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 reasoning 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.
b.
c.
d.
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 agricultural
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 Organization?
a.
54 percent
b.
72 percent
c.
89 percent
d.
97 percent
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.
12. Opponents of free trade often want the United States to prohibit the import of goods made in overseas factories 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.
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.
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.
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.
34. In a December 2007 New York Times column, Paul Krugman noted that
a.
it is difficult to find instances of trade between high-wage countries in the modern era.
b.
it is difficult to find instances of trade between high-wage countries and low-wage countries in the modern era.
c.
the United States now imports more oil and other raw materials from other advanced countries than from the
third world.
d.
the United States now imports more manufactured goods from the third world than from other advanced
countries.
35. In recent years, which countries have taken a unilateral approach to the removal of trade restrictions?
a.
China and North Korea
b.
Chile and South Korea
c.
Russia and Japan
d.
the United States and Mexico
36. Which of the following is the most accurate statement?
a.
The one argument for restricting trade that almost all economists accept as valid is the infant-industry
argument.
b.
Almost all economists insist that it is never appropriate to protect “key” industries, even when there are
legitimate concerns about national security.
c.
The idea that one nation might want to threaten another nation with a trade restriction is associated with the
protection-as-a-bargaining-chip argument for restricting trade.
d.
The protection-as-a-bargaining-chip argument for restricting trade is also known as the infant-industry
argument.
37. Suppose Ukraine subsidizes Ukrainian wheat farmers, while Russia offers no subsidy to Russian wheat farmers. As a
result of the Ukrainian subsidy, sales of Ukrainian wheat to Russia
a.
may prompt Russian farmers to invoke the infant-industry argument.
b.
increase the consumer surplus of Russian buyers of wheat.
c.
decrease the total surplus of the Russian people.
d.
All of the above are correct.
38. A common argument in favor of restricting trade
a.
concerns the strategy of bargaining.
b.
is that efforts should be made to get new industries started.
c.
emphasizes the belief that all countries should play by the same rules.
d.
All of the above are correct.
39. A common argument in favor of restricting international trade in good x is based on the premise that
a.
international trade reduces total surplus in countries that export good x.
b.
international trade reduces total surplus in countries that import good x.
c.
international trade is desirable only when countries with different domestic supplies of natural resources play
by different rules when trading with one another.
d.
trade restrictions can be useful when one country bargains with its trading partners.
40. If the United States threatens to impose a tariff on Colombian coffee if Colombia does not remove agricultural
subsidies, the United States will be
a.
better off regardless of how Colombia responds.
b.
better off if Colombia removes the subsidies, and will be no worse off if it doesn’t.
c.
worse off if Colombia doesn’t remove the subsidies in response to the threat.
d.
worse off regardless of how Colombia responds.