CHAPTER 1THE INTERNATIONAL ECONOMY AND GLOBALIZATION

MULTIPLE CHOICE
1. A primary reason why nations conduct international trade is because:
a
.
Some nations prefer to produce one thing while others produce other things
b
.
Resources are not equally distributed among all trading nations
c
.
Trade enhances opportunities to accumulate profits
d
.
Interest rates are not identical in all trading nations
ANS: !TS: 1
". A main ad#antage of speciali$ation results from:
a
.
%conomies of large&scale production
b
.
The speciali$ing country beha#ing as a monopoly
c
.
Smaller production runs resulting in lower unit costs
d
.
'igh wages paid to foreign wor(ers
ANS: A !TS: 1
). International trade in goods and ser#ices is sometimes used as a substitute for all of the following
e*cept:
a
.
International mo#ements of capital
b
.
International mo#ements of labor
c
.
+omestic production of the same goods and ser#ices
d
.
+omestic production of different goods and ser#ices
ANS: + !TS: 1
,. If a nation has an open economy- it means that the nation:
a
.
Allows pri#ate ownership of capital
b
.
'as fle*ible e*change rates
c
.
'as fi*ed e*change rates
d .onducts trade with other countries
.
ANS: + !TS: 1
/. International trade forces domestic firms to become more competiti#e in terms of:
a
.
The introduction of new products
b
.
!roduct design and quality
c
.
!roduct price
d
.
All of the abo#e
ANS: + !TS: 1
0. The mo#ement to free international trade is most li(ely to generate short&term unemployment in which
industries1
a
.
Industries in which there are neither imports nor e*ports
b
.
Import&competing industries
c
.
Industries that sell to domestic and foreign buyers
d
.
Industries that sell to only foreign buyers
ANS: !TS: 1
2. International trade is based on the idea that:
a
.
%*ports should e*ceed imports
b
.
Imports should e*ceed e*ports
c
.
Resources are more mobile internationally than are goods
d
.
Resources are less mobile internationally than are goods
ANS: + !TS: 1
3. Arguments for free trade are sometimes disregarded by politicians because:
a
.
4a*imi$ing domestic efficiency is not considered important
b
.
4a*imi$ing consumer welfare may not be a chief priority
c
.
There e*ist sound economic reasons for (eeping one5s economy isolated from other
economies
d
.
%conomists tend to fa#or highly protected domestic mar(ets
ANS: !TS: 1
6. 'ow much physical output a wor(er producers in an hour5s wor( depends on:
a
.
The wor(er5s moti#ation and s(ill
b
.
The technology- plant- and equipment in use
c
.
'ow easy the product is to manufacture
d
.
All of the abo#e
ANS: + !TS: 1
17. The largest amount of trade with the 8nited States in recent years has been conducted by:
a
.
.anada
b
.
9ermany
c
.
.hile
d
.
8nited :ingdom
ANS: A !TS: 1
11. Increased foreign competition tends to:
a
.
Intensify inflationary pressures at home
b
.
Induce falling output per wor(er&hour for domestic wor(ers
c
.
!lace constraints on the wages of domestic wor(ers
d
.
Increase profits of domestic import&competing industries
ANS: . !TS: 1
1". ;;;; is the ability of a firm<industry- under free and fair mar(et conditions- to design- produce- and
mar(et goods and ser#ices that are better and<or cheaper than those of other firms<industries.
a
.
.ompetiti#eness
b
.
!rotectionism
c .omparati#e ad#antage
.
d
.
Absolute ad#antage
ANS: A !TS: 1
1). A firm5s ;;;;- relati#e to that of other firms- is generally regarded as the most important determinant
of competiti#eness.
a
.
Income le#el
b
.
Tastes and preferences
c
.
9o#ernmental regulation
d
.
!roducti#ity
ANS: + !TS: 1
1,. =ree traders maintain that an open economy is ad#antageous in that it pro#ides all of the following
e*cept:
a
.
Increased competition for world producers
b
.
A wider selection of products for consumers
c
.
The utili$ation of the most efficient production methods
d
.
Relati#ely high wage le#els for all domestic wor(ers
ANS: + !TS: 1
1/. Recent pressures for protectionism in the 8nited States ha#e been moti#ated by all of the following
e*cept:
a
.
8.S. firms shipping component production o#erseas
b
.
'igh profit le#els for American corporations
c
.
Sluggish rates of producti#ity growth in the 8nited States
d
.
'igh unemployment rates among American wor(ers
ANS: !TS: 1
10. International trade tends to cause welfare losses to at least some groups in a country:
a
.
The less mobile the country5s resources
b
.
The more mobile the country5s resources
c
.
The lower the country5s initial li#ing standard
d
.
The higher the country5s initial li#ing standard
ANS: A !TS: 1
12. =or a nation to ma*imi$e its producti#ity in a global economy:
a
.
>nly imports are necessary
b
.
>nly e*ports are necessary
c
.
oth imports and e*ports are necessary
d
.
Neither imports nor e*ports are necessary
ANS: . !TS: 1
13. A feasible effect of international trade is that:
a
.
A monopoly in the home mar(et becomes an oligopoly in the world mar(et
b
.
An oligopoly in the home mar(et becomes a monopoly in the world mar(et
c
.
A purely competiti#e firm becomes an oligopolist
d
.
A purely competiti#e firm becomes a monopolist
ANS: A !TS: 1
16. International trade in goods and ser#ices tends to:
a
.
Increase all domestic costs and prices
b
.
:eep all domestic costs and prices at the same le#el
c
.
?essen the amount of competition facing home manufacturers
d
.
Increase the amount of competition facing home manufacturers
ANS: + !TS: 1
"7. The real income of domestic producers and consumers can be increased by:
a
.
Technological progress- but not international trade
b
.
International trade- but not technological progress
c
.
Technological progress and international trade
d
.
Neither technological progress nor international trade
ANS: . !TS: 1
"1. In the 8nited States- automobiles are
a
.
Imported- but not e*ported
b
.
%*ported- but not imported
c
.
Imported and e*ported
d
.
Neither e*ported nor imported
ANS: . !TS: 1
"". Technological impro#ements are similar to international trade since they both:
a
.
!ro#ide benefits for all producers and consumers
b
.
Increase the nation5s aggregate income
c
.
Reduce unemployment for all domestic wor(ers
d
.
%nsure that industries can operate at less than full capacity
ANS: !TS: 1
"). A sudden shift from import tariffs to free trade may induce short&term unemployment in:
a
.
Import&competing industries
b
.
Industries that are only e*porters
c
.
Industries that sell domestically as well as e*port
d
.
Industries that neither import nor e*port
ANS: A !TS: 1
",. Recent empirical studies indicate that producti#ity performance in industries is:
a
.
+irectly related to globali$ation of industries
b
.
In#ersely related to globali$ation of industries
c
.
Not related to globali$ation of industries
d
.
Any of the abo#e
ANS: A !TS: 1
"/. %mpirical research indicates that ;;;; best enhances producti#ity gains for firms and industries.
a
.
?ocal competition
b
.
Regional competition
c
.
9lobal competition
d
.
No competition
ANS: . !TS: 1
"0. Increased globali$ation is fostered by:
a
.
Increased tariffs and quotas
b
.
Restrictions on the migration of labor
c
.
Reduced transportation costs
d
.
Restrictions on in#estment flows
ANS: . !TS: 1
"2. A reduced share of the world e*port mar(et for the 8nited States would be attributed to:
a
.
+ecreased producti#ity in 8.S. manufacturing
b
.
'igh incomes of American households
c
.
Relati#ely low interest rates in the 8nited States
d
.
'igh le#els of in#estment by American corporations
ANS: A !TS: 1
"3. The dominant trading nation in the world mar(et following @orld @ar II was:
a
.
8nited :ingdom
b
.
9ermany
c
.
South :orea
d
.
8nited States
ANS: + !TS: 1
"6. A closed economy is one in which:
a
.
Imports e*actly equal e*ports- so that trade is balanced
b
.
+omestic firms in#est in industries o#erseas
c
.
The home economy is isolated from foreign trade
d
.
Sa#ing e*actly equals in#estment at full employment
ANS: . !TS: 1
)7. Relati#e to countries with low ratios of e*ports to gross domestic product- countries ha#ing high
e*port to gross domestic product ratios are ;;;; #ulnerable to changes in the world mar(et.
a
.
?ess
b
.
4ore
c
.
%qually
d
.
Any of the abo#e
ANS: !TS: 1
)1. @hich of the following is a fallacy of international trade1
a
.
Trade is a $ero&sum acti#ity
b
.
%*ports increase employment in e*porting industries
c
.
Import restrictions increase employment in import&competing industries
d
.
Tariffs and quotas reduce trade #olume
ANS: A !TS: 1
)". =oreign ownership of 8.S. financial assets
a 'as decreased since the 16075s
.
b
.
'as increased since the 16075s
c
.
'as made the 8.S. a net borrower since the late 16375s
d
.
oth a and c
ANS: + !TS: 1
)). The first wa#e of globali$ation was brought to an end by
a
.
The 9reat +epression
b
.
The Second @orld @ar
c
.
The =irst @orld @ar
d
.
The Smoot&'awley Act
ANS: . !TS: 1
),. 4ultilateral trade negotiations ha#e led to
a
.
.ontinued trade liberali$ation
b
.
=inancial liberali$ation
c
.
Increased in#estment
d
.
All of the abo#e
ANS: + !TS: 1
TRUE/FALSE
1. Important trading partners of the 8nited States include .anada- 4e*ico- Aapan- and .hina.
ANS: T !TS: 1
". The 8nited States e*ports a larger percentage of its gross domestic product than Aapan- 9ermany- and
.anada.
ANS: = !TS: 1
). >pening the economy to international trade tends to lessen inflationary pressures at home.
ANS: T !TS: 1
,. The benefits of international trade accrue in the forms of lower domestic prices- de#elopment of more
efficient methods and new products- and a greater range of consumption choices.
ANS: T !TS: 1
/. In an open trading system- a country will import those commodities that it produces at relati#ely low
cost while e*porting commodities that can be produced at relati#ely high cost.
ANS: = !TS: 1
0. Although free trade pro#ides benefits for consumers- it is often argued that import protection should be
pro#ided to domestic producers of strategic goods and materials #ital to the nation5s security.
ANS: T !TS: 1
2. In the long run- competiti#eness depends on an industry5s natural resources- its stoc( of machinery and
equipment- and the s(ill of its wor(ers in creating goods that people want to buy.
ANS: T !TS: 1
3. If a nation has an open economy- it means that the nation allows pri#ate ownership of capital.
ANS: = !TS: 1
6. Increased foreign competition tends to increase profits of domestic import&competing companies.
ANS: = !TS: 1
17. Restricti#e trade policies ha#e resulted in 8.S. producers of minerals and metals supplying all of the
8.S. consumers5 needs.
ANS: = !TS: 1
SHORT ANSWER
1. @hat is the most important factor which contributes to competiti#eness1
ANS:
:ey to the concept of competiti#eness is producti#ity- or output per wor(er hour.
!TS: 1
". @hat are the challenges of the international trading system1
ANS:
Among the challenges that the international trading system faces are dealing with fair labor standards
and concerns about the en#ironment.
!TS: 1
ESSAY
1. +oes e*posure to competition with the world leader in a particular industry impro#e a firm5s
producti#ity1
ANS:
The 4c:insey institute found that higher producti#ity rested on the ability of mangers to in#ent new
and e#er more efficient ways of ma(ing products and on the ability of engineers to design products
that are easy to ma(e. The institute researchers obser#ed that in the auto industry in Aapan or the food
industry in the 8nited States- managers and engineers do not achie#e inno#ations because they are
smarter wor( harder or are better educated than their peers. They do so because they are subBected to
intense global competition- where impro#ing labor producti#ity is the (ey to success.
!TS: 1
". @hat are the essential arguments in fa#or of free trade1
ANS:
!roponents of an open trading system contend that international trade results in higher le#els of
consumption and in#estment- lower prices of commodities- and a wider range of product choices for
consumers. Trade also enables wor(ers to become more producti#e- and wages of wor(ers whose s(ills
are more scarce internationally tend to rise.
!TS: 1