Answer: Exports are important to a country because they create work for domestic suppliers, generate wages for workers, and dividend payments for local shareholders. This then translates into income for grocery stores, department stores, and other establishments, which then creates more jobs and wages, and so on. Diff: 1 Page Ref: 151 Skill: AACSB: Globalization Objective: 6.1: Understand the motivation for international trade. 29
133) Why is the notion of specialization important when analyzing the benefits of free trade? Answer: Critics of free trade worry that imports can have a negative effect on a country because they involve an outflow of capital. Those taking this perspective argue that by substituting locally-made goods for imports allows the country to not only have the goods, but also keep the money. Supporters of free trade disagree. They believe that it is important to consider the role of specialization. If countries specialize in what they do best, and trade for everything else, their resources are more productive and ultimately, the country will be better off. Those taking this view feel that limiting imports only forces a country to make an inefficient use of its resources. Diff: 1 Page Ref: 155 Skill: AACSB: Globalization Objective: 6.2: Summarize and discuss the differences among the classical country-based theories of international trade. 134) Which trade theory is best at explaining trade in differentiated goods? Answer: Linder's country similarity theory argues that trade in manufactured goods should occur primarily between countries with similar per capita incomes. The theory is especially useful for explaining trade in differentiated goods where brand names and product reputations are important in the purchase decision. Diff: 3 Page Ref: 159 Objective: 6.3: Use modern firm-based theories of international trade to describe global strategies adopted by businesses. 135) Explain what determines the products for which a country has a comparative advantage. Answer: Heckscher and Ohlin explored the question of which products a country will have a comparative advantage in. They theorized that a country would have a comparative advantage in the production of products that intensively use resources the country has in abundance. While most economists intuitively agreed with the theory, a study by Leontief found just the opposite occurred. Diff: 3 Page Ref: 158 Objective: 6.2: Summarize and discuss the differences among the classical country-based theories of international trade. 136) Why did firm-based trade theories develop? Answer: Firm-based theories developed for three reasons: 1) the growing importance of MNCs in the postwar international economy; 2) the inability of the country-based theories to explain and predict the existence and growth of intraindustry trade, and 3) the failure of Leontief and others to empirically validate the country-based Heckscher-Ohlin theory. Diff: 2 Page Ref: 159 Objective: 6.3: Use modern firm-based theories of international trade to describe global strategies adopted by businesses.
- Winter '13
- International Trade, AACSB, Page Ref