CHAPTER 1—THE 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: B PTS: 1

2. A main advantage of specialization results from:

a. Economies of large-scale production
b. The specializing country behaving as a monopoly
c. Smaller production runs resulting in lower unit costs
d. High wages paid to foreign workers

ANS: A PTS: 1

3. International trade in goods and services is sometimes used as a substitute for all
of the following except:
a. International movements of capital
b. International movements of labor
c. Domestic production of the same goods and services
d. Domestic production of different goods and services

ANS: D PTS: 1

4. If a nation has an open economy, it means that the nation:

a. Allows private ownership of capital
b. Has flexible exchange rates
 c. Has fixed exchange rates
d. Conducts trade with other countries

ANS: D PTS: 1

5. International trade forces domestic firms to become more competitive in terms of:
a. The introduction of new products
b. Product design and quality
c. Product price
d. All of the above

ANS: D PTS: 1

6. The movement to free international trade is most likely to generate short-term

unemployment in which industries?
a. Industries in which there are neither imports nor exports
b. Import-competing industries
c. Industries that sell to domestic and foreign buyers
d. Industries that sell to only foreign buyers

ANS: B PTS: 1

7. International trade is based on the idea that:

a. Exports should exceed imports
b. Imports should exceed exports
c. Resources are more mobile internationally than are goods
d. Resources are less mobile internationally than are goods

ANS: D PTS: 1

8. Arguments for free trade are sometimes disregarded by politicians because:

a. Maximizing domestic efficiency is not considered important
 b. Maximizing consumer welfare may not be a chief priority
c. There exist sound economic reasons for keeping one's economy isolated
from other economies
d. Economists tend to favor highly protected domestic markets

ANS: B PTS: 1

9. How much physical output a worker producers in an hour's work depends on:
a. The worker's motivation and skill
b. The technology, plant, and equipment in use
c. How easy the product is to manufacture
d. All of the above

ANS: D PTS: 1

10. The largest amount of trade with the United States in recent years has been
conducted by:
a. Canada
b. Germany
c. Chile
d. United Kingdom

ANS: A PTS: 1

11. Increased foreign competition tends to:

a. Intensify inflationary pressures at home
b. Induce falling output per worker-hour for domestic workers
c. Place constraints on the wages of domestic workers
d. Increase profits of domestic import-competing industries

ANS: C PTS: 1
12. ____ is the ability of a firm/industry, under free and fair market conditions, to
design, produce, and market goods and services that are better and/or cheaper
than those of other firms/industries.
a. Competitiveness
b. Protectionism
c. Comparative advantage
d. Absolute advantage

ANS: A PTS: 1

13. A firm's ____, relative to that of other firms, is generally regarded as the most
important determinant of competitiveness.
a. Income level
b. Tastes and preferences
c. Governmental regulation
d. Productivity

ANS: D PTS: 1

14. Free traders maintain that an open economy is advantageous in that it provides all
of the following except:
a. Increased competition for world producers
b. A wider selection of products for consumers
c. The utilization of the most efficient production methods
d. Relatively high wage levels for all domestic workers

ANS: D PTS: 1

15. Recent pressures for protectionism in the United States have been motivated by all
of the following except:
a. U.S. firms shipping component production overseas
b. High profit levels for American corporations
c. Sluggish rates of productivity growth in the United States
 d. High unemployment rates among American workers

ANS: B PTS: 1

16. International trade tends to cause welfare losses to at least some groups in a
country:
a. The less mobile the country's resources
b. The more mobile the country's resources
c. The lower the country's initial living standard
d. The higher the country's initial living standard

ANS: A PTS: 1

17. For a nation to maximize its productivity in a global economy:

a. Only imports are necessary
b. Only exports are necessary
c. Both imports and exports are necessary
d. Neither imports nor exports are necessary

ANS: C PTS: 1

18. A feasible effect of international trade is that:

a. A monopoly in the home market becomes an oligopoly in the world
market
b. An oligopoly in the home market becomes a monopoly in the world
market
c. A purely competitive firm becomes an oligopolist
d. A purely competitive firm becomes a monopolist

ANS: A PTS: 1

19. International trade in goods and services tends to:

 a. Increase all domestic costs and prices
b. Keep all domestic costs and prices at the same level
c. Lessen the amount of competition facing home manufacturers
d. Increase the amount of competition facing home manufacturers

ANS: D PTS: 1

20. 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: C PTS: 1

21. In the United States, automobiles are

a. Imported, but not exported
b. Exported, but not imported
c. Imported and exported
d. Neither exported nor imported

ANS: C PTS: 1

22. Technological improvements are similar to international trade since they both:
a. Provide benefits for all producers and consumers
b. Increase the nation's aggregate income
c. Reduce unemployment for all domestic workers
d. Ensure that industries can operate at less than full capacity

ANS: B PTS: 1
23. A sudden shift from import tariffs to free trade may induce short-term
unemployment in:
a. Import-competing industries
b. Industries that are only exporters
c. Industries that sell domestically as well as export
d. Industries that neither import nor export

ANS: A PTS: 1

24. Recent empirical studies indicate that productivity performance in industries is:
a. Directly related to globalization of industries
b. Inversely related to globalization of industries
c. Not related to globalization of industries
d. Any of the above

ANS: A PTS: 1

25. Empirical research indicates that ____ best enhances productivity gains for firms
and industries.
a. Local competition
b. Regional competition
c. Global competition
d. No competition

ANS: C PTS: 1

26. Increased globalization is fostered by:

a. Increased tariffs and quotas
b. Restrictions on the migration of labor
c. Reduced transportation costs
d. Restrictions on investment flows
 ANS: C PTS: 1

27. A reduced share of the world export market for the United States would be
attributed to:
a. Decreased productivity in U.S. manufacturing
b. High incomes of American households
c. Relatively low interest rates in the United States
d. High levels of investment by American corporations

ANS: A PTS: 1

28. The dominant trading nation in the world market following World War II was:
a. United Kingdom
b. Germany
c. South Korea
d. United States

ANS: D PTS: 1

29. A closed economy is one in which:

a. Imports exactly equal exports, so that trade is balanced
b. Domestic firms invest in industries overseas
c. The home economy is isolated from foreign trade
d. Saving exactly equals investment at full employment

ANS: C PTS: 1

30. Relative to countries with low ratios of exports to gross domestic product,
countries having high export to gross domestic product ratios are ____ vulnerable
to changes in the world market.
a. Less
b. More
c. Equally
 d. Any of the above

ANS: B PTS: 1

31. Which of the following is a fallacy of international trade?

a. Trade is a zero-sum activity
b. Exports increase employment in exporting industries
c. Import restrictions increase employment in import-competing industries
d. Tariffs and quotas reduce trade volume

ANS: A PTS: 1

32. Foreign ownership of U.S. financial assets

a. Has decreased since the 1960's
b. Has increased since the 1960's
c. Has made the U.S. a net borrower since the late 1980's
d. Both a and c

ANS: D PTS: 1

33. The first wave of globalization was brought to an end by

a. The Great Depression
b. The Second World War
c. The First World War
d. The Smoot-Hawley Act

ANS: C PTS: 1

34. Multilateral trade negotiations have led to

a. Continued trade liberalization
b. Financial liberalization
c. Increased investment
 d. All of the above

ANS: D PTS: 1

TRUE/FALSE

1. Important trading partners of the United States include Canada, Mexico, Japan,
and China.

ANS: T PTS: 1

2. The United States exports a larger percentage of its gross domestic product than
Japan, Germany, and Canada.

ANS: F PTS: 1

3. Opening the economy to international trade tends to lessen inflationary pressures

at home.

ANS: T PTS: 1

4. The benefits of international trade accrue in the forms of lower domestic prices,
development of more efficient methods and new products, and a greater range of
consumption choices.

ANS: T PTS: 1

5. In an open trading system, a country will import those commodities that it

produces at relatively low cost while exporting commodities that can be produced
at relatively high cost.

ANS: F PTS: 1
 6. Although free trade provides benefits for consumers, it is often argued that import
protection should be provided to domestic producers of strategic goods and
materials vital to the nation's security.

ANS: T PTS: 1

7. In the long run, competitiveness depends on an industry's natural resources, its

stock of machinery and equipment, and the skill of its workers in creating goods
that people want to buy.

ANS: T PTS: 1

8. If a nation has an open economy, it means that the nation allows private
ownership of capital.

ANS: F PTS: 1

9. Increased foreign competition tends to increase profits of domestic import-

competing companies.

ANS: F PTS: 1

10. Restrictive trade policies have resulted in U.S. producers of minerals and metals
supplying all of the U.S. consumers' needs.

ANS: F PTS: 1

SHORT ANSWER

1. What is the most important factor which contributes to competitiveness?

ANS:
Key to the concept of competitiveness is productivity, or output per worker hour.

PTS: 1
 2. What are the challenges of the international trading system?

ANS:
Among the challenges that the international trading system faces are dealing with
fair labor standards and concerns about the environment.

PTS: 1

ESSAY

1. Does exposure to competition with the world leader in a particular industry

improve a firm's productivity?

ANS:
The McKinsey institute found that higher productivity rested on the ability of
mangers to invent new and ever more efficient ways of making products and on
the ability of engineers to design products that are easy to make. The institute
researchers observed that in the auto industry in Japan or the food industry in the
United States, managers and engineers do not achieve innovations because they
are smarter work harder or are better educated than their peers. They do so
because they are subjected to intense global competition, where improving labor
productivity is the key to success.

PTS: 1

2. What are the essential arguments in favor of free trade?

ANS:
Proponents of an open trading system contend that international trade results in
higher levels of consumption and investment, lower prices of commodities, and a
wider range of product choices for consumers. Trade also enables workers to
become more productive, and wages of workers whose skills are more scarce
internationally tend to rise.

PTS: 1