ABDM3233 International Business Planning

Tutorial 3
Multiple Choice Questions
1) Most of the world merchandise trade is composed of trade in ________.
A) minerals
B) services
C) manufactured goods
D) agricultural products
Answer: C
2)The danger of trade dependency is that ________.
A) it often leads to the exploitation of developed countries
B) political turmoils in a country might affect all dependent countries
C) the countries involved in trade often get into rivalry over trade tariff issues
D) it is difficult to end trade activities with current trade partners and find new trade partners
Answer: B
3) ________ says that nations should accumulate financial wealth, usually in the form of gold,
by encouraging exports and discouraging imports.
A) Absolute advantage theory
B) Factor proportions theory
C) Mercantilism
D) Communism
Answer: C
4)The condition that results when the value of a nation's exports is greater than the value of its
imports is called ________.
A) a trade deficit
B) a trade surplus
C) mercantilism
D) dumping
Answer: B
5)The condition that results when the value of a country's imports is greater than the value of its
exports is called ________.
A) a trade deficit
B) economies of scale
C) a break-even point
D) absolute advantage
Answer: A

6) Which of the following refers to the ability of a nation to produce a good more efficiently than
any other nation?
A) mercantilism
B) comparative advantage
C) absolute advantage
D) neomercantilism
Answer: C
7) The theory of absolute advantage measures a nation's wealth by determining the ________.
A) amount of gold it has on reserve
B) quantity of minerals it has on reserve
C) total trade volume in the country
D) living standards of its people
Answer: c
8)The international product life cycle theory was put forth for ________.
A) service goods
B) abundant resources
C) manufactured goods
D) natural resources
Answer: C
9)During which of the following stages of the international product life cycle theory does high
purchasing power and buyer demand in an industrialized nation encourage a company to
design and introduce a product concept?
A) product decline stage
B) new product stage
C) maturing product stage
D) standardized product stage
Answer: B
10) When a nation cannot produce a good more efficiently than other nations, but it can produce
that good more efficiently than it does any other good, we say this is a case of __________.
a. Absolute advantage
b. Comparative advantage
c. Mercantilism
answer : b
Discussion Questions
11) Discuss the three essential pillars of the theory of mercantilism.

Answer: The trade theory that nations should accumulate financial wealth, usually in the
form of gold, by encouraging exports and discouraging imports is called mercantilism.
It states that other measures of a nation's well-being, such as living standards or human
development, are irrelevant.
3 pillars :
trade surpluses, government intervention, and colonialism.
Trade Surpluses-Nations believed they could increase their wealth by maintaining a trade
surplus- the condition that results when the value of a nation's exports is greater than the value
of its imports. In mercantilism, a trade surplus meant that a country was taking in more gold on
the sale of its exports than it was paying out for its imports. A trade deficit is the opposite
condition-one that results when the value of a country's imports is greater than the value of its
exports. In mercantilism, trade deficits were to be avoided at all costs.
Government Intervention-Governments actively intervened in international trade to maintain a
trade surplus. According to mercantilism, the accumulation of wealth depended on increasing a
nation's trade surplus, not necessarily expanding its total value or volume of trade. The
governments of mercantilist nations did this by either banning certain imports or imposing
various restrictions on them, such as tariffs or quotas. At the same time, they subsidized
industries based in the home country to expand exports. Governments also typically
outlawed the removal of their gold and silver to other nations.
Colonialism - Mercantilist nations acquired territories (colonies) around the world to
serve as sources of inexpensive raw materials and as markets for higher-priced finished
goods. These colonies were the source of essential raw materials, including tea, sugar,
tobacco, rubber, and cotton. These resources would be shipped to the mercantilist nation,
where they were incorporated into finished goods such as clothing, cigars, and other products.
These finished goods would then be sold to the colonies. Trade between mercantilist countries
and their colonies were a huge source of profits for the mercantilist powers. The colonies
received low prices for basic raw materials but paid high prices for finished goods.
12) Explain how the theory of absolute advantage conflicts with the theory of mercantilism.
Answer: The theory of mercantilism conflicts with another trade theory, the theory of absolute
advantage. Scottish economist Adam Smith first put forth the trade theory of absolute advantage
in 1776.
The ability of a nation to produce a good more efficiently than any other nation is called an
absolute advantage. In other words, a nation with an absolute advantage can produce a greater
output of a good or service than other nations using the same amount of, or fewer, resources.
The theory of absolute advantage destroys the mercantilist idea that international trade is
a zero-sum game. Instead, because there are gains to be had by both countries party to an
exchange, international trade is a positive-sum game.
The theory also calls into question the objective of national governments to acquire

wealth through restrictive trade policies. It argues that nations should instead open their
doors to trade so their people can obtain a greater quantity of goods more cheaply. The theory
does not measure a nation's wealth by how much gold and silver it has on reserve but by
the living standards of its people.
13) Briefly describe the new trade theory. Does its focus on productivity put it at odds with the
theory of comparative advantage and factor proportions theory?
New trade theory says that there are gains from specialization and economies of scale,
companies first to market create barriers to entry, and government is helpful if it assists
its home-based companies.
Because new trade theory emphasizes productivity rather than a nations resources, it is in
line with the theory of comparative advantage and at odds with factor proportions theory.

What are the patterns of global and regional trade flows that we see among nations?
60 percent of world merchandise trade occurs among high-income countries. 34 percent of
world merchandise trade occurs among high-income countries and low- and middle-income
nations. About 6 percent of trade occurs only among low- and middle-income nations.
Intra-regional trade accounts for 71 percent of Europes exports, 52 percent of Asias exports,
and around 48 percent of North Americas exports.
This century is called the Pacific century due to expected growth in Asia and a shift in trade
from the Atlantic to the Pacific Ocean.