Washburn University

BU 355

Chapter 6: Test Bank

TRUE/FALSE QUESTIONS

1)Mercantilism, propagated in the sixteenth and seventeenth centuries, advocated that countries should simultaneously encourage both imports and exports.

 

2. Although mercantilism is an old and largely discredited doctrine, its echoes remain in modern political debate and in the trade policies of many countries.

 

3. Free trade refers to a situation in which a government, through quotas or duties, attempts to influence what its citizens can buy from another country, or what they can produce and sell to another country.

 

4. David Ricardo's theory of comparative advantage was the first to explain why unrestricted free trade is beneficial to a country.

 

5. According to Adam Smith, market mechanism, rather than government policy, should determine a country's imports and exports.

 

6. The theories of Smith, Ricardo, and Heckscher-Ohlin failed to identify the specific benefits of international trade.

 

7. Smith, Ricardo, and Heckscher-Ohlin suggested that a country's economy would gain only if its citizens buy products that are made in that country.

 

8. Limits on imports are often in the interests of domestic consumers, but not domestic producers.

 

9. New trade theory stresses that in some cases countries specialize in the production of particular products because of underlying differences in factor endowments.

 

10. The first theory of international trade that emerged in England asserted that gold and silver were the mainstays of national wealth and essential to vigorous commerce.

 

11. The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus.  The major advantage of mercantilism was that it viewed trade as a zero-sum game.
12. A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

 

13. In his book The Wealth of Nations, Adam Smith supported the mercantilist assumption that trade is a zero-sum game.

 

14. According to Adam Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries.

 

15. According to Ricardo's theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to import goods that it produces less efficiently.

16. According to the theory of comparative advantage, potential world production is greater with unrestricted free trade than it is with restricted trade.

 

17. Ricardo's theory of comparative advantage is a major intellectual weapon for advocates of free trade because it provides a strong rationale for encouraging free trade.

 

18. The Nobel Prize-winning economist Paul Samuelson argued that contrary to the standard interpretation, in certain circumstances the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade regime with a poor nation.

 

19. A certain amount of friction is involved when resources are required to move from one economic activity to another.

 

20. Free trade is likely to increase a country's stock of resources and the efficiency with which it utilizes those resources.

 

21. Despite the short-term adjustment costs associated with adopting a free trade regime, trade would seem to produce greater economic growth and higher living standards in the long run.

 

22. Factor endowments refer to the extent to which free trade impacts the wealth of a country.

 

23. Most economists prefer Ricardo's theory to the Heckscher-Ohlin theory because it makes fewer simplifying assumptions.

 

24. The Heckscher-Ohlin theory is the best predictor of real-world international trade patterns.

 

25. When the impact of differences of technology on productivity is controlled for, Heckscher-Ohlin theory gains predictive power.

 

26. Raymond Vernon's product life-cycle theory was based on the observation that for most of the twentieth century a very large proportion of the world's new products were developed by the firms situated in Germany and sold first in the German market.

 

27. According to the product life cycle theory, as demand for a product starts to grow in other advanced countries, potential for exports from the United States will gradually increase.

 

28. According to the product life-cycle theory, the locus of global production initially switches from developing countries to other advanced nations and then from those nations to the United States.

 

29. Viewed from an Asian or European perspective, Vernon's argument that most new products are developed and introduced in the United States seems ethnocentric and increasingly dated.

 

30. While Vernon's theory is useful for explaining the pattern of international trade in the modern world, its relevance during the period of American global dominance seemed more limited.

 

31. The new trade theory emerged from the thought that the ability of firms to attain economies of scale might have important implications for international trade.

 

32. Factor endowments are unit cost reductions associated with a large scale of output.