s resources and the efficiency with which resources are utilized will cause a country’s PPF to shift____ | outward - as a consequence of this outward shift a country can produce more of both goods than it did before the introduction of free trade |
| The product life-cycle theory suggests that mature industries tend to shift production out of the United States and into | low-cost assembly locations. |
| Which trade theory explains why countries are trade partners even when they do not differ in their resource endowments or technology? | New trade theory |
| Which trade theory states that for products where economies of scale are significant and represent a substantial amount of world demand, the first movers in an industry can gain a scale-based cost advantage that is not available to late entrants? | New trade theory |
| Which of the four attributes identified by Porter would be evident in a country that has the necessary infrastructure to compete in a given industry? | factor endowments |
| Porter states that firms are typically most sensitive to the needs of their closest customers. He called this _____ conditions. | demand |
| Under new trade theory, as the size of markets increase, companies may be able to develop better ______. | economies of scale |
| Which of the following theories was based on the belief that it was better to keep production facilities close to the market and to the firm’s center of decision making, given the uncertainty and risks inherent in introducing new products? | Product life cycle |
| Heckscher and Ohlin identified differences in national factor endowments as the root of ______. | comparative advantage |
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