International Business: Environments and Operations, 16e, Global Edition (Daniels et al.

)
Chapter 5 Trade and Factor Mobility Theory

1) Factor mobility refers to the movement of which of the following combinations?

A) capital, technology and people
B) currency, profits and raw materials
C) labor, capital and management
D) trade, profits and materials
Answer: A
Diff: 2
Learning Outcome: Define the fundamental concepts of international business
Skill: Concept
Objective: 5-1 Understand why policymakers rely on international trade and factor mobility
theories to help achieve economic objectives
AACSB: Analytical thinking

2) Costa Rica's recent economic transformation to depend more on high-tech manufacturing is

largely due to its adoption of ________ trade policy.
A) an import substitution
B) a comparative advantage
C) a factor proportions
D) a strategic
Answer: D
Diff: 2
Skill: Application
Objective: 5-1 Understand why policymakers rely on international trade and factor mobility
theories to help achieve economic objectives
AACSB: Reflective thinking

3) Countries enact trade policies based on trade theories, which, in turn, affect companies'
optimum production locations.
Answer: TRUE
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-1 Understand why policymakers rely on international trade and factor mobility
theories to help achieve economic objectives
AACSB: Reflective thinking

1
Copyright © 2018 Pearson Education Limited
4) Understanding trade theories helps companies know if they will need to compete against
goods and services produced abroad.
Answer: TRUE
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-1 Understand why policymakers rely on international trade and factor mobility
theories to help achieve economic objectives
AACSB: Reflective thinking

5) What is the theory of country size? How is country size determined? How does country size
affect national trade patterns?
Answer: The theory of country size says that countries with large land areas are more likely to
have varied climates and an assortment of natural resources than smaller countries, thus making
them more self-sufficient. Although land area is the most obvious way of measuring a country's
size, countries also can be compared on the basis of economic size. Distance to foreign markets
affects trade patterns in large 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 unreliability of timely product delivery. In addition, large countries' production
and market centers are more likely to be located at a greater distance from other countries,
raising the transport costs of foreign trade.
Diff: 3
Learning Outcome: Compare and contrast theories of international trade
Skill: Synthesis
Objective: 5-1 Understand why policymakers rely on international trade and factor mobility
theories to help achieve economic objectives
AACSB: Analytical thinking

6) What is the country similarity theory? According to this theory, what factors affect trade
patterns?
Answer: Observations of trade patterns reveal that most of the world's trade occurs among
countries that have similar characteristics, specifically among industrial, or developed, countries.
The country similarity theory says that once a company has developed a new product in response
to observed market conditions in the home market, it will turn to markets it sees as most similar
to those at home. In addition, markets in industrial countries can support products and their
variations. Thus, companies from different countries produce different product models, and each
may gain some markets abroad.
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Synthesis
Objective: 5-1 Understand why policymakers rely on international trade and factor mobility
theories to help achieve economic objectives
AACSB: Analytical thinking

2
Copyright © 2018 Pearson Education Limited
7) The trade theory that says a country should export more than it imports is known as ________.
A) mercantilism
B) absolute advantage
C) comparative advantage
D) import substitution
Answer: A
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

8) Under mercantilism, governments sought to influence trade by ________.

A) establishing bilateral trading agreements with other countries
B) limiting exports
C) limiting imports and subsidizing exports
D) encouraging the development of manufacturing in their colonies
Answer: C
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

9) Which of the following undesirable results will most likely occur for a country running a
favorable balance of trade?
A) higher unemployment
B) higher domestic interest rates
C) fewer funds to invest abroad
D) granting credit that may be risky
Answer: D
Diff: 2
Skill: Application
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

3
Copyright © 2018 Pearson Education Limited
10) Neomercantilism describes the approach of countries that try to run a favorable balance of
trade to ________.
A) build up gold reserves
B) achieve a social or political objective
C) lower their rates of inflation
D) buy raw materials more cheaply
Answer: B
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

11) According to Adam Smith's theory of absolute advantage, specialization allows countries to
increase their efficiency for each of the following reasons EXCEPT ________.
A) labor could become more skilled by repeating the same tasks
B) transportation costs could be lowered by producing closer to markets
C) labor would not lose time in switching from the production of one kind of product to another
D) higher production would provide incentives for the development of more effective working
methods
Answer: B
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

12) Which of the following is most likely a basis for a Jamaican natural advantage in
international trade?
A) product technology developed by a Jamaican company
B) high literacy rates among Jamaican citizens
C) the use of English as the primary language
D) beautiful beaches and climate
Answer: D
Diff: 2
Skill: Application
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

4
Copyright © 2018 Pearson Education Limited
13) As a leading exporter of luxury automobiles, Germany has built a strong reputation in
engineering. Germany's trade most likely relies on a(n) ________.
A) outward immigration restriction
B) natural advantage
C) acquired advantage
D) neomercantilist policy
Answer: C
Diff: 2
Skill: Application
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

14) Assume the following conditions: In the United States it takes 5 units of resources to produce
a ton of potatoes and 10 to produce a ton of coal. In Canada it takes 6 units of resources to
produce a ton of potatoes and 9 to produce a ton of coal. According to the theory of absolute
advantage, ________.
A) the United States should export potatoes to Canada and import coal from Canada
B) the United States should export coal to Canada and import potatoes from Canada
C) the United States should import both potatoes and coal from Canada, while concentrating on
production of more valuable goods
D) there would be no basis for trade
Answer: A
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Application
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

15) Comparative advantage differs from absolute advantage in that the former ________,
whereas the latter ________.
A) holds that countries should specialize their production; does not
B) holds that trade should be kept as nearly in balance as possible; says countries should seek a
favorable balance of trade
C) bases trade on natural advantages; bases trade on acquired advantage
D) states that there is a basis of trade even if one country can produce everything more
efficiently than another country; does not deal with this issue
Answer: D
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

5
Copyright © 2018 Pearson Education Limited
16) The comparative advantage theory holds that a country will gain from trade ________.
A) when it exports products for which it has an acquired advantage and imports products for
which another country has a natural advantage
B) if it exports goods it can produce more efficiently than other countries and imports goods
other countries can produce more efficiently than it can
C) even though it can produce all goods more efficiently than other countries
D) if it exports products using its abundant production factors in exchange for products for which
it has scarce production factors
Answer: C
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

17) According to the theory of comparative advantage, a country gains from foreign trade even
though it may have an absolute advantage in the production of all products because ________.
A) the country will forgo producing its less efficient output in order to produce its more efficient
output
B) workers become more efficient through specialization
C) economies of scale will reduce cost
D) there will be more incentive to develop cost-saving technologies
Answer: A
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

18) Assume the following conditions: In the United States it takes 4 units of resources to produce
a ton of potatoes and 5 to produce a ton of coal. In Canada it takes 6 units of resources to
produce a ton of potatoes and 10 to produce a ton of coal. According to the theory of
comparative advantage, ________.
A) there would be no basis for trade
B) the United States should import potatoes from Canada and export coal to Canada
C) the United States should export both potatoes and coal to Canada
D) the United States should export potatoes to Canada and import coal from Canada
Answer: B
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

6
Copyright © 2018 Pearson Education Limited
19) Which of the following assumptions was made in the original theories of absolute and
comparative advantage?
A) Specialized labor seeks efficiency.
B) Labor resources are fully employed.
C) Countries pursue objectives other than economic efficiency.
D) Production networks enable countries to concentrate on particular functions.
Answer: B
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

20) The free trade theories of specialization primarily assume that ________.
A) specialization leads to unemployment, but production gains compensate for job losses
B) resources can move internationally from the production of one good to another
C) resources can move domestically from the production of one good to another
D) countries have objectives other than economic efficiency
Answer: C
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

21) Which one of the following is a primary assumption of the free trade theories of
specialization?
A) Domestic resources are unable to move from the production of one good to another.
B) Countries have objectives other than economic efficiency.
C) Specialization triggers unemployment.
D) Resources are immobile internationally.
Answer: D
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

7
Copyright © 2018 Pearson Education Limited
22) Under mercantilism, colonial powers sought to run trade surpluses with their colonies by
preventing the colonies from manufacturing.
Answer: TRUE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

23) An objective of neomercantilism is to build up gold reserves.

Answer: FALSE
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

24) The theory of absolute advantage holds that there are advantages to trade because different
countries can produce different goods more efficiently than others.
Answer: TRUE
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

25) Under the theory of absolute advantage, countries hold two types of advantages—acquired
advantages and technological advantages.
Answer: FALSE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

8
Copyright © 2018 Pearson Education Limited
26) The comparative advantage theory holds that a country will gain from trade even though it
can produce all goods more efficiently than other countries.
Answer: TRUE
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

27) Comparative advantage theory holds that gains from trade are the result of capital
movements from countries with low interest rates to countries with higher interest rates.
Answer: FALSE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

28) The free trade theories of specialization assume that countries will be better off even though
some people are unemployed.
Answer: FALSE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

9
Copyright © 2018 Pearson Education Limited
29) In a short essay, discuss the theory of mercantilism, and discuss favorable and unfavorable
balances of trade as they apply to international business.
Answer: Mercantilism holds that a country's wealth is measured by its holdings of treasure,
which usually meant gold. According to the theory, countries should export more than they
import and, if successful, receive gold from countries that run deficits. To export more than they
imported, governments imposed restrictions on most imports and subsidized production of many
products that could otherwise not compete in domestic or export markets.

A favorable balance of trade indicates that a country is exporting more than it is importing. An
unfavorable balance of trade indicates that a country is importing more than it is exporting,
which is known as a deficit. However, it is not necessarily beneficial to run a trade surplus nor is
it necessarily disadvantageous to run a trade deficit. A country that is running a surplus, or
favorable balance of trade, is, for the time being, importing goods and services of less value than
those it is exporting. In effect, the surplus country is granting credit to the deficit country. If that
credit cannot eventually buy sufficient goods and services, the so-called favorable trade balance
actually may turn out to be disadvantageous for the country with the surplus.
Diff: 3
Learning Outcome: Compare and contrast theories of international trade
Skill: Application
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Reflective thinking

30) In a short essay, discuss the theory of absolute advantage and the reasons a country's
efficiency improves based on this theory.
Answer: The theory of absolute advantage holds that different countries produce some goods
more efficiently than other countries; thus, global efficiency can increase through free trade.
Developed by Adam Smith, the theory of absolute advantage says the real wealth of a country
consists of the goods and services available to its citizens. Smith reasoned that if trade were
unrestricted, each country would specialize in those products that gave it a competitive
advantage. Each country's resources would shift to the efficient industries because the country
could not compete in the inefficient ones. Through specialization, countries could increase their
efficiency because of three reasons:
a. Labor could become more skilled by repeating the same tasks.
b. Labor would not lose time in switching from the production of one kind of product to
another.
c. Long production runs would provide incentives for the development of more effective
working methods.
Diff: 3
Learning Outcome: Compare and contrast theories of international trade
Skill: Synthesis
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

10
Copyright © 2018 Pearson Education Limited
31) What is the difference between the free trade theories of absolute advantage and comparative
advantage? How can free trade improve global efficiency?
Answer: Absolute advantage holds that different countries produce some goods more efficiently
than other countries; thus, global efficiency can increase through free trade. Based on this theory,
Adam Smith questioned why the citizens of any country should have to buy domestically
produced goods when they could buy those goods cheaper abroad. But what happens when one
country can produce all products at an absolute advantage? David Ricardo examined this
question and expanded on Adam Smith's theory of absolute advantage to develop the theory of
comparative advantage. Ricardo reasoned that there may still be global efficiency gains from
trade if a country specializes in products that it can produce more efficiently than other products
—regardless of whether other countries can produce those same products even more efficiently.
Diff: 3
Learning Outcome: Compare and contrast theories of international trade
Skill: Synthesis
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Application of knowledge

32) What assumptions underlie the theories of specialization in international trade? What are the
limitations of these assumptions?
Answer: The assumptions that underlie the theories of specialization in international trade
include the following:
a. Full employment: When countries have many unemployed or unused resources, they may
seek to restrict imports to employ or use idle resources.
b. Economic efficiency: Countries may pursue objectives other than output efficiency. They
may avoid overspecialization because of the vulnerability created by changes in technology.
c. Division of gains: If a country perceives a trading partner is gaining too large a share of
benefits, it may forgo absolute 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: If it costs more to transport the goods than is saved through specialization,
then the advantages of trade are negated.
f. Statics and dynamics: The relative conditions that give countries advantages or disadvantages
in the production of given products are dynamic, not static, as the theories view countries'
advantages.
g. Services: An increasing portion of world trade is in services, and the theories deal with
commodities.
h. Production networks: Specialization may take place by function or by component as well as
by final product.
i. Mobility: The assumption that resources can move domestically from the production of one
good to another, and at no cost, is not completely valid.
Diff: 3
Learning Outcome: Compare and contrast theories of international trade
Skill: Critical Thinking
Objective: 5-2 Illustrate the historical and current rationale for interventionist and free trade
theories
AACSB: Analytical thinking

11
Copyright © 2018 Pearson Education Limited
33) Nontradable goods are BEST defined as ________.
A) products and services for which exporting costs are excessive
B) factors of production that exceed safety regulations
C) goods used for national defense
D) products that comprise a portion of the inputs for finished products
Answer: A
Diff: 2
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

34) Countries with varied climates and varied natural resources generally ________ than
countries with less varied climates and natural resources.
A) have lower per capita incomes
B) depend less heavily on trade
C) have more ethnic subgroups
D) have higher endowments of capital relative to labor
Answer: B
Diff: 2
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

35) Countries with large land areas are generally less dependent on trade than countries with
small land areas because of ________.
A) highly restricted economic scales
B) self-sufficiency with natural resources
C) higher transportation costs related to foreign trade
D) the development of unique products that have a limited demand
Answer: C
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

36) Eight of the top 10 exporting and importing countries are countries with ________.
A) cheap labor forces
B) small land masses
C) natural advantages
D) developed economies
Answer: D
Diff: 2
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

12
Copyright © 2018 Pearson Education Limited
37) The trade theory that says countries should concentrate production on those products using
their most abundant production factors is the ________.
A) factor proportions theory
B) theory of comparative advantage
C) theory of absolute advantage
D) theory of nontradable goods
Answer: A
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

38) El Salvador has a population density of about 620 people per square mile and neighboring
Honduras a population density of about 115 people per square mile. According to the factor
proportions theory of trade, one would expect El Salvador's exports to Honduras to ________.
A) have a lower labor-to-land ratio than its imports from Honduras
B) have a higher labor-to-land ratio than its imports from Honduras
C) embody more capital per square mile than its imports from Honduras
D) embody more capital per worker than its imports from Honduras
Answer: B
Diff: 3
Learning Outcome: Compare and contrast theories of international trade
Skill: Critical Thinking
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Reflective thinking

39) Tests to substantiate the factor proportions theory have had mixed results most likely because
________.
A) labor migration quickly outdates any studies
B) most countries have a favorable balance of trade
C) labor skills and education are not homogeneous
D) large and small countries have different trade policies
Answer: C
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

13
Copyright © 2018 Pearson Education Limited
40) Most world trade takes place ________.
A) between developed countries and developing countries
B) among developed countries
C) among developing countries
D) between raw material exporters and manufacturing exporters
Answer: B
Diff: 2
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

41) One way that developed countries specialize in order to gain acquired advantages is by
________.
A) allocating research efforts more heavily in specific sectors
B) emphasizing production in natural resource endowments
C) restricting imports to those in the service sector
D) subsidizing the transport of exports
Answer: A
Diff: 3
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

42) Why is the United States both an exporter and importer of such products as vehicles and
passenger aircraft?
A) Buyers procure similar products for replacement parts.
B) Transportation costs and cultural differences limit exporters.
C) Companies differentiate products to appeal to different consumers.
D) Bilateral trading agreements require this interchange for a number of products.
Answer: C
Diff: 2
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

43) Which of the following statements is most likely FALSE?

A) Developing countries trade mainly with developed countries.
B) Developed countries trade mainly with other developed countries.
C) Cultural similarity among countries enhances their trade with each other.
D) The greater the geographic distance between countries, the greater the trade.
Answer: D
Diff: 2
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Reflective thinking

14
Copyright © 2018 Pearson Education Limited
44) Countries with large land areas are generally less dependent on trade than countries with
small land areas.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Application of knowledge

45) The factor proportions theory holds that countries should concentrate production on those
products that use their most abundant production factors.
Answer: TRUE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

46) The factor proportions theory holds that countries should improve their competitiveness by
importing capital and skilled employees from abroad.
Answer: FALSE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Analytical thinking

47) Most world trade takes place between raw material exporters and manufacturing exporters.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 5-3 Describe theories that explain national trade patterns
AACSB: Application of knowledge

48) All countries face the questions of what, how much, and with whom they should import and
export. How they answer these questions primarily affects whether ________.
A) nontradable goods become tradable
B) products go through a lengthy life cycle
C) companies adhere to laissez-faire export policies
D) a company's present production location will be competitive
Answer: D
Diff: 2
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Application of knowledge

15
Copyright © 2018 Pearson Education Limited
49) According to the product life cycle (PLC) theory, production and sales are primarily
domestic in the introductory stage because ________.
A) businesses need quick market feedback
B) tariff reductions remain under negotiation
C) international transport costs are too high
D) international patents have not been approved
Answer: A
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

50) According to the PLC theory, what is the most likely reason that companies manufacture
products in locations with high labor rates during the introductory stage of a product's life cycle?
A) Doing so allows use of long production runs using capital-intensive methods.
B) Many consumers are willing to pay high costs for the newest products.
C) Transportation costs are reduced by focusing on markets in developed countries.
D) Import restrictions prevent production in countries other than the ones making product
innovations.
Answer: B
Diff: 3
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

51) According to the PLC theory, developing countries have their best production advantage in
which stage of the product life cycle?
A) growth
B) maturity
C) decline
D) introduction
Answer: C
Diff: 2
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

16
Copyright © 2018 Pearson Education Limited
52) According to the PLC theory, at an early stage of a product's life cycle the product is likely
to be made in a more ________ method than in its later stages.
A) capital-intensive
B) labor-intensive
C) land-intensive
D) low-cost
Answer: B
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

53) Which of the hypothetical new products, if successful, would most likely diffuse its
production and sales according to the product life cycle theory?
A) a Ferrari sports car selling for $200,000 to a niche, upper-end market
B) a Sony television that receives global transmissions without a satellite dish or cable
connection, introduced at a high price but targeted eventually for sale to a mass market
C) a new Diet Coca-Cola soft drink flavored with cranberries
D) a Kyocera plastic chip carrier, which is expected to be quickly obsolete because of
innovations
Answer: B
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Application
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Application of knowledge

54) All of the following are types of products that are usually exceptions to what is predicted by
the product life cycle theory EXCEPT ________.
A) trendy clothing
B) luxury items
C) differentiated products
D) consumer durables
Answer: D
Diff: 2
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

17
Copyright © 2018 Pearson Education Limited
55) Contrary to the product life cycle theory, there has been an increased tendency for companies
to ________.
A) sell products only in their home markets throughout the cycle
B) produce and sell products in countries where counterfeiting is low
C) introduce new products simultaneously in domestic and foreign markets
D) sell new products in developing countries before expanding into developed countries
Answer: C
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

56) All of the following are features of the diamond of national advantage theory EXCEPT
________.
A) firm strategy, structure, and rivalry
B) strategic trade policy regulations
C) related and supporting industries
D) demand conditions
Answer: B
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

57) The diamond of national advantage would be best used to answer which of the following
questions?
A) How do developed countries prevent the trade of blood diamonds?
B) How can developing countries create a significant trade surplus?
C) Why do specialized competitive advantages differ among countries?
D) Why do most innovative products originate in developed countries?
Answer: C
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Application
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Reflective thinking

18
Copyright © 2018 Pearson Education Limited
58) According to the diamond of national advantage theory, the domestic existence of all four
conditions best explains ________.
A) the essence of an industry's development
B) the position of a product in its life cycle
C) where globally competitive firms develop and sustain themselves
D) why countries rely on abundant factor endowments
Answer: C
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

59) Many products' location of production will shift internationally as the products go through
their life cycle.
Answer: TRUE
Diff: 1
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

60) According to the product life cycle (PLC) theory of trade, most new products are produced in
countries where wage rates are low.
Answer: FALSE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Application of knowledge

61) The four favorable domestic conditions of the diamond of national advantage help to explain
how and where globally competitive companies develop and sustain themselves.
Answer: TRUE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Application of knowledge

19
Copyright © 2018 Pearson Education Limited
62) The existence of the four favorable conditions of the diamond of national advantage does not
guarantee that an industry will develop in a given locale.
Answer: TRUE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Analytical thinking

63) An exception to the PLC theory in terms of production location is often a product with very
rapid change in innovation.
Answer: TRUE
Diff: 2
Learning Outcome: Compare and contrast theories of international trade
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Application of knowledge

64) A strategic trade policy is one that develops industries to lessen dependence on foreign
military goods.
Answer: FALSE
Diff: 1
Skill: Concept
Objective: 5-4 Explain why a country's export capabilities are dynamic
AACSB: Application of knowledge

65) Which of the following BEST supports a nation's decision to implement a strategic trade
(industrial) policy?
A) The policies have usually resulted in big payoffs.
B) Governments, rather than entrepreneurs, should take the risks of developing new industries.
C) Consumer needs would otherwise not be met.
D) Government actions should target industries that are believed to give the country its best
export advantages.
Answer: D
Diff: 3
Learning Outcome: Compare and contrast theories of international trade
Skill: Critical Thinking
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

20
Copyright © 2018 Pearson Education Limited
66) A governmental strategic trade (industrial) policy is one that ________.
A) lessens dependence on foreign military goods
B) seeks reciprocal free trade agreements between developed and developing countries
C) targets the resources needed to support industries that seem to fit best with the country's
advantages
D) limits imports to encourage domestic production of what would otherwise be imported
Answer: C
Diff: 2
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

67) Which of the following statements most likely undermines the arguments for a strategic trade
policy?
A) Entrepreneurs, rather than governments, should take business risks.
B) Developed countries have production lead time over developing countries.
C) If big companies can figure out what products to develop, so can governments.
D) Governments have limited resources, so industries with greater growth potential should be
targeted.
Answer: A
Diff: 3
Skill: Critical Thinking
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

68) Between now and 2050, countries undergoing a simultaneous population reduction and an
increased percentage of retirees in the population most likely will need more ________.
A) imports
B) immigrants
C) domestic products
D) favorable balances of trade
Answer: B
Diff: 2
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Application of knowledge

69) The most internationally mobile factor of production is ________.

A) labor
B) management
C) long-term capital
D) short-term capital
Answer: D
Diff: 1
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

21
Copyright © 2018 Pearson Education Limited
70) All the following are reasons for the lower international mobility of people than capital
EXCEPT ________.
A) the differences in economic return between countries are lower for people than for capital.
B) it is more expensive to move people than capital.
C) people may have to learn another language and adapt to a different culture.
D) international capital transfers have less cumbersome legal restrictions than international
movements of people.
Answer: A
Diff: 2
Skill: Application
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

71) All of the following are examples of international labor mobility EXCEPT ________.
A) a manager assigned by an MNE to work short-term abroad
B) a refugee who takes up employment in another country
C) a college student on a study abroad program
D) an illegal immigrant working in another country
Answer: C
Diff: 2
Skill: Application
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

72) Labor and capital mobility are intertwined because ________.

A) illegal workers sometimes pay large sums to people who smuggle them into another country
B) people cannot emigrate to another country unless they bring capital with them
C) companies receive tax benefits for hiring immigrants
D) immigrants bring an investment in human capital with them
Answer: D
Diff: 2
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

73) Brain drain is a term that describes ________.

A) a country's loss of educated, productive people
B) a nation's shift from an emerging market to a developed economy
C) the exportation of high-technology products in exchange for low-technology products
D) the unauthorized use of patents, copyrights, and technology by the counterfeiting industry
Answer: A
Diff: 2
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

22
Copyright © 2018 Pearson Education Limited
74) Which of the following is the LEAST likely result of outward migration?
A) Emigrants remit capital used to start businesses in their home countries.
B) Nations receive more foreign aid.
C) Nations lose highly educated and productive workers.
D) Countries receive remittances from emigrants.
Answer: B
Diff: 3
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Reflective thinking

75) Country X brings in a large number of unskilled immigrants to meet its labor needs. Which
of the following is the LEAST likely to occur in Country X as a result?
A) Country X will develop a long-term class of "have-nots" if the children of immigrants remain
unskilled.
B) Country X will need more unskilled people in the future if immigrant children become
skilled.
C) The continual supply of unskilled labor will delay the development of labor-saving
technology in Country X.
D) Country X will experience a significant transfer of knowledge and a resulting rise in start-up
businesses.
Answer: D
Diff: 3
Skill: Application
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Reflective thinking

76) The international mobility of labor includes workers, students, tourists, and retirees who
travel to another country.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

77) The term brain drain describes the export of high-technology products in exchange for low-
technology products.
Answer: FALSE
Diff: 1
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

23
Copyright © 2018 Pearson Education Limited
78) Companies and individuals transfer capital internationally primarily because of expectations
of earning higher returns.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Application of knowledge

79) From an economic standpoint, why do production factors move from one country to another?
How does factor movement affect international trade?
Answer: Capital, especially short-term capital, is the most internationally mobile production
factor. Companies and private individuals primarily transfer capital because of differences in
expected return. Short-term capital is more mobile than long-term capital, especially direct
investment, because there is more likely to be an active market through which investors can
quickly buy foreign holdings and sell them if they want to transfer capital back home or to
another country. Furthermore, investors feel more certain about short-term political and
economic conditions in a foreign country than about long-term ones. People are also
internationally mobile. Unlike funds that can be cheaply transferred by wire, people must usually
incur high transportation costs to work in another country. Although international mobility of
production factors may be a substitute for trade, the mobility may stimulate trade through sales
of components, equipment, and complementary products. If trade could not occur and production
factors could not move internationally, a country would have to either forgo consuming certain
goods or produce them differently, which in either case would usually result in decreased
worldwide output and higher prices. In some cases, however, the inability to gain sufficient
access to foreign production factors may stimulate efficient methods of substitution, such as the
development of alternatives for traditional production methods.
Diff: 3
Skill: Synthesis
Objective: 5-5 Summarize the reasons for and major effects of international factor movements
AACSB: Analytical thinking

80) In this example, assume that both trade and production factors are internationally mobile.
Using domestic labor, the labor cost per silicon chip is $.10 in Japan and $.20 in the United
States. Using domestic capital, the capital cost per chip is $.10 in Japan and $.05 in the United
States. Chip transportation in either direction is $.10. Japanese labor is willing to work in the
United States for $.15 per chip including the workers' transport cost. U.S. capital will go to Japan
at a cost of $.08 per chip including transaction costs. Which silicon chips will the United States
buy?
A) those made in Japan with Japanese labor and capital
B) those made in the United States with U.S. labor and capital
C) those made in Japan with Japanese labor and U.S. capital
D) those made in the United States with Japanese labor and U.S. capital
Answer: D
Diff: 3
Skill: Application
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Application of knowledge

24
Copyright © 2018 Pearson Education Limited
81) The inability of a company to gain foreign production factors to use in its domestic
operations most likely ________.
A) entices the company to export its own production factors
B) stimulates the company to adopt efficient substitute methods of production
C) stimulates foreign companies to invest in that domestic market
D) causes the company's products to move more rapidly through their life cycles
Answer: B
Diff: 2
Skill: Concept
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Application of knowledge

82) Which of the following is NOT one of the reasons that foreign investment may stimulate
exports from the home (donor) country?
A) The investor often sends home-country components to its facilities abroad.
B) The investor often sends home-country equipment to its facilities abroad.
C) Home-country aid usually goes where the investments are made.
D) The foreign facility is adept at selling the investors' home country products.
Answer: C
Diff: 2
Skill: Concept
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Analytical thinking

83) Analysts conclude that the finite supply of natural resources will most likely ________.
A) cause a higher proportion of world trade to occur among developed countries
B) cause a higher proportion of world trade to occur among developing countries
C) serve as an advantage for developing countries in their sales to developed countries
D) create a greater portion of world trade in the form of services
Answer: C
Diff: 2
Skill: Concept
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Analytical thinking

25
Copyright © 2018 Pearson Education Limited
84) Research shows that urbanization leads to higher productivity. Which of the following is the
LEAST likely reason for this?
A) Urbanization establishes an inflow of immigrants who will work for less money.
B) In urban areas, firms can more easily find people with the exact skills they need.
C) Urbanization allows for economies in moving supplies and finished products.
D) In urban areas, knowledge flows more easily from one company to another and from one
industry to another.
Answer: A
Diff: 2
Skill: Concept
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Analytical thinking

85) The premise that there will be more finely tuned specialization of production among
countries is most likely based on the idea that companies will ________.
A) depend more on production of nontradable goods and services
B) encourage urbanization in emerging countries that lack infrastructure
C) establish facilities in dispersed locations to hinder domestic competition
D) take advantage of wage and skill differences among countries
Answer: D
Diff: 2
Skill: Concept
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Analytical thinking

86) The combination of free trade and free movement of production factors offers maximum
production efficiency.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Analytical thinking

87) The finite nature of natural resources should work as a disadvantage for the export prices of
developing countries.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Reflective thinking

26
Copyright © 2018 Pearson Education Limited
88) The growth of small-scale production technology will most likely enable small countries to
produce products efficiently for their own consumption.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 5-6 Assess the relationship between foreign trade and international factor mobility
AACSB: Analytical thinking

27
Copyright © 2018 Pearson Education Limited