CHAPTER 3SOURCES OF COMPARATIVE ADVANTAGEMULTIPLE-CHOICE QUESTIONS1. Which of the following suggests that a nation will export the commodity in the productionof which a great deal of its relatively abundant and cheap factor is used?a. The Linder theoryb. The product life cycle theoryc. The MacDougall theoryd. The Heckscher-Ohlin theory2. According to Staffan Linder, trade between two countries tends to be most pronouncedwhen the countries:a. Find their tastes and preferences to be quite harmoniousb. Experience economies of large-scale production over large output levelsc. Face dissimilar relative abundances of the factors of productiond. Find their per-capita income levels to be approximately the same3. Which of the following is a long-run theory, emphasizing changes in the trading position ofa nation over a number of years?a. Theory of factor endowmentsb. Comparative advantage theoryc. Theory of the product cycled. Overlapping demand theory4. The Leontief paradox questioned the validity of the theory of:a. Comparative advantageb. Factor endowmentsc. Overlapping demandsd. Absolute advantage5. Which of the following would least likely apply to the product life cycle theory?a. Calculators and computersb. Coal and crude oilc. Home movie camerasd. Office machinery6. Classical trade theory emphasized which of the following as an underlying explanation ofthe basis for trade?a. Productivities of labor inputsb. Tastes and preferences among nationsc. Changes in technologies over timed. Quantities of economic resources7. Concerning the influence that transportation costs have on the location of industry, which ofthe following industries has generally attempted to locate production facilities close to resource supplies?a. Autosb. Steelc. Soft drinksd. Valuable electronics goods8. Assume that Country A, in the absence of trade, finds itself relatively abundant in labor andrelatively scarce in land. The factor endowment theory reasons that with free trade, the internal distribution of national income in Country A will change in favor of:a. Laborb. Landc. Both labor and landd. Neither labor nor land9. When considering the effects of transportation costs, the conclusions of our trade modelmust be modified. This is because transportation costs result in:a. Lower trade volume, higher import prices, smaller gains from tradeb. Lower trade volume, lower import prices, smaller gains from tradec. Higher trade volume, higher import prices, smaller gains from traded. Higher trade volume, lower import prices, greater gains from trade10. Most economists maintain that the major factor underlying wage stagnation in the UnitedStates in the 1990s has been:a. Import competitionb. Technological changec. Rising real value of the minimum waged. Increasing union membership11. Assume the cost of transporting autos from Japan to Canada exceeds the pretrade pricedifference for autos between Japan and Canada. Trade in autos is:a. Impossibleb. Possiblec. Highly profitabled. Moderately profitable12. Eli Heckscher and Bertil Ohlin are associated with the theory of comparative advantage thatstresses differences in:a. Income levels among countriesb. Tastes and preferences among countriesc. Resource endowments among countriesd. Labor productivities among countries13. Hong Kong is relatively abundant in labor, while Canada is relatively abundant in capital. Inboth countries the production of shirts is relatively more labor intensive than the production of computers. According to the factor endowment theory, Hong Kong will have a(n):a. Absolute advantage in the production of shirts and computersb. Absolute advantage in the production of computersc. Comparative advantage in the production of shirtsd. Comparative advantage in the production of computers75 / 1214. If Japanese workers receive lower wages in the production of autos than do Americanworkers:a. Japan will have a comparative advantage in the production of autosb. Japan will have an absolute advantage in the production of autosc. Production costs will be lower in Japan than in the U.S.d. Production costs could be lower in the U.S. if American labor productivity is higherthan the Japanese15. Which trade theory suggests that a newly produced good, once exported, could ultimatelyend up being imported as the technology is transferred to lower-cost nations?a. Factor endowment theoryb. Product life cycle theoryc. Overlapping demand theoryd. Comparative advantage theory16. A firm is said to enjoy economies of scale over the range of output for which the long-runaverage cost is:a. Increasingb. Constantc. Decreasingd. None of the above17. A product will be internationally traded as long as the pretrade price differential between thetrading partners is:a. Greater than the cost of transporting it between themb. Equal to the cost of transporting it between themc. Less than the cost of transporting it between themd. None of the above18. Which of the following suggests that by widening the market’s size, internati onal trade canpermit longer production runs for manufacturers, which leads to increasing efficiency?a. Economies of scaleb. Diseconomies of scalec. Comparative cost theoryd. Absolute cost theory19. The Leontief paradox:a. Was applied to the product life cycle theoryb. Suggested that the U.S. exports labor-intensive goodsc. Found that national income differences underlie world trade patternsd. Implied that diseconomies of scale occur at low output levels20. Which of the following best applies to the theory of overlapping demands?a. Manufactured goodsb. Servicesc. Primary productsd. None of the above21. The Heckscher-Ohlin theory explains comparative advantage as the result of differences incountries’:a. Economies of large-scale productionb. Relative abundance of various resourcesc. Relative costs of labord. Research and development22. Boeing aircraft company was able to cover its production costs of the first “jumbo jet” in the1970s because Boeing could market it to several foreign airlines in addition to domestic airlines. This illustrates:a. How economies of scale make possible a larger variety of products in internationaltradeb. A transfer of wealth from domestic consumers to domestic producers as the result oftradec. How a natural monopoly is forced to behave more competitively with internationaltraded. How a natural monopoly is forced to behave less competitively with international trade23. Which trade theory contends that a country that initially develops and exports a new productmay eventually become an importer of it and may no longer manufacture the product?a. Theory of factor endowmentsb. Theory of overlapping demandsc. Economies of scale theoryd. Product life cycle theory24. The theory of overlapping demands predicts that trade in manufactured goods is unimpor-tant for countries with very different:a. Tastes and preferencesb. Expectations of future interest rate levelsc. Per-capita income levelsd. Labor productivities25. The trade model of the Swedish economists Heckscher and Ohlin maintains that:a. Absolute advantage determines the distribution of the gains from tradeb. Comparative advantage determines the distribution of the gains from tradec. The division of labor is limited by the size of the world marketd. A country exports goods for which its resource endowments are most suited26. According to the factor endowment model, countries heavily endowed with land will:a. Devote excessive amounts of resources to agricultural productionb. Devote insufficient amounts of resources to agricultural productionc. Export products that are land-intensived. Import products that are land-intensive27. For the United States, empirical studies indicate that over the past two decades the cost ofinternational transportation relative to the value of U.S. imports has:a. Increasedb. Decreasedc. Not changedd. None of the above77 / 1228. Should international transportation costs decrease, the effect on international trade wouldinclude a(n):a. Increase in the volume of tradeb. Smaller gain from tradec. Decline in the income of home producersd. Decrease in the level of specialization in production.29. That the division of labor is limited by the size of the market best applies to which explana-tion of trade?a. Factor endowment theoryb. Product life cycle theoryc. Economies of scale theoryd. Overlapping demand theory30. A larger variety of products results from international trade especially if:a. International trade affords producers monopoly powerb. National governments levy import tariffs and quotasc. Producing goods entails increasing costsd. Economies of scale exist for producers31. With economies of scale and decreasing unit costs, a country has the incentive to:a. Specialize completely in the product of its comparative advantageb. Specialize partially in the product of its comparative advantagec. Specialize completely in the product of its comparative disadvantaged. Specialize partially in the product of its comparative disadvantage32. Proponents of ________ maintain that government should enact policies that encourage thedevelopment of emerging, “sunrise” industries.a. Product life cycle policyb. Static comparative advantage policyc. Intraindustry trade policyd. Industrial policy33. Legislation requiring domestic manufacturers to install pollution abatement equipment tendsto promote:a. Higher production costs and an increase in outputb. Higher production costs and a decrease in outputc. Lower production costs and an increase in outputd. Lower production costs and a decrease in output34. Stringent governmental regulations (e.g., air quality standards) imposed on domestic steelmanufacturers tend to:a. Enhance their competitiveness in the international marketb. Detract from their competitiveness in the international marketc. Increase the profitability and productivity of domestic manufacturersd. Reduce the market share of foreign firms selling steel in the domestic market35. Among the determinants underlying a country’s internatio nal competitiveness in businessservices (e.g., construction) are:a. The potential scale economies afforded by a market’s sizeb. Abundance of equipment including data processing facilities and computersc. Skills and capabilities of employees and their wage ratesd. All of the above36. The simultaneous import and export of computers by Germany is an example of:a. Intraindustry tradeb. Interindustry tradec. Perfect competitiond. Imperfect competition37. Linder’s theory of overlapping demand provide s an explanation of:a. Product life cycle theoryb. Factor endowment modelc. Economies of large-scale productiond. Intraindustry trade38. Intraindustry trade can be explained in part by:a. Adam Smith’s principle of absolute advantageb. Perfect competition in product marketsc. Diseconomies of large scale productiond. Transportation costs between and within nations39. The Leontief paradox provided:a. Support for the principle of absolute advantageb. Support for the factor endowment modelc. Evidence against the factor endowment modeld. Evidence against the principle of absolute advantage40. Which trade theory suggests that comparative advantage tends to shift from one nation toanother as a product matures?a. Interindustry trade theoryb. Intraindustry trade theoryc. Product life cycle theoryd. Overlapping demand theory41. Which trade theory is tantamount to a short-run version of the factor price equalizationtheory?a. Specific factors theoryb. Product life cycle theoryc. Economies of scale theoryd. Overlapping demand theory79 / 1242. According to the specific factors trade theory:a. Owners of factors specific to export industries suffer from trade, while owners offactors specific to import-competing industries gainb. Owners of factors specific to export industries gain from trade, while owners of factorsspecific to import-competing industries sufferc. Both owners of factors specific to export industries and owners of factors specific toimport-competing industries gain from traded. Both owners of factors specific to export industries and owners of factors specific toimport-competing industries suffer from trade43. Which nation has sometimes been characterized as being a “pollution haven” due to itslenient environmental standards that encourage the production of pollution-intensive goods?a. Japanb. Canadac. Germanyd. Mexico44. Boeing Inc. has criticized The Airbus Company’s competitiveness on the grounds thatAirbus benefits from:a. Import tariffs protecting Airbus in the European marketb. Import quotas protecting Airbus in the European marketc. Lenient environmental standards of European governmentsd. Production subsidies supplied by European governments45. To justify the subsidies it has received from European governments, The Airbus Companyhas used all of the following arguments except:a. Its subsidies have prevented U.S. aircraft firms from holding a worldwide monopolyb. U.S. aircraft firms have benefitted from military-sponsored programs of the U.S.governmentc. Air bus’ subsidies were totally repaid as the firm realized profits on its aircraft salesd. Without subsidies to Airbus, Europe would be dependent on the United States as asupplier of aircraft46. Expanding trade or technological improvements:a. Increases the demand for skilled workers in the U.S.b. Decreases the demand for unskilled workers in the U.S.c. Increases the demand for unskilled workers in the U.S.d. Both a and b.47. Economists agree that wages of unskilled workers are being held down by:a. International tradeb. Technology improvementsc. Lack of educationd. A combination of a, b, and c48. The factor endowment theory states that comparative advantage is explained:a. Exclusively by differences in relative supply conditionsb. Exclusively by differences in relative national demand conditionsc. Both supply and demand conditionsd. None of the above49. The factor endowment theory assumes:a. Same tastes and preferencesb. Factor inputs of uniform qualityc. Same technologyd. All of the above50. In explaining international trade, the product life cycle theory focuses on:a. Tastes and preferencesb. The role of technological innovationc. Per-capita income levels of nationsd. Both b and c.TRUE-FALSE QUESTIONST F 1. According to Ricardian theory, comparative advantage depends on relative dif-ferences in labor productivity.T F 2. The Heckscher-Ohlin theory asserts that relative differences in labor productivity underlie comparative advantage.T F 3. The factor-endowment theory highlight s the relative abundance of a nation’s resources as the key factor underlying comparative advantage.T F 4. According to the factor-endowment theory, a nation will export that good for which a large amount of the relatively scarce resource is used.T F 5. According to the factor-endowment theory, a nation will import that good for which a large amount of the relatively abundant resource is used.T F 6. The Heckscher-Ohlin theory suggests that land-abundant nations will export land-intensive goods while labor-abundant nations will export labor-intensivegoods.T F 7. The Heckscher-Ohlin theory contends that over a period of years a country that initially is an exporter of a product will become an importer of that product.T F 8. The Heckscher-Ohlin theory emphasizes the role that demand plays in the crea-tion of comparative advantage.T F 9. The factor-endowment theory asserts that with specialization and trade there tends to occur an equalization in the relative resource prices of trading partners. T F 10. According to the factor-endowment theory, international specialization and trade cause a nation’s cheap resource to become cheaper and a nation’s expensiveresource to become more expensive.T F 11. Fears about the downward pressure that cheap foreign workers place on U.S.wages have led U.S. labor unions to lobby for import restrictions such as tariffsand quotas.81 / 12T F 12. According to the factor-price-equalization theory, international trade results in the relative differences in resource prices between nations being eliminated.T F 13. Empirical testing by Wassily Leontief gave support to the Heckscher-Ohlin theory of trade.T F 14. The Leontief Paradox was the first major challenge to the product-life-cycle theory of trade.T F 15. The Leontief Paradox suggested that, in contrast to the predictions of the factor-endowment theory, U.S. exports were less capital-intensive than U.S. import-competing goods.T F 16. The specific-factors theory analyzes the income distribution effects of trade in the short run when resources are immobile among industries.T F 17. Owners of resources specific to export industries tend to lose from international trade, while owners of factors specific to import-competing industries tend togain.T F 18. The factor-price-equalization theory is a short-run version of the specific-factors theory.T F 19. With economies of scale, specialization in a few products allows a manufacturer to benefit from longer production runs which lead to decreasing average cost.T F 20. With decreasing costs, a country has an incentive to partially specialize in the product of its comparative advantage.T F 21. By widening the size of the domestic market, international trade permits compa-nies to take advantage of longer production runs and increasing efficiencies suchas mass production.T F 22. The theory of overlapping demands applies best to trade in manufactured goods. T F 23. Decreasing cost conditions lead to complete specialization in the production of the commodity of comparative advantage.T F 24. According to Staffan Linder, the factor endowment theory is useful in explaining trade patterns in manufactured goods, but not primary products.T F 25. The theory of overlapping demands asserts that trade in manufactured goods is stronger the less similar the demand structures of two countries.T F 26. The theory of overlapping demands contends that international trade in manufac-tured products is strongest among nations with similar income levels.T F 27. According to the theory of overlapping demands, trade in manufactured goods would be greater among two wealthy countries than among a wealthy countryand a poor country.T F 28. Recent studies of U.S. resource endowments indicate that the United States is most abundant in unskilled labor, followed by semiskilled labor and skilled labor.T F 29. Intraindustry trade would occur if computers manufactured in the United States by IBM are exported to Japan while the United States imports computers manu-factured by Hitachi of Japan.T F 30. Because seasons in the Southern Hemisphere are opposite those in the Northern Hemisphere, one would expect intraindustry trade to occur in agricultural products.T F 31. Intraindustry trade can be explained by product differentiation, economies of scale, seasons of the year, and transportation costs.T F 32. According to the theory of intraindustry trade, many manufactured goods undergoa trade cycle in which the home country initially is an exporter and eventuallybecomes an importer of a product.T F 33. The product-life-cycle theory applies best to trade in primary products in the short run.T F 34. According to the product-life-cycle theory, the first stage of a product’s trade cycle is when it is introduced to the home market.T F 35. According to the product life cycle theor y, the last stage of a product’s trade cycle is when it becomes an import-competing good.T F 36. Ricardo’s theory of comparative advantage is a static theory that does not con-sider changes in international competitiveness over the long run.T F 37. Dynamic comparative advantage refers to the creation of comparative advantage through the mobilization of skilled labor, technology, and capital.T F 38. Industrial policy seeks to direct resources to declining industries in which pro-ductivity is low, linkages to the rest of the economy are weak, and future com-petitiveness is remote.T F 39. Europe’s jumbo-jet manufacturer, Airbus, has justified receiving governmental subsidies on the grounds that the subsidies prevent the United States from becom-ing a monopoly in the jumbo-jet market.T F 40. The imposition of pollution-control regulations on domestic steel manufacturers leads to decreases in production costs and an improvement in the steel manufac-turers’ competitiveness.T F 41. Empirical studies conclude that U.S. environmental policies are a more important determinant of trade performance than capital, raw materials, labor skills, andwages.T F 42. Most developing countries have pollution-control laws and enforcement policies that are more stringent than those of the major industrial countries.83 / 12T F 43. Although the theory of comparative advantage explains trade in manufactured goods, it has no explanatory value for trade in business services.T F 44. When transportation costs are added to our trade model, the low-cost exporting country produces less, consumes more, and exports less than that which occurs inthe absence of transportation costs.T F 45. When transportation costs are added to our trade model, the degree of specializa-tion in production between two countries increases as do the gains from trade.T F 46. In the absence of transportation costs, free trade results in the equalization of the prices of traded goods, as well as resource prices, in the trading nations.T F 47. In industries where the final product is much less weighty or bulky than the materials from which it is made, firms tend to locate production near resourcesupplies.T F 48. Industrial processes that add weight or bulk to a commodity are likely to be located near the resource market to minimize transportation costs.T F 49. A product will be traded only if the cost of transporting it between nations is less than the pretrade difference between their relative product prices.T F 50. Generally speaking, transportation costs are more important than production costs as a source of comparative advantage.T F 51. The product-life-cycle model contends that when a new product is introduced to the home market, it generally requires low-skilled labor to produce it.T F 52. According to the product life cycle model, comparative advantage shifts from cheap-labor countries to high-technology countries after a manufactured goodbecomes standardized.ANSWERSAnswers to Multiple-Choice Questions1. d2. d3. c4. b5. b6. a7. b8. a9. a10. b 11. a12. c13. c14. d15. b16. c17. a18. a19. b20. a21. b22. a23. d24. c25. d26. c27. b28. a29. c30. d31. a32. d33. b34. b35. d36. a37. d38. d39. c40. c41. a42. b43. d44. d45. c46. d47. d48. a49. d50. bAnswers to True-False Questions1. T2. F3. T4. F5. F6. T7. F8. F9. T10. F11. T 12. T13. F14. F15. T16. T17. F18. F19. T20. F21. T22. T23. T24. F25. F26. T27. T28. F29. T30. T31. T32. F33. F34. T35. T36. T37. T38. F39. T40. F41. F42. F43. F44. T45. F46. T47. T48. F49. T50. F51. F52. FSHORT ANSWER QUESTIONS1. Does factor price equalization occur in the real world?Answer: In the real world, differences in factor prices tend to exist. Different technologies, imperfect markets, transportation costs, and trade barriers may prevent factor prices from equalizing among nations.2. What is the focus of the product life cycle theory, and where is it applicable?Answer: The product life cycle theory focuses on the role of technological innovation as a key determinant of trade patterns. It applies to manufactured goods.ESSAY QUESTIONS1. Explain how immigration and trade may worsen wage inequality, and how college educa-tion may mitigate against that.Answer: Trade tends to increase the demand for skilled workers relative to unskilled workers, thus worsening wage inequality. Immigration of unskilled workers decreases the supply of skilled workers relative to unskilled workers, thus worsening wage inequality. Alternatively, college education increases the supply of skilled workers relative to unskilled workers, thus reducing wage inequality.2. How does Staffan Linder explain world trade patterns?Answer: Linder offers two explanations of world trade patterns. Trade in primary products conforms well to the factor-endowment theory. However, trade in manufactured goods is best explained by overlapping demand structures among nations. For manufactured goods, the basis for trade is stronger when the structure of demand in two nations is more similar, due to similar per-capita incomes.85 / 12。
