ECON 340 TEST 2 (CH 6-9) QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026
Trans Pacific Partnership (TPP) - Answers Between 12 countries
Attempts to unlock the gains that many economists believe flow from free trade across international
borders.
Mercantilism - Answers Came about in the 16th and 17th centuries.
Advocated that countries should simultaneously encourage exports and discourage imports.
Not sustainable in the long-run.
Trade surplus - Answers Value of exports > Value of imports
Trade balance - Answers Value of exports = Value of imports
Trade deficit - Answers Value of exports < Value of imports
Absolute Advantage - Answers Theory by Adam Smith
Proposed in 1776
Was the first to explain why unrestricted free trade is beneficial to a country.
A country has this in a product when it is more efficient than any other country at producing it.
Free trade - Answers The absence of barriers to the free flow of goods and services between
countries.
What are the theories that built on Smith's work? - Answers Theory of Comparative Advantage
Heckscher-Ohlin Theory
Theory of Comparative Advantage - Answers The intellectual basis of the modern argument for
unrestricted free trade.
Advanced by the 19th century English economist David Ricardo
Heckscher-Ohlin theory - Answers Refinement of Ricardo's work in the 20th century by two Swedish
economists, Eli Hckscher and Bertil Ohlin.
Argues that comparative advantage arises from differences in national factor endowments
Life-Cycle theory - Answers Proposed by Raymond Vernon.
Suggests that early in their life cycle, most new products are produced in and exported from the
country in which they were developed. As a new products becomes widely accepted, production
starts in other countries which may ultimately result in the product being exported back to the
country of its original innovation.
What was created as a response to the failure of the Heckscher-Ohlin theory and why? - Answers
Life-Cycle theory; to explain the observed patterned of international trade
The Life-Cycle theory was based on what? - Answers It was based on the observation that for most of
the 20th century, a large proportion of the world's new products had been developed by U.S. firms
and sold first in the U.S. market
New trade theory - Answers Developed by Paul Krugman in the 1980s.
The observed pattern of trade in the world economy may me due in part to the ability of firms in a
given market to capture first-mover advantages.
Economies of scale - Answers Unit cost reductions associated with a large scale of output.
The ability to spread fixed costs over a large volume
The ability of large-volume producers to utilize specialized employees and equipment that are more
productive than less specialized ones. - Answers Examples of sources of economies of scale
Economies of scale is a major source of - Answers Cost reductions in many industries.
The pattern of trade we observe in the world economy may be the result of... - Answers Economies of
scale and first-mover advantages
First-mover advantages - Answers The economic and strategic advantages that occur to the first to
enter a market.
New trade theory argues - Answers That for those products where economies of scale are significant
and represent a substantial proportion of world demand, the first movers in an industry can gain a
scale-based cost advantage that later entrants find almost impossible to match.
New trade theory suggests - Answers That nations may benefit from trade even when they do not
differ in resource endowments or technology.
That a country may predominate in the export of a good simply because it was lucky enough to have
one or more firms among the first to produce that good.
What do the Theory of Comparative Advantage, the Heckscher-Ohlin theory, the Life-Cycle theory,
and the New trade theory all have in common and where do they differ? - Answers They all agree
, that international trade is beneficial to a country and they lack agreement in their recommendations
for government policy,
What is the flaw with mercantilism? - Answers It viewed trade as a zero-sum game.
Zero-sum game - Answers A situation in which an economic gain by one country results in an
economic loss by another.
Constant returns to specialization - Answers The units of resources required to produce a good are
assumed to remain constant no matter where one is on a country's production possibly frontier (PPF)
Why do most economists prefer the Heckscher-Ohlin theory to Ricardo's theory? - Answers Makes
fewer simplifying assumptions.
Factor endowments in comparative advantage - Answers A countries endowment with resources
such as land, labor, an capital.
What does the Heckscher-Ohlin theory attempt to explain? - Answers The pattern of International
trade that we observe I the world economy.
Michael Porter theorizes that four broad attributes of a nation that shape the environment in which
local firms compete, and these attributes promote or impede the creation of comparative advantage.
These attributes are: - Answers Factor endowments
Demand Conditions
Related and supporting industries
Firm strategy, structure, and rivalry
Factor endowments - Answers A nation's position in factors of production, such as skilled labor or the
infrastructure necessary to compete in a given industry.
Demand Conditions - Answers The nature of home demand for the industry's product or service.
Related and supporting industries - Answers The presence or absence of supplier industries and
related industries that are internationally competitive.
Firm strategy, structure, and rivalry - Answers The conditions governing how companies are created,
organized, and managed and the nature of domestic rivalry.
This theory had countries maximizing exports and minimizing imports.
Circa 1550s - Answers Mercantilism
Adam Smith states that countries should specialize in the production of goods for which they can
produce most efficiently and then trade these for goods produced by other countries.
1776 - Answers Absolute advantage theory
David Ricardo states that 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.
1817 - Answers Comparative advantage theory
This theory predicts that countries will export those goods that make intensive use of factors that are
locally abundant and import goods that make intensive use of factors that are locally scarce.
1919-1933 - Answers Heckscher-Ohlin theory
This theory, initially proposed by Raymond Vernon, points out that where a new product is introduced
is important. Over time, cost considerations start playing a greater role in the competitive process.
Mid-1960s - Answers Product life-cycle theory
Through its impact on economies of scale, trade can increase the variety of goods available to
consumers while decreasing the average cost of those goods.
1980s - Answers New trade Theory
Michael Porter contends that the degree to which a nation is likely to achieve international success in
a certain industry is a function of the combined impact of factor endowments
1990 - Answers National competitive advantage theory
According to Adam Smith, _____ should determine what a country imports and what it exports. -
Answers The market mechanism
A situation in which 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 is called -
Answers Free trade
According to the product life-cycle theory, once a new product becomes widely accepted
internationally then production for that product - Answers Will start to take place in other countries
Which theory stresses that in some cases, countries specialize in the production and export of
particular product's not because of underlying differences in factor endowments, but because in
Trans Pacific Partnership (TPP) - Answers Between 12 countries
Attempts to unlock the gains that many economists believe flow from free trade across international
borders.
Mercantilism - Answers Came about in the 16th and 17th centuries.
Advocated that countries should simultaneously encourage exports and discourage imports.
Not sustainable in the long-run.
Trade surplus - Answers Value of exports > Value of imports
Trade balance - Answers Value of exports = Value of imports
Trade deficit - Answers Value of exports < Value of imports
Absolute Advantage - Answers Theory by Adam Smith
Proposed in 1776
Was the first to explain why unrestricted free trade is beneficial to a country.
A country has this in a product when it is more efficient than any other country at producing it.
Free trade - Answers The absence of barriers to the free flow of goods and services between
countries.
What are the theories that built on Smith's work? - Answers Theory of Comparative Advantage
Heckscher-Ohlin Theory
Theory of Comparative Advantage - Answers The intellectual basis of the modern argument for
unrestricted free trade.
Advanced by the 19th century English economist David Ricardo
Heckscher-Ohlin theory - Answers Refinement of Ricardo's work in the 20th century by two Swedish
economists, Eli Hckscher and Bertil Ohlin.
Argues that comparative advantage arises from differences in national factor endowments
Life-Cycle theory - Answers Proposed by Raymond Vernon.
Suggests that early in their life cycle, most new products are produced in and exported from the
country in which they were developed. As a new products becomes widely accepted, production
starts in other countries which may ultimately result in the product being exported back to the
country of its original innovation.
What was created as a response to the failure of the Heckscher-Ohlin theory and why? - Answers
Life-Cycle theory; to explain the observed patterned of international trade
The Life-Cycle theory was based on what? - Answers It was based on the observation that for most of
the 20th century, a large proportion of the world's new products had been developed by U.S. firms
and sold first in the U.S. market
New trade theory - Answers Developed by Paul Krugman in the 1980s.
The observed pattern of trade in the world economy may me due in part to the ability of firms in a
given market to capture first-mover advantages.
Economies of scale - Answers Unit cost reductions associated with a large scale of output.
The ability to spread fixed costs over a large volume
The ability of large-volume producers to utilize specialized employees and equipment that are more
productive than less specialized ones. - Answers Examples of sources of economies of scale
Economies of scale is a major source of - Answers Cost reductions in many industries.
The pattern of trade we observe in the world economy may be the result of... - Answers Economies of
scale and first-mover advantages
First-mover advantages - Answers The economic and strategic advantages that occur to the first to
enter a market.
New trade theory argues - Answers That for those products where economies of scale are significant
and represent a substantial proportion of world demand, the first movers in an industry can gain a
scale-based cost advantage that later entrants find almost impossible to match.
New trade theory suggests - Answers That nations may benefit from trade even when they do not
differ in resource endowments or technology.
That a country may predominate in the export of a good simply because it was lucky enough to have
one or more firms among the first to produce that good.
What do the Theory of Comparative Advantage, the Heckscher-Ohlin theory, the Life-Cycle theory,
and the New trade theory all have in common and where do they differ? - Answers They all agree
, that international trade is beneficial to a country and they lack agreement in their recommendations
for government policy,
What is the flaw with mercantilism? - Answers It viewed trade as a zero-sum game.
Zero-sum game - Answers A situation in which an economic gain by one country results in an
economic loss by another.
Constant returns to specialization - Answers The units of resources required to produce a good are
assumed to remain constant no matter where one is on a country's production possibly frontier (PPF)
Why do most economists prefer the Heckscher-Ohlin theory to Ricardo's theory? - Answers Makes
fewer simplifying assumptions.
Factor endowments in comparative advantage - Answers A countries endowment with resources
such as land, labor, an capital.
What does the Heckscher-Ohlin theory attempt to explain? - Answers The pattern of International
trade that we observe I the world economy.
Michael Porter theorizes that four broad attributes of a nation that shape the environment in which
local firms compete, and these attributes promote or impede the creation of comparative advantage.
These attributes are: - Answers Factor endowments
Demand Conditions
Related and supporting industries
Firm strategy, structure, and rivalry
Factor endowments - Answers A nation's position in factors of production, such as skilled labor or the
infrastructure necessary to compete in a given industry.
Demand Conditions - Answers The nature of home demand for the industry's product or service.
Related and supporting industries - Answers The presence or absence of supplier industries and
related industries that are internationally competitive.
Firm strategy, structure, and rivalry - Answers The conditions governing how companies are created,
organized, and managed and the nature of domestic rivalry.
This theory had countries maximizing exports and minimizing imports.
Circa 1550s - Answers Mercantilism
Adam Smith states that countries should specialize in the production of goods for which they can
produce most efficiently and then trade these for goods produced by other countries.
1776 - Answers Absolute advantage theory
David Ricardo states that 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.
1817 - Answers Comparative advantage theory
This theory predicts that countries will export those goods that make intensive use of factors that are
locally abundant and import goods that make intensive use of factors that are locally scarce.
1919-1933 - Answers Heckscher-Ohlin theory
This theory, initially proposed by Raymond Vernon, points out that where a new product is introduced
is important. Over time, cost considerations start playing a greater role in the competitive process.
Mid-1960s - Answers Product life-cycle theory
Through its impact on economies of scale, trade can increase the variety of goods available to
consumers while decreasing the average cost of those goods.
1980s - Answers New trade Theory
Michael Porter contends that the degree to which a nation is likely to achieve international success in
a certain industry is a function of the combined impact of factor endowments
1990 - Answers National competitive advantage theory
According to Adam Smith, _____ should determine what a country imports and what it exports. -
Answers The market mechanism
A situation in which 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 is called -
Answers Free trade
According to the product life-cycle theory, once a new product becomes widely accepted
internationally then production for that product - Answers Will start to take place in other countries
Which theory stresses that in some cases, countries specialize in the production and export of
particular product's not because of underlying differences in factor endowments, but because in
