Chapter 6 T/F

Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country.

The theories of Smith and Ricardo show that countries should not engage in international trade for products that it is able to produce for itself.

David Ricardo's theory of comparative advantage explains international trade in terms of international differences in political environments.

New trade theory stresses that in some cases countries specialize in the production and export of particular products because the world market can support only a limited number of firms.

Porter's theory of national competitive advantage recommends unrestricted free trade between countries.

Heckscher-Ohlin theory supports the case for unrestricted free trade between nations.

Mercantilism supports the idea that countries should export more than what they import.

Mercantilist doctrine advocates unrestricted free trade between countries.

The principle of mercantilism views trade as a positive-sum game.

A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

Adam smith argued that countries should specialize in the production of goods for which they have an absolute advantage.

According to Ricardo's theory of comparative advantage, countries should produce all the products for which they have an absolute advantage.

According to Ricardo's theory of comparative advantage, countries shall not produce a good even if they have an absolute advantage in its production.

The theory of comparative advantage suggests that trade is a positive-sum game in which all countries that participate realize economic gains.

Simple model of free trade assumed away transportation costs between countries.

Resources always move easily from one economic activity to another.

The production possibility frontier will be parabolic if constant return to specialization is observed.

The production possibility frontier will be convex if constant return to specialization is observed.

Diminishing returns show that it is feasible for a country to specialize to the degree suggested by the simple Ricardian model.

The simple comparative advantage model assumed that trade does not change a country's stock of resources or the efficiency with which it utilizes those resources.

According to Paul Samuelson's critique, a poor country will rapidly improve its productivity if a rich country enters into a free trade agreement with it.

Paul Samuelson's critique argues that trade is a positive-sum game in which all countries that participate realize economic gains.

A rich country improves its productivity by engaging in free trade with a poor country. This situation supports Paul Samuelson's critique.

Factor endowments refer to the extent to which a country is gifted with such resources as land, labor, and capital.

The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally scarce.

Heckscher-Ohlin theory stresses that comparative advantage arises from differences in productivity.

The Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments.

Ricardo's theory makes fewer simplifying assumptions compared to Heckscher-Ohlin theory.

A capital intensive country exports products that are capital intensive. This is an example of Leontief Paradox.

A key assumption in the Heckscher-Ohlin theory is that technologies are the same across countries.

The product life-cycle theory argues that a large proportion of the world's new products had been developed by U.S. firms.

The product life-cycle theory argues that the developing nations will not produce a product if the product is highly standardized.

Some of the arguments made by the product life-cycle theory seem ethnocentric and increasingly dated when viewed from an Asian or European perspective.

Economies of scale are unit cost reductions associated with a large scale of output.

Companies that trade small volumes of product can benefit from economies of scale.

Variety of goods that a country can produce is limited by the size of the market in industries where economies of scale are important.

First-mover advantages are the economic and strategic advantages that accrue to early entrants into an industry.

New trade theory suggests that nations cannot benefit from trade when they do not differ in resource endowments or technology.

According to the new trade theory, firms that establish a first-mover advantage with regard to the production of a particular new product may subsequently dominate global trade in that product.

The theories of international trade claim that promoting free trade is generally in the best interests of an individual firm, although it may not always be in the best interest of a country.

New trade theorists stress the role of luck in giving a firm first-mover advantages.

Porter contends that government has little or no effect on the four components that shape the environment in which firms compete.

From a profit perspective, it makes sense for firms to disperse their productive activities to those countries where they can be performed most efficiently.