UNIVERSITY OF

INTERNATIONAL
BUSINESS AND ECONOMICS
School of International Trade and Economics
INTERNATIONAL BUSINESS THEORY
ASSIGNMENT 2

Student Name: Valdimiro Anibal Inacio Beleza

Beijing, 11/10/2015

True or False
1. F
2. T
3. F
4. F
5. T
6. F
7. T
8. F
9. F
10.F
11.F
12.T
13.T
14.F
15.F
16.F
17.T
18.T
19.T
20.F
21.F
22.T
23.F
24.F
25.T

Essay

26.T
27.T
28.T
29.F
30.F
31.F
32.T
33.T
34.T
35.F
36.T
37.F
38.T
39.F
40.T
41.D

Multiple Choice
41. D
42. C
43. C
44. A
45. C
46. A
47. C
48. C
49. D
50. A
51. A
52. C
53. C
54. A
55. A
56. B
57. B
58. D
59. C
60. C
61. C
62. B
63. C
64. B
65. A
66. B
67. D
68. D
69. C
70. C
71. B
72. C
73. B
74. B
75. C

76. D
77. B
78. D
79. A
80. D

Questions

81. What are the benefits of free trade?

Answer:

Free trade refers to a situation where a government does not attempt to

influence through quotas or duties what its citizens can buy from another country or
what they can produce and sell to another country. The theories of Smith, Ricardo and
Heckscher-Ohlin show why it is beneficial for a country to engage in international
trade even for products it is able to produce for itself. International trade allows a
country to specialize in the manufacture and export of products that can be produced
most efficiently in that country, and import products that can be produced more
efficiently in other countries.
82. Discuss the mercantilist philosophy. What was the theory's main flaw?
Answer: Mercantilism, which emerged in England in the mid-16 th century, asserted
that it is in a countrys best interest to maintain a trade surplus, to export more than it
imports. Mercantilism advocated government intervention to achieve a surplus in the
balance of trade. It viewed trade as a zero-sum game, one in which a gain by one
country results in a loss by another As an economic philosophy, mercantilism is
problematic and not valid, yet many political views today have the goal of boosting
exports while limiting imports by seeking only selective liberalization of trade.
83. What was Adams Smith's contribution to the theory of why nations trade? What is
the theory of absolute advantage?
Answer: Adam Smith challenged the mercantilist philosophy and its zero-sum
approach to trade. Smith argued, in his 1776 landmark book, The Wealth of Nations,
that free trade, or trade without government intervention, could be beneficial to
countries if each country produced and exported those products in which it was most
efficient, or in his words, those products in which the country had an absolute
advantage. Smith argued that if countries specialized in the production of goods in
which they had an absolute advantage they could then trade these goods for the goods
produced by other countries.

84. How did David Ricardo extend Adam Smith's work? Explain the theory of
comparative advantage.
Answer: David Ricardo took Adam Smiths theory one step further by exploring what
might happen when one country has an absolute advantage in the production of all
goods. According to Ricardos theory of comparative advantage, it makes sense for a
country to specialize in the production of those goods that it produces most efficiently
and to buy the goods that it produces less efficiently from other countries, even if this
means buying goods from other countries that it could produce more efficiently itself.
The simple example of comparative advantage makes a number of assumptions: only
two countries and two goods; zero transportation costs; similar prices and values;
resources are mobile between goods within countries, but not across countries;
constant returns to scale; fixed stocks of resources; and no effects on income
distribution within countries
85. Discuss the link between trade and economic growth.
Answer: Research Shows that in general, countries that adopt a more open stance
toward international trade enjoy higher growth rates than those that close their
economies to trade. Higher growth should in turn, raise income level and living
standards. Trade might increase a country's stock of resources as increased supplies
become available from abroad. Free trade might increase the efficiency of resource
utilization, and free up resources for other uses
86. Explain the Heckscher-Ohlin theory. What is the relationship between HeckscherOhlin's work and the theory of comparative advantage?
Answer: Heckscher and Ohlin suggested that comparative advantage arises from
differences in national factor endowments. The Heckscher-Ohlin theory predicts that
countries will export those goods that make intensive use of factors that are locally
abundant, while importing goods that make use of factors that are locally scarce.
Thus, Heckscher and Ohlin suggest that free trade is beneficial, but argue that the
pattern of trade is determined by differences in factor endowments, rather than
differences in productivity.

87. What is the Leontief paradox?

Answer: Wassily Leontief tested the Heckscher-Ohlin theory. Leontief postulated that
since the U.S was relatively abundant in capital compared to other nations, the U.S
would be an exporter of capital-intensive goods and an importer of labor-intensive
goods. However, Leontief found that U.S exports were less capital intensive than U.S
imports. Because this result was at variance with the predictions of Heckscher-Ohlin,
it has become known as the Leontief paradox.
88. Explain the product life-cycle theory.
Answer: The product life cycle theory, proposed by Raymond Vernon in the mid1960s, was based on the observation that for most of the 20th century a very large
proportion of the world's new products had been developed by U.S. firms and sold
first in the U.S. market. It suggests that the wealth and size of the U.S market gave
American firms a strong incentive to develop new consumer products. Vernon argued
that most new products were initially produced in the U.S. According to Vernon, early
in the life cycle of a product most new products are produced and are exported from
the country in which they were developed. As a new product becomes widely
accepted internationally, production starts in other countries. As a result, the theory
suggests, the product may ultimately be exported back to the country of its
innovation.
89. Evaluate the product life cycle. How well does the theory hold up? What are the
theory's weaknesses?
Answer: When viewed historically, the product life cycle theory appears to be an
accurate explanation of international trade patterns. However, from an Asian or a
European perspective the theory is ethnocentric. Many new products are now
introduced in Japan or Europe or even simultaneously in the U.S, Europe and Japan.
In general, while Vernon's theory was useful for explaining trade during the brief
period of American dominance, it is not particularly relevant in today's global
economy.
90. What are economies of scale? Why are they important in understanding trade
patterns?

Answer: Economies of scale are a major source of cost reductions in many industries.
Because of the need to achieve economies of scale, some global industries may only
be able to support a small number of firms. World trade patterns would reflect this
phenomenon.
91. Explain the new trade theory. What is the role of economies of scale in this
theory?
Answer: The new trade theory emerged in the 1970s when several economists
suggested that economies of scale might play a role in world trade. New trade theory
suggests that (1) through its impact on economies of scale, trade can increase the
variety of goods available to consumers and decrease average costs of those goods
and (2) in those industries when the output required to attain economies of scale
represents a significant proportion of total world demand, the global market may only
be able to support a small number of enterprises.
92. Explain the connections between economies of scale, first-mover advantages, and
trade patterns.
Answer: First mover advantages are the economic and strategic advantages that
accrue to early entrants into an industry. Because they are able to gain economies of
scale, early entrants may get a lock on the world market that discourages subsequent
entry. In other words, the ability of first-movers to reap economies of scale creates a
barrier to entry. Countries may dominate in the export of certain goods because
economies of scale are important to their production and because firms located in
those countries were first to capture scale economies, giving them a first mover
advantage.
93. Discuss the implications of the new trade theory.
Answer: The new trade theory suggests that countries may benefit from trade even
when they do not differ in resource endowments or technology. Through trade, a
country can specialize in the production of certain products and achieve scale
economies and thus, lower production costs and trade for other products. Consumers
should benefit from lower prices. New trade theory also suggests that a company may
dominate a certain industry simply because it got there first. If the firm can achieve
economies of scale, they may act as a barrier to entry to other firms.

94. Does new trade theory support the work of Heckscher and Ohlin? Is the theory at
variance with the theory of comparative advantage?
Answer: New trade theory does not support Heckscher and Ohlin's work. In fact, new
trade theorists argue that the U.S is a major exporter of commercial jet aircraft not
because the country is better endowed with the factors of production required to make
a plane, but because Boeing, an American firm, was one of the first movers in the
industry. In contrast, the theory does support the theory of comparative advantage
95. Does new trade theory support government intervention and strategic trade
policy? Explain.
Answer: According to new trade theorists, luck, entrepreneurship and innovation are
all important in giving a firm first mover advantages. Therefore, new trade theory
supports the notion of government intervention on the basis that a government,
through the judicious use of subsidies, could increase the chances of its domestic
firms becoming first movers in newly emerging industries.
96. What are the four attributes identified by Porter as being important in determining
why a nation achieves success in a particular industry?
Answer: The four attributes identified by Porter include factor endowments; demand
conditions or the nature of home demand for the industry's product or service; related
and supporting industries or the presence or absence in a nation of supplier industries
and related industries that are internationally competitive and firm strategy, structure
and rivalry or the conditions in the nation governing how companies are created,
organized and managed and the nature of domestic rivalry.
97. What is the difference between basic factors and advanced factors in Porter's
diamond?
Answer: Porter differentiates between factors of production. According to Porter,
there are basic factors such as natural resources, climate and demographics and
advanced factors such as infrastructure, skilled labor and research facilities. Advanced
factors are a product of investment by individuals. Porter suggests that advanced
factors are most important for competitive advantage.

98. Porter has stated that a nation's firms gain competitive advantage if their domestic
consumers are sophisticated and demanding. Explain this statement.
Answer: Firms are typically most sensitive to the needs of their closest customers.
Therefore, according to Porter, the characteristics of home country demand will shape
the attributes of domestically made products and create pressure for innovation and
quality. Porter suggests that if a nation's domestic consumers are sophisticated and
demanding, the nation's firms will gain a competitive advantage.
99. What is the role of government in Porter's theory?
Answer: According to Porter, government can influence each of the four main
attributes of his model. For example, factor endowments can be affected by subsidies
or policies toward education, domestic demand can be shaped through local product
standards, regulations can influence supporting and related industries and firm rivalry
can be affected by tax policies and anti trust regulations.

100. Discuss the implications of international trade theory for a firm.

Answer: The implications of trade theory for a firm are reflected in location
implications, firms can capitalize on the differences between countries by dispersing
their production activities around the globe to wherever a product can be produced the
most efficiently; in first-mover implications, it pays to invest substantial financial
resources in trying to build a first mover advantage and in policy implications, it is in
the best interests of a firm to invest in upgrading advanced factors of production and
to lobby the government to adopt policies that have a favorable impact on Porter's
Diamond.