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CHAPTER 6 International Trade and Factor Mobility Theory 1. Why should managers in international business understand international trade theory? a. The understanding helps them decide whether to embrace PLC versus factor proportions theory when seeking to sell abroad. b. If they face supply shortages in their domestic market, it helps them to find suppliers abroad. c. Countries enact trade policies based on trade theories, which, in turn, affect companies' optimum production locations. d. The theory is essential in determining the best pricing strategy to use when exporting. Answer: c. Countries enact trade policies based on trade theories, which, in turn, affect companies' optimum production locations. 2. Why should managers in international business understand international trade theory? a. Countries' trade policies, based on trade theories, influence which products companies might export to given countries. b. The understanding helps managers decide whether their companies should follow laissez-faire management practices. c. The theories help managers decide whether to locate production in large versus small countries. d. The comprehension is useful when deciding whether to transfer managers abroad to manage foreign operations. Answer: a. Countries' trade policies, based on trade theories, influence which products companies might export to given countries. 3. Because all countries face the questions of what, how much, and with whom they should import and export, international business managers _____. a. cannot possibly see what their governments' policies are if an invisible hand directs these policies b. should understand the theories used to answer these questions because policies affect business operations c. should locate their companies' operations in small countries where they have more access to influencing the policies used to answer these questions d. should concentrate on production of nontradable goods because they are less affected by government policies Answer: b. should understand the theories used to answer these questions because policies affect business operations 4. All countries face the questions of what, how much, and with whom they should import and export. How they answer these questions affects whether _____. a. nontradable goods become tradable b. products go through a life cycle c. companies should follow laissez-faire export policies d. a company's present production location will be competitive or not Answer: d. a company's present production location will be competitive or not 5. The trade theory that premises a country's wealth is measured by its holdings of treasure, usually in gold, is known as _____. a. mercantilism b. the Porter Diamond c. monetarism d. bullionism Answer: a. mercantilism 6. Neomercantilism describes the approach of countries to run a favorable balance of trade to _____. a. build up gold reserves b. achieve some social or political objective c. lower their rates of inflation d. buy raw materials more cheaply Answer: b. achieve some social or political objective 7. Which of the following undesirable results may come about for a country running a favorable balance of trade? a. Its unemployment increases. b. It cannot as easily repay its external debt. c. It may have to devalue its currency. d. Its credit to other countries may buy insufficient goods and services when repaid. Answer: d. Its credit to other countries may buy insufficient goods and services when repaid. 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. limiting imports and subsidizing exports 9. _____ holds that there are advantages to trade because different countries can produce different goods more efficiently than others. a. A favorable balance of trade b. The theory of absolute advantage c. The product life cycle theory d. The tradable goods theory Answer: b. The theory of absolute advantage 10. Which of the following is most likely a basis for a Jamaican natural advantage in the export of goods and services? a. Reggae music b. high literacy rate in comparison with most other low-income countries c. the use of English as the primary language d. clear, warm Caribbean waters Answer: d. clear, warm Caribbean waters 11. Adam Smith's concept of _____ is today commonly referred to as product or process technology. a. a patent b. a natural advantage c. an acquired advantage d. a comparative advantage Answer: c. an acquired advantage 12. Assume the following conditions: In the United States it takes 5 resources to produce a ton of potatoes and 10 to produce a ton of coal. In Canada it takes 6 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. the United States should export potatoes to Canada and import coal from Canada 13. Comparative advantage holds that there is a basis for trade when Country A specializes _____. a. in producing those goods and services it can produce more efficiently than Country B b. in new products and Country B specializes in mature products c. in labor-intensive products and Country B specializes in capital-intensive products d. in producing the product that it can produce more efficiently than another product even though Country B can produce both products more efficiently than Country A Answer: d. in producing the product that it can produce more efficiently than another product even though Country B can produce both products more efficiently than Country A 14. 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. even though it can produce all goods more efficiently than other countries 15. 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 forego 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. the country will forego producing its less efficient output in order to produce its more efficient output 16. Assume the following conditions: In the United States it takes 4 resources to produce a ton of potatoes and 5 to produce a ton of coal. In Canada it takes 6 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. the United States should import potatoes from Canada and export coal to Canada 17. Adam Smith in his theory of absolute advantage reasoned that specialization of production would lead to greater efficiency. He gave all of the following reasons except _____. a. labor could become more skilled by repeating the same tasks b. specialized labor would immigrate to countries better able to use their skills c. labor would not lose time in switching from the production of one kind of product to another d. long production runs would provide incentives for the development of more effective working methods Answer: b. specialized labor would immigrate to countries better able to use their skills 18. Assume that two countries can increase their combined output through specialization and trade. The two are most apt to do so if each perceives it will _____. a. be satisfied with the share of increased output it receives relative to what the trading partner receives even though their shares may be unequal b. receive some share of the increased output c. exchange low-value production for high-value production d. reduce unemployment through trade Answer: a. be satisfied with the share of increased output it receives relative to what the trading partner receives even though their shares may be unequal 19. The free trade theories of specialization assumed that _____. a. although the specialization would lead to some unemployment, the production gains would more than compensate for job losses b. countries had objectives other than economic efficiency c. resources can move domestically from the production of one good to another d. resources can move internationally from the production of one good to another Answer: c. resources can move domestically from the production of one good to another 20. The free trade theories of specialization assumed that _____. a. although specialization would lead to some unemployment, the production gains would more than compensate for job losses b. countries had objectives other than economic efficiency c. domestic resources are unable to move from the production of one good to another d. resources are immobile internationally Answer: d. resources are immobile internationally 21. Countries with large land areas are generally less dependent on trade than countries with small land areas. One of the factors causing this difference is that large countries _____. a. are more apt to have varied climates and natural resources b. have more people c. can support long production runs d. typically speak languages that are not official elsewhere Answer: a. are more apt to have varied climates and natural resources 22. Countries with large land areas are generally less dependent on trade than countries with small land areas. One of the factors causing this difference is that large countries _____. a. are less densely populated b. are self-sufficient in natural resources c. generally have less of their production and markets near their borders, thus incurring higher transportation costs for foreign trade d. are more likely to develop unique products for which there is little demand elsewhere Answer: c. generally have less of their production and markets near their borders, thus incurring higher transportation costs for foreign trade 23. Nine of the top 10 exporting countries are countries with _____. a. cheap labor b. small land masses c. dependence primarily on raw material exports d. high incomes per capita Answer: d. high incomes per capita 24. Countries with varied climates and varied natural resources, generally _____ than countries with less varied climates and natural resources. a. have higher per capita incomes b. depend less on trade c. have more ethnic subgroups d. have higher endowments of capital relative to labor Answer: b. depend less on trade 25. The factor proportions theory of trade says that a country will have its best trade advantage if it concentrates on _____. a. importing labor-intensive products and exporting capital-intensive ones b. exporting its expensive products c. producing products using its abundant production factors d. producing products using its scarce production factors Answer: c. producing products using its abundant production factors 26. Testing the factor proportions theory as an explanation of world trade is complicated by the fact that _____. a. excess capacity may cause distortions in cost b. industrial countries prefer to export labor intensive products in spite of having high capital intensities c. product obsolescence occurs too rapidly to obtain sufficient data on imports and exports d. the same product may be produced most efficiently in different countries by using different labor-capital ratios Answer: d. the same product may be produced most efficiently in different countries by using different labor-capital ratios 27. 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. have a higher labor-to-land ratio than its imports from Honduras 28. 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 good Answer: a. factor proportions theory 29. The country similarity theory of trade is a departure from earlier trade theories in that it _____. a. prescribes that similar countries should not attempt to develop specialization as a means of trading with each other b. says that small countries trade primarily with each other and so do large countries c. says that the greater benefits from trade will come when the economic gap between high-income countries and low-income countries is lessened d. shows that most of world trade occurs among high-income countries rather than between high-income and low-income countries Answer: d. shows that most of world trade occurs among high-income countries rather than between high-income and low-income countries 30. Most world trade takes place _____. a. between high-income countries and low-income countries b. among high-income countries c. among low-income countries d. between raw material exporters and manufacturing exporters Answer: b. among high-income countries 31. High-income countries specialize in order to gain acquired advantages primarily by _____. a. apportioning their research efforts b. emphasizing products based on their natural resource endowments c. restricting imports d. subsidizing the transport of exports Answer: a. apportioning their research efforts 32. Why is the United States both an exporter and importer of such products as vehicles and passenger aircraft? a. Buyers procure similar products from more than one country to help assure the receipt of replacement parts in case one supplier has production problems. b. Transportation savings explain most of the pattern. c. Different companies from different countries have developed product variations that appeal to different consumers. d. Bilateral trading agreements require this interchange for a number of products. Answer: c. Different companies from different countries have developed product variations that appeal to different consumers. 33. The product life cycle (PLC) theory of trade holds that _____. a. exports will be higher for products that go through a cycle than products that do not b. durable products will be exported more than perishable ones c. countries are better off if they concentrate on products not likely to become obsolete because of innovations d. products' location of production will shift internationally depending on the stage in the life cycle Answer: d. products' location of production will shift internationally depending on the stage in the life cycle 34. In the introductory stage of the product life cycle, the production and sales are primarily in the same country because _____. a. there is a need to produce close to consumers in order to get quick feedback on needed product alterations b. there has not been time to negotiate tariff reductions for sales in other countries c. companies lack sufficient capacity to serve foreign markets as well d. there has not been time to patent the products in multiple countries Answer: a. there is a need to produce close to consumers in order to get quick feedback on needed product alterations 35. At an early stage of a product's life cycle, the product is apt to be made in a more _____ method than in its later stages. a. capital-intensive b. labor-intensive c. standardized d. low-cost Answer: b. labor-intensive 36. Low-income countries have their best export advantage in which stage of the product life cycle? a. growth b. maturity c. decline d. introduction Answer: c. decline 37. Which of the following products would most likely change international production location as predicted by the product life cycle theory? a. a consumer durable b. a luxury product c. a product that becomes obsolete very rapidly d. a differentiated product that doesn't compete on the basis of price Answer: a. a consumer durable 38. Which of the hypothetical new products, if successful, would most likely diffuse its production and sales according to the product life cycle (PLC) theory? a. a Ferrari sports car selling for $150,000 to a niche upper-end market b. a Sony television (It can receive transmissions from anywhere in the world without a satellite dish or cable connection.) introduced at a high price but targeted eventually for sale to a mass market c. a new Coca-Cola soft drink flavored with cranberries d. a Kyocera plastic chip carrier, which is expected to be obsolete within a year because of innovations Answer: b. a Sony television (It can receive transmissions from anywhere in the world without a satellite dish or cable connection.) introduced at a high price but targeted eventually for sale to a mass market 39. Contrary to the product life cycle theory, there has been an increased tendency to _____. a. sell products only in companies' home markets throughout the cycle b. produce and sell them first in countries where product counterfeiting is high c. introduce them simultaneously in multiple markets and produce them where costs are minimized for serving the multiple markets d. introduce them first in low-income countries and later in high-income countries Answer: c. introduce them simultaneously in multiple markets and produce them where costs are minimized for serving the multiple markets 40. All of the following are types of products that are usually exceptions to what is predicted by the product life cycle theory except _____. a. quickly obsolesced products b. luxury products c. differentiated products d. consumer durables Answer: d. consumer durables 41. The identification by a government of target industries to be competitive internationally is a(n) _____. a. example of central planning b. strategic trade policy c. import substitution policy d. export-led development policy Answer: b. strategic trade policy 42. A governmental strategic trade policy is one that _____. a. develops industries to lessen dependence on foreign military goods b. seeks reciprocal free trade agreements c. targets industries to be competitive internationally d. limits imports so as to produce what would otherwise be imported Answer: c. targets industries to be competitive internationally 43. Which of the following is an argument for using a strategic trade 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. Because government influence is seldom neutral, government actions should concentrate on helping those industries that will give them the best export advantages. Answer: d. Because government influence is seldom neutral, government actions should concentrate on helping those industries that will give them the best export advantages. 44. Which of the following is an argument against using a strategic trade policy? a. Excessive competition develops because too many countries identify and target the same industries. b. Almost any industry can be considered strategic. c. There have been no successes in using this policy. d. Consumers pay higher prices as a result. Answer: a. Excessive competition develops because too many countries identify and target the same industries. 45. All of the following are elements of the Porter Diamond except _____. a. demand conditions b. factor conditions c. governmental assistance conditions d. related and supporting industries Answer: c. governmental assistance conditions 46. The Porter Diamond seeks to answer the question, _____? a. How do we prevent diamonds produced by slave labor (blood diamonds) from entering international markets b. How can we create a trade surplus c. Why do specialized competitive advantages differ among countries d. Why does most innovation originate in the high-income countries Answer: c. Why do specialized competitive advantages differ among countries 47. The domestic existence of the four favorable conditions of the Porter Diamond for a particular industry _____. a. helps to explain how and where globally competitive companies develop and sustain themselves b. guarantees that the industry will develop and sustain itself within that country c. is essential for the industry's development d. helps to explain the location of production as products move through their life cycles Answer: a. helps to explain how and where globally competitive companies develop and sustain themselves 48. Costa Rica applied the concepts of the Porter Diamond to help transform its economy by _____. a. building domestic demand for the products it wished to produce b. looking globally, rather than just domestically, to get favorable conditions c. following import substitution policies d. concentrating on the development of nontradable goods Answer: b. looking globally, rather than just domestically, to get favorable conditions 49. The international movement of production factors takes place primarily because of _____. a. governmental incentives b. perceptions of earning higher returns c. political (persecution and war dangers) d. inadequate border controls to prevent the movements Answer: b. perceptions of earning higher returns 50. The most internationally mobile factor of production is _____. a. labor b. management c. long-term capital d. short-term capital Answer: d. short-term capital 51. All the following are reasons for the lower international mobility of people than capital except _____. a. the differences in economic return among countries is 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. the differences in economic return among countries is lower for people than for capital 52. All of the following are examples of international labor mobility except _____. a. a manager assigned to work short-term abroad by an MNE b. a refugee who takes up employment in another country c. a student on a study abroad program d. a person working illegally in another country Answer: c. a student on a study abroad program 53. 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. countries receiving immigrants must incur large expenses to educate them enough to be employable d. many immigrants embody human capital because of the investment made in their education before they move Answer: d. many immigrants embody human capital because of the investment made in their education before they move 54. Brain drain is a term to describe _____. a. the loss by a country of productive human resources b. having three examinations in one day c. the exportation of products embodying high-technology in exchange for low-technology products d. the unauthorized use of patents and technology Answer: a. the loss by a country of productive human resources 55. The term used to describe a country's loss of highly educated productive human resources is known as _____. a. an unfavorable balance of trade b. a Porter Diamond by recipient countries and a diamond in the rough by origin countries c. dual development d. brain drain Answer: d. brain drain 56. All of the following have been effects of the international mobility of production factors except _____. a. some countries have transformed themselves from low-wage to high-wage countries as a result b. the movement has made the concept of trade specialization obsolete c. poor countries have lost many highly educated and productive workers d. poor countries have sometimes received more from remittances from their citizens who have gone abroad than they have received from their exports Answer: b. the movement has made the concept of trade specialization obsolete 57. The international movement of production factors as an alternative to trade _____. a. may or may not lead to a more efficient global allocation of resources b. guarantees that global economic efficiency is maximized c. increases of world output and decreases of prices d. will force consumers in some countries to forego buying certain products Answer: a. may or may not lead to a more efficient global allocation of resources 58. All of the following are reasons that foreign investment may stimulate exports from the home (donor) country except _____. 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 in the form of merchandise usually goes where the investments are made d. the foreign facility may be adept at selling home country products Answer: c. home country aid in the form of merchandise usually goes where the investments are made 59. The inability of a company to gain foreign production factors to use in its domestic operations may _____. a. entice the company to export its own production factors b. stimulate the company to adopt efficient substitute methods of production c. stimulate foreign companies to invest in that domestic market d. cause the company's products to move more rapidly through their life cycles Answer: b. stimulate the company to adopt efficient substitute methods of production 60. In the following example, which silicon chips will the United States buy? Assume that both trade and production factors are internationally mobile. Using domestic labor, the labor cost per 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 transactions costs. a. made in Japan with Japanese labor and capital b. made in the United States with U.S. labor and capital c. made in Japan with Japanese labor and U.S. capital d. made in the United States with Japanese labor and U.S. capital Answer: d. made in the United States with Japanese labor and U.S. capital 61. Countries enact trade policies based on trade theories, which, in turn, affect companies' optimum production locations. Answer: True 62. All countries face the questions of what, how much, and with whom they should export and imports. Answer: True 63. An objective of neomercantilism is to build up gold reserves. Answer: False 64. Under mercantilism, governments sought to influence trade by limiting imports and subsidizing exports. Answer: True 65. 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 66. The theory of absolute advantage holds that a country will gain from trade even though it can produce all goods more efficiently than other countries. Answer: False 67. 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 68. Gains from trade in comparative advantage theory hold that the gains are due to economies of scale that reduce costs. Answer: False 69. According to theories of specialization in international trade, gains occur because specialized workers move to countries that can use their skills more effectively. Answer: False 70. The free trade theories of specialization assume that countries have objectives other than economic efficiency. Answer: False 71. Countries with large land areas are generally less dependent on trade than countries with small land areas. Answer: True 72. The top 10 exporting countries are dominated by countries with cheap labor. Answer: False 73. The factor proportions theory holds that countries should concentrate production on those products using their most abundant production factors. Answer: True 74. The factor proportions theory holds that a country will most benefit from trade by importing labor-intensive products and exporting capital-intensive products. Answer: False 75. Most world trade takes place between raw material exporters and manufacturing exporters. Answer: False 76. Trade among high-income countries occurs primarily because of specialization in different agricultural products. Answer: False 77. Many products' location of production will shift internationally as they go through their life cycle. Answer: True 78. At an early stage of a product's life cycle, the product is apt to be made in a more capital-intensive method than in its later stages. Answer: False 79. Luxury products are the most likely types of products to behave according to the product life cycle theory of trade and investment. Answer: False 80. A consumer durable product is more apt to behave according to the product life cycle theory of trade and development than a product with very rapid obsolescence. Answer: True 81. A strategic trade policy is one that develops industries to lessen dependence on foreign military goods. Answer: False 82. The target by a government of an industry to be competitive internationally is known as import substitution policy. Answer: False 83. The domestic conditions of the four favorable conditions of the Porter Diamond for a particular industry help to explain how and where globally competitive companies develop and sustain themselves. Answer: True 84. The Porter Diamond seeks to answer the question, Why do specialized competitive advantages differ among countries? Answer: True 85. Production factors move internationally primarily because of perceptions of earning higher returns. Answer: True 86. The most internationally mobile factor of production is labor. Answer: False 87. The term brain drain describes the exportation of products embodying high-technology in exchange for low-technology products. Answer: False 88. Poor countries have sometimes received more in remittances from their citizens who have gone abroad than they have received from their exports. Answer: True 89. Foreign investment may stimulate exports from the donor country. Answer: True 90. If a country cannot gain foreign production factors to use in its domestic operations, it may be stimulated to adopt efficient substitute methods of production. Answer: True 91. In a short essay, discuss why the understanding of international trade theory is useful to managers in international business. Answer: Trade in goods and services is one of the means by which countries are linked economically. Authorities in all countries wrestle with the questions of what, how much, and with whom their country should import and export. Once they make decisions, officials enact policies to achieve the desired results. These policies have an impact on business because they affect which countries can produce given products more efficiently and whether countries will permit imports to compete against their domestically produced goods and services. In turn, a country's policies influence which products companies might export to given countries, as well as what and where companies can produce in order to sell in the given countries. 92. In a short essay, discuss the theory of mercantilism, and discuss favorable and unfavorable balances of trade as it applies to international business. Answer: Mercantilism held that a country's wealth was 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 that 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. 93. What is the difference between absolute advantage and comparative advantage? 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? In 1817, 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. 94. 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: • labor could become more skilled by repeating the same tasks • labor would not lose time in switching from the production of one kind of product to another • long production runs would provide incentives for the development of more effective working methods 95. In a short essay, discuss the theory of acquired advantage and provide examples that support your answer. Answer: Countries that produce manufactured goods and services competitively have an acquired advantage, usually in either product or process technology. An advantage in product technology is a country's ability to produce a unique product or one that is easily distinguished from those of competitors. For example, Denmark exports silver tableware, not because there are rich Danish silver mines but because Danish companies have developed distinctive products. An advantage in process technology is a country's ability to produce a homogeneous product (one not easily distinguished from that of competitors) efficiently. For example, Japan has exported steel in spite of having to import iron and coal, the two main ingredients necessary for steel production. A primary reason for Japan's success is that its steel mills encompass new labor-saving and material-saving processes. 96. 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: (1) full employment, (2) economic efficiency objective, (3) division of gains, (4) two countries; two commodities, (5) transport costs, (6) mobility, (7) statics and dynamics, and (8) services. The limitations of the assumptions are as follows: 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 objective—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, they may forego absolute gains for themselves 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. Mobility—The assumption that resources can move domestically from the production of one good to another, and at no cost, is not completely valid. g. 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. h. Services—An increasing portion of world trade is in services, and the theories deal with commodities. 97. In a short essay, discuss the factors that contribute to the effects of the Heckscher-Ohlin theory. Answer: The factor proportions theory said that differences in countries' endowments of labor compared to their endowments of land or capital explained differences in the cost of production factors. Heckscher and Ohlin proposed that if labor were abundant in comparison to land and capital, labor costs would be relatively low compared to land and capital costs. These relative factor costs would lead countries to excel in the production and export of products that used their abundant, and therefore cheaper, production factors. 98. In a short essay, discuss the theory of country size, citing the factors that differentiate this theory. Answer: The theory of country size says that countries with large land areas are more apt to have varied climates and an assortment of natural resources than smaller countries would, thus making them more self-sufficient. Although the theory of absolute advantage ignores transport costs in trade, these costs affect large and small countries differently. Normally, the farther the distance, the higher the transport costs. The average distance between production location and markets is higher for the international trade of large countries. Transport costs make it more likely that small countries will trade internationally because their costs of getting products over their borders are worth the effort. 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. Countries with large economies and high per capita incomes are more likely to produce goods that use technologies requiring long production runs. This is because these countries develop industries to serve their large domestic markets, which in turn tend to be competitive in export markets. In industries where long production runs are important for gaining competitive advantages, companies tend to locate their production in few countries, using these locations as sources of exports to other countries. Where long production runs are unimportant, companies are more apt to minimize exporting. Instead, they produce in most countries where they sell. 99. How do technological complexities complicate managers' use of factor proportions theory to determine where to locate their production? Answer: The factor proportions analysis becomes more complicated when the same product can be produced by different methods, such as with labor or capital. Canada produces wheat with a capital-intensive method because of its abundance of low-cost capital relative to labor. In contrast, India produces wheat by using a much smaller number of machines in comparison to its abundant and cheap labor. In the final analysis, managers must compare the cost in each locale based on the type of production that will minimize costs there. 100. In what type of country are new products more likely to be produced? Why? Answer: Companies develop new products because there is an observed need and market for them. This means that a U.S. company is more apt to develop a new product for the U.S. market, as would a French company for the French market, and so on. At the same time, almost all new technology that results in new products and production methods originates in industrial countries because of a combination of factors—competition, demanding consumers, the availability of scientists and engineers, and high incomes. 101. In a short essay, discuss in detail the various stages of the international product life cycle. Answer: The international product life cycle theory of trade states that certain kinds of products go through a continuum, or cycle, that consists of four stages—introduction, growth, maturity, and decline. The location of production to serve world markets will shift internationally depending on the stage of the cycle. a. Introduction—Most new products are produced in and exported from high-income industrial countries because of their combined demand conditions and labor skills. Many reasons account for the dominant position of industrial countries, including competition, demanding consumers, the availability of scientists and engineers, and high incomes. Early production also generally occurs in a domestic location so the company can obtain rapid market feedback, as well as save transport costs. b. Growth—As sales of the new product grow, competitors enter the market. At the same time, demand is likely to grow substantially in foreign markets, particularly in other industrial countries. In fact, demand may be sufficient to justify producing in some foreign markets to reduce or eliminate transport charges, but the output at this stage is likely to stay almost entirely in the foreign country with the additional manufacturing unit. The original producing country will also increase its exports in this stage but lose certain key export markets in which competitors commence local production. c. Maturity—In this stage, worldwide demand begins to level off, although it may be growing in some countries and declining in others. There is often a "shake-out" of producers such that product models become highly standardized, making cost an important competitive weapon. Longer production runs become possible for foreign plants, which in turn reduce per-unit cost for their output. The lower per-unit costs create demand in emerging markets. d. Decline—As a product moves to the decline stage, those factors occurring during the mature stage continue to evolve. The markets in industrial countries decline more rapidly than those in emerging markets as affluent customers demand newer products. By this time, market and cost factors have dictated that almost all production is in emerging markets, which export to the declining or small-niche markets in industrial countries. In other words, the country in which the innovation first emerged and exported from then becomes the importer. 102. In a short essay, discuss the country similarity theory, citing factors that lead similar countries to trade with each other. 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. For example, the United States is the world's largest trader, and 8 of its 10 largest trading partners are either industrialized or newly industrialized countries. Globally, 11 of the 12 largest traders are industrialized or newly industrialized countries. Overall trade patterns seem to be at odds with the traditional theories that emphasize country-by-country differences. 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. 103. In a short essay, discuss the two basic approaches to government policy that support strategic trade policy. Answer: The two basic approaches to government policy are to alter conditions that will affect industry in general and to alter conditions that will affect a targeted industry. Regardless of whether a government takes a general or specific approach, it may alter the competitive positions of specific companies and production locations. The first approach means altering conditions that affect factor proportions, efficiency, and innovation. A country may upgrade production factors by improving human skills through education, providing infrastructure, promoting a highly competitive environment so that companies must make improvements, and inducing consumers to demand a higher quality of products and services. The second approach is to target specific industries. This approach has usually resulted in only small payoffs, largely because governments find it difficult to identify and target the right industries. Moreover, there has been a tendency for too many countries to identify the same industries, so excessive competition has led to inadequate returns. 104. What are the four conditions in the Porter Diamond? What are the limitations of the Porter Diamond in explaining countries' competitive advantage? Answer: The Porter Diamond shows that four conditions are important for competitive superiority: (1) demand, (2) factor endowment, (3) related and supporting industries, (4) and firm strategy. The existence of the four favorable conditions does not guarantee that an industry will develop in a given locale. Entrepreneurs may face favorable conditions for many different lines of business. In fact, comparative advantage theory holds that resource limitations may cause companies in a country not to try to compete in some industries, even though an absolute advantage may exist. A second limitation of the diamond concerns the increased ability of companies to gain market information, production factors, and supplies from abroaAnswer: d. At the same time, they face more competition from foreign production and foreign companies. The absence of any of the four conditions from the diamond domestically, therefore, may not inhibit companies and industries from becoming globally competitive. 105. From an economic standpoint, why do production factors move from one country to another? 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 apt 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. If they move legally, they must get immigration papers, and most countries give these sparingly. Finally, they may have to learn another language and adjust to a different culture away from their families and friends who serve as their customary support groups. 106. Explain the relationship between international trade and factor mobility from the standpoint of cost reduction. Answer: Factor movement is an alternative to trade that may or may not be a more efficient allocation of resources. If trade could not occur and production factors could not move internationally, a country would have to either forego 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. Test Bank for International Business: Environments and Operations John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan 9780131869424, 9780201846188, 9780130308016, 9780201566260, 9780201107135, 9780132668668
