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IB TEST 2
| Question | Answer |
|---|---|
| Trade Theories | The patterns of international trade and why countries specialize in certain products. |
| Mercantilism | An economic theory that suggests a country should maintain a trade surplus. Is criticized for being a zero-sum game. |
| Absolute Advantage | A country should specialize in producing goods it can produce more efficiently than others and trade for goods it cannot produce as efficiently. |
| Comparative Advantage | Even if a country has an absolute advantage in all goods, it should specialize in the ones it produces most efficiently and trade for the rest. |
| Heckscher-Ohlin Theory | A country exports goods that use its abundant resources intensively and imports goods that require scarce resources. |
| New Trade Theory | Trade allows firms to achieve economies of scale, which can lower costs and increase product variety. |
| Product Life Cycle Theory | Products originate in developed countries then production shifts to developing nations as costs rise. |
| Porter’s Diamond of Competitive Advantage | a framework explaining why certain industries in specific countries are internationally competitive. |
| Factor endowments | Natural & advanced resources |
| Demand conditions | Domestic market demand pushes firms to improve. |
| Related and supporting industries | Strong local industries boost competitiveness. |
| Firm strategy, structure, and rivalry | Intense domestic competition drives innovation |
| Trade Policy Instruments | Tools governments use to regulate trade. |
| Tariffs | Taxes on imported goods to protect domestic industries |
| Specific tariffs | Fixed charge per unit |
| Ad valorem tariffs | Percentage of the value of the good. |
| Effects of tariffs | Increase government revenue, protect domestic producers, and raise prices for consumers. |
| Subsidies | Government payments to domestic firms to lower production costs and increase competitiveness. |
| Import Quotas | Limits on the quantity of goods that can be imported. |
| Voluntary Export Restraints (VERs) | Agreements where exporting countries limit exports to avoid stricter trade policies |
| Local Content Requirements | A portion of a product must be made domestically to qualify for trade benefits. |
| Antidumping Policies | Protect domestic industries by imposing duties on foreign goods sold below market value. |
| Political Motives for Trade Policy: | Protecting jobs, National security, Retaliation against unfair trade, Protecting consumers, Human rights and environmental concerns. |
| Economic Motives for Trade Policy | Infant Industry Argument and Strategic Trade Policy |
| Foreign Direct Investment | When a firm invests directly in new facilities in a foreign country. |
| Types of FDI | Greenfield investment: Building a brand-new business in a foreign country Mergers & Acquisitions: Buying or merging with an existing foreign business. |
| Trends in FDI | Increasing FDI in developing economies. Companies use FDI to avoid trade barriers |
| Motives for FDI | Access to natural resources |
| The WTO's GATS has taken the lead to: | provide enhanced protection for intellectual property |
| One major difference between NAFTA (now USMCA) and the European Union (EU) is that | The EU has a common currency, while NAFTA does not involve monetary integration |
| Which of the following observations about tariffs is true? | Tariffs are generally pro-producer and anti-consumer |
| The ___________ theory argues that the pattern of international trade is determined by differences in factor endowments. | Heckscher-Ohlin |
| Which of the following is the main principle of mercantilism? | It is in a country's best interests to maintain a trade surplus |
| The Smoot-Hawley Act aimed at: | avoiding rising unemployment. |
| The President views the persistent U.S. trade deficit as a sign of weakness. His position on trade seems to be based on a belief that trade is a game that the U.S. needs to win. Which of the following theories is his trading philosophy based on? | Mercantilism |
| Which of the following is a potential downside of a country using tariffs as a form of protectionism? | Higher prices for domestic consumers and possible retaliatory tariffs from trading partners |
| In Country ABC, the only firms allowed to import sugar are certain trading companies, each of which is allocated the right to bring in a certain amount of sugar each year. This is an example of | an import quota. |
| Which of the following is considered a disadvantage of the euro? | national authorities losing control over monetary policy |
| Brazil and Japan agree to eliminate trade barriers while maintaining independent trade policies with other countries. What level of economic integration does this represent? | Free Trade Area |
| According to the OLI framework, which of the following is an example of location advantages? | A country’s natural resources and low-cost labor |
| The government of Country A does not attempt to influence through quotas or duties what its citizens can buy from another country. This is an example of which of the following? | Free Trade |
| Why might a firm prefer internalization over licensing when entering a foreign market? | To maintain control over proprietary technology and reduce the risk of intellectual property theft |
| Which of the following is a key feature of a customs union? | Free trade between member countries and a common external tariff on non-members |
| Four factors of Porter’s Diamond of Competitive Advantage | Factor Conditions, Demand Conditions, Related and Supporting Industries, and Firm Strategy, Structure and Rivalry |
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