International Trade Theory Quiz
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Questions and Answers

What is Foreign Direct Investment (FDI)?

  • Forming partnerships with local companies abroad.
  • Investing in foreign stocks and bonds.
  • Buying foreign currency for trade purposes.
  • Acquiring or starting businesses in foreign markets. (correct)

    • What political factor can encourage Foreign Direct Investment?

  • High import tariffs.
  • Complex bureaucratic processes.
  • Strict regulations on foreign ownership.
  • Government tax incentives. (correct)

    • Why does France import radios from Japan?

  • France has a higher wage rate than Japan.
  • Japanese radios have better quality.
  • French radios are more expensive to produce.
  • Japan has a comparative advantage in radio production. (correct)

    • What is the primary reason companies engage in Foreign Direct Investment?

    <p>To avoid trade barriers and tariffs. (B)</p> Signup and view all the answers

    Which of the following is NOT a type of international investment?

    <p>Domestic Partnership Investment (DPI) (C)</p> Signup and view all the answers

    What is the main reason countries engage in international trade?

    <p>To achieve mutual benefits in trade (B)</p> Signup and view all the answers

    What does the concept of Absolute Advantage refer to?

    <p>A country that can produce a good more efficiently than another country (D)</p> Signup and view all the answers

    Which theory argues that a country should minimize imports to increase wealth?

    <p>Mercantilism (B)</p> Signup and view all the answers

    What is one criticism of Mercantilism?

    <p>It can restrict trade and innovation (C)</p> Signup and view all the answers

    What does the theory of Comparative Advantage suggest?

    <p>Countries should specialize in what they produce most efficiently (C)</p> Signup and view all the answers

    Which of the following is an example of Absolute Advantage?

    <p>Japan producing electronics more efficiently than Canada (D)</p> Signup and view all the answers

    Which factor pushes firms to innovate and improve products?

    <p>Increased competition from foreign products (A)</p> Signup and view all the answers

    How does international trade affect economic growth?

    <p>By expanding economic opportunities and creating jobs (D)</p> Signup and view all the answers

    What does the theory of Comparative Advantage suggest about trade?

    <p>Countries should specialize in goods they can produce at the lowest opportunity cost. (D)</p> Signup and view all the answers

    According to the Heckscher-Ohlin Theory, countries should specialize in producing goods based on their:

    <p>Relative factor endowments. (C)</p> Signup and view all the answers

    What is a key implication of Linder’s Country Similarity Theory?

    <p>Countries with similar income levels tend to engage in similar types of trade. (C)</p> Signup and view all the answers

    What primary limitation does the Leontief Paradox expose regarding the Heckscher-Ohlin Theory?

    <p>It challenges the assumption of capital-rich countries exporting capital-intensive goods. (D)</p> Signup and view all the answers

    Which of the following is true about the New Trade Theory?

    <p>It considers economies of scale and first-mover advantages. (A)</p> Signup and view all the answers

    What is one of the main benefits of trade highlighted in the content?

    <p>It enhances competitiveness and creates economic activity. (A)</p> Signup and view all the answers

    What concept is best illustrated by China exporting textiles and Germany exporting machinery?

    <p>Comparative advantage. (B)</p> Signup and view all the answers

    In which economic theory is the belief that a country's wealth is measured by its gold and silver prevalent?

    <p>Mercantilism. (A)</p> Signup and view all the answers

    Which of the following does NOT represent a political factor affecting Foreign Direct Investment (FDI)?

    <p>Market size expansion. (C)</p> Signup and view all the answers

    What is an example of intra-industry trade as explained by Linder’s Country Similarity Theory?

    <p>Germany and Japan both exporting cars to each other. (A)</p> Signup and view all the answers

    What do First-Mover Advantages generally refer to in the context of trade?

    <p>Firms establishing dominance by being the earliest to enter a market. (C)</p> Signup and view all the answers

    Which of the following trade theories emphasizes the importance of firm-based considerations instead of country-based comparisons?

    <p>New Trade Theory. (C)</p> Signup and view all the answers

    Under mercantilism, which of the following policies would be expected?

    <p>Imposition of tariffs to protect domestic industries. (B)</p> Signup and view all the answers

    How does trade influence resource efficiency between countries?

    <p>It allows countries to use resources more efficiently. (D)</p> Signup and view all the answers

    What is the primary goal of foreign direct investment (FDI)?

    <p>To establish business operations in another country. (D)</p> Signup and view all the answers

    Flashcards

    Mutual Benefit

    Both parties gain something valuable from trade.

    Absolute Advantage

    A country produces a good more efficiently than another country.

    Comparative Advantage

    Even if one country is better at producing everything, it should specialize and trade.

    Mercantilism

    Economic theory that a country's wealth is measured by its gold and silver stock.

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    Trade Wars

    Countries impose tariffs to protect domestic industries and limit imports.

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    Efficiency in Trade

    Countries specialize in their strongest sectors for better outputs.

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    Economic Growth via Trade

    Trade creates jobs and expands economic opportunities.

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    Competition & Innovation

    Exposure to foreign products improves domestic firms’ quality and prices.

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    Foreign Direct Investment (FDI)

    Investment by firms directly in foreign markets, like acquiring businesses.

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    Foreign Portfolio Investment (FPI)

    Buying stocks and bonds in foreign markets without direct control.

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    Political Factors Affecting FDI

    Conditions like trade barriers and government incentives that influence foreign investment.

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    Trade Benefits

    Mutual advantages realized from trade between countries leading to efficiency.

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    Heckscher-Ohlin Theory

    Countries specialize based on their resource endowments (labor vs. capital).

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    Leontief Paradox

    Observation that U.S. exports more labor-intensive goods despite being capital-rich.

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    Linder’s Country Similarity Theory

    Countries with similar income levels trade similar types of goods.

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    New Trade Theory

    Focus on economies of scale and first-mover advantages in trade.

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    Economic Development Incentives

    Governments offer benefits to attract businesses.

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    Trade Barriers

    Tariffs and restrictions imposed to protect domestic industries.

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    Intra-Industry Trade

    Countries export and import similar products within the same industry.

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    First-Mover Advantage

    Benefits gained by being the first to enter a market.

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    Opportunity Cost

    The loss of potential gain from other alternatives when one alternative is chosen.

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    Specialization

    Focusing resources on producing a specific good or service.

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    Study Notes

    International Trade Theory

    • International trade occurs due to mutual benefits, better quality/lower prices, increased efficiency, competition, and innovation, leading to economic growth. Countries specialize in what they produce most efficiently and trade with each other.
    • Example: Canada (oil) and Brazil (coffee) benefit from specialization and trade.

    Classical Country-Based Trade Theories

    • Focused on countries, explaining trade in commodities.
    • Mercantilism (16th-18th Century): Countries sought to maximize exports, minimize imports, accumulating wealth measured in gold and silver. Led to protectionism. Criticized because trade restrictions harm overall efficiency. Modern-day example: trade wars.
    • Absolute Advantage (Adam Smith, 1776): A country has absolute advantage when it's more efficient at producing a good than another. Advocates for free trade where countries export what they produce best and import the rest. Example: Canada (wheat) and Japan (electronics).
    • Comparative Advantage (David Ricardo, 1817): Trade is beneficial even if one country is more efficient at producing everything; countries should specialize in what they produce at a lower opportunity cost. Example: US (airplanes) and Vietnam (T-shirts). The US has a greater comparative advantage in airplanes, while Vietnam has a comparative advantage in T-shirts.
    • Heckscher-Ohlin Theory (Relative Factor Endowments): Countries export goods using their abundant resources and import goods using scarce resources. Example: China (labor-rich) exports textiles, Germany (capital-rich) exports machinery.
      • Leontief Paradox: The U.S., a capital-rich country, exports more labor-intensive goods than capital-intensive ones, contradicting this theory.

    Modern Firm-Based Trade Theories

    • Focus on firms, not countries.
    • Linder’s Country Similarity Theory: Countries with similar income levels often trade similar goods. Explains intra-industry trade—countries exporting and importing similar products. Example: US and Canada trading cars.
    • New Trade Theory (Krugman, 1970s): Economies of scale—lower costs as production increases. First-mover advantage—early market entrants gain advantages. Global rivalry—firms compete across borders. Example: Boeing and Airbus in the global aircraft market.

    Foreign Direct Investment (FDI)

    • Foreign Portfolio Investment (FPI): Buying stocks or bonds abroad.
    • Foreign Direct Investment (FDI): Setting up foreign operations.
    • Political Factors:
      • Avoiding trade barriers—Companies locate abroad to avoid tariffs.
      • Government incentives—Governments offer incentives to attract investment. Example: Toyota building plants in the US.

    Trade and Exchange Rates

    • Exchange rates affect import and export prices. Example: Different wage rates in France and Japan, impacting the price of goods traded between them.

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    Description

    Test your knowledge on the fundamentals of international trade theory, including the benefits of trade, classical country-based theories, and important concepts such as mercantilism and absolute advantage. Explore examples and understand how countries specialize in production.

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