55
Figure 7-5
58) Refer to Figure 7-5. Fenwick currently both produces and imports pistachios. The government of
Fenwick decides to restrict international trade in pistachios by imposing a quota that allows imports of
only 5 million pounds each year. Figure 7-5 shows the estimated demand and supply curves for
pistachios in Fenwick and the results of imposing the quota. Answer questions a-j using the figure.
a. If there is no quota what is the domestic price of pistachios and what is the quantity of pistachios
demanded by consumers?
b. If there is no quota how many pounds of pistachios would domestic producers supply and what
quantity would be imported?
c. If there is no quota what is the dollar value of consumer surplus?
d. If there is no quota what is the dollar value of producer surplus received by producers in Fenwick?
e. If there is no quota what is the revenue received by foreign producers who supply pistachios to
Fenwick?
f. With a quota in place what is the price that consumers of Fenwick must now pay and what is the
quantity demanded?
g. With a quota in place what is the dollar value of consumer surplus? Are consumers better off?
h. With a quota in place what is the dollar value of producer surplus received by producers in
Fenwick? Are domestic producers better off?
i. Calculate the revenue to foreign producers who are granted permission to sell in Fenwick after the
imposition of the quota.
j. Calculate the deadweight loss as a result of the quota.
56
7.5 The Arguments over Trade Policies and Globalization
1) In the United States during the Great Depression, tariffs were ________ than they were following
World War II, and ________ than they are today.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
2) The Smoot-Hawley Tariff
A) lowered U.S. tariffs by 50 percent following World War II.
B) was passed by the U.S. Congress following the Civil War as a means of increasing government
revenue.
C) was passed by the U.S. Congress upon a recommendation made by the General Agreement on Tariffs
and Trade (GATT) in 1948.
D) raised average tariff rates by over 50 percent in the United States in 1930.
3) In 1930, the U.S. government attempted to help domestic firms that were harmed by the Great
Depression by passing the Smoot-Hawley Tariff. In response to this tariff, other countries ________ and
international trade ________.
A) lowered their tariffs; thrived
B) raised their tariffs; collapsed
C) eliminated tariffs; began to grow outside of the United States
D) doubled their tariffs; became unrestricted
4) In 1995, the General Agreement on Tariffs and Trade (GATT), which was established in 1948, was
replaced by the World Trade Organization (WTO). Why did members of the GATT push for the
establishment of the WTO?
A) The GATT agreement only covered trade in goods. The WTO was created to cover trade in goods,
services, and intellectual property.
B) The charter of the GATT had run out and a new organization was needed to promote international
trade.
C) The creation of the European Union (EU) made the GATT obsolete. The WTO was formed to regulate
trade between the EU and other nations.
D) By 1995 tariffs had been eliminated. The WTO was created to reduce non-tariff trade barriers.
5) The World Trade Organization (WTO) promotes foreign trade and investment, or globalization. In
recent years opposition to globalization has led to violent protests at meetings of the WTO. All of the
following are reasons for these anti-globalization protests except
A) protestors believe the WTO favors the interests of high-income countries at the expense of lower-
income countries.
B) protesters believe that tariffs are needed to protect domestic firms from foreign competition.
C) protesters believe that free trade destroys the distinctive cultures of many countries.
D) protesters object to the loss of intellectual property (such as software programs and movies) that
results from foreign trade and investment.
6) Eliminating trade barriers does all of the following except
A) increases economic efficiency.
B) lowers incomes.
C) lowers domestic prices.
D) All of the above occur when trade barriers are eliminated.
7) Protectionism is the use of ________ to protect domestic firms from foreign competition.
A) military force
B) trade barriers
C) cheap labor
D) dumping
8) Your roommate Hansen argues that American producers cannot compete with foreign producers
because wages are lower in foreign countries than in the United States. Hansen
A) is incorrect. Free trade raises living standards by increasing economic efficiency.
B) is right in asserting the need to protect high wages if the United States wishes to maintain its high
standard of living.
C) is correct in arguing that the high wages of U.S. workers make it impossible to compete with workers
in low-wage countries.
D) is advancing the anti-dumping argument for protectionism.
9) Many economists ________ protectionism because it ________ consumers and ________ jobs in
domestic industries that use protected products.
A) support; benefits; creates
B) criticize; causes losses to; eliminates
C) support; lowers prices for; raises wages for
D) criticize; unfairly rewards; relocates
10) All but one of the following statements is used to justify protectionism. Which statement is not used
to justify protectionism?
A) Free trade leads to higher prices for imported goods.
B) Free trade reduces employment by driving domestic firms out of business.
C) A country should not rely on other countries for goods that are critical to its national defense.
D) Trade restrictions are necessary to protect new firms until they can gain experience and become
more productive.
11) Domestic producers require time to gain experience and lower their unit costs; this will allow these
producers to compete successfully in international markets. This statement describes the ________
argument for protectionism.
A) diseconomies of scale
B) protecting national security
C) anti-dumping
D) infant industry
12) Which of the following describes the national security argument for protectionism?
A) Nearly all industries can make some claim to strategic importance so such trade restrictions can get
out of hand.
B) Increases in economic surplus outweigh the decreases in consumer surplus that result from
protectionism.
C) Some goods should be insulated from foreign competition to ensure an adequate supply of these
goods in the event of an international conflict.
D) Private companies (for example, Coca-Cola) should not be forced to reveal their trade secrets to
foreign companies.
13) Economists believe the most persuasive argument for protectionism is to
A) save jobs.
B) protect high wages.
C) protect national security.
D) protect infant industries.
14) Dumping refers to
A) selling inferior products to unsuspecting consumers.
B) selling a product for a price below its cost of production.
C) exporting products that do not meet domestic safety standards.
D) illegally avoiding tariffs by selling products on the black market.
15) It is difficult to determine if foreign companies are selling their products for prices below their costs
of production because
A) the true costs of production are difficult to calculate.
B) the firms have no legal obligation to reveal this information.
C) costs are calculated in the firms’ local currencies.
D) domestic taxes increase the firms’ costs but it is difficult to determine the incidence of these taxes.
16) In general, the costs tariffs and quotas impose on consumers are
A) large in total but relatively small per person.
B) small in total but relatively large per person.
C) large in total and large per person.
D) small in total and small per person.
17) Which of the following is a reason for the success that firms have in getting the government to erect
barriers to foreign competition?
A) The jobs lost to foreign competition are easy to identify but jobs created by foreign trade are often
hard to identify.
B) People who benefit from foreign trade tend not to vote in elections; people who are harmed by
foreign trade are much more likely to vote.
C) Firms that are harmed by trade barriers have less money to lobby government officials to eliminate
the barriers than do firms that benefit from trade barriers.
D) The costs from free trade are greater than the benefits.
Article Summary
According to JP Morgan Chase, increased shipments of Chinese steel over the past two years has
generated a wave of protectionism from countries around the globe. Decreasing domestic demand
and slower economic growth have resulted in a large increase in steel exports from China, driving
down global prices. The almost doubling of Chinese steel exports since 2013 has steel mills in areas
ranging from South Africa to Europe to India to the United States pushing their governments for
protectionist measures against the Chinese-produced steel.
Source: Jasmine Ng, ” JPMorgan Says `Waves of Protectionism’ Will Cap China Steel,”
Bloomberg.com, October 4, 2015.
18) Refer to the Article Summary. Assume countries initially enacted protectionist measures against
Chinese steel imports. If these protectionist measures were eventually eliminated, then all else equal,
the price of steel in those countries would________ and the quantity of steel demanded in those
countries would ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
19) The General Agreement on Tariffs and Trade (GATT) was formed to replace the World Trade
Organization (WTO) because the WTO was empowered only to reduce barriers to trade in goods. The
GATT is an agreement to reduce barriers to trade in goods, services, and intellectual property.
20) In 1995, the General Agreement on Tariffs and Trade (GATT) was replaced by the World Trade
Organization (WTO).
21) Globalization is the process of countries imposing trade restrictions on other countries.
22) Dumping refers to countries exporting unwanted and inferior products to other countries.
23) a. Define the term “globalization.”
b. Describe the benefits of globalization.
c. Who is likely to oppose globalization and why?
24) Protectionism is usually justified on the basis of one of four arguments. What are those four
arguments?
25) The textbook refers to the following quotation from a Federal Reserve publication: “Trade is a win-
win situation for all countries that participate.” But many firms and workers oppose free-trade policies
and protests against globalization have become a regular occurrence at meetings of the World Trade
Organization. If trade is a “win-win” situation, why is there strong opposition to free trade and
globalization?
26) What was the GATT, why was it established, and why and with what was it replaced?