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Chapter 19 : Trade Policy
MULTIPLE CHOICE
1. What was GATT?
a.
an international organization that oversaw multilateral trade negotiations and tariff policies
b.
a voluntary export-restriction agreement governing international trade in textiles
c.
a free-trade area in southeast Asia
d.
an Eastern European trading bloc that disbanded in the early 1990s
2. The essence of outward-looking development is that it:
a.
relies on primary exports until domestic industry is efficient enough to compete in export
markets.
b.
gets prices right and lets the free market dictate the development of manufactured exports.
c.
establishes an incentive system that induces firms to seek export markets.
d.
subsidizes export-oriented manufacturing firms.
3. When the government auctions import licenses, it captures the quota rent. Who gets the quota rent
when the government administratively allocates import licenses?
a.
the foreign producer of the imported product
b.
the importers
c.
the domestic consumer
d.
the domestic producers of the import substitutes
4. The effective rate of protection measures how much:
a.
investment will be drawn into the protected industry.
b.
profit can be earned by producing the protected product.
c.
the margin of price over input cost for domestic producers can exceed the margin at world
market prices.
d.
the price of the product increases due to the tariff.
5. Effective rates of protection in developing countries typically:
a.
are very high for manufactured consumer goods.
b.
differ widely from industry to industry.
c.
discriminate against the agricultural sector.
d.
all of the above.
6. Other things being equal, the effective rate of protection for domestic producers of steel nails will be
higher:
a.
when the tariff on imported nails is low.
b.
when the tariff on imported steel is low.
c.
when the value added in converting steel to nails is high.
d.
all of the above.
7. Zawana faces world prices for finished radios and radio components, which are 100 shillings and 95
shillings, respectively. There is a 30 percent tariff on imported radios and no tariff on imported
components. The effective rate of protection for the radio assembly industry in Zawana is:
a.
30 percent.
c.
600 percent.
b.
60 percent.
d.
5 percent.
8. Suppose Kenya imports film at a border price of $5 per roll. If there are 70 Kenyan shillings to the
dollar and Kenya imposes a 50 percent tariff on imported film, then the domestic price of the imported
film per roll is:
a.
350 shillings.
c.
525 shillings.
b.
105 shillings.
d.
400 shillings.
9. To minimize losses to consumer surplus, protection for infant industries should be provided through:
a.
subsidies.
c.
tariffs.
b.
quotas.
d.
an overvalued exchange rate.
10. Economists generally prefer the use of subsidies instead of protective tariffs because:
a.
subsidies create smaller deadweight losses.
b.
subsidies can be targeted more carefully.
c.
the visible cost of subsidies creates an automatic incentive to phase out protection.
d.
all of the above.
11. What effect do high import tariffs have on a country’s export industries?
a.
Tariffs reduce the demand for foreign exchange, so the home currency appreciates; this
hurts exports.
b.
Tariffs reduce the demand for foreign exchange, so the home currency depreciates; this
boosts exports.
c.
Tariffs reduce the demand for foreign exchange, so the home currency appreciates; this
boosts exports.
d.
Tariffs do not affect exports, just imports.
12. Malawi’s currency, the kwacha, is overvalued when the kwacha price of foreign exchange rate is:
a.
too high compared to the equilibrium free-trade exchange rate.
b.
too low compared to the equilibrium free-trade exchange rate.
c.
rising.
d.
falling.
13. Which of the following is NOT an argument in favor of export-oriented development over import
substitution?
a.
International competition compels domestic producers to become more efficient.
b.
Exposure to world markets enhances opportunities to learn new technologies.
c.
Producing for export permits greater specialization.
d.
Outward-looking development favors firms that are better at rent seeking.
14. What credit-market policy did the Korean government use to promote exports in its transition toward a
rapidly industrializing nation?
a.
The government liberalized financial markets and let market forces allocate credit.
b.
The government set high interest rates on loans to exporters to screen out low-productivity
investments.
c.
The government cut off credit to exporters to make them compete for loans overseas.
d.
The government used low-interest-rate loans as a form of indirect subsidy to exporters.
SHORT ANSWER
IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in
pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two
terms and (2) the relationship between them.
1. Import substitution, infant industry
ANS:
Answer will vary
2. Tariff revenue, quota rent
ANS:
Answer will vary
3. Import quota, deadweight loss
ANS:
Answer will vary
4. Overvalued exchange rate, import-GDP ratio
ANS:
Answer will vary
5. Rent seeking, import licensing
ANS:
Answer will vary
6. Outward-looking strategy, global market
ANS:
Answer will vary
7. East Asian Tigers, export-orientation
ANS:
Answer will vary
8. GATT, most-favored-nation principle
ANS:
Answer will vary
9. Trade liberalization, benefits of exporting
ANS:
Answer will vary
10. Effective rate of protection, value added
ANS:
Answer will vary
11. Trade protection, political economy
ANS:
Answer will vary
