46) Trade barriers are politically popular because
A) they are a way to avoid trade wars and still protect domestic producers.
B) people recognize their use as a negotiating tool in international relations.
C) their benefits are widespread, while their costs are highly concentrated.
D) their benefits are concentrated, while their costs are widespread.
47) Which of the following reasons explains why rich countries persistently restrict textile
imports from poor countries?
A) The trade restrictions make textile consumers better off.
B) The trade restrictions make workers in poor countries better off.
C) The trade restrictions benefit an organized visible special interest in rich countries.
D) Rich countries have a strong need for the revenue from these trade restrictions.
48) When NAFTA was approved, Congress attempted to soften the losses suffered by some
industries by
A) creating new jobs to hire workers who lost their jobs because of NAFTA.
B) setting aside funds to support and retrain workers who lost their jobs because of NAFTA.
C) reducing tariffs.
D) imposing quotas.
49) Which of the following is a reason why only limited attempts are made to compensate those
who lose from free international trade?
A) Free trade advocates consistently lobby to eliminate compensation.
B) It would be difficult to determine the extent to which someone’s sufferings were because of
free trade and not due to reasons under their own control.
C) No one loses in the from free trade in the long run.
D) None of the above answers are correct.
50) Selling a product in a foreign nation at a price less than its cost of production is called
A) infant-industry exploitation.
B) absolute advantage.
C) dumping.
D) net exporting.
51) The (false) idea that an industry should be protected because of learning-by-doing until it is
large enough to compete successfully in world markets is the ________ argument for protection.
A) cheap foreign labor
B) infant industry
C) dumping
D) comparative advantage
52) When a rich nation buys a product made in a poor nation, in the poor nation the demand for
labor ________ and the wage rate ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
53) Which of the following is a valid reason for protecting an industry?
A) The industry is unable to compete with low-wage foreign competitors.
B) Protection penalizes lax environmental standards.
C) Protection keeps richer nations from exploiting the workers of poorer countries.
D) None of the above reasons is a valid reason for protection.
54) Which of the statements about the gains from international trade is CORRECT?
A) Everyone gains from international trade.
B) Some people gain from international trade and some lose, though overall the gains exceed the
losses.
C) Some people gain from international trade and some lose; though overall the losses exceed
the gains.
D) Everyone loses from international trade.
1) Between August 2007 and July 2008, Brazil exported more than 3.5 billion pounds of coffee
to the rest of the world. Because of this, we know definitively that
A) Brazil has comparative advantage in coffee production.
B) the rest of the world has comparative advantage in coffee production.
C) the rest of the world has absolute advantage in coffee production.
D) Brazil has absolute advantage in coffee production.
2) Between August 2007 and July 2008, Brazil exported more than 3.5 billion pounds of coffee
to the rest of the world. Because of this, we know that
A) Brazilian coffee workers “gain” from this trade.
B) Brazilian producers “lose” from this trade.
C) Brazilian consumers “gain” from this trade.
D) Brazilian car manufacturers “lose” from this trade.
3) During 2005-2006 Europe imported more than $70 million worth of U.S. long-grain rice. How
is the gain from trade distributed?
A) European rice consumers gain from trade.
B) There is no gain from trade.
C) European rice producers gain from trade.
D) American rice consumers gain from trade.
4) During 2005-2006 Europe imported more than $70 million worth of U.S. long-grain rice. In
2006, the European Union threatened to restrict imports of long-grain rice because traces of
genetically modified rice were found mixed in to commercial supplies. What would NOT be an
effect in the European rice market if U.S. imports were banned?
A) There would be an increase in long-grain rice consumption.
B) There would be an increase in European rice production.
C) The price of long-grain rice would increase.
D) The quantity of long-grain rice imports would decrease.
5) In 2006, the European Union (EU) threatened to ban imports of long-grain rice because traces
of genetically modified rice were found mixed in to commercial supplies. Instead of a ban,
suppose the EU placed a tariff on the import of long-grain rice. Which of the following would be
an outcome of this tariff?
A) The EU would gain tariff revenue.
B) The social loss would decrease.
C) European rice producers would decrease production.
D) The price of long-grain rice in the EU would be higher with a tariff than if rice imports were
completely banned.
6) In 2006, the European Union (EU) threatened to ban imports of long-grain rice because traces
of genetically modified rice were found mixed in to commercial supplies. Instead of a complete
ban, suppose the EU placed a tariff on the import of long-grain rice. Which of the following
would be an outcome of this tariff?
A) The price of long-grain rice in the EU would be lower with a tariff than if rice imports were
completely banned, but higher than with free trade.
B) The price of long-grain rice in the EU would be higher with a tariff than if rice imports were
completely banned.
C) The price of long-grain rice in the EU would be higher with a tariff than if rice imports were
completely banned, but lower than with free trade.
D) The price of long-grain rice in the EU would be lower with a tariff than if rice imports were
completely banned, but lower than with free trade.
7) The European Union imports bananas from Latin America as well as imports from Europe’s
former colonies in the African, Caribbean and Pacific (ACP) group. In 2006 the tariff on bananas
from Latin America was higher than on ACP bananas. Which of the following statements is
NOT true?
A) European consumers are better off with tariff than with free trade.
B) For European consumers, the price of ACP bananas is lower than Latin American bananas.
C) The gain from free trade is decreased because of banana tariffs.
D) The price European consumers pay for bananas is higher with the tariff than the free trade
price.
8) In 2007, European Union (EU) negotiators have offered to cut tariffs for Latin American
bananas to avoid “banana wars.” What are the effects of a cut in tariffs?
A) The quantity of bananas imported into the EU will increase.
B) The price of bananas for consumers will increase.
C) The quantity of bananas produced in the EU (such as in France and Spain) will increase.
D) Tariff revenue will increase.
9) In 2006, European Union tariff on imported bananas from Latin America was €176 a ton.
Suppose 2.5 million tons of bananas were imported in 2006 but then the tariff decreased to €152
a ton in 2007 and as a result, 3 million tons were imported in 2007. What is the change in tariff
revenue between 2006 and 2007?
A) €1,000,000
B) €440,000,000
C) €445,000,000
D) – €1,000,000
10) In 2006, European Union tariff on imported bananas from Latin America was €176 a ton.
Suppose 2.5 million tons of bananas were imported in 2006 but then the tariff decreased to €152
a ton in 2007 and as a result, 3 million tons were imported in 2007. What is the tariff revenue in
2007?
A) €445,000,000
B) €528,000,000
C) €440,000,000
D) €375,000,000
11) During the first 6 months of 2008, the United States imported 1,655,740,870 pounds of
coffee. Suppose the United States is considering placing trade restrictions on the importation of
coffee. If the United States has a goal of raising tax revenue from coffee imports, what policy
should they pursue?
A) tariff on imported coffee
B) subsidy on imported coffee
C) quota on imported coffee
D) voluntary export restraints on coffee
12) During the first 6 months of 2008, the United States imported more than 1.6 billion pounds
of coffee. Suppose the United States is considering placing trade restrictions on the importation
of coffee. What would be a potential consequence of such a trade restriction?
A) The U.S. price of coffee would increase.
B) U.S. consumers would drink more coffee.
C) The quantity of coffee imported into the United States would increase.
D) If the United States instead imposed a quota on coffee imports, government tax revenue
would increase by more than with a tariff.
13) During the first 6 months of 2008, the United States imported from Africa, Asia, and Latin
America more than 1.6 billion pounds of coffee and did not export any coffee. Based on this, we
know definitively that
A) Africa, Asia, and Latin America have comparative advantage in coffee production.
B) the U.S. has absolute advantage in coffee production.
C) Africa, Asia, and Latin America have absolute advantage in coffee production.
D) the U.S. has comparative advantage in coffee production.
14) During the first 6 months of 2008, the United States imported from Africa, Asia, and Latin
America more than 1.6 billion pounds of coffee and did not export any coffee. How is the gain
from imports distributed between consumers and domestic producers?
A) U.S. producers are harmed and U.S. consumers are harmed.
B) U.S. producers are harmed and U.S. consumers are helped.
C) U.S. producers are helped and U.S. consumers are harmed.
D) U.S. producers are harmed and U.S. consumers are helped.
15) Currently Belize, a country in Central America, has a small coffee industry but does not
export any coffee. Suppose the government of Belize, in order to protect the new coffee industry
to enable it to grow into a mature industry that can compete in world markets, places a tariff on
the importation of coffee. What is the argument for placing the tariff on coffee?
A) the infant-industry argument
B) the dumping argument
C) to protect Belize coffee workers
D) to prevent rich countries from exploiting developing countries
16) Belize, a country in Central America, has a small coffee industry. Suppose Belize does not
have free trade but it has comparative advantage in coffee production. If Belize allowed
international trade, what would be the gains from trade?
A) Belize coffee producers would gain from trade.
B) Belize coffee consumers would gain from trade.
C) Belize would gain tariff revenue from trade.
D) All of these answers are gains from trade.
17) During the first 6 months of 2008, the European Union (EU) initiated an anti-dumping case
against China for imports of taper candles. What is dumping?
A) when China sells its candles to the EU at a lower price than China’s cost of production
B) when China does not pay the tariff on the candles
C) when China sells its candles to the EU at a lower price than other producers
D) when China tries to sell more candles to the EU than is allowed by the import quota
18) The U.S.-Colombia Trade Promotion Agreement was signed on November 22, 2006, in
Washington, D.C. This comprehensive trade agreement eliminated tariffs and other barriers to
goods and services. Currently, no U.S. agricultural exports enjoy tariff-free access to the
Colombian market. If the United States has a comparative advantage in agricultural, which of the
following is TRUE?
A) Columbian agricultural producers were better off before free trade.
B) Columbian agricultural consumers were better off before free trade.
C) Columbia was better off before the international trade.
D) Columbia must have comparative disadvantage in all production.
19) The U.S.-Colombia Trade Promotion Agreement was signed on November 22, 2006, in
Washington, D.C. This comprehensive trade agreement eliminated tariffs and other barriers to
goods and services. Colombia will immediately eliminate tariffs on wheat, barley, peanuts, and
many other products in which Columbia does not have a comparative advantage. This policy
means that the price of peanuts in Columbia will become
A) equal to the free trade price.
B) lower than the free trade price.
C) higher than the price when a tariff was in place.
D) higher than the free trade price.
20) Agriculture Secretary Ed Schafer today announced that Chile’s Livestock and Agricultural
Service approved the U.S. inspection, control and certification systems for poultry, allowing
these products to enter the Chilean market effective immediately. What is NOT an effect of this
change in Chilean policy on the Chilean poultry market?
A) Chile’s tariff revenue will increase.
B) The quantity of poultry consumed in Chile will increase.
C) The quantity of Chilean imports will increase.
D) The price for poultry in Chile will decrease.
1) Define comparative advantage and discuss its role in international trade.
2) “Because the United States is the largest economy in the world and can produce anything it
needs domestically, there are no gains from trade for the United States.” Is the previous
statement correct or incorrect?
3) Why do nations engage in international trade?
4) During 2010, as oil and gas prices continued to increase, a growing number of Americans
called for the United States to become less reliant on Middle-Eastern oil. Would it make sense
for the United States to try to become totally self-reliant in the production of oil? Why or why
not?
5) Give a brief description of the history of tariffs in the U.S.
6) How does a tariff affect the domestic price of the import, the domestic consumption, the
domestic production, and the quantity imported?
7) The United States imposes a tariff on foreign limes. How does the tariff affect the U.S. price
of a lime and the production of limes in the United States?
8) What are the effects of a tariff?
9) Explain the effects of a quota.
10) Currently, the United States has a quota on the amount of sugar that is allowed to be
imported into the United States. What would happen to the price of sugar in the United States if
the quota was removed? What would happen to U.S. consumption and U.S. production of sugar?
11) How does a quota affect the domestic price of the import, the domestic consumption, the
domestic production, and the quantity imported?
12) How does a tariff affect the government’s revenue? How does a quota affect the
government’s revenue?
13) Discuss reasons why we see trade restrictions. Are any of these reasons valid?
14) Two arguments used to promote trade barriers are the infant-industry argument, and the
dumping argument. Explain each of these arguments and evaluate whether each one has any
flaws.
15) What is dumping?
16) Because wage rates are so low in Africa, why don’t Microsoft, Cisco and other major
corporations close down their American operations and move to Africa?
52
17) Some people assert that protection from foreign competition prevents rich countries from
exploiting developing countries. What is this argument in more detail and what is its flaw?
18) Explain how governments restrict international trade and who benefits as well as who loses
from the restrictions.
19) What is “rent seeking?” How does it apply to restricting imports?
20) Economics demonstrates that opening up unrestricted free international trade is beneficial to
all nations. However, are there any losers from such a policy change?
21) How does the United States attempt to compensate losers from lower trade restrictions?
6 Numeric and Graphing Questions
Price
(dollars per
pound)
Quantity supplied
(thousands of
pounds per year)
Quantity
demanded
(thousands of
pounds per year)
21
120
60
18
100
100
15
80
140
12
60
180
9
40
220
1) The United States imports cheese from a variety of countries. The table above gives the
domestic supply of, and demand for, cheese in the United States. The world price of cheese is
$12 per pound, and trade is unrestricted.
a) How many pounds of cheese are consumed in the United States?
b) How many pounds of cheese are produced in the United States?
c) How many pounds of cheese are imported into the United States?
If a $3 per pound tariff is imposed,
d) How many pounds of cheese are consumed in the United States?
e) How many pounds of cheese are produced in the United States?
f) How many pounds of cheese are imported into the United States?
g) How much will the U.S. government collect in tariff revenue?
h) Who benefits from the tariff? Who loses?
2) The above figure shows the domestic supply of and domestic demand for an imported good.
The world price is $15 per unit.
a) At the world price of $15 per unit, what is the domestic consumption and domestic
production?
b) At the world price of $15 per unit, what is the quantity imported?
c) If the government imposes a tariff of $5 per unit, what is the domestic consumption and
domestic production?
d) With the $5 per unit tariff, what is the quantity imported?
e) How much revenue does the government collect with a tariff of $5 per unit?
3) Suppose that elimination of tariffs on agricultural products means that 1,000 farm workers
lose jobs that pay an average of $20,000 per year. At the same time, because of the importation
of relatively cheaper foreign vegetables, 150 million consumers save $2 per year on their grocery
bills.
a) What is the total income lost by farm workers because of the free trade?
b) What is the total dollar amount saved by all consumers combined?
c) Which is greater, the lost income or the consumer savings? Do the benefits of free trade out-
weigh the costs in this simple example?
d) Which group is most likely to become politically involved over the issue of removing the
tariffs, the farm workers or the consumers? Why?
1) As a result of an increase in tariffs, imports decrease and government revenue increases.
2) Tariffs and quotas both decrease the amount of a good consumed and raise the price paid by
domestic residents for the good.
3) Quotas are less damaging to an economy than are tariffs.
4) Dumping occurs when a foreign firm sells its exports at a lower price than it costs to produce
them.
5) Most economists would agree that “saving jobs” is a valid reason for restricting trade.
6) The infant-industry argument is the only perfectly valid argument for protection.
7) Over the past 80 years, the United States has reduced its average tariff rate so today it is less
than 5 percent.
8) Less developed countries, compared to industrialized ones, are more likely to have higher
tariff rates.