Question 1

What are the gains and losses of a trade restriction versus free trade? Explain carefully.

Accepted Answer

There are two types of losses from a trade restriction, such as a tariff or quota. First, it involves a waste of resources that could be freed up to produce other goods and services under free trade. Second, a trade restriction creates a deadweight loss, which is the value of lost gains from trade. In the case of a tariff, the market price increases so that there is a loss in consumer surplus. On the other hand, a higher price raises producer surplus, which is the gain from domestic producers. In other words, domestic producers gain while domestic consumers lose with a trade restriction.

Question 2

Use the following to answer questions:
Figure: A Tariff on Imports  
-(Figure: A Tariff on Imports) Refer to the figure. Suppose the government intervenes with a $2 tariff; the total value of deadweight loss as a result of the tariff is:

Accepted Answer

A)  $150 million. 
B)  $200 million. 
C)  $400 million. 
D)  $550 million. 
A)  $150 million. 
B)  $200 million. 
C)  $400 million. 
D)  $550 million. A

Question 3

Governments can use tariffs to help domestic firms act like a cartel when selling to international buyers:

Accepted Answer

A)  if it's unlikely that other governments would impose retaliatory tariffs. 
B)  and if all governments do this, greater gains are realized by all countries. 
C)  only if international buyers have few substitutes for the domestic good. 
D)  but there are no actual examples of governments trying to do this. 
A)  if it's unlikely that other governments would impose retaliatory tariffs. 
B)  and if all governments do this, greater gains are realized by all countries. 
C)  only if international buyers have few substitutes for the domestic good. 
D)  but there are no actual examples of governments trying to do this. C

Question 4

Use the following to answer questions:
Figure: Trade  
-(Figure: Trade) Refer to the figure. If this figure represents the market for oil and the country imposes no tariffs on international trade, domestic consumption will be:

Accepted Answer

A)  500 units. 
B)  1,000 units. 
C)  1,150 units. 
D)  1,300 units. 
A)  500 units. 
B)  1,000 units. 
C)  1,150 units. 
D)  1,300 units.

Question 5

Which of the following is TRUE about the economic policy of "protectionism"?

Accepted Answer

A)  It raises the prices of foreign goods in domestic markets. 
B)  It restricts competitive forces in domestic markets. 
C)  It can be achieved through quotas and tariffs. 
D)  All of the statements are correct. 
A)  It raises the prices of foreign goods in domestic markets. 
B)  It restricts competitive forces in domestic markets. 
C)  It can be achieved through quotas and tariffs. 
D)  All of the statements are correct.

Question 6

Use the following to answer questions:
Figure: Shirts  
-(Figure: Shirts) Refer to the figure. If a tariff raised the world price to $4 a shirt, how much consumer surplus would be lost?

Accepted Answer

A)  $5,000,000 
B)  $10,000,000 
C)  $85,000,000 
D)  $30,000,000 
A)  $5,000,000 
B)  $10,000,000 
C)  $85,000,000 
D)  $30,000,000

Question 7

Use the following to answer questions:
Figure: Shirts  
-(Figure: Shirts) Refer to the figure. If a $5 tariff was levied on shirts, how much tax revenue would the government collect?

Accepted Answer

A)  $0 
B)  $100 million 
C)  $200 million 
D)  $375 million 
A)  $0 
B)  $100 million 
C)  $200 million 
D)  $375 million

Question 8

For strategic trade protectionism to be effective, the:

Accepted Answer

A)  good in question must be produced with high-tech equipment. 
B)  supply of the good in question must be elastic. 
C)  supply of the good in question must be inelastic. 
D)  good in question must be one of many goods that the country exports. 
A)  good in question must be produced with high-tech equipment. 
B)  supply of the good in question must be elastic. 
C)  supply of the good in question must be inelastic. 
D)  good in question must be one of many goods that the country exports.

Question 9

A tariff on a good when the world price is lower than the domestic price leads to:

Accepted Answer

A)  tariff revenues that will be lower than under free trade. 
B)  domestic imports that will be higher than under free trade. 
C)  lower domestic consumption of the good than under free trade. 
D)  lower domestic production of the good than under free trade. 
A)  tariff revenues that will be lower than under free trade. 
B)  domestic imports that will be higher than under free trade. 
C)  lower domestic consumption of the good than under free trade. 
D)  lower domestic production of the good than under free trade.

Question 10

An increase in import trade tends to ______ domestic prices.

Accepted Answer

A)  increase 
B)  decrease 
C)  hold constant 
D)  have an indeterminate effect on 
A)  increase 
B)  decrease 
C)  hold constant 
D)  have an indeterminate effect on

Question 11

Domestic consumers lose more than domestic producers gain because of import restrictions.

Accepted Answer

A) True 
 B)False

Question 12

A tariff results in a higher:
I. consumer surplus.
II. producer surplus.
III. government revenue.

Accepted Answer

A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II, and III 
A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II, and III

Question 13

Trade:

Accepted Answer

A)  decreases the number of jobs. 
B)  increases the number of jobs. 
C)  moves jobs from export industries to import-competing industries. 
D)  moves jobs from import-competing industries to export industries. 
A)  decreases the number of jobs. 
B)  increases the number of jobs. 
C)  moves jobs from export industries to import-competing industries. 
D)  moves jobs from import-competing industries to export industries.

Question 14

Figure: Market Activity with and without Trade   
Refer to the figure. Using the diagram for market activity with and without trade to consider the effects of a trade restriction that eliminated foreign trade in an economy, answer the following questions.
a. What is the dollar amount of deadweight loss created as a result of the trade restriction?
b. What is the dollar value of wasted resources as a result of the trade restriction?
c. What is the dollar gain in domestic producer surplus as a result of the trade restriction?

Accepted Answer

a. $450
b.

Question 15

Use the following to answer questions:
Figure: Costs of Tariffs  
-(Figure: Costs of Tariffs) Refer to the figure. In the figure representing the market for leather, what price would consumers pay for leather in the absence of a tariff or other import restrictions?

Accepted Answer

A)  a price less than $50 
B)  $50 
C)  a price somewhere between $50 and $100 
D)  $100 
A)  a price less than $50 
B)  $50 
C)  a price somewhere between $50 and $100 
D)  $100

Question 16

International trade is similar to local trade because:

Accepted Answer

A)  specialization does not occur in either case. 
B)  both are based on the concept of comparative advantage. 
C)  both are always efficient. 
D)  neither have political considerations. 
A)  specialization does not occur in either case. 
B)  both are based on the concept of comparative advantage. 
C)  both are always efficient. 
D)  neither have political considerations.

Question 17

Protectionism protects domestic industries from the competitive forces exerted by foreign firms.

Accepted Answer

A) True 
 B)False

Question 18

Reducing tariffs causes consumer surplus to increase but producer surplus to decrease.

Accepted Answer

A) True 
 B)False

Question 19

World supply of a good ______ domestic supply.

Accepted Answer

A)  is less elastic than 
B)  is more elastic than 
C)  is equally elastic to 
D)  has indeterminate elasticity compared with 
A)  is less elastic than 
B)  is more elastic than 
C)  is equally elastic to 
D)  has indeterminate elasticity compared with

Question 20

In 1845, French economist Frédéric Bastiat famously compared tariffs to blocking out the sun since both low-priced imports and free sunlight discourage domestic industry. What part of the trade diagram best describes the encouragement of domestic industry if Bastiat's "blockade" was taken seriously?

Accepted Answer

A)  deadweight loss 
B)  fall in consumer surplus 
C)  fall in producer surplus 
D)  wasted resources 
A)  deadweight loss 
B)  fall in consumer surplus 
C)  fall in producer surplus 
D)  wasted resources

Exam 9: International Trade

What are the gains and losses of a trade restriction versus free trade? Explain carefully.

Use the following to answer questions: Figure: A Tariff on Imports -(Figure: A Tariff on Imports) Refer to the figure. Suppose the government intervenes with a $2 tariff; the total value of deadweight loss as a result of the tariff is:

Governments can use tariffs to help domestic firms act like a cartel when selling to international buyers:

Use the following to answer questions: Figure: Trade -(Figure: Trade) Refer to the figure. If this figure represents the market for oil and the country imposes no tariffs on international trade, domestic consumption will be:

Which of the following is TRUE about the economic policy of "protectionism"?

Use the following to answer questions: Figure: Shirts -(Figure: Shirts) Refer to the figure. If a tariff raised the world price to $4 a shirt, how much consumer surplus would be lost?

Use the following to answer questions: Figure: Shirts -(Figure: Shirts) Refer to the figure. If a $5 tariff was levied on shirts, how much tax revenue would the government collect?

For strategic trade protectionism to be effective, the:

A tariff on a good when the world price is lower than the domestic price leads to:

An increase in import trade tends to ______ domestic prices.

Domestic consumers lose more than domestic producers gain because of import restrictions.

A tariff results in a higher: I. consumer surplus. II. producer surplus. III. government revenue.

Trade:

Use the following to answer questions: Figure: Costs of Tariffs -(Figure: Costs of Tariffs) Refer to the figure. In the figure representing the market for leather, what price would consumers pay for leather in the absence of a tariff or other import restrictions?

International trade is similar to local trade because:

Protectionism protects domestic industries from the competitive forces exerted by foreign firms.

Reducing tariffs causes consumer surplus to increase but producer surplus to decrease.

World supply of a good ______ domestic supply.

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Price Discrimination

Consumer Choice

Filters