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Chapter 32 Comparative Advantage and the Open Economy 589
4) Which of the following is consistent with international trade theory?
A) The United States needs trade restrictions to stay competitive.
B) The United States has been falling behind Europe and Japan because its economy is too
open.
C) The standard of living within a country is a function of the economic strength of the
economy and not of its relative position.
D) A country should strive for comparative advantage in manufacturing.
5) According to the Swiss Institute for Management Development, the top country in terms of
productive efficiency is
A) Germany. B)
J
apan.
C) Switzerland. D) the United States.
6) The United States is considered by the Institute for Management Development to be the most
competitive economy because
A) U.S. residents are willing to work harder than anyone else is.
B) of widespread entrepreneurship.
C) of a high saving rate.
D) of selected restrictions on imports from Japan and Europe.
7) All of the following are cited as factors in explaining U.S. competitiveness EXCEPT
A) large investments in scientific research. B) economic restructuring.
C) widespread entrepreneurship. D) reducing the federal deficit.
8) All of the following are cited as factors in explaining U.S. competitiveness EXCEPT
A) the open U.S. financial system. B) economic restructuring.
C) investments in information technology. D) the decline of entrepreneurship.
9) The concept of global competitiveness
A) is not practical because economic well
b
eing is evaluated within each country.
B) means that the economic well
b
eing of each nation must be compared with nations with
same size population.
C) means that the economic well
b
eing of each nation must be compared with nations on the
same continent.
D) means that the export import ratio of each nation must be compared.
10) People who focus on the competitiveness of the United States are
A) focusing on the right thing if the United States is to stay a leading economic power.
B) treating the United States as if it is a business firm.
C) also focusing on the importance of education.
D) correctly recognizing that trade is a zero sum game.
11) Discuss the relationship between U.S. competitiveness relative to other countries and standards
of living in the United States.
12) The United States has fallen behind Japan and most of Europe in terms of competitiveness. Do
you agree or disagree? Why?
32.5 Arguments Against Free Trade
1) A new industry develops, and our government wants to protect it from foreign competition.
Which one of the following arguments would appropriately describe this type of protection?
A) National security B) Cartelization
C) Infant industry D) Protecting American jobs
2) Which of the following is an argument against free trade?
A) Protecting infant industries B) Protecting against dumping
C) Protecting domestic jobs D) All of the above
3) Selling a good abroad below the price charged in the home market, or at a price below the cost
of production is called
A) dumping. B) import substitution.
C) a quota. D) a tariff.
4) One problem with the infant industry argument is that
A) the protection is typically never removed, creating a domestic monopoly.
B) it fails to protect domestic industries from foreign competition.
C) it must be approved by the IMF and the World Bank.
D) it must be approved by the Federal Reserve Board.
5) The infant industry argument suggests that
A) a country requires tariff protection when it has no comparative advantage in the
production of any good.
B) a country requires protection against unfair trade practices.
C) an industry may require temporary tariff protection until the industry matures.
D) the industry has no potential and must be protected to survive.
6) The infant industry argument has a normative economic basis because
A) clearly, all industries need to be protected.
B) protected industries are selected on a factual basis.
C) the government must decide which industries should be protected.
D) political corruption is the only deciding factor.
7) An assumption behind the infant industry argument for tariff protection is that
A) foreign competitors are selling output below average cost.
B) the domestic industry will be facing an upward adjustment in its average cost.
C) the domestic industry will eventually gain comparative advantage in producing the good.
D) the market needs additional competition to satisfy consumer demand.
8) For infant industry tariff protection to be valid requires that
A) the tariff must be allowed to last forever.
B) only industries that currently are producing efficiently should be protected.
C) government officials must predict which industries will eventually be able to compete
with more established foreign producers.
D) the industries protected must have substantial monopoly power in the absence of foreign
competition.
9) When one country dumps some of its products in another country, it
A) increases the aggregate level of employment in the importing country, thereby depressing
that nation s market wages.
B) also exports new technology to the importing nation and thereby indirectly boosts the
importing nation s real GDP.
C) sells its products abroad at a price lower than the price in the home market or lower than
the cost of production.
D) also exports pollution causing technologies and thereby creates environmental hazards in
the receiving country.
10) Dumping occurs when, in a foreign market, a good is sold
A)
b
elow its cost of production or below the price in that market.
B) at a discount below the list price.
C)
b
elow its nominal price.
D) at a price above the equilibrium price.
11) Dumping typically occurs as long as the foreign producer sells its output at a price
A) above its total costs.
B)
b
elow its average total costs but above its average variable costs.
C)
b
elow its average variable costs.
D) above its average fixed costs but below its total variable costs.
12) Dumping typically occurs because
A) the exporting country raises its prices to increase profits.
B) the exporting country usually is experiencing a recession and has excess production.
C) the importing country is experiencing a recession.
D) the importing country has assessed significant tariffs.
13) Dumping is considered a practice that seriously harms domestic producers because
A) the quality of the dumped good is superior to that of the importing country.
B) it allows the exporting country to use poor quality materials.
C) it establishes a price that cannot be met by domestic producers.
D) it discriminates between wealthy and poor countries.
14) Dumping is defined as
A) selling a good abroad at prices above the costs of the firms in the foreign countries.
B) exporting goods that are of inferior quality.
C) selling a good abroad at prices below its cost of production or below the price charged in
the home market.
D) exporting goods that are sources of pollution.
15) Governments sometimes subsidize domestic industries. When this occurs,
A) the governments also impose tariffs on imports to protect the industries even more.
B) the subsidized industries have an advantage in international markets relative to
non subsidized industries.
C) firms cannot be guilty of dumping because their prices are not below their costs.
D) the subsidized industries sell less in international markets because it is more profitable to
sell domestically.
16) Which of the following is NOT a true statement regarding free trade?
A) Free trade promotes specialization and efficient production.
B) Free trade generally reduces the domestic prices of imports.
C) Free trade may stimulate economic growth through export sales.
D) Every individual in a country gains short term benefits from free trade.
17) Free trade policies may lead to
A) a decrease in world output.
B) price increases in world markets.
C) some labor sectors experiencing some short term job loss.
D) none of the above.
18) U.S. job losses cited by anti trade critics
A) are mostly a short term problem in isolated industries.
B) are non existent.
C) affect only capital intensive U.S. industries.
D) are mostly due to poor training by U.S. firms.
19) Using trade restrictions to protect special interests such as the U.S. auto industry
A) results in lower prices for U.S. auto consumers.
B) raises the prices that U.S. consumers must pay for autos.
C) is a very cost efficient way of dealing with trade problems.
D) is the best long term solution for threatened U.S. jobs.
20) When economists David Gould, G.L. Woodbridge, and Roy Ruffin examined the data on the
relationship between increases in imports and the rate of unemployment, they concluded that
A) free trade leads to increased unemployment.
B) there is not a causal link between increases in imports and the rate of unemployment.
C) increases in imports always precede increases in unemployment by a period of 6 months
to one year.
D) increases in unemployment always precede increases in imports by a period of 6 months
to one year.
21) The infant industry argument says that
A) tariffs should be imposed to allow a new industry in a country to get established.
B) dumping should be allowed in order to establish a presence of an industry that has
previously not had a presence in another country.
C) countries should produce and trade goods according to their comparative advantage.
D) imports should target new products from other countries to take advantage of the
transmission of new ideas.
22) The contention that tariffs should be imposed to protect from import competition an industry
that is trying to get started is
A) a basic argument for free trade. B) the infant industry argument.
C) dumping. D) a voluntary restraint agreement.
23) The contention that tariffs should be imposed to when a foreign government provides financial
assistance its producers is
A) a national defense concern. B) the infant industry argument.
C) dumping. D) to counter foreign subsidies.
24) The argument a tariff on imported goods produced by an unlimited industry could benefit the
members of the domestic union is
A) the national defense argument. B) the protect domestic jobs argument.
C) the infant industry argument. D) the dumping argument.
25) The contention that domestic unions tend to want to restrict foreign competition with tariffs is
A) a national defense concern. B) the infant industry argument.
C) dumping. D) to protect domestic jobs.
26) The contention that specific sensitive domestic technologies must not be traded freely is
A) a national defense concern. B) the infant industry argument.
C) dumping. D) to protect domestic jobs.
27) All of the following are arguments against free trade EXCEPT
A) the infant industry argument. B) dumping.
C) comparative advantage. D) the need to protect American jobs.
28) The infant industry argument for tariff protection is that tariffs should be imposed to protect
from competition
A) industries that are essential if a country is to become an industrial nation.
B) industries needed for national defense.
C) industries that cannot compete with foreign competitors at this point in time, but will be
able to once they gain some size and experience.
D) industries that can compete with foreign competitors at this point in time and are deemed
essential by the government.
29) One argument against free trade is the
A) comparative advantage argument. B) absolute advantage argument.
C) considerate advantage argument. D) infant industry argument.
30) If the infant industry argument is used to protect an industry that has already matured, then
A) consumers lose because they will pay a price for a product that is above the world price.
B) consumers lose because they will pay a price for a product, which is less than the world
price.
C) stockholders lose because the firm cannot compete with other firms.
D) no one loses.
31) For the infant industry argument for tariffs to be appropriate, it is necessary that
A) the industry be deemed essential by the government.
B) the government can identify which industries will eventually be able to compete with
more established foreign producers.
C) only industries that currently are operating efficiently will be protected.
D) the country has access to the most modern production techniques.
32) During the 1960s, U.S. steel firms argued they needed tariff protection because Germany and
Japan were using new mills to make steel since their old mills were destroyed in World War II.
Essentially, this argument is a form of the
A) infant industry argument. B) anti dumping argument.
C) countering foreign subsidies argument. D) national defense argument.
33) A rationale used for tariff protection by some is that
A) the country wants to practice international price discrimination.
B) the country finds its cost of producing their products higher than in other countries.
C) imports are produced by firms that received subsidies from their governments.
D) imports are produced by firms that are more efficient than domestic producers are.
34) Dumping is
A) selling a good abroad in huge quantities at a very low price.
B) exporting goods that are sources of pollution.
C) exporting goods that are of inferior quality relative to the goods sold in the domestic
market.
D) selling a good abroad at a price below cost or below the price charged in the domestic
market.
35) Selling a good abroad below the price charged in the home market is
A) a basic argument for free trade. B) the infant industry argument.
C) dumping. D) a voluntary restraint agreement.
36) When a firm sells its good abroad below the cost of producing the good the firm is
A) using the concept of comparative advantage.
B) dumping.
C) taking advantage of the infant industry argument.
D) taking advantage of absolute advantage.
37) Dumping is
A) international price discrimination.
B) international monopolistic pricing.
C) collusive behavior among producers in different countries.
D) selling goods produced with government approval.
38) Country X subsidizes industry A. A worldwide recession has hit and Country X has decided to
export Good A worldwide, selling the product for less than it costs to produce it. This is
A) the infant industry argument. B) comparative advantage argument.
C) dumping. D) a regional trade bloc.
39) Governments sometimes subsidize domestic industries. When this occurs,
A) the governments will not impose tariffs.
B) the subsidized sell less in international markets because it is more profitable to sell at
home.
C) the subsidized industries have an advantage on international markets relative to
non subsidized firms. For this reason, other countries often impose tariffs on the
subsidized imports.
D) the subsidized industries have an advantage on international markets relative to
nonsubsidized firms. However, this is not an argument for imposing tariffs and tariffs
would violate international agreements.
40) Some argue that U.S. workers cannot compete with cheap labor from many developing nations.
This
A) is true and is a justification for tariffs to protect domestic jobs.
B) is true and it is has been found that tariffs in these cases can save thousands of jobs and
benefit the economy.
C) is true but the benefits of free trade are still such that tariffs should not be placed on these
industries.
D) is not true, as evidenced by the fact that the United States carries on a lot of trade with
countries that have lower wages.
41) Which of the reasons given for tariff protection make consumers better off by generating lower
prices?
A) infant industry argument
B) protecting U.S. jobs argument
C) anti dumping argument
D) None provides lower prices for domestic consumers.
42) Suppose an industry receives protection from the government in the form of tariffs. A number
of years later, it is observed that the quantity supplied by domestic firms had decreased and that
the domestic price was substantially greater than the world price. We could conclude that
A) the tariff had been imposed to counteract dumping and had been successful.
B) removal of the tariff would actually cause domestic output to increase and price to fall.
C) the tariff had been imposed to protect an infant industry and that the industry still needed
protection.
D) removal of the tariff would cause domestic output to fall even further and the price to fall
to consumers.
43) The idea that tariffs should be imposed to protect new and developing industries is referred to
as
A) the start up argument. B) the infant industry argument.
C) the incubator business theory. D) the new markets theory.
44) The argument that with initial protection an industry will eventually become competitive is
called the
A) national security argument.
B) strategic bargaining argument.
C) the trade adjustment assistance argument.
D) infant industry argument.
45) The argument that a tariff has to be imposed in order to protect any industry just getting started
until it gets large enough to be competitive internationally is the
A) start up industry argument. B) infant industry argument.
C)
b
aby industry argument. D) fledgling industry argument.
46) The argument that trade in high tech equipment can facilitate the implementation of advanced
military technology in countries that may become strategic opponents later on is the
A) national security argument. B) infant industry argument.
C) protecting domestic jobs argument. D) environmental and safety argument.
47) The argument that many critics of free trade have suggested that genetic engineering of plants
and animals could lead to accidental production of new diseases is the
A) national security argument. B) infant industry argument.
C) protecting domestic jobs argument. D) environmental and safety argument.
48) A problem with the infant industry argument is that
A) it is too restrictive in targeting new industries to protect.
B) it does not protect the most important new industries in a country.
C) it is almost impossible to eliminate the tariff once the industry matures.
D) it allows infant industries to mature so that tariffs can be eliminated.
49) According to the infant industry argument, protection should be withdrawn from an infant
industry when the companies in the industry
A) are listed on the domestic stock exchange.
B)
b
ecome profitable.
C) double their sales revenues.
D) reach a sufficient size to compete with foreign firms.
50) Protection of a new industry until it becomes strong enough to compete is called
A) the national defense argument.
B) the government indirect tax argument.
C) the leveling the playing field argument.
D) the infant industry argument.
51) The infant industry argument is often criticized because
A) it is difficult to determine which industry merits protection.
B) it reduces government revenues in the short term.
C) it reduces the employment rate.
D) it reduces labor productivity in the short term.
52) Protection of new products from global competition is known as
A) the infant industry argument. B) dumping.
C) a quota. D) protection of domestic jobs.
53) The selling of a good or service abroad at a price below what is charged in the home market or
below the cost of production is referred to as
A) recycling. B) a quota. C) dumping. D) a tariff.
54) The selling of a good or service abroad at a price below production costs is
A) marginal cost selling. B) price discrimination.
C) price differentiation. D) dumping.
55) If a good sells for $10 domestically and the same good sells for $7 abroad, then this firm is
engaging in
A) marginal cost selling. B) price discrimination.
C) price differentiation. D) dumping.
56) If costs a firm $10 to produce a good and the same good sells for $7 abroad, then this firm is
engaging in
A) profit maximization. B) price discrimination.
C) price differentiation. D) dumping.
57) In international trade the term dumping means
A) price discrimination by domestic producers.
B) selling goods in a foreign market for a price less than on the home market.
C) selling goods in a home market for a price less than on the foreign market.
D) selling goods on the black market to avoid paying taxes.
58) Arguments in support of protectionism (and against free trade) include all of the following
EXCEPT
A) new and troubled industries need to be protected until they acquire sufficient strength to
compete equally against their foreign counterparts.
B)
j
obs at home should be protected from cheap foreign labor.
C) protectionism increase total domestic consumption possibilities.
D) national security interests require that nations retain the ability to produce vital materials
at home and avoid dependence upon potential enemies.
59) Which of the following is NOT an argument against free trade?
A) infant industry argument B) protecting domestic job argument
C) countering foreign subsidies argument D) comparative advantage argument
60) All of the following are arguments in favor of restricting trade EXCEPT
A) comparative advantage. B) protecting domestic jobs.
C) protecting emerging industries. D) dumping.
61) When a good is put onto the global market at a price below the cost to produce it, this is known
as
A) the infant industry argument. B) dumping.
C) a quota. D) protection of domestic jobs.
62) Explain the infant industry argument.
63) What is the relationship between imports and employment?
64) What must a government know for the infant industry argument to be a valid reason for
imposing tariffs?
32.6 Ways to Restrict Foreign Trade
1) Import restrictions due to the imposition of tariffs by the U.S. government
A) will ultimately cause inefficient resource allocation in the United States.
B) will lead to lower incomes in the economy of U.S. trade partners.
C) will lead to a decline in the quantity of the product consumed in the United States.
D) all of the above are likely to occur
2) One way tariffs differ from quotas is that
A) tariffs produce revenues for the importing country s government.
B) quotas produce revenues for the exporting country s government.
C) tariffs produce no revenues but set limits on the imported items.
D) tariffs are applied only on raw materials.
3) In general, who will benefit as the result of a tariff?
I. Domestic producers
II. Domestic consumers
III. The domestic government
A) I only
B) II only
C)
b
oth I and III
D)
b
oth II and III
E) All of the above are correct
4) Quotas and tariffs both serve the purpose of
A) increasing foreign trade.
B) restricting foreign trade.
C) causing domestic producers to lose revenues.
D) lowering prices on imported goods.
5) A quota is
A) a tariff imposed on goods that are dumped in the country.
B) a law that prevents ecologically damaging goods from being imported into a country.
C) a market imposed balancing factor that keeps prices of imports and exports in
equilibrium.
D) a government imposed restriction on the quantity of a specific good that can be imported.
6) An import quota specifies
A) the amount of funds that can be paid for any imported good.
B) the amount of taxes that must be paid on any imported good.
C) the maximum amount of an item that may be imported during a specified period.
D) the minimum amount of an item that may be imported during a specified period.
7) If a country voluntarily agrees to have its companies import more goods from another country,
the country has
A) a voluntary import expansion (VIE) agreement.
B) a voluntary restraint agreement (VRA).
C) a mandated tariff.
D) a mandated agreement.
8) Tariffs to limit imports to protect U.S. jobs will also
A) stimulate exports.
B) limit exports.
C) decrease import prices.
D) reduce domestic production of import threatened products.
9) The Uruguay round of GATT (1993) talks
A) reduced trade barriers and tariffs.
B) increased trade barriers and tariffs.
C) lowered some trade barriers but increased tariffs.
D) left tariffs and trade barriers unchanged.
