Chapter 5 ib

Chapter 5 – International Trade Theory

In a situation of _____________, a country would have no reliance on other countries for any goods, services, or technologies.

a.     independence 

b.     dependence

c.     interdependence

d.     congruence

When government policy is directed toward improving the export competitiveness of a specific industry, this policy is a:

a.       strategic trade policy. 

b.       favorable balance of trade.

c.       independence theory.

d.       factor proportions theory.

   In a short essay, discuss the theory of acquired advantage, and provide examples that support your answer.

         Answer

         Countries that produce manufactured goods and services competitively have an acquired advantage, usually in either product or process technology. An advantage in product technology is a country’s ability to produce a unique product or one that is easily distinguished from those of competitors. For example, Denmark exports silver tableware, not because there are rich Danish silver mines but because Danish companies have developed distinctive products. An advantage in process technology is a country’s ability to produce a homogeneous product (one not easily distinguished from that of competitors) efficiently. For example, Japan has exported steel in spite of having to import iron and coal, the two main ingredients necessary for steel production. A primary reason for Japan’s success is that its steel mills encompass new labor-saving and material-saving processes.

In a short essay, discuss the factors that contribute to the effects of the Heckscher-Ohlin theory.

         Answer

         The factor-proportions theory said that differences in countries’ endowments of labor compared to their endowments of land or capital explained differences in the cost of production factors. Heckscher and Ohlin proposed that if labor were abundant in comparison to land and capital, labor costs would be relatively low compared to land and capital costs. These relative factor costs would lead countries to excel in the production and export of products that used their abundant, and therefore cheaper, production factors.

How do technological complexities complicate managers’ use of factor proportions theory to determine where to locate their production?

         Answer

         The factor-proportions analysis becomes more complicated when the same product can be produced by different methods, such as with labor or capital.  Canada produces wheat with a capital-intensive method because of its abundance of low-cost capital relative to labor.  In contrast, India produces wheat by using a much smaller number of machines in comparison to its abundant and cheap labor.  In the final analysis, managers must compare the cost in each locale based on the type of production that will minimize costs there.

In what type of country are new products more likely to be produced?  Why?

         Answer

         Companies develop new products because there is an observed need and market for them.  This means that a U.S. company is more apt to develop a new product for the U.S. market, as would a French company for the French market, and so on.  At the same time, almost all new technology that results in new products and production methods originates in industrial countries because of a combination of factors—competition, demanding consumers, the availability of scientists and engineers, and high incomes.