International Business (Daniels, et al) - Chapter 06

7/24/2019 International Business (Daniels, et al) - Chapter 06

1/26

International Business, 14e (Daniels et al.)

Chapter 6 International Trade and Factor-Mobility Theory

1) Which of the following is NOT a reason thatinternational trade theory is useful for managers tounderstand?A) Countries use trade theories to help them decide how to improve their competitive positions, such as

improving the uantity and uality of production factors!") Countries# trade policies affect whether imports are allowed to compete against domestic production,thus affecting where companies need to produce to serve given mar$ets!C) Countries use laisse%&faire policies to intervene in the free movement of international trade, thusaffecting where companies can produce most efficiently!') Countries wrestle with the uestions and set policies on what, with whom, and how much theyshould import and e(port, thus affecting companies# ailities to produce given products efficiently andsell them into given mar$ets!Answer* C'iff* +earning Outcome* Compare and contrast theories of international trade

-$ill* ConceptO.ective* 1

/) Why should managers in international usiness understand international trade theories?A) Countries# trade policies, ased on trade theories, influence which products companies might e(portto given countries!") The understanding helps managers decide whether their companies should follow laisse%&fairemanagement practices!C) The theories help managers decide whether to use large&scale versus small&scale technologies forserving their e(port mar$ets!') The comprehension is useful when deciding whether to transfer managers aroad to manage foreign

operations!Answer* A'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

+) "ecause all countries face the uestions of what, how much, and with whom they should import ande(port, international usiness managers should most li$ely 00000000!A) identify their governments# trade policies to determine if an invisile hand directs these decisions") understand the theories used to answer these uestions ecause policies affect usiness operations

C) estalish operations in small countries where they can e(ert more political influence') produce only nontradale goods that are less affected y government policiesAnswer* "'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

1


2/26

) All countries face the uestions of what, how much, and with whom they should import and e(port!2ow they answer these uestions primarily affects whether 00000000!A) nontradale goods ecome tradale") products go through a lengthy life cycleC) companies adhere to laisse%&faire e(port policies') a company#s present production location will e competitiveAnswer* '

'iff* /-$ill* ConceptO.ective* 1

3) The trade theory that says a country should e(port more than it imports is $nown as 00000000!A) mercantilism") asolute advantageC) comparative advantage') import sustitutionAnswer* A'iff* 1

earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

4) 5nder mercantilism, governments sought to influence trade y 00000000!A) estalishing ilateral trading agreements with other countries") limiting e(portsC) limiting imports and susidi%ing e(ports') encouraging the development of manufacturing in their coloniesAnswer* C'iff* /

earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

6) Which of the following undesirale results will most li$ely occur for a country running a favoralealance of trade?A) higher unemployment") higher domestic interest ratesC) fewer funds to invest aroad') granting credit that may e ris$yAnswer* '

'iff* /-$ill* ApplicationO.ective* 1

/


3/26

7) Neomercantilism descries the approach of countries that try to run a favorale alance of trade to00000000!A) uild up gold reserves") achieve a social or political o.ectiveC) lower their rates of inflation') uy raw materials more cheaplyAnswer* "

'iff* 1earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

8) According to Adam -mith#s theory of asolute advantage, speciali%ation allows countries to increasetheir efficiency for each of the following reasons 9:C9;T 00000000!A) laor could ecome more s$illed y repeating the same tas$s") transportation costs could e lowered y producing closer to mar$etsC) laor would not lose time in switching from the production of one $ind of product to another') higher production would provide incentives for the development of more effective wor$ing methods

Answer* "'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

1eflective thin$ing s$ills

11) As a leading e(porter of lu(ury automoiles, ermany has uilt a strong reputation in engineering!ermany#s trade most li$ely relies on a@n) 00000000!A) outward immigration restriction") natural advantageC) acuired advantage

') neomercantilist policyAnswer* C'iff* /-$ill* ApplicationO.ective* 1

+


4/26

1/) Assume the following conditions* n the 5nited -tates it ta$es 3 units of resources to produce a tonof potatoes and 1< to produce a ton of coal! n Canada it ta$es 4 units of resources to produce a ton ofpotatoes and 8 to produce a ton of coal! According to the theory of asolute advantage, 00000000!A) the 5nited -tates should e(port potatoes to Canada and import coal from Canada") the 5nited -tates should e(port coal to Canada and import potatoes from CanadaC) the 5nited -tates should import oth potatoes and coal from Canada, while concentrating onproduction of more valuale goods

') there would e no asis for tradeAnswer* A'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ApplicationO.ective* 1AAC-"* Analytic -$ills

1+) Comparative advantage differs from asolute advantage in that the former 00000000, whereas thelatter 00000000!A) holds that countries should speciali%e their productionB does not

") holds that trade should e $ept as nearly in alance as possileB says countries should see$ afavorale alance of tradeC) ases trade on natural advantagesB ases trade on acuired advantage') states that there is a asis of trade even if one country can produce everything more efficiently thananother countryB does not deal with this issueAnswer* ''iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

1) The comparative advantage theory holds that a country will gain from trade 00000000!A) when it e(ports products for which it has an acuired advantage and imports products for whichanother country has a natural advantage") if it e(ports goods it can produce more efficiently than other countries and imports goods othercountries can produce more efficiently than it canC) even though it can produce all goods more efficiently than other countries') if it e(ports products using its aundant production factors in e(change for products for which it hasscarce production factorsAnswer* C'iff* 1earning Outcome* Compare and contrast theories of international trade



5/26

13) According to the theory of comparative advantage, a country gains from foreign trade even though itmay have an asolute advantage in the production of all products ecause 00000000!A) the country will forego producing its less efficient output in order to produce its more efficient output") wor$ers ecome more efficient through speciali%ationC) economies of scale will reduce cost') there will e more incentive to develop cost&saving technologiesAnswer* A

'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1AAC-"* Analytic -$ills

14) Assume the following conditions* n the 5nited -tates it ta$es units of resources to produce a tonof potatoes and 3 to produce a ton of coal! n Canada it ta$es 4 units of resources to produce a ton ofpotatoes and 1< to produce a ton of coal! According to the theory of comparative advantage, 00000000!A) there would e no asis for trade") the 5nited -tates should import potatoes from Canada and e(port coal to Canada

C) the 5nited -tates should e(port oth potatoes and coal to Canada') the 5nited -tates should e(port potatoes to Canada and import coal from CanadaAnswer* "'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1AAC-"* Analytic -$ills

16) Which of the following assumptions was made in the original theories of asolute and comparativeadvantage?

A) -peciali%ed laor see$s efficiency!") aor resources are fully employed!C) Countries pursue o.ectives other than economic efficiency!') ;roduction networ$s enale countries to concentrate on particular functions!Answer* "'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

17) The free trade theories of speciali%ation primarily assume that 00000000!

A) speciali%ation leads to unemployment, ut production gains compensate for .o losses") resources can move internationally from the production of one good to anotherC) resources can move domestically from the production of one good to another') countries have o.ectives other than economic efficiencyAnswer* C'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* /

3


6/26

18) The free trade theories of speciali%ation primarily assume that 00000000!A) domestic resources are unale to move from the production of one good to another") countries have o.ectives other than economic efficiencyC) speciali%ation triggers unemployment') resources are immoile internationallyAnswer* '

'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* /

/


7/26

/+) 9ight of the top 1< e(porting and importing countries are countries with 00000000!A) cheap laor forces") small land massesC) natural advantages') developed economiesAnswer* ''iff* /

-$ill* ConceptO.ective* +AAC-"* 'ynamics of the gloal economy

/) The trade theory that says countries should concentrate production on those products using theirmost aundant production factors is the 00000000!A) factor proportions theory") theory of comparative advantageC) theory of asolute advantage') theory of nontradale goodsAnswer* A

'iff* 1earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* +

/3) 9l -alvador has a population density of aout 4/< people per suare mile and neighoring 2ondurasa population density of aout 113 people per suare mile! According to the factor proportions theory oftrade, one would e(pect 9l -alvador#s e(ports to 2onduras to 00000000!A) have a lower laor&to&land ratio than its imports from 2onduras") have a higher laor&to&land ratio than its imports from 2ondurasC) emody more capital per suare mile than its imports from 2onduras

') emody more capital per wor$er than its imports from 2ondurasAnswer* "'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* Critical Thin$ingO.ective* +AAC-"* >eflective thin$ing s$ills

/4) Tests to sustantiate the factor proportions theory have had mi(ed results most li$ely ecause00000000!A) laor migration uic$ly outdates any studies

") most countries have a favorale alance of tradeC) laor s$ills and education are not homogeneous') large and small countries have different trade policiesAnswer* C'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* +

6


8/26

/6) ost world trade ta$es place 00000000!A) etween developed countries and developing countries") among developed countriesC) among developing countries') etween raw material e(porters and manufacturing e(portersAnswer* "'iff* /

-$ill* ConceptO.ective* +AAC-"* 'ynamics of the gloal economy

/7) One way that developed countries speciali%e in order to gain acuired advantages is y 00000000!A) allocating research efforts more heavily in specific sectors") emphasi%ing production in natural resource endowmentsC) restricting imports to those in the service sector') susidi%ing the transport of e(portsAnswer* A'iff* +

-$ill* ConceptO.ective* +

/8) Why is the 5nited -tates oth an e(porter and importer of such products as vehicles and passengeraircraft?A) "uyers procure similar products for replacement parts!") Transportation costs and cultural differences limit e(porters!C) Companies differentiate products to appeal to different consumers!') "ilateral trading agreements reuire this interchange for a numer of products!Answer* C'iff* /

-$ill* ConceptO.ective* +

+


9/26

+1) According to the product life cycle theory, production and sales are primarily domestic in theintroductory stage ecause 00000000!A) usinesses need uic$ mar$et feedac$") tariff reductions remain under negotiationC) international transport costs are too high') international patents have not een approvedAnswer* A

'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective*

+/) According to the ;C theory, at an early stage of a product#s life cycle the product is li$ely to emade in a more 00000000 method than in its later stages!A) capital&intensive") laor&intensiveC) land&intensive') low&cost

Answer* "'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective*

++) According to the ;C theory, what is the most li$ely reason that companies manufacture products inlocations with high laor rates during the introductory stage of a product#s life cycle?A) 'oing so allows use of long production runs using capital&intensive methods!") any consumers are willing to pay high costs for the newest products!C) Transportation costs are reduced y focusing on mar$ets in developed countries!

') mport restrictions prevent production in countries other than the ones ma$ing product innovations!Answer* "'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective*

+) According to the ;C theory, developing countries have their est production advantage in whichstage of the product life cycle?A) growth") maturity

C) decline') introductionAnswer* C'iff* /-$ill* ConceptO.ective*

8


10/26

+3) Which of the hypothetical new products, if successful, would most li$ely diffuse its production andsales according to the product life cycle theory?A) a Derrari sports car selling for E/


11/26

+8) The diamond of national advantage would e est used to answer which of the following uestions?A) 2ow do developed countries prevent the trade of lood diamonds?") 2ow can developing countries create a significant trade surplus?C) Why do speciali%ed competitive advantages differ among countries?') Why do most innovative products originate in developed countries?Answer* C'iff* /

earning Outcome* Compare and contrast theories of international trade-$ill* ApplicationO.ective* AAC-"* >eflective thin$ing s$ills


12/26

+) A governmental strategic trade @industrial) policy is one that 00000000!A) lessens dependence on foreign military goods") see$s reciprocal free trade agreements etween developed and developing countriesC) targets the resources needed to support industries that seem to fit est with the country#s advantages') limits imports to encourage domestic production of what would otherwise e importedAnswer* C'iff* /

-$ill* ConceptO.ective*

) Which of the following statements most li$ely undermines the arguments for a strategic tradepolicy?A) 9ntrepreneurs, rather than governments, should ta$e usiness ris$s!") 'eveloped countries have production lead time over developing countries!C) f ig companies can figure out what products to develop, so can governments!') overnments have limited resources, so industries with greater growth potential should e targeted!Answer* A'iff* +

-$ill* Critical Thin$ingO.ective* AAC-"* Analytic -$ills

3) "etween now and /


13/26

6) All the following are reasons for the lower international moility of people than capital 9:C9;Twhich one?A) The differences in economic return etween countries are lower for people than for capital!") t is more e(pensive to move people than capital!C) ;eople may have to learn another language and adapt to a different culture!') nternational capital transfers have less cumersome legal restrictions than international movementsof people!

Answer* A'iff* /-$ill* ApplicationO.ective* 3AAC-"* Analytic -$ills

7) All of the following are e(amples of international laor moility 9:C9;T 00000000!A) a manager assigned y an N9 to wor$ short&term aroad") a refugee who ta$es up employment in another countryC) a college student on a study aroad program') an illegal immigrant wor$ing in another country

Answer* C'iff* /-$ill* ApplicationO.ective* 3

8) aor and capital moility are intertwined ecause 00000000!A) illegal wor$ers sometimes pay large sums to people who smuggle them into another country") people cannot emigrate to another country unless they ring capital with themC) companies receive ta( enefits for hiring immigrants') immigrants ring an investment in human capital with themAnswer* '


3


14/26

31) Which of the following is the 9A-T li$ely result of outward migration?A) 9migrants remit capital used to start usinesses in their home countries!") Nations receive more foreign aid!C) Nations lose highly educated and productive wor$ers!') Countries receive remittances from emigrants!Answer* "'iff* +

-$ill* ConceptO.ective* 3AAC-"* 'ynamics of the gloal economy

3/) Country : rings in a large numer of uns$illed immigrants to meet its laor needs! Which of thefollowing is the 9A-T li$ely to occur in Country : as a result?A) Country : will develop a long&term class of Ghave&notsG if the children of immigrants remainuns$illed!") Country : will need more uns$illed people in the future if immigrant children ecome s$illed!C) The continual supply of uns$illed laor will delay the development of laor saving technology inCountry :!

') Country : will e(perience a significant transfer of $nowledge and a resulting rise in start&upusinesses!Answer* ''iff* +-$ill* ApplicationO.ective* 3

3+) n this e(ample, assume that oth trade and production factors are internationally moile! 5singdomestic laor, the laor cost per silicon chip is E!1< in =apan and E!/< in the 5nited -tates! 5singdomestic capital, the capital cost per chip is E!1< in =apan and E!per chip including the wor$ers# transport cost! 5!-! capital will go to =apan at a cost of E!


15/26

3) The inaility of a company to gain foreign production factors to use in its domestic operations mostli$ely 00000000!A) entices the company to e(port its own production factors") stimulates the company to adopt efficient sustitute methods of productionC) stimulates foreign companies to invest in that domestic mar$et') causes the company#s products to move more rapidly through their life cyclesAnswer* "


33) All of the following are reasons that foreign investment may stimulate e(ports from the home@donor) country 9:C9;T which of the following?A) The investor often sends home&country components to its facilities aroad!") The investor often sends home&country euipment to its facilities aroad!C) 2ome&country aid usually goes where the investments are made!') The foreign facility is adept at selling the investors# home country products!Answer* C


34) Analysts conclude that the finite supply of natural resources will most li$ely 00000000!A) cause a higher proportion of world trade to occur among developed countries") cause a higher proportion of world trade to occur among developing countriesC) serve as an advantage for developing countries in their sales to developed countries') create a greater portion of world trade in the form of servicesAnswer* C'iff* /


36) >esearch shows that urani%ation leads to higher productivity! Which of the following is the 9A-Tli$ely reason for this?A) 5rani%ation estalishes an inflow of immigrants who will wor$ for less money!") n uran areas, firms can more easily find people with the e(act s$ills they need!C) 5rani%ation allows for economies in moving supplies and finished products!') n uran areas, $nowledge flows more easily from one company to another and from one industry toanother!Answer* A

'iff* /-$ill* ConceptO.ective* 4AAC-"* ulticultural and diversity understanding

13


16/26

37) The premise that there will e more finely tuned speciali%ation of production among countries ismost li$ely ased on the idea that companies will 00000000!A) depend more on production of nontradale goods and services") encourage urani%ation in emerging countries that lac$ infrastructureC) estalish facilities in dispersed locations to hinder domestic competition') ta$e advantage of wage and s$ill differences among countriesAnswer* '

'iff* /-$ill* ConceptO.ective* 4AAC-"* 'ynamics of the gloal economy

38) Costa >ica#s recent economic transformation to depend more on high&tech manufacturing is largelydue to its adoption of 00000000 trade policy!A) an import sustitution") a comparative advantageC) a factor proportions') a strategic

Answer* ''iff* /-$ill* ApplicationO.ective* 1AAC-"* >eflective thin$ing s$ills

4ica#s attraction of high&tech D' 9:C9;T thecountry#s 00000000!A) demand for high&tech products") literacy rateC) uality of life

') political stailityAnswer* A'iff* /earning Outcome* 9(plain the implications of foreign direct investment for oth host and homecountry-$ill* ConceptO.ective* 1

14


17/26

41) Countries enact trade policies ased on trade theories, which, in turn, affect companies# optimumproduction locations!Answer* T>59'iff* 1earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

4/) 5nderstanding trade theories helps companies $now if they will need to compete against goods andservices produced aroad!Answer* T>59'iff* 1earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

4+) 5nder mercantilism, colonial powers sought to run trade surpluses with their colonies y preventingthe colonies from manufacturing!

Answer* T>59'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1AAC-"* Analytic -$ills

4) An o.ective of neomercantilism is to uild up gold reserves!Answer* DA-9'iff* 1earning Outcome* Compare and contrast theories of international trade


43) The theory of asolute advantage holds that there are advantages to trade ecause different countriescan produce different goods more efficiently than others!Answer* T>59'iff* 1earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

44) 5nder the theory of asolute advantage, countries hold two types of advantages

acuiredadvantages and technological advantages!Answer* DA-9'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

16


18/26

46) The comparative advantage theory holds that a country will gain from trade even though it canproduce all goods more efficiently than other countries!Answer* T>59'iff* 1earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

47) Comparative advantage theory holds that gains from trade are the result of capital movements fromcountries with low interest rates to countries with higher interest rates!Answer* DA-9'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

48) The free trade theories of speciali%ation assume that countries will e etter off even though somepeople are unemployed!

Answer* DA-9'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

6


19/26

6+) The factor proportions theory holds that countries should concentrate production on those productsthat use their most aundant production factors!Answer* T>59'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

6) The factor proportions theory holds that countries should improve their competitiveness yimporting capital and s$illed employees from aroad!Answer* DA-9'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective* 1

63) ost world trade ta$es place etween raw material e(porters and manufacturing e(porters!Answer* DA-9

'iff* /-$ill* ConceptO.ective* +

64) Trade occurs more etween culturally dissimilar countries than etween culturally similar countries!Answer* DA-9'iff* /-$ill* ConceptO.ective* +AAC-"* ulticultural and diversity understanding

66) any products# location of production will shift internationally as the products go through their lifecycle!Answer* T>59'iff* 1earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective*

67) According to the ;C theory of trade, most new products are produced in countries where wagerates are low!Answer* DA-9

'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective*

18


20/26

68) u(ury products are the most li$ely types of products to ehave according to the product life cycletheory of trade!Answer* DA-9'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective*

759'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective*

71) The four favorale domestic conditions of the diamond of national advantage help to e(plain howand where gloally competitive companies develop and sustain themselves!

Answer* T>59'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* ConceptO.ective*

7/) The e(istence of the four favorale conditions of the diamond of national advantage does notguarantee that an industry will develop in a given locale!Answer* T>59'iff* /earning Outcome* Compare and contrast theories of international trade

-$ill* ConceptO.ective*

7+) A strategic trade policy is one that develops industries to lessen dependence on foreign militarygoods!Answer* DA-9'iff* 1-$ill* ConceptO.ective*

7) Companies and individuals transfer capital internationally primarily ecause of e(pectations of

earning higher returns!Answer* T>59'iff* 1-$ill* ConceptO.ective* 3

/eflective thin$ing s$ills

8/) n a short essay, discuss the theory of mercantilism, and discuss favorale and unfavorale alancesof trade as they apply to international usiness!Answer* ercantilism holds that a country#s wealth is measured y its holdings of treasure, whichusually meant gold! According to the theory, countries should e(port more than they import and, ifsuccessful, receive gold from countries that run deficits! To e(port more than they imported,

governments imposed restrictions on most imports and susidi%ed production of many products thatcould otherwise not compete in domestic or e(port mar$ets!

A favorale alance of trade indicates that a country is e(porting more than it is importing! Anunfavorale alance of trade indicates that a country is importing more than it is e(porting, which is$nown as a deficit! 2owever, it is not necessarily eneficial to run a trade surplus nor is it necessarilydisadvantageous to run a trade deficit! A country that is running a surplus, or favorale alance of trade,is, for the time eing, importing goods and services of less value than those it is e(porting! n effect, thesurplus country is granting credit to the deficit country! f that credit cannot eventually uy sufficientgoods and services, the so&called favorale trade alance actually may turn out to e disadvantageous forthe country with the surplus!

'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* ApplicationO.ective* 1

//


23/26

8+) n a short essay, discuss the theory of asolute advantage and the reasons a country#s efficiencyimproves ased on this theory!Answer* The theory of asolute advantage holds that different countries produce some goods moreefficiently than other countriesB thus, gloal efficiency can increase through free trade! 'eveloped yAdam -mith, the theory of asolute advantage says the real wealth of a country consists of the goodsand services availale to its citi%ens! -mith reasoned that if trade were unrestricted, each country wouldspeciali%e in those products that gave it a competitive advantage! 9ach country#s resources would shift to

the efficient industries ecause the country could not compete in the inefficient ones! Throughspeciali%ation, countries could increase their efficiency ecause of three reasons*a! aor could ecome more s$illed y repeating the same tas$s!! aor would not lose time in switching from the production of one $ind of product to another!c! ong production runs would provide incentives for the development of more effective wor$ingmethods!'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* -ynthesisO.ective* 1, /AAC-"* Analytic -$ills

8) What is the difference etween the free trade theories of asolute advantage and comparativeadvantage? 2ow can free trade improve gloal efficiency?Answer* Asolute advantage holds that different countries produce some goods more efficiently thanother countriesB thus, gloal efficiency can increase through free trade! "ased on this theory, Adam-mith uestioned why the citi%ens of any country should have to uy domestically produced goodswhen they could uy those goods cheaper aroad! "ut what happens when one country can produce allproducts at an asolute advantage? 'avid >icardo e(amined this uestion and e(panded on Adam-mith#s theory of asolute advantage to develop the theory of comparative advantage! >icardo reasonedthat there may still e gloal efficiency gains from trade if a country speciali%es in products that it can

produce more efficiently than other productsregardless of whether other countries can produce those

same products even more efficiently!'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* -ynthesisO.ective* 1, /AAC-"* Analytic -$ills

/+


24/26

83) What assumptions underlie the theories of speciali%ation in international trade? What are thelimitations of these assumptions?Answer* The assumptions that underlie the theories of speciali%ation in international trade include thefollowing*a! Dull employment* When countries have many unemployed or unused resources, they may see$ torestrict imports to employ or use idle resources!! 9conomic efficiency* Countries may pursue o.ectives other than output efficiency! They may avoid

overspeciali%ation ecause of the vulneraility created y changes in technology!c! 'ivision of gains* f a country perceives a trading partner is gaining too large a share of enefits, itmay forgo asolute gains for itself so as to prevent relative losses!d! Two countries, two commodities* Two countries trading only two commodities is unrealistic!e! Transport costs* f it costs more to transport the goods than is saved through speciali%ation, then theadvantages of trade are negated!f! -tatics and dynamics* The relative conditions that give countries advantages or disadvantages in theproduction of given products are dynamic, not static, as the theories view countries# advantages!g! -ervices* An increasing portion of world trade is in services, and the theories deal with commodities!h! ;roduction networ$s* -peciali%ation may ta$e place y function or y component as well as y finalproduct!

i! oility* The assumption that resources can move domestically from the production of one good toanother, and at no cost, is not completely valid!'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* Critical Thin$ingO.ective* /AAC-"* Analytic -$ills

84) What is the theory of country si%e? 2ow is country si%e determined? 2ow does country si%e affectnational trade patterns?Answer* The theory of country si%e says that countries with large land areas are more li$ely to have

varied climates and an assortment of natural resources than smaller countries, thus ma$ing them moreself&sufficient! Although land area is the most ovious way of measuring a country#s si%e, countries alsocan e compared on the asis of economic si%e! 'istance to foreign mar$ets affects trade patterns inlarge and small countries differently! Normally, the farther the distance, the higher the transport costs,the longer the inventory carrying time, and the greater the uncertainty and unreliaility of timely productdelivery! n addition, large countries# production and mar$et centers are more li$ely to e located at agreater distance from other countries, raising the transport costs of foreign trade!'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* -ynthesisO.ective* 1, +

AAC-"* Analytic -$ills

/


25/26

86) What is the country similarity theory? According to this theory, what factors affect trade patterns?Answer* Oservations of trade patterns reveal that most of the world#s trade occurs among countries thathave similar characteristics, specifically among industrial, or developed, countries! The countrysimilarity theory says that once a company has developed a new product in response to oserved mar$etconditions in the home mar$et, it will turn to mar$ets it sees as most similar to those at home! naddition, mar$ets in industrial countries can support products and their variations! Thus, companies fromdifferent countries produce different product models, and each may gain some mar$ets aroad!

'iff* /earning Outcome* Compare and contrast theories of international trade-$ill* -ynthesisO.ective* 1, +AAC-"* Analytic -$ills

87) n a short essay, discuss the four stages of the international product life cycle!Answer* The international product life cycle theory of trade states that certain $inds of products go

through a continuum, or cycle, that consists of four stagesintroduction, growth, maturity, and decline!

The location of production will shift internationally depending on the stage of the cycle!a! ntroduction* ost new products are produced in and e(ported from developed countries ecause of

their comined demand conditions and laor s$ills! any reasons account for the dominant position ofdeveloped countries, including competition, demanding consumers, the availaility of scientists andengineers, and high incomes! 9arly production also generally occurs in a domestic location so thecompany can otain rapid mar$et feedac$, as well as save transport costs!! rowth* As sales of the new product grow, competitors enter the mar$et! At the same time, demandis li$ely to grow sustantially in foreign mar$ets, particularly in other developed countries! n fact,demand may e sufficient to .ustify producing in some foreign mar$ets to reduce or eliminate transportcharges, ut the output at this stage is li$ely to stay almost entirely in the foreign country with theadditional manufacturing unit! The original producing country will also increase its e(ports in this stageut lose certain $ey e(port mar$ets in which competitors commence local production!c! aturity* n this stage, worldwide demand egins to level off, although it may e growing in some

countries and declining in others! There is often a Gsha$e&outG of producers such that product modelsecome highly standardi%ed, ma$ing cost an important competitive weapon! onger production runsecome possile for foreign plants, which in turn reduce per&unit cost for their output! The lower per&unit costs create demand in developing countries!d! 'ecline* As a product moves to the decline stage, those factors occurring during the mature stagecontinue to evolve! The mar$ets in developed countries decline more rapidly than those in developingcountries as affluent customers demand newer products! "y this time, mar$et and cost factors havedictated that almost all production is in developing countries, which e(port to the declining or small&niche mar$ets in developed countries! n other words, the country in which the innovation first emergedand e(ported from then ecomes the importer!'iff* +

earning Outcome* Compare and contrast theories of international trade-$ill* ApplicationO.ective* AAC-"* Analytic -$ills

/3


26/26

88) What are the arguments for and against nations developing and implementing strategic tradepolicies?Answer* The two asic approaches to government policy are to alter conditions that will affect industry

in generala non&strategic approachand to alter conditions that will affect a targeted industrya

strategic approach! >egardless of whether a government ta$es a general or specific approach, it mayalter the competitive positions of specific companies and production locations!

The first approach means altering conditions that affect factor proportions, efficiency, and innovation! Acountry may upgrade production factors y improving human s$ills through education, providinginfrastructure, promoting a highly competitive environment so that companies must ma$eimprovements, and inducing consumers to demand a higher uality of products and services!

The second approach is to target specific industries! This approach has usually resulted in only smallpayoffs, largely ecause governments find it difficult to identify and target the right industries!oreover, too many countries may identify the same industries!'iff* +earning Outcome* Compare and contrast theories of international trade-$ill* Critical Thin$ing

O.ective* 1AAC-"* Analytic -$ills

1

International Business (Daniels, et al) - Chapter 06

Documents

Transcript of International Business (Daniels, et al) - Chapter 06