Chapter 06International Trade Theory True / False Questions 1. Mercantilism, propagated in the sixteenth and seventeenth centuries, advocated thatcountries should simultaneously encourage both imports and exports. True False 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. True False 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. True False 4. David Ricardo's theory of comparative advantage was the first to explain why unrestricted free trade is beneficial to a country. True False 5. According to Adam Smith, market mechanism, rather than government policy, shoulddetermine a country's imports and exports. True False 6. The theories of Smith, Ricardo, and Heckscher-Ohlin failed to identify the specific benefits of international trade. True False 6-1© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.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. True False 8. Limits on imports are often in the interests of domestic consumers, but not domestic producers. True False 9. New trade theory stresses that in some cases countries specialize in the production of particular products because of underlying differences in factor endowments. True False 10. The first theory of international trade that emerged in England asserted that gold andsilver were the mainstays of national wealth and essential to vigorous commerce. True False 11. The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus. True False 12. The major advantage of mercantilism was that it viewed trade as a zero-sum game. True False 13. A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. True False 14. In his book, "The Wealth of Nations," Adam Smith supported the mercantilist assumption that trade is a zero-sum game. True False 15. 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. True False 6-2© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.16. According to Ricardo's theory of comparative advantage, it makes sense for a countryto specialize in the production of those goods that it produces most efficiently and to import goods that it produces less efficiently. True False 17. According to the theory of comparative advantage, potential world production is greater with unrestricted free trade than it is with restricted trade. True False 18. 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. True False 19. 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. True False 20. A certain amount of friction is involved when resources are required to move from one economic activity to another. True False 21. Free trade is likely to increase a country's stock of resources and the efficiency with which it utilizes those resources. True False 22. 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. True False 23. Factor endowments refer to the extent to which free trade impacts the wealth of a country. True False 24. Most economists prefer Ricardo's theory to the Heckscher-Ohlin theory because it makes fewer simplifying assumptions. True False 6-3© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.25. The Heckscher-Ohlin theory is the best predictor of real-world international trade patterns. True False 26. When the impact of differences of technology on productivity is controlled for, Heckscher-Ohlin theory gains predictive power. True False 27. 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. True False 28. According to the product life cycle theory, as demand for a product starts to grow in other advanced countries, potential for exports from the U.S. will gradually increase. True False 29. 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 . True False 30. 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. True False 31. 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. True False 32. 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. True False 33. Factor endowments are unit cost reductions associated with a large scale of output. True False 6-4© 2014 by