International Economics, 10e (Krugman/Obstfeld/Melitz)
Chapter 9 The Instruments of Trade Policy
9.1 Basic Tariff Analysis
1) Specific tariffs are
A) import taxes stated in specific legal statutes.
B) import taxes calculated as a fixed charge for each unit of imported goods.
C) import taxes calculated as a fraction of the value of the imported goods.
D) the same as import quotas.
E) import taxes calculated based solely on the origin country.
2) Ad valorem tariffs are
A) import taxes stated in ads in industry publications.
B) import taxes calculated as a fixed charge for each unit of imported goods.
C) import taxes calculated as a fraction of the value of the imported goods.
D) the same as import quotas.
E) import taxes calculated solely on the origin country.
3) The excess supply curve of a product we (H) import from foreign countries (F) increases as
A) excess demand of country H increases.
B) excess demand of country F increases.
C) excess supply of country H increases.
D) excess supply of country F increases.
E) excess supply of country F decreases.
4) Suppose the United States eliminates its tariff on ball bearings used in producing exports. Ball
bearing prices in the United States would be expected to
A) increase, and the foreign demand for U.S. exports would increase.
B) decrease, and the foreign demand for U.S. exports would increase.
C) increase, and the foreign demand for U.S. exports would decrease.
D) decrease, and the foreign demand for U.S. exports would decrease.
E) decrease, and the foreign demand would be unchanged.
5) A specific tariff provides home producers more protection when
A) the home market buys cheaper products rather than expensive products.
B) it is applied to a commodity with many grade variations.
C) the home demand for a good is elastic with respect to price changes.
D) it is levied on manufactured goods rather than primary products.
E) the home supply outnumbers the foreign imports.
6) A lower tariff on imported steel would most likely benefit
A) foreign producers at the expense of domestic consumers.
B) domestic manufacturers of steel.
C) domestic consumers of steel.
D) workers in the steel industry.
E) foreign consumers of steel.
7) A problem encountered when implementing an “infant industry” tariff is that
A) domestic consumers will purchase the foreign good regardless of the tariff.
B) the industry may never “mature.”
C) most industries require tariff protection when they are mature.
D) the tariff may hurt the industry’s domestic sales.
E) the tariffs fail to protect the domestic producers.
8) Which of the following is a fixed percentage of the value of an imported product?
A) specific tariff
B) ad valorem tariff
C) nominal tariff
D) effective protection tariff
E) infant industry tariff
9) A tax of 20 cents per unit of imported garlic is an example of a(n)
A) specific tariff.
B) ad valorem tariff.
C) nominal tariff.
D) effective protection tariff.
E) a disadvantageous tariff.
10) A tax of 20 percent per unit of imported garlic is an example of a(n)
A) specific tariff.
B) ad valorem tariff.
C) nominal tariff.
D) effective protection tariff.
E) a disadvantageous tariff
11) Which type of tariff is forbidden in the United States on Constitutional grounds?
A) import tariff
B) export tariff
C) specific tariff
D) prohibitive tariff
E) import quota
12) Tariffs are NOT defended on the grounds that they
A) improve the terms of trade of foreign nations.
B) protect jobs and reduce unemployment.
C) promote growth and development of young industries.
D) prevent over-dependence of a country on only a few industries.
E) protect domestic producers from foreign low prices.
13) The most vocal political pressure for tariffs is generally made by
A) consumers lobbying for export tariffs.
B) consumers lobbying for import tariffs.
C) consumers lobbying for lower import tariffs.
D) producers lobbying for export tariffs.
E) producers lobbying for import tariffs.
14) Tariff rates on products imported into the U.S.
A) have dropped substantially over the past 50 years.
B) were prohibited by the Constitution.
C) reached an all time high in 2002.
D) have risen steadily since 1920.
E) were the government’s main source of income in 2006.
15) What is a TRUE statement concerning the imposition in the U.S. of a tariff on cheese?
A) It lowers the price of cheese domestically.
B) It raises the price of cheese internationally.
C) It raises revenue for the government.
D) It will always result in retaliation from abroad.
E) it leads to higher domestic demand for cheese.
16) The tariff levied in a “large country” (Home), lowers the world price of the imported good.
This causes
A) foreign consumers to demand less of the good on which was levied a tariff.
B) domestic demand for imports to decrease.
C) domestic demand for imports to increase.
D) foreign suppliers to produce less of the good on which was levied a tariff.
E) no change in the foreign price of the good it imports.
17) It is argued that a tariff may help promote employment in a single industry, but is not likely
to help employment in general. Discuss.
18) Refer to above figure. In the absence of trade, how many Widgets does this country produce?
19) Refer to above figure. In the absence of trade, how many Widgets does this country
consume?
20) Refer to above figure. With free trade and no tariffs, what is the quantity of Widgets
imported?
21) Refer to above figure. With a specific tariff of $3 per unit, what is the quantity of Widgets
imported?
22) Refer to above figure. With free trade and no tariffs, what is the quantity of Widgets
produced domestically?
23) Refer to above figure. The lowest specific tariff which would be considered prohibitive is
________.
24) Refer to above figure. With a specific tariff of $3 per unit, what is the quantity of Widgets
produced domestically?
25) Refer to above figure. With free trade and no tariffs, what is the quantity of Widgets
consumed domestically?
26) Refer to above figure. With a specific tariff of $3 per unit, what is the quantity of Widgets
consumed domestically?
27) The effective rate of protection measures
A) the “true” ad valorem value of a tariff.
B) the quota equivalent value of a tariff.
C) the efficiency with which the tariff is collected at the customhouse.
D) the protection given by the tariff to domestic value added.
E) the difference between domestic and foreign prices of the import.
28) If the tariff on computers is not changed, but domestic computer producers shift from
domestically produced semiconductors to imported components, then the effective rate of
protection in the computer industry will
A) increase.
B) decrease
C) remain the same.
D) depend on whether computers are PCs or “Supercomputers.”
E) no longer apply.
29) If the tariff on computers is not changed, but the government then adds hitherto nonexistent
tariffs on imported semi-conductor components, then the effective rate of protection in the
computer industry will
A) increase.
B) decrease.
C) remain the same.
D) depend on whether computers are PCs or “Supercomputers.”
E) no longer apply.
30) When a government allows raw materials and other intermediate products to enter a country
duty free, this generally results in a(an)
A) effective tariff rate less than the nominal tariff rate.
B) nominal tariff rate less than the effective tariff rate.
C) rise in both nominal and effective tariff rates.
D) fall in both nominal and effective tariff rates.
E) rise in only the effective tariff rate.
31) Of the many arguments in favor of tariffs, the one that has enjoyed significant economic
justification has been the
A) cheap foreign labor argument.
B) infant industry argument.
C) even playing field argument.
D) balance of payments argument.
E) domestic living standard argument.
32) As globalization tends to increase the proportion of imported inputs relative to domestically
supplied components
A) the nominal tariff automatically increases.
B) the rate of (effective) protection automatically decreases.
C) the nominal tariff automatically decreases.
D) the rate of (effective) protection automatically increases.
E) the amount of tariffs levied increases.
33) In an inflationary environment, then over time
A) a specific tariff will tend to raise more revenue than an ad valorem tariff.
B) an ad valorem tariff will tend to raise more revenue than a specific tariff.
C) an optimum tariff will tend to raise more revenue than an escalating tariff.
D) a tariff quota will tend to raise more revenue than a specific tariff.
E) an import quota would raise more revenue than a specific tariff.
34) Some argue that tariffs always hurt the imposing country’s economic welfare, and are
typically designed to shift resources from one sector to another, protected or preferred one,
within an economy. Find and discuss a counter example to this argument.
35) The effective rate of protection is a weighted average of nominal tariffs and tariffs on
imported inputs. It has been noted that in most industrialized countries, the nominal tariffs on
raw materials or intermediate components or products are lower than on final-stage products
meant for final markets. Why would countries design their tariff structures in this manner? Who
tends to be helped, and who is harmed by this cascading tariff structure?
9.2 Costs and Benefits of a Tariff
1) If a good is imported into (large) country H from country F, then the imposition of a tariff in
country H
A) raises the price of the good in both countries (the “Law of One Price”).
B) raises the price in country H and cannot affect its price in country F.
C) lowers the price of the good in both countries.
D) lowers the price of the good in H and could raise it in F.
E) raises the price of the good in H and lowers it in F.
2) If a good is imported into (small) country H from country F, then the imposition of a tariff In
country H
A) raises the price of the good in both countries (the “Law of One Price”).
B) raises the price in country H and does not affect its price in country F.
C) lowers the price of the good in both countries.
D) lowers the price of the good in H and could raise it in F.
E) raises the price of the good in H and lowers it in F.
3) If a small country imposes a tariff, then
A) the producers must suffer a loss.
B) the consumers must suffer a loss.
C) the government revenue must suffer a loss.
D) the demand curve must shift to the left.
E) the world price on that item will shift.
4) The imposition of tariffs on imports results in deadweight (triangle) losses. These are
A) production and consumption distortion effects.
B) redistribution effects.
C) revenue effects
D) efficiency effects.
E) distortion of incentives.
5) The main redistribution effect of a tariff is the transfer of income from
A) domestic producers to domestic buyers.
B) domestic buyers to domestic producers.
C) domestic producers to domestic government.
D) domestic government to domestic consumers.
E) foreign producers to domestic consumers.
6) The principle benefit of tariff protection goes to
A) domestic consumers of the good produced.
B) foreign consumers of the good produced.
C) domestic producers of the good produced.
D) foreign producers of the good produced.
E) the domestic government.
7) Should the home country be “large” relative to its trade partners, its imposition of a tariff on
imports would lead to an increase in domestic welfare if the terms of the trade rectangle exceed
the sum of the
A) revenue effect plus redistribution effect.
B) protective effect plus revenue effect.
C) consumption effect plus redistribution effect.
D) production distortion effect plus consumption distortion effect.
E) terms of trade gain.
8) The deadweight loss of a tariff
A) is a social loss because it promotes inefficient use of national resources.
B) is a social loss because it reduces the revenue of the government.
C) is not a social loss because it merely redistributes revenue from one sector to another.
D) is not a social loss because it is paid for by rich corporations.
E) is not a social loss because it aids domestic consumers.
9) A policy of tariff reduction in the computer industry is
A) in the interest of the United States as a whole and in the interest of computer producing
regions of the country.
B) in the interest of United States as a whole but not in the interest of computer producing
regions of the country.
C) not in the interest of the United States as a whole but in the interests of computer producing
regions of the country.
D) not in the interest of the United States as a whole and not in the interests of computer
consumers.
E) not in the interest of the United States as a whole but in the interests of foreign computer
producers.
10) The fact that industrialized countries levy very low or no tariff on raw materials and semi
processed goods
A) helps developing countries export manufactured products.
B) has no effect on developing country exports.
C) hurts developing country efforts to export manufactured goods.
D) hurts developing country efforts to export raw materials.
E) does not affect industrialized countries’ exports.
11) The imposition of tariffs will help a nation attain which of the following goals?
A) decreased domestic consumer prices
B) increased domestic employment
C) increased amount and variety of goods available for consumers
D) increased competition between domestic and foreign producers
E) gains for domestic producers
12) The change in the economic welfare of a country associated with an increase in a tariff
equals
A) efficiency loss – terms of trade gain.
B) efficiency gain – terms of trade loss.
C) efficiency loss + tax revenue gain.
D) efficiency loss + tax revenue gain + terms of trade gain.
E) efficiency loss – tax revenue gain.
13) The two deadweight triangles are the Consumption distortion and Production distortion
losses. It is easy to understand why the Consumption distortion constitutes a loss for society.
After all it raises the prices of goods to consumers, and even causes some consumers to drop out
of the market altogether. It seems paradoxical that the Production distortion is considered an
equivalent burden on society. After all, in this case, profits increase, and additional production
(with its associated employment) comes on line. This would seem to be an offset rather than an
addition to the burden or loss borne by society. Explain why the Production distortion is indeed
a loss to society, and what is wrong with the logic that leads to the apparent paradox.
14) In the country levying the tariff, the tariff will
A) increase both consumer and producer surplus.
B) decrease both the consumer and producer surplus.
C) decrease consumer surplus and increase producer surplus.
D) increase consumer surplus and decrease producer surplus.
E) decrease consumer surplus but leave producers surplus unchanged.
15) Refer to above figure. In the absence of trade, what is the country’s consumer surplus?
16) Refer to above figure. In the absence of trade, what is the country’s producer surplus?
17) Refer to above figure. The loss of Consumer Surplus due to the tariff equals ________.
18) Refer to above figure. In the absence of a tariff and in the presence of trade, what is the
country’s consumer surplus?
19) Refer to above figure. Given a tariff of $3 per unit, what is the country’s consumer surplus?
20) Refer to above figure. What is the amount of efficiency loss resulting from imposition of the
tariff?
21) Refer to above figure. What is the amount of government revenue resulting from imposition
of the tariff?
9.3 Other Instruments of Trade Policy
1) An important difference between tariffs and quotas is that tariffs
A) raise the price of the good.
B) generate tax revenue for the government.
C) stimulate international trade.
D) help domestic producers.
E) are paid by foreign producers.
2) Throughout the post-World War II era, the importance of tariffs as a trade barrier has
A) increased.
B) decreased.
C) remained the same.
D) fluctuated wildly.
E) demonstrated a classic random walk with a mean-reversion tendency.
3) In the exporting country, an export subsidy will
A) help consumers and raise the overall economic welfare of the exporting country.
B) hurt consumers but raise the overall economic welfare of the exporting country.
C) hurt consumers and lower the overall economic welfare of the exporting country.
D) help consumers but lower economic welfare of the exporting country.
E) help consumers and have no effect on the economic welfare of the exporting country.
4) Economic theory in general, and trade theory in particular are replete with equivalencies. For
example, it is argued that for any specific tariff one can find an equivalent ad valorem tariff; and
that for any quota one can calculate a tariff equivalent. Discuss conditions or situations under
which a specific and an ad valorem tariff are not equivalent. Discuss conditions or situations
when a tariff and a quota are not equivalent.
5) An export subsidy is
A) a payment to a firm or individual that ships a good abroad.
B) a fee that is charged to a country that ships goods to the U.S.
C) a payment made to a foreign government in return for preferential trade treatment.
D) illegal in the U.S. but is fairly common in the rest of the world.
E) a limit on the quantity of a good or service that can be sold abroad.
6) An export subsidy differs from a tariff in each of the following ways EXCEPT
A) a tariff generates revenue.
B) a tariff is applied to imports.
C) a tariff results in an efficiency loss.
D) a tariff is a tax.
E) a tariff discourages imports.
7) The European Union’s Common Agricultural Policy (CAP) is, in effect
A) a tariff imposed on agricultural exports.
B) a tariff imposed on agricultural imports.
C) a subsidy that reduces the cost of agricultural exports.
D) a subsidy that increases the cost of agricultural exports.
E) a quota that limits production of agricultural goods by EU nations.
8) An import quota is similar to a ________ in its effect on imports, except that an import quota
________.
A) tariff; does not generate revenue
B) tariff; generates revenue
C) subsidy; does not generate revenue
D) subsidy; generates revenue
E) tariff; does not result in an efficiency loss.
9) The U.S. sugar quota
A) generates government revenue.
B) results in net welfare benefits to the U.S. economy.
C) results in benefits to sugar producers that exceed the cost to consumers.
D) results in costs to consumers that exceed the benefits to sugar producers.
E) does not result in an efficiency loss.
10) Which of the following are examples of goods that have been subject to voluntary export
restraints?
A) Japanese cars and Chinese solar panels
B) Belgian chocolates and French wines
C) French wines and cheeses
D) Japanese sushi and German cars
E) Taiwanese electronics and Canadian barley
9.4 The Effects of Trade Policy: A Summary
1) An export tariff will ________ producer surplus, ________ consumer surplus, ________
government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
2) An export subsidy will ________ producer surplus, ________ consumer surplus, ________
government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
3) An import quota will ________ producer surplus, ________ consumer surplus, ________
government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
4) A voluntary export restraint will ________ producer surplus, ________ consumer surplus,
________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
9.5 Appendix to Chapter 9: Tariffs and Import Quotas in the Presence of Monopoly
1) If an import-competing firm is imperfectly competitive, then under free trade an export tariff
will ________ domestic market price, ________ producer surplus, ________ consumer surplus,
________ government revenue, and ________ overall domestic national welfare.
A) increase; have no effect on; decrease; increase; decrease
B) decrease; decrease; increase; decrease; have no effect on
C) increase; have no effect on; increase; decrease; increase
D) decrease; increase; decrease; increase; decrease
E) have no effect on; have no effect on; decrease; increase; decrease
2) If an import-competing firm is imperfectly competitive, than under free trade an import quota
will ________ domestic market price, ________ producer surplus, ________ consumer surplus,
________ government revenue, and ________ overall domestic national welfare.
A) increase; increase; decrease; have no effect on; decrease
B) decrease; decrease; increase; decrease; have no effect on
C) increase; have no effect on; decrease; increase; decrease
D) decrease; increase; decrease; increase; decrease
E) have no effect on; have no effect on; decrease; increase; decrease
3) Suppose an import-competing firm is imperfectly competitive. Replacement of an export tariff
with an import quota that yields the same level of imports will ________ market price, ________
producer surplus, ________ consumer surplus, ________ government revenue, and ________
overall domestic national welfare.
A) increase; increase; decrease; decrease; decrease
B) have no effect on; have no effect on; have no effect on; decrease; decrease
C) increase; have no effect on; decrease; decrease; increase
D) increase; increase; increase; decrease; have an ambiguous effect on
E) decrease; decrease; increase; decrease; increase
4) If an import-competing firm is the only domestic producer of a good, then a transition from
autarky to free trade will ________ domestic price, ________ producer surplus, ________
consumer surplus, and ________ overall domestic national welfare.
A) decrease; decrease; increase; increase
B) increase; increase; increase; increase
C) decrease; decrease; decrease; decrease
D) increase; increase; decrease; decrease
E) increase; increase; decrease; increase