Chapter 9/Application: International Trade ❖ 61
237. If Freedonia changes its laws to allow international trade in software and the world price is higher than its do-
mestic price, then it must be the case that
a.
both consumer surplus and producer surplus increase.
b.
consumer surplus increases and producer surplus decreases.
c.
consumer surplus decreases and producer surplus increases.
d.
both consumer surplus and producer surplus decrease.
238. If Freedonia changes its laws to allow international trade in software and the world price is lower than its do-
mestic price, then it must be the case that
a.
both consumer surplus and producer surplus increase.
b.
consumer surplus increases and producer surplus decreases.
c.
consumer surplus decreases and producer surplus increases.
d.
both consumer surplus and producer surplus decrease.
239. Domestic producers of a good become worse off, and domestic consumers of a good become better off, when
a country begins allowing international trade in that good and
a.
the country becomes an importer of the good as a result.
b.
the world price exceeds the domestic price of the good that prevailed before international trade was
allowed.
c.
the country in question has a comparative advantage, relative to other countries, in producing the
good.
d.
total surplus does not change as a result.
240. When a country allows trade and becomes an exporter of a good,
a.
domestic producers become better off, and domestic consumers become worse off.
b.
domestic producers become worse off, and domestic consumers become better off.
c.
domestic producers become better off, but the effect on the well-being of domestic consumers is
ambiguous.
d.
domestic consumers become worse off, but the effect on the well-being of domestic producers is
ambiguous.
241. When a country allows trade and becomes an importer of a good,
a.
domestic producers become better off, and domestic consumers become worse off.
b.
domestic producers become worse off, and domestic consumers become better off.
c.
domestic consumers become better off, but the effect on the well–being of domestic producers is
ambiguous.
d.
domestic producers become worse off, but the effect on the well-being of domestic consumers is
ambiguous.
62 ❖ Chapter 9/Application: International Trade
242. In the market for apples in a certain country, consumer surplus increases and total surplus increases when that
country
a.
abandons a no-trade policy, adopts a free-trade policy, and becomes an importer of apples.
b.
abandons a no-trade policy, adopts a free-trade policy, and becomes an exporter of apples.
c.
abandons a free-trade policy, adopts a no-trade policy, and becomes an importer of apples.
d.
abandons a free-trade policy, adopts a no-trade policy, and becomes an exporter of apples.
243. In September 2009, President Obama imposed a 35 percent tariff on
a.
tires imported from South Korea.
b.
tires imported from China.
c.
automobiles imported from South Korea.
d.
beef imported from Canada.
244. In September 2009, President Obama
a.
imposed a tariff on tires imported from China; in doing so, the president reneged on an agreement
into which the U.S. had entered in 2001.
b.
imposed a tariff on tires imported from China; the tariff was in accordance with an agreement into
which the U.S. had entered in 2001.
c.
removed a tariff on tires imported from China; the tariff had been imposed by President George W.
Bush.
d.
removed a tariff on tires imported from China; the tariff had been imposed by President Bill
Clinton.
245. In 2001, the U.S. agreed to support China’s entry into the World Trade Organization. Under a special “safe-
guard provision” of that agreement, American companies or workers harmed by imports from China can ask
the government for protection by demonstrating that
a.
imports from China pose a hazard to the health of American citizens.
b.
China is competing unfairly or selling its products at less than their true cost.
c.
products that are allegedly “made in China” are actually made in a different country.
d.
American producers have suffered a “market disruption” or a “surge” in imports from China.
246. In September 2009, China took steps toward imposing tariffs on American exports of
a.
automotive products and chicken in response to President Obama’s decision to impose tariffs on
toys imported from China.
b.
airplanes and beef in response to President Obama’s decision to impose tariffs on toys imported
from China.
c.
automotive products and chicken in response to President Obama’s decision to impose tariffs on
tires imported from China.
d.
airplanes and beef in response to President Obama’s decision to impose tariffs on tires imported
from China.
Chapter 9/Application: International Trade ❖ 63
THE WINNERS AND LOSERS FROM TRADE (PART II)
Figure 9-20
The figure illustrates the market for rice in Vietnam.
16
Domestic demand
Domestic supply
2,000
8
10 World Price
3,0001,500
4
Quantity
Price
1. Refer to Figure 9-20. From the figure it is apparent that
a.
Vietnam will experience a shortage of rice if trade is not allowed.
b.
Vietnam will experience a surplus of rice if trade is not allowed.
c.
Vietnam has a comparative advantage in producing rice, relative to the rest of the world.
d.
foreign countries have a comparative advantage in producing rice, relative to Vietnam.
2. Refer to Figure 9-20. From the figure it is apparent that
a.
Vietnam has a comparative advantage in producing rice, relative to the rest of the world.
b.
foreign countries have a comparative advantage in producing rice, relative to Vietnam.
c.
Vietnam has an absolute advantage in producing rice, relative to the rest of the world.
d.
foreign countries have an absolute advantage in producing rice, relative to Vietnam.
3. Refer to Figure 9-20. In the absence of trade, total surplus in the Vietnamese rice market amounts to
a.
9,250.
b.
10,000.
c.
12,000.
d.
13,000.
64 ❖ Chapter 9/Application: International Trade
4. Refer to Figure 9-20. Given that Vietnam is a small country, it is apparent from the figure that
a.
Vietnam will export rice if trade is allowed.
b.
Vietnam will import rice if trade is allowed.
c.
Vietnam has nothing to gain either by importing or exporting rice.
d.
the world price will fall if Vietnam begins to allow its citizens to trade with other countries.
5. Refer to Figure 9-20. With trade, Vietnam will
a.
export 1,000 units of rice.
b.
export 1,500 units of rice.
c.
import 1,000 units of rice.
d.
import 1,500 units of rice.
6. Refer to Figure 9-20. With trade, Vietnamese rice producers will produce
a.
2,000 units of rice and their producer surplus will be 4,000.
b.
2,000 units of rice and their producer surplus will be 7,500.
c.
3,000 units of rice and their producer surplus will be 7,500.
d.
3,000 units of rice and their producer surplus will be 9,000.
7. Refer to Figure 9-20. Vietnam’s gains from trade in rice amount to
a.
750.
b.
1,000.
c.
1,250.
d.
1,500.
Chapter 9/Application: International Trade ❖ 65
Scenario 9-2
For a small country called Boxland, the equation of the domestic demand curve for cardboard is
,
where represents the domestic quantity of cardboard demanded, in tons, and represents the price of a ton
of cardboard.
For Boxland, the equation of the domestic supply curve for cardboard is
,
where represents the domestic quantity of cardboard supplied, in tons, and again represents the price of a
ton of cardboard.
8. Refer to Scenario 9-2. If Boxland prohibits international trade in cardboard, then the equilibrium price of a
ton of cardboard is
a.
$36 and the equilibrium quantity of cardboard is 74 tons.
b.
$44 and the equilibrium quantity of cardboard is 88 tons.
c.
$52 and the equilibrium quantity of cardboard is 96 tons.
d.
$60 and the equilibrium quantity of cardboard is 100 tons.
9. Refer to Scenario 9-2. Suppose the world price of cardboard is $45. Then, if Boxland goes from prohibiting
international trade in cardboard to allowing international trade in cardboard,
a.
domestic producers of cardboard become better off and domestic consumers of cardboard become
better off.
b.
domestic producers of cardboard become better off and domestic consumers of cardboard become
worse off.
c.
domestic producers of cardboard become worse off and domestic consumers of cardboard become
better off.
d.
domestic producers of cardboard become worse off and domestic consumers of cardboard become
worse off.
10. Refer to Scenario 9-2. Suppose the world price of cardboard is $45 and international trade is allowed. Then
Boxland’s consumers demand
a.
110 tons of cardboard and Boxland’s producers supply 75 tons of cardboard.
b.
110 tons of cardboard and Boxland’s producers supply 96 tons of cardboard.
c.
96 tons of cardboard and Boxland’s producers supply 75 tons of cardboard.
d.
96 tons of cardboard and Boxland’s producers supply 96 tons of cardboard.
66 ❖ Chapter 9/Application: International Trade
11. Refer to Scenario 9-2. Suppose the world price of cardboard is $45. Then, relative to the no-trade situation,
international trade in cardboard produces which of the following results for Boxland?
a.
It increases consumer surplus, decreases producer surplus, and increases total surplus.
b.
It increases consumer surplus, increases producer surplus, and increases total surplus.
c.
It increases consumer surplus, decreases producer surplus, and decreases total surplus.
d.
It decreases consumer surplus, increases producer surplus, and increases total surplus.
12. Refer to Scenario 9-2. Suppose the world price of cardboard is $45. Then Boxland’s gains from internation-
al trade in cardboard amount to
a.
$88.75.
b.
$102.50.
c.
$122.50.
d.
$135.00.
13. Refer to Scenario 9-2. Suppose the world price of cardboard is $45. Then, relative to the no-trade situation,
international trade in cardboard
a.
benefits Boxlandian consumers by $721 and harms Boxlandian producers by $525.00.
b.
benefits Boxlandian consumers by $721 and harms Boxlandian producers by $598.50.
c.
benefits Boxlandian consumers by $672 and harms Boxlandian producers by $598.50.
d.
harms Boxlandian consumers by $336 and harms Boxlandian producers by $525.00.
14. Refer to Scenario 9-2. Suppose the world price of cardboard is $60. Then, if Boxland goes from prohibiting
international trade in cardboard to allowing international trade in cardboard,
a.
domestic producers of cardboard become better off and domestic consumers of cardboard become
better off.
b.
domestic producers of cardboard become better off and domestic consumers of cardboard become
worse off.
c.
domestic producers of cardboard become worse off and domestic consumers of cardboard become
better off.
d.
domestic producers of cardboard become worse off and domestic consumers of cardboard become
worse off.
15. Refer to Scenario 9-2. Suppose the world price of cardboard is $60 and international trade is allowed. Then
Boxland’s consumers demand
a.
110 tons of cardboard and Boxland’s producers supply 120 tons of cardboard.
b.
96 tons of cardboard and Boxland’s producers supply 96 tons of cardboard.
c.
96 tons of cardboard and Boxland’s producers supply 115 tons of cardboard.
d.
80 tons of cardboard and Boxland’s producers supply 120 tons of cardboard.
Chapter 9/Application: International Trade ❖ 67
16. Refer to Scenario 9-2. Suppose the world price of cardboard is $60. Then, relative to the no-trade situation,
international trade in cardboard produces which of the following results for Boxland?
a.
It decreases consumer surplus, increases producer surplus, and decreases total surplus.
b.
It decreases consumer surplus, increases producer surplus, and increases total surplus.
c.
It decreases consumer surplus, decreases producer surplus, and decreases total surplus.
d.
It increases consumer surplus, increases producer surplus, and increases total surplus.
17. Refer to Scenario 9-2. Suppose the world price of cardboard is $60. Then Boxland’s gains from internation-
al trade in cardboard amount to
a.
$145.
b.
$160.
c.
$210.
d.
$320.
18. Refer to Scenario 9-2. Suppose the world price of cardboard is $60. Then, relative to the no-trade situation,
international trade in cardboard
a.
benefits Boxlandian consumers by $750 and harms Boxlandian producers by $660.
b.
harms Boxlandian consumers by $736 and harms Boxlandian producers by $598.
c.
harms Boxlandian consumers by $704 and benefits Boxlandian producers by $864.
d.
harms Boxlandian consumers by $804 and benefits Boxlandian producers by $984.
1. Congressman Smith cites the “jobs argument” when he argues in favor of restrictions on trade; he argues that
everything can be produced at lower cost in other countries. The likely flaw in Congressman Smith’s reason-
ing is that he ignores the fact that
a.
there is no evidence that any worker ever lost his or her job because of free trade.
b.
unemployment of labor is not a serious problem relative to other economic problems.
c.
the gains from trade are based on comparative advantage.
d.
the gains from trade are based on absolute advantage.
2. “Owners of firms in young industries should be willing to incur temporary losses if they believe
that those firms will be profitable in the long run.” This observation helps to explain why many economists
are skeptical about the
a.
national-security argument.
b.
infant-industry argument.
c.
unfair-competition argument.
d.
jobs argument.
68 ❖ Chapter 9/Application: International Trade
3. One should be especially wary of the national–security argument for restricting trade when that argument is
made by
a.
representatives of industry.
b.
representatives of the defense establishment.
c.
members of households.
d.
foreign government officials.
4. The “unfair–competition” argument might be cited by an American who believes that
a.
almost every country has a comparative advantage, relative to the United States, in producing
almost all goods.
b.
young industries should be protected against foreign competition until they become profitable.
c.
the American automobile industry should be protected against Japanese firms that are able to
produce automobiles at relatively low cost.
d.
the French government’s subsidies to French farmers justify restrictions on American imports of
French agricultural products.
5. If the United States threatens to impose a tariff on Honduran blueberries if Honduras does not remove agricul-
tural subsidies, the United States will be
a.
better off no matter how Honduras responds.
b.
better off if Honduras gives in, and will be no worse off if it doesn’t.
c.
worse off if Honduras doesn’t give in to the threat.
d.
worse off no matter how Honduras responds.
6. Which of the following arguments for trade restrictions is often advanced?
a.
Trade restrictions make all Americans better off.
b.
Trade restrictions increase economic efficiency.
c.
Trade restrictions are necessary for economic growth.
d.
Trade restrictions are sometimes necessary for national security.
7. About what percent of total world trade is accounted for by countries that belong to the World Trade Organi-
zation?
a.
54 percent
b.
72 percent
c.
89 percent
d.
97 percent
Chapter 9/Application: International Trade ❖ 69
8. At present, the United States uses a system of quotas to limit the amount of sugar imported into the country.
Which of the following statements is most likely true?
a.
The quotas are probably the result of lobbying from U.S. consumers of sugar. The quotas increase
consumer surplus for the United States, reduce producer surplus for the United States, and harm
foreign sugar producers.
b.
The quotas are probably the result of lobbying from U.S. producers of sugar. The quotas increase
producer surplus for the United States, reduce consumer surplus for the United States, and harm
foreign sugar producers.
c.
The quotas are probably the result of lobbying from foreign producers of sugar. The quotas reduce
producer surplus for the United States, increase consumer surplus for the United States, and benefit
foreign sugar producers.
d.
U.S. lawmakers did not need to be lobbied to impose the quotas because total surplus for the United
States is higher with the quotas than without them.
9. Suppose France subsidizes French wheat farmers, while Germany offers no subsidy to German wheat farmers.
As a result of the French subsidy, sales of French wheat to Germany
a.
may prompt German farmers to invoke the unfair-competition argument.
b.
increase the consumer surplus of German buyers of wheat.
c.
increase the total surplus of the German people.
d.
All of the above are correct.
10. Congresswoman Gaga represents a state in which several firms manufacture furniture. She wants to impose
tariffs on all imported furniture. Which of the following is the least likely consequence of such tariffs?
a.
Domestic furniture buyers will lose consumer surplus, have less variety, and will pay higher prices.
b.
Domestic furniture producers will gain producer surplus.
c.
Domestic furniture producers will have a higher rate of technological advance.
d.
Domestic furniture producers will have more market power.
11. Countries that restrict foreign trade are likely to
a.
forgo the additional surplus that trade allows, but will probably enjoy economies of scale.
b.
forgo the additional surplus that trade allows, but will be compensated by a higher rate of
technological change.
c.
forgo the additional surplus that trade allows, but will have a lower rate of unemployment.
d.
have more firms with domestic market power.
70 ❖ Chapter 9/Application: International Trade
12. Opponents of free trade often want the United States to prohibit the import of goods made in overseas facto-
ries that pay wages below the U.S. minimum wage. Prohibiting such goods is likely to
a.
cause these factories to pay the U.S. minimum wage.
b.
increase the rate of technological advance in poor countries so that they can afford to pay higher
wages.
c.
increase poverty in poor countries and benefit U.S. firms which compete with these imports.
d.
harm U.S. firms which compete with these imports.
13. Several arguments for restricting trade have been advanced. Those arguments do not include
a.
the jobs argument.
b.
the protection-as-a-bargaining-chip argument.
c.
the no-deadweight-loss argument.
d.
the infant-industry argument.
14. Critics of free trade sometimes argue that allowing imports from foreign countries causes a reduction in the
number of domestic jobs. An economist would argue that
a.
foreign competition may cause unemployment in import-competing industries, but the effect is
temporary because other industries, especially exporting industries, will be expanding.
b.
foreign competition may cause unemployment in import-competing industries, but the increase in
consumer surplus due to free trade is more valuable than the lost jobs.
c.
the critics are correct, so countries must protect their industries with tariffs or quotas.
d.
foreign competition may cause unemployment in import-competing industries, but the increase in
the variety of goods consumers can choose from is more valuable than the lost jobs.
15. Which of the following is not a commonly-advanced argument for trade restrictions?
a.
the jobs argument
b.
the national-security argument
c.
the infant-industry argument
d.
the efficiency argument
16. Workers displaced by trade eventually find jobs in
a.
another country.
b.
the government sector.
c.
the industries in which the country has a comparative advantage.
d.
a different company in the same industry.
Chapter 9/Application: International Trade ❖ 71
17. The infant-industry argument
a.
is based on the belief that protecting industries when they are young will pay off later.
b.
is based on the belief that protecting industries producing goods and services for infants is
necessary if a country is to have healthy children.
c.
has the support of most economists.
d.
is an argument that is advanced by advocates of free trade.
18. Which of the following is the most accurate statement?
a.
Protection is necessary in order for young industries to grow up and be successful.
b.
Protection is not necessary for an industry to grow.
c.
Protection is necessary because if young industries are not protected, they may suffer losses.
d.
Protection may not always be necessary for infant industries, but it has proven to be useful in most
cases.
19. If the Korean steel industry subsidizes the steel that it sells to the United States, the
a.
United States should protect its domestic steel industry from this unfair competition.
b.
harm done to U.S. steel producers from this unfair competition exceeds the gain to U.S. consumers
of cheap Korean steel.
c.
harm done to U.S. steel producers is less than the benefit that accrues to U.S. consumers of steel.
d.
United States should subsidize the products it sells to Korea.
20. The two basic approaches that a country can take as a means to achieve free trade are the
a.
unilateral approach and the multilateral approach.
b.
short-run approach and the long-run approach.
c.
continental approach and the global approach.
d.
industry approach and the security approach.
21. When a country takes a multilateral approach to free trade, it
a.
removes trade restrictions on its own.
b.
reduces its trade restrictions while other countries do the same.
c.
does not remove trade restrictions no matter what other countries do.
d.
is willing to trade with multiple countries at once.
22. Which of the following is not an advantage of a multilateral approach to free trade over a unilateral approach?
a.
A multilateral approach can reduce trade restrictions abroad as well as at home.
b.
A multilateral approach has the potential to result in freer trade.
c.
A multilateral approach requires the agreement of two or more nations.
d.
A multilateral approach may have political advantages.
72 ❖ Chapter 9/Application: International Trade
23. When a country takes a unilateral approach to free trade, it
a.
removes trade restrictions on its own.
b.
reduces its trade restrictions while other countries do the same.
c.
does not remove trade restrictions no matter what other countries do.
d.
is willing to trade with multiple countries at once.
24. A possible outcome of the multilateral approach to free trade is that such an approach can
a.
win political support when a unilateral approach cannot.
b.
result in more restricted trade than under a unilateral approach, when international negotiations fail.
c.
result in drastic reductions in tariffs for many countries.
d.
All of the above are correct.
25. Which of the following assertions is not correct about the multilateral approach to free trade?
a.
The multilateral approach has the potential to result in freer trade than does the unilateral approach.
b.
The multilateral approach may have a political advantage over the unilateral approach.
c.
The multilateral approach is simpler than the unilateral approach.
d.
NAFTA and GATT both represent multilateral approaches to free trade.
26. The North American Free Trade Agreement
a.
is an example of the unilateral approach to free trade.
b.
eliminated tariffs on imports to North America from the rest of the world.
c.
reduced trade restrictions among Canada, Mexico and the United States.
d.
All of the above are correct.
27. Since World War II, GATT has been responsible for reducing the average tariff among member countries
from about
a.
40 percent to about 5 percent.
b.
40 percent to about 20 percent.
c.
80 percent to about 20 percent.
d.
20 percent to about 10 percent.
28. The General Agreement on Tariffs and Trade (GATT) was initiated in response to
a.
in increase in exports of low-priced goods from developing countries to developed countries.
b.
the replacement of manufacturing jobs with service jobs in developed countries.
c.
economic dislocations caused by the North American Free Trade Agreement (NAFTA) in the
1990s.
d.
high tariffs imposed during the Great Depression of the 1930s.
Chapter 9/Application: International Trade ❖ 73
29. The rules established under GATT are enforced by the
a.
governments of the nations that are involved in GATT.
b.
North American Free Trade Association.
c.
World Trade Organization.
d.
European Union.
30. President Bush imposed temporary tariffs on imported steel in 2002. The reasons for this trade restriction is
most consistent with the
a.
national-security argument.
b.
infant-industry argument.
c.
unfair competition argument.
d.
protection–as-a-bargaining chip-argument.
31. The problem with the protection–as-a-bargaining-chip argument for trade restrictions is
a.
if it works consumer surplus will decline.
b.
if it works producer surplus falls.
c.
if it fails the country faces a choice between two bad options.
d.
if it fails total surplus will increase.
32. In a 2007 New York Times article Paul Krugman wrote that
a.
the infant-industry argument works well as an argument in favor of protection for the U.S. steel
industry.
b.
the negative effects of third world exports on U.S. wages may be increasing.
c.
there are social gains to the U.S. from free trade.
d.
high wage countries account for a growing share of U.S. imports of manufactured goods.
33. In a December 2007 New York Times column Paul Krugman argued in favor of
a.
protectionism based on the national-security argument.
b.
protectionism based on the infant-industry argument.
c.
protectionism based on the unfair-competition argument.
d.
keeping world markets relatively open.