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Quiz 2 Chapter 3 and 4
CHAPTER 3
SOURCES OF COMPARATIVE ADVANTAGE
MULTIPLE CHOICE
1. Which
of the following suggests that a nation will export the commodity in the
production of which a great deal of its relatively abundant and cheap factor is
used?
a. The Linder theory
b. The product life cycle theory
c. The MacDougall theory
d. The Heckscher-Ohlin theory
2. According
to Staffan Linder, trade between two countries tends to be most pronounced when
the countries:
a. Find their tastes and preferences to be
quite harmonious
b. Experience economies of large-scale
production over large output levels
c. Face dissimilar relative abundances of
the factors of production
d. Find their per capita income levels to
be approximately the same
3. Which
of the following is a long-run theory, emphasizing changes in the trading
position of a nation over a number of years?
a. Theory of factor endowments
b. Comparative advantage theory
c. Theory of the product cycle
d. Overlapping demand theory
4. The
Leontief paradox questioned the validity of the theory of:
a. Comparative advantage
b. Factor endowments
c. Overlapping demands
d. Absolute advantage
5. Which
of the following would least likely apply to the product life cycle theory?
a. Calculators and computers
b. Coal and crude oil
c. Home movie cameras
d. Office machinery
6. Classical
trade theory emphasized which of the following as an underlying explanation of
the basis for trade?
a. Productivities of labor inputs
b. Tastes and preferences among nations
c. Changes in technologies over time
d. Quantities of economic resources
7. Concerning
the influence that transportation costs have on the location of industry, which
of the following industries has generally attempted to locate production
facilities close to resource supplies?
a. Autos
b. Steel
c. Soft drinks
d. Valuable electronics goods
8. Assume
that Country A, in the absence of trade, finds itself relatively abundant in
labor and relatively scarce in land. The factor endowment theory reasons that
with free trade, the internal distribution of national income in Country A will
change in favor of:
a. Labor
b. Land
c. Both labor and land
d. Neither labor nor land
9. When
considering the effects of transportation costs, the conclusions of our trade
model must be modified. This is because transportation costs result in:
a. Lower trade volume, higher import
prices, smaller gains from trade
b. Lower trade volume, lower import
prices, smaller gains from trade
c. Higher trade volume, higher import
prices, smaller gains from trade
d. Higher trade volume, lower import
prices, greater gains from trade
10. Most
economists maintain that the major factor underlying wage stagnation in the
United States in the 1990s has been:
a. Import competition
b. Technological change
c. Rising real value of the minimum wage
d. Increasing union membership
11. Assume
the cost of transporting autos from Japan to Canada exceeds the pretrade price
difference for autos between Japan and Canada. Trade in autos is:
a. Impossible
b. Possible
c. Highly profitable
d. Moderately profitable
12. Eli
Heckscher and Bertil Ohlin are associated with the theory of comparative
advantage that stresses differences in:
a. Income levels among countries
b. Tastes and preferences among countries
c. Resource endowments among countries
d. Labor productivities among countries
13. Hong
Kong is relatively abundant in labor, while Canada is relatively abundant in
capital. In both countries the production of shirts is relatively more labor
intensive than the production of computers. According to the factor endowment
theory, Hong Kong will have a(n):
a. Absolute advantage in the production of
shirts and computers
b. Absolute advantage in the production of
computers
c. Comparative advantage in the production
of shirts
d. Comparative advantage in the production
of computers
14. If
Japanese workers receive lower wages in the production of autos than do
American workers:
a. Japan will have a comparative advantage
in the production of autos
b. Japan will have an absolute advantage
in the production of autos
c. Production costs will be lower in Japan
than in the U.S.
d. Production costs could be lower in the
U.S. if American labor productivity is higher than the Japanese
15. Which
trade theory suggests that a newly produced good, once exported, could
ultimately end up being imported as the technology is transferred to lower-
cost nations?
a. Factor endowment theory
b. Product life cycle theory
c. Overlapping demand theory
d. Comparative advantage theory
16. A
firm is said to enjoy economies of scale over the range of output for which the
long-run average cost is:
a. Increasing
b. Constant
c. Decreasing
d. None of the above
17. A
product will be internationally traded as long as the pretrade price
differential between the trading partners is:
a. Greater than the cost of transporting
it between them
b. Equal to the cost of transporting it
between them
c. Less than the cost of transporting it
between them
d. None of the above
18. Which
of the following suggests that by widening the market's size, international
trade can permit longer production runs for manufacturers, which leads to
increasing efficiency?
a. Economies of scale
b. Diseconomies of scale
c. Comparative cost theory
d. Absolute cost theory
19. The
Leontief paradox:
a. Was applied to the product life cycle
theory
b. Suggested that the U.S. exports
labor-intensive goods
c. Found that national income differences
underlie world trade patterns
d. Implied that diseconomies of scale
occur at low output levels
20. Which
of the following best applies to the theory of overlapping demands?
a. Manufactured goods
b. Services
c. Primary products
d. None of the above
21. The
Heckscher-Ohlin theory explains comparative advantage as the result of
differences in countries':
a. Economies of large-scale production
b. Relative abundance of various resources
c. Relative costs of labor
d. Research and development
22. Boeing
aircraft company was able to cover its production costs of the first
"jumbo jet" in the 1970s because Boeing could market it to several
foreign airlines in addition to domestic airlines. This illustrates:
a. How economies of scale make possible a
larger variety of products in international trade
b. A transfer of wealth from domestic
consumers to domestic producers as the result of trade
c. How a natural monopoly is forced to
behave more competitively with international trade
d. How a natural monopoly is forced to
behave less competitively with international trade
23. Which
trade theory contends that a country that initially develops and exports a new
product may eventually become an importer of it and may no longer manufacture
the product?
a. Theory of factor endowments
b. Theory of overlapping demands
c. Economies of scale theory
d. Product life cycle theory
24. The
theory of overlapping demands predicts that trade in manufactured goods is
unimportant for countries with very different:
a. Tastes and preferences
b. Expectations of future interest rate
levels
c. Per-capita income levels
d. Labor productivities
25. The
trade model of the Swedish economists Heckscher and Ohlin maintains that:
a. Absolute advantage determines the
distribution of the gains from trade
b. Comparative advantage determines the
distribution of the gains from trade
c. The division of labor is limited by the
size of the world market
d. A country exports goods for which its
resource endowments are most suited
26. According
to the factor endowment model, countries heavily endowed with land will:
a. Devote excessive amounts of resources
to agricultural production
b. Devote insufficient amounts of
resources to agricultural production
c. Export products that are land-intensive
d. Import products that are land-intensive
27. For
the United States, empirical studies indicate that over the past two decades
the cost of international transportation relative to the value of U.S. imports
has:
a. Increased
b. Decreased
c. Not changed
d. None of the above
28. Should
international transportation costs decrease, the effect on international trade
would include:
a. An increase in the volume of trade
b. A smaller gain from trade
c. A decline in the income of home
producers
d. A decrease in the level of specialization
in production.
29. That
the division of labor is limited by the size of the market best applies to
which explanation of trade?
a. Factor endowment theory
b. Product life cycle theory
c. Economies of scale theory
d. Overlapping demand theory
30. A
larger variety of products results from international trade especially if:
a. International trade affords producers
monopoly power
b. National governments levy import
tariffs and quotas
c. Producing goods entails increasing
costs
d. Economies of scale exist for producers
31. With
economies of scale and decreasing unit costs, a country has the incentive to:
a. Specialize completely in the product of
its comparative advantage
b. Specialize partially in the product of
its comparative advantage
c. Specialize completely in the product of
its comparative disadvantage
d. Specialize partially in the product of
its comparative disadvantage
32. Proponents
of ____ maintain that government should enact policies that encourage the development
of emerging, "sunrise" industries.
a. Product life cycle policy
b. Static comparative advantage policy
c. Intraindustry trade policy
d. Industrial policy
33. Legislation
requiring domestic manufacturers to install pollution abatement equipment tends
to promote:
a. Higher production costs and an increase
in output
b. Higher production costs and a decrease
in output
c. Lower production costs and an increase
in output
d. Lower production costs and a decrease
in output
34. Stringent
governmental regulations (e.g., air quality standards) imposed on domestic
steel manufacturers tend to:
a. Enhance their competitiveness in the
international market
b. Detract from their competitiveness in
the international market
c. Increase the profitability and
productivity of domestic manufacturers
d. Reduce the market share of foreign
firms selling steel in the domestic market
35. Among
the determinants underlying a country's international competitiveness in
business services (e.g., construction) are:
a. The potential scale economies afforded
by a market's size
b. Abundance of equipment including data
processing facilities and computers
c. Skills and capabilities of employees
and their wage rates
d. All of the above
36. The
simultaneous import and export of computers by Germany is an example of:
a. Intraindustry trade
b. Interindustry trade
c. Perfect competition
d. Imperfect competition
37. Linder's
theory of overlapping demand provides an explanation of:
a. Product life cycle theory
b. Factor endowment model
c. Economies of large-scale production
d. Intraindustry trade
38. Intraindustry
trade can be explained in part by:
a. Adam Smith's principle of absolute
advantage
b. Perfect competition in product markets
c. Diseconomies of large scale production
d. Transportation costs between and within
nations
39. The
Leontief paradox provided:
a. Support for the principle of absolute
advantage
b. Support for the factor endowment model
c. Evidence against the factor endowment
model
d. Evidence against the principle of
absolute advantage
40. Which
trade theory suggests that comparative advantage tends to shift from one nation
to another as a product matures?
a. Interindustry trade theory
b. Intraindustry trade theory
c. Product life cycle theory
d. Overlapping demand theory
41. Which
trade theory is tantamount to a short-run version of the factor price
equalization theory?
a. Specific factors theory
b. Product life cycle theory
c. Economies of scale theory
d. Overlapping demand theory
42. According
to the specific factors trade theory:
a. Owners of factors specific to export
industries suffer from trade, while owners of factors specific to
import-competing industries gain
b. Owners of factors specific to export
industries gain from trade, while owners of factors specific to
import-competing industries suffer
c. Both owners of factors specific to
export industries and owners of factors specific to import-competing industries
gain from trade
d. Both owners of factors specific to
export industries and owners of factors specific to import-competing industries
suffer from trade
43. Which
nation has sometimes been characterized as being a "pollution haven"
due to its lenient environmental standards that encourage the production of
pollution-intensive goods?
a. Japan
b. Canada
c. Germany
d. Mexico
44. Boeing
Inc. has criticized The Airbus Company's competitiveness on the grounds that
Airbus benefits from:
a. Import tariffs protecting Airbus in the
European market
b. Import quotas protecting Airbus in the
European market
c. Lenient environmental standards of
European governments
d. Production subsidies supplied by
European governments
45. To
justify the subsidies it has received from European governments, The Airbus
Company has used all of the following arguments except:
a. Its subsidies have prevented U.S.
aircraft firms from holding a world-wide monopoly
b. U.S. aircraft firms have benefited from
military-sponsored programs of the U.S. government
c. Airbus' subsidies were totally repaid
as the firm realized profits on its aircraft sales
d. Without subsidies to Airbus, Europe
would be dependent on the United States as a supplier of aircraft
46. Expanding
trade or technological improvements
a. Increases the demand for skilled
workers in the U.S.
b. Decreases the demand for unskilled
workers in the U.S.
c. Increases the demand for unskilled
workers in the U.S.
d. Both a and b.
47. Economists
agree that wages of unskilled workers are being held down by
a. International trade
b. Technology improvements
c. Lack of education
d. A combination of a, b, and c
48. The
factor endowment theory states that comparative advantage is explained
a. Exclusively by differences in relative
supply conditions
b. Exclusively by differences in relative
national demand conditions
c. Both supply and demand conditions
d. None of the above
49. The
factor endowment theory assumes
a. Same tastes and preferences
b. Factor inputs of uniform quality
c. Same technology
d. All of the above
50. In
explaining international trade, the product life cycle theory focuses on
a. Tastes and preferences
b. The role of technological innovation
c. Per-capita income levels of nations
d. Both b and c
TRUE/FALSE
1. According
to Ricardian theory, comparative advantage depends on relative differences in
labor productivity.
2. The
Heckscher-Ohlin theory asserts that relative differences in labor productivity
underlie comparative advantage.
3. The
factor-endowment theory highlights the relative abundance of a nation's
resources as the key factor underlying comparative advantage.
4. According
to the factor-endowment theory, a nation will export that good for which a
large amount of the relatively scarce resource is used.
5. According
to the factor-endowment theory, a nation will import that good for which a
large amount of the relatively abundant resource is used.
6. The
Heckscher-Ohlin theory suggests that land-abundant nations will export land-intensive
goods while labor-abundant nations will export labor-intensive goods.
7. The
Heckscher-Ohlin theory contends that over a period of years a country that
initially is an exporter of a product will become an importer of that product.
8. The
Heckscher-Ohlin theory emphasizes the role that demand plays in the creation of
comparative advantage.
9. The
factor-endowment theory asserts that with specialization and trade there tends
to occur an equalization in the relative resource prices of trading partners.
10. According
to the factor-endowment theory, international specialization and trade cause a
nation's cheap resource to become cheaper and a nation's expensive resource to
become more expensive.
11. Fears
about the downward pressure that cheap foreign workers place on U.S. wages have
led U.S. labor unions to lobby for import restrictions such as tariffs and
quotas.
12. According
to the factor-price-equalization theory, international trade results in the
relative differences in resource prices between nations being eliminated.
13. Empirical
testing by Wassily Leontief gave support to the Heckscher-Ohlin theory of
trade.
14. The
Leontief Paradox was the first major challenge to the product-life-cycle theory
of trade.
15. The
Leontief Paradox suggested that, in contrast to the predictions of the
factor-endowment theory, U.S. exports were less capital-intensive than U.S.
import-competing goods.
16. The
specific-factors theory analyzes the income distribution effects of trade in
the short run when resources are immobile among industries.
17. Owners
of resources specific to export industries tend to lose from international
trade, while owners of factors specific to import-competing industries tend to
gain.
18. The
factor-price-equalization theory is a short-run version of the specific-factors
theory.
19. With
economies of scale, specialization in a few products allows a manufacturer to
benefit from longer production runs which lead to decreasing average cost.
20. With
decreasing costs, a country has an incentive to partially specialize in the
product of its comparative advantage.
21. By
widening the size of the domestic market, international trade permits companies
to take advantage of longer production runs and increasing efficiencies such as
mass production.
22. The
theory of overlapping demands applies best to trade in manufactured goods.
23. Decreasing
cost conditions lead to complete specialization in the production of the commodity
of comparative advantage.
24. According
to Staffan Linder, the factor endowment theory is useful in explaining trade
patterns in manufactured goods, but not primary products.
25. The
theory of overlapping demands asserts that trade in manufactured goods is
stronger the less similar the demand structures of two countries.
26. The
theory of overlapping demands contends that international trade in manufactured
products is strongest among nations with similar income levels.
27. According
to the theory of overlapping demands, trade in manufactured goods would be
greater among two wealthy countries than among a wealthy country and a poor
country.
28. Recent
studies of U.S. resource endowments indicate that the United States is most
abundant in unskilled labor, followed by semi-skilled labor and skilled labor.
29. Intraindustry
trade would occur if computers manufactured in the United States by IBM are
exported to Japan while the United States imports computers manufactured by
Hitachi of Japan.
30. Because
seasons in the Southern Hemisphere are opposite those in the Northern
Hemisphere, one would expect intraindustry trade to occur in agricultural
products.
31. Intraindustry
trade can be explained by product differentiation, economies of scale, seasons
of the year, and transportation costs.
32. According
to the theory of intraindustry trade, many manufactured goods undergo a trade
cycle in which the home country initially is an exporter and eventually becomes
an importer of a product.
33. The
product-life-cycle theory applies best to trade in primary products in the
short run.
34. According
to the product-life-cycle theory, the first stage of a product's trade cycle is
when it is introduced to the home market.
35. According
to the product life cycle theory, the last stage of a product's trade cycle is
when it becomes an import-competing good.
36. Ricardo's
theory of comparative advantage is a static theory that does not consider
changes in international competitiveness over the long run.
37. Dynamic
comparative advantage refers to the creation of comparative advantage through
the mobilization of skilled labor, technology, and capital.
38. Industrial
policy seeks to direct resources to declining industries in which productivity
is low, linkages to the rest of the economy are weak, and future
competitiveness is remote.
39. Europe's
jumbo-jet manufacturer, Airbus, has justified receiving governmental subsidies
on the grounds that the subsidies prevent the United States from becoming a
monopoly in the jumbo-jet market.
40. The
imposition of pollution-control regulations on domestic steel manufacturers
leads to decreases in production costs and an improvement in the steel
manufacturers' competitiveness.
41. Empirical
studies conclude that U.S. environmental policies are a more important
determinant of trade performance than capital, raw materials, labor skills, and
wages.
42. Most
developing countries have pollution-control laws and enforcement policies that
are more stringent than those of the major industrial countries.
43. Although
the theory of comparative advantage explains trade in manufactured goods, it
has no explanatory value for trade in business services.
44. When
transportation costs are added to our trade model, the low-cost exporting
country produces less, consumes more, and exports less than that which occurs
in the absence of transportation costs.
45. When
transportation costs are added to our trade model, the degree of specialization
in production between two countries increases as do the gains from trade.
46. In
the absence of transportation costs, free trade results in the equalization of
the prices of traded goods, as well as resource prices, in the trading nations.
47. In
industries where the final product is much less weighty or bulky than the
materials from which it is made, firms tend to locate production near resource
supplies.
48. Industrial
processes that add weight or bulk to a commodity are likely to be located near
the resource market to minimize transportation costs.
49. A
product will be traded only if the cost of transporting it between nations is
less than the pretrade difference between their relative product prices.
50. Generally
speaking, transportation costs are more important than production costs as a
source of comparative advantage.
51. The
product-life-cycle model contends that when a new product is introduced to the
home market, it generally requires low-skilled labor to produce it.
52. According
to the product life cycle model, comparative advantage shifts from cheap-labor
countries to high-technology countries after a manufactured good becomes
standardized.
SHORT ANSWER
1. Does
factor price equalization occur in the real world?
2. What
is the focus of the product life cycle theory, and where is it applicable?
ESSAY
1. Explain
how immigration and trade may worsen wage inequality, and how college education
may mitigate against that.
2. How
does Staffan Linder explain world trade patterns?
CHAPTER 4—TARIFFS
MULTIPLE CHOICE
1. The
imposition of tariffs on imports results in deadweight welfare losses for the
home economy. These losses consist of the:
a. Protective effect plus consumption
effect
b. Redistribution effect plus revenue
effect
c. Revenue effect plus protective effect
d. Consumption effect plus redistribution
effect
2. Suppose
that the United States eliminates its tariff on steel imports, permitting
foreign-produced steel to enter the U.S. market. Steel prices to U.S. consumers
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
3. A
$100 specific tariff provides home producers more protection from foreign
competition 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
4. A
lower tariff on imported aluminum would most likely benefit:
a. Foreign producers at the expense of
domestic consumers
b. Domestic manufacturers of aluminum
c. Domestic consumers of aluminum
d. Workers in the domestic aluminum
industry
5. When
a government allows raw materials and other intermediate products to enter a
country duty free, its tariff policy generally results in a:
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
6. Of
the many arguments in favor of tariffs, the one that has enjoyed the most
significant economic justification has been the:
a. Infant industry argument
b. Cheap foreign labor argument
c. Balance of payments argument
d. Domestic living standard argument
7. The
redistribution effect of an import tariff is the transfer of income from the
domestic:
a. Producers to domestic buyers of the
good
b. Buyers to domestic producers of the
good
c. Buyers to the domestic government
d. Government to the domestic buyers
8. Which
of the following is true concerning a specific tariff?
a. It is exclusively used by the U.S. in
its tariff schedules.
b. It refers to a flat percentage duty
applied to a good's market value.
c. It is plagued by problems associated
with assessing import product values.
d. It affords less protection to home
producers during eras of rising prices.
9. The
principal benefit of tariff protection goes to:
a. Domestic consumers of the good produced
b. Domestic producers of the good produced
c. Foreign producers of the good produced
d. Foreign consumers of the good produced
10. Which
of the following policies permits a specified quantity of goods to be imported
at one tariff rate and applies a higher tariff rate to imports above this
quantity?
a. Tariff quota
b. Import tariff
c. Specific tariff
d. Ad valorem tariff
11. Assume
the United States adopts a tariff quota on steel in which the quota is set at 2
million tons, the within-quota tariff rate equals 5 percent, and the over-quota
tariff rate equals 10 percent. Suppose the U.S. imports 1 million tons of
steel. The resulting revenue effect of the tariff quota would accrue to:
a. The U.S. government only
b. U.S. importing companies only
c. Foreign exporting companies only
d. The U.S. government and either U.S.
importers or foreign exporters
12. When
the production of a commodity does not utilize imported inputs, the effective
tariff rate on the commodity:
a. Exceeds the nominal tariff rate on the
commodity
b. Equals the nominal tariff rate on the
commodity
c. Is less than the nominal tariff rate on
the commodity
d. None of the above
13. Developing
nations often maintain that industrial countries permit raw materials to be
imported at very low tariff rates while maintaining high tariff rates on
manufactured imports. Which of the following refers to the above statement?
a. Tariff-quota effect
b. Nominal tariff effect
c. Tariff escalation effect
d. Protective tariff effect
14. Should
the home country be "large" relative to the world, its imposition of
a tariff on imports would lead to an increase in domestic welfare if the
terms-of-trade effect exceeds the sum of the:
a. Revenue effect plus redistribution
effect
b. Protective effect plus revenue effect
c. Consumption effect plus redistribution
effect
d. Protective effect plus consumption
effect
15. Should
Canada impose a tariff on imports, one would expect Canada's:
a. Terms of trade to improve and volume of
trade to decrease
b. Terms of trade to worsen and volume of
trade to decrease
c. Terms of trade to improve and volume of
trade to increase
d. Terms of trade to worsen and volume of
trade to increase
16. A
beggar-thy-neighbor policy is the imposition of:
a. Free trade to increase domestic
productivity
b. Trade barriers to increase domestic
demand and employment
c. Import tariffs to curb domestic
inflation
d. Revenue tariffs to make products cheaper
for domestic consumers
17. A
problem encountered when implementing an "infant industry" tariff is
that:
a. Domestic consumers will purchase the
foreign good regardless of the tariff
b. Political pressure may prevent the
tariff's removal when the industry matures
c. Most industries require tariff
protection when they are mature
d. Labor unions will capture the
protective effect in higher wages
18. Tariffs
are not defended on the ground 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 overdependence of a country on
only a few industries
19. The
deadweight loss of a tariff:
a. Is a social loss since it promotes
inefficient production
b. Is a social loss since it reduces the
revenue for the government
c. Is not a social loss because society as
a whole doesn't pay for the loss
d. Is not a social loss since only
business firms suffer revenue losses
20. Which
of the following is a fixed percentage of the value of an imported product as
it enters the country?
a. Specific tariff
b. Ad valorem tariff
c. Nominal tariff
d. Effective tariff
21. A
tax of 20 cents per unit of imported cheese would be an example of:
a. Compound tariff
b. Effective tariff
c. Ad valorem tariff
d. Specific tariff
22. A
tax of 15 percent per imported item would be an example of:
a. Ad valorem tariff
b. Specific tariff
c. Effective tariff
d. Compound tariff
23. Which
type of tariff is not used by the American government?
a. Import tariff
b. Export tariff
c. Specific tariff
d. Ad valorem tariff
24. Which
trade policy results in the government levying a "two-tier" tariff on
imported goods?
a. Tariff quota
b. Nominal tariff
c. Effective tariff
d. Revenue tariff
25. If
we consider the impact on both consumers and producers, then protection of the
steel industry is:
a. In the interest of the United States as
a whole, but not in the interest of the state of Pennsylvania
b. In the interest of the United States as
a whole and in the interest of the state of Pennsylvania
c. Not in the interest of the United
States as a whole, but it might be in the interest of the state of Pennsylvania
d. Not in the interest of the United
States as a whole, nor in the interest of the state of Pennsylvania
26. If
I purchase a stereo from South Korea, I obtain the stereo and South Korea
obtains the dollars. But if I purchase a stereo produced in the United States,
I obtain the stereo and the dollars remain in America. This line of reasoning
is:
a. Valid for stereos, but not for most
products imported by the United States
b. Valid for most products imported by the
United States, but not for stereos
c. Deceptive since Koreans eventually
spend the dollars on U.S. goods
d. Deceptive since the dollars spent on a
stereo built in the United States eventually wind up overseas
27. The
most vocal political pressure for tariffs is generally made by:
a. Consumers lobbying for export tariffs
b. Consumers lobbying for import tariffs
c. Producers lobbying for export tariffs
d. Producers lobbying for import tariffs
28. If
we consider the interests of both consumers and producers, then a policy of
tariff reduction in the U.S. auto industry is:
a. In the interest of the United States as
a whole, but not in the interest of auto-producing states
b. In the interest of the United States as
a whole, and in the interest of auto-producing states
c. Not in the interest of the United
States as a whole, nor in the interest of auto-producing states
d. Not in the interest of the United
States as a whole, but is in the interest of auto-producing states
29. Free
traders point out that:
a. There is usually an efficiency gain
from having tariffs
b. There is usually an efficiency loss
from having tariffs
c. Producers lose from tariffs at the
expense of consumers
d. Producers lose from tariffs at the
expense of the government
30. A
decrease in the import tariff will result in:
a. An increase in imports but a decrease
in domestic production
b. A decrease in imports but an increase
in domestic production
c. An increase in price but a decrease in
quantity purchased
d. A decrease in price and a decrease in
quantity purchased
Figure
4.1 illustrates the demand and supply schedules for pocket calculators in
Mexico, a "small" nation that is unable to affect the world price.
Figure
4.1. Import Tariff Levied by a "Small" Country
31. Consider
Figure 4.1. In the absence of trade, Mexico produces and consumes:
a. 10 calculators
b. 40 calculators
c. 60 calculators
d. 80 calculators
32. Consider
Figure 4.1. In the absence of trade, Mexico's producer surplus and consumer
surplus respectively equal:
a. $120, $240
b. $180, $180
c. $180, $320
d. $240, $240
33. Consider
Figure 4.1. With free trade, Mexico imports:
a. 40 calculators
b. 60 calculators
c. 80 calculators
d. 100 calculators
34. Consider
Figure 4.1. With free trade, the total value of Mexico's imports equal:
a. $220
b. $260
c. $290
d. $300
35. Consider
Figure 4.1. With free trade, Mexico's producer surplus and consumer surplus
respectively equal:
a. $5, $605
b. $25, $380
c. $45, $250
d. $85, $195
36. Consider
Figure 4.1. With a per-unit tariff of $3, the quantity of imports decreases to:
a. 20 calculators
b. 40 calculators
c. 50 calculators
d. 70 calculators
37. According
to Figure 4.1, the loss in Mexican consumer surplus due to the tariff equals:
a. $225
b. $265
c. $285
d. $325
38. According
to Figure 4.1, the tariff results in the Mexican government collecting:
a. $100
b. $120
c. $140
d. $160
39. According
to Figure 4.1, Mexican manufacturers gain ____ because of the tariff.
a. $75
b. $85
c. $95
d. $105
40. According
to Figure 4.1, the deadweight cost of the tariff totals:
a. $60
b. $70
c. $80
d. $90
41. Consider
Figure 4.1. The tariff would be prohibitive (i.e., eliminate imports) if it
equaled:
a. $2
b. $3
c. $4
d. $5
Assume
the United States is a large consumer of steel that is able to influence the
world price. Its demand and supply schedules are respectively denoted by DU.S.
and SU.S. in Figure 4.2. The overall (United States plus world) supply schedule
of steel is denoted by SU.S.+W.
Figure
4.2. Import Tariff Levied by a "Large" Country
42. Consider
Figure 4.2. With free trade, the United States achieves market equilibrium at a
price of $____. At this price, ____ tons of steel are produced by U.S. firms,
____ tons are bought by U.S. buyers, and ____ tons are imported.
a. $450, 5 tons, 60 tons, 55 tons
b. $475, 10 tons, 50 tons, 40 tons
c. $525, 5 tons, 60 tons, 55 tons
d. $630, 30 tons, 30 tons, 0 tons
43. Consider
Figure 4.2. Suppose the United States imposes a tariff of $100 on each ton of
steel imported. With the tariff, the price of steel rises to $____ and imports
fall to ____ tons.
a. $550, 20 tons
b. $550, 30 tons
c. $575, 20 tons
d. $575, 30 tons
44. Consider
Figure 4.2. Of the $100 tariff, $____ is passed on to the U.S. consumer via a
higher price, while $____ is borne by the foreign exporter; the U.S. terms of
trade:
a. $25, $75, improve
b. $25, $75, worsen
c. $75, $25, improve
d. $75, $25, worsen
45. Referring
to Figure 4.2, the tariff's deadweight welfare loss to the United States
totals:
a. $450
b. $550
c. $650
d. $750
46. According
to Figure 4.2, the tariff's terms-of-trade effect equals:
a. $300
b. $400
c. $500
d. $600
47. According
to Figure 4.2, the tariff leads to the overall welfare of the United States:
a. Rising by $250
b. Rising by $500
c. Falling by $250
d. Falling by $500
48. Suppose
that the production of $500,000 worth of steel in the United States requires
$100,000 worth of iron ore. The U.S. nominal tariff rates for importing these
goods are 15 percent for steel and 5 percent for iron ore. Given this
information, the effective rate of protection for the U.S. steel industry is
approximately:
a. 6 percent
b. 12 percent
c. 18 percent
d. 24 percent
49. Suppose
that the production of a $30,000 automobile in Canada requires $10,000 worth of
steel. The Canadian nominal tariff rates for importing these goods are 25
percent for automobiles and 10 percent for steel. Given this information, the
effective rate of protection for the Canadian automobile industry is
approximately:
a. 15 percent
b. 32 percent
c. 48 percent
d. 67 percent
Exhibit
4.1
Assume
that the United States imports automobiles from South Korea at a price of
$20,000 per vehicle and that these vehicles are subject to an import tariff of
20 percent. Also assume that U.S. components are used in the vehicles assembled
by South Korea and that these components have a value of $10,000.
50. Refer
to Exhibit 4.1. In the absence of the Offshore Assembly Provision of U.S.
tariff policy, the price of an imported vehicle to the U.S. consumer after the
tariff has been levied is:
a. $22,000
b. $23,000
c. $24,000
d. $25,000
51. Refer
to Exhibit 4.1. Under the Offshore Assembly Provision of U.S. tariff policy,
the price of an imported vehicle to the U.S. consumer after the tariff has been
levied is:
a. $22,000
b. $23,000
c. $24,000
d. $25,000
52. Suppose
an importer of steel is required to pay a tariff of $20 per ton plus 5 percent
of the value of steel. This is an example of a (an):
a. Specific tariff
b. Ad valorem tariff
c. Compound tariff
d. Tariff quota
53. A
compound tariff is a combination of a (an):
a. Tariff quota and a two-tier tariff
b. Revenue tariff and a protective tariff
c. Import tariff and an export tariff
d. Specific tariff and an ad valorem
tariff
Table
4.1. Production Costs and Prices of Imported and Domestic VCRs
Imported
VCRs Domestic VCRs
Component
parts $150 Imported component parts $150
Assembly
cost/profit 50 Assembly
cost
50
Nominal
tariff
25 Profit 25
____ ____
Import
price Domestic price
after
tariff 225 after
tariff 225
54. Consider
Table 4.1. Prior to the tariff, the total price of domestically-produced VCRs
is:
a. $150
b. $200
c. $225
d. $250
55. Consider
Table 4.1. Prior to the tariff, the total price of imported VCRs is:
a. $150
b. $200
c. $225
d. $235
56. Consider
Table 4.1. The nominal tariff rate on imported VCRs equals:
a. 11.1 percent
b. 12.5 percent
c. 16.7 percent
d. 50.0 percent
57. Consider
Table 4.1. Prior to the tariff, domestic value added equals:
a. $25
b. $50
c. $75
d. $100
58. Consider
Table 4.1. After the tariff, domestic value added equals:
a. $25
b. $50
c. $75
d. $100
59. Consider
Table 4.1. The effective tariff rate equals:
a. 11.1 percent
b. 16.7 percent
c. 50.0 percent
d. 100.0 percent
60. If
the domestic value added before an import tariff for a product is $500 and the
domestic value added after the tariff is $550, the effective rate of protection
is:
a. 5 percent
b. 8 percent
c. 10 percent
d. 15 percent
61. When
a tariff on imported inputs exceeds that on the finished good,
a. The nominal tariff rate on the finished
product would tend to overstate its protective effect
b. The nominal tariff rate would tend to
understate it's protective effect
c. It is impossible to determine the
protective effect of a tariff
d. Tariff escalation occurs
62. The
offshore assembly provision in the U.S.
a. Provides favorable treatment to U.S.
trading partners
b. Discriminates against primary product
importers
c. Provides favorable treatment to
products assembled abroad from U.S. manufactured components
d. Hurts the U.S. consumer
63. Arguments
for U.S. trade restrictions include all of the following except
a. Job protection
b. Infant industry support
c. Maintenance of domestic living standard
d. Improving incomes for developing
countries
64. For
the United States, a foreign trade zone (FTZ) is
a. A site within the United States
b. A site outside the United States
c. Always located in poorer developing
countries
d. Is used to discourage trade
TRUE/FALSE
1. To
protect domestic producers from foreign competition, the U.S. government levies
both import tariffs and export tariffs.
2. With
a compound tariff, a domestic importer of an automobile might be required to
pay a duty of $200 plus 4 percent of the value of the automobile.
3. With
a specific tariff, the degree of protection afforded domestic producers varies
directly with changes in import prices.
4. During
a business recession, when cheaper products are purchased, a specific tariff
provides domestic producers a greater amount of protection against
import-competing goods.
5. A
ad valorem tariff provides domestic producers a declining degree of protection
against import-competing goods during periods of changing prices.
6. With
a compound duty, its "specific" portion neutralizes the cost
disadvantage of domestic manufacturers that results from tariff protection
granted to domestic suppliers of raw materials, and the "ad valorem"
portion of the duty grants protection to the finished-goods industry.
7. The
nominal tariff rate signifies the total increase in domestic productive
activities compared to what would occur under free-trade conditions.
8. When
material inputs enter a country at a very low duty while the final imported
product is protected by a high duty, the result tends to be a high rate of
protection for domestic producers of the final product.
9. According
to the tariff escalation effect, industrial countries apply low tariffs to
imports of finished goods and high tariffs to imports of raw materials.
10. Under
the Offshore Assembly Provision of U.S. tariff policy, U.S. import duties apply
only to the value added in the foreign assembly process, provided that
U.S.-made components are used by overseas companies in their assembly
operations.
11. Bonded
warehouses and foreign trade zones have the effect of allowing domestic
importers to postpone and prorate over time their import duty obligations.
12. A
nation whose imports constitute a very small portion of the world market supply
is a price taker, facing a constant world price for its import commodity.
13. Graphically,
consumer surplus is represented by the area above the demand curve and below
the product's market price.
14. Producer
surplus is the revenue producers receive over and above the minimum necessary
for production.
15. For
a "small" country, a tariff raises the domestic price of an imported
product by the full amount of the duty.
16. Although
an import tariff provides the domestic government additional tax revenue, it
benefits domestic consumers at the expense of domestic producers.
17. An
import tariff reduces the welfare of a "small" country by an amount
equal to the redistribution effect plus the revenue effect.
18. The
deadweight losses of an import tariff consist of the protection effect plus the
consumption effect.
19. The
redistribution effect is the transfer of producer surplus to domestic consumers
of the import-competing product.
20. As
long as it is assumed that a nation accounts for a negligible portion of
international trade, its levying an import tariff necessarily increases its
overall welfare.
21. Changes
in a "large" country's economic conditions or trade policies can
affect the terms at which it trades with other countries.
22. A
"large" country, that levies a tariff on imports, cannot improve the
terms at which it trades with other countries.
23. For
a "large" country, a tariff on an imported product may be partially
absorbed by the domestic consumer via a higher purchase price and partially
absorbed by the foreign producer via a lower export price.
24. If
a "large" country levies a tariff on an imported good, its overall
welfare increases if the monetary value of the tariff's consumption effect plus
protective effect exceeds the monetary value of the terms-of-trade effect.
25. If
a "small" country levies a tariff on an imported good, its overall
welfare increases if the monetary value of the tariff's consumption effect plus
protective effect is less than the monetary value of the terms-of-trade effect.
26. A
tariff on steel imports tends to improve the competitiveness of domestic
automobile companies.
27. If
a tariff reduces the quantity of Japanese autos imported by the United States,
over time it reduces the ability of Japan to import goods from the United
States.
28. A
compound tariff permits a specified amount of goods to be imported at one
tariff rate while any imports above this amount are subjected to a higher
tariff rate.
29. A
tariff can be thought of as a tax on imported goods.
30. Although
tariffs on imported steel may lead to job gains for domestic steel workers,
they can lead to job losses for domestic auto workers.
31. Relatively
low wages in Mexico make it impossible for U.S. manufacturers of
labor-intensive goods to compete against Mexican manufacturers.
32. According
to the infant-industry argument, temporary tariff protection granted to an
infant industry will help it become competitive in the world market; when
international competitiveness is achieved, the tariff should be removed.
Exhibit
4.2
In the
absence of international trade, assume that the equilibrium price and quantity
of motorcycles in Canada is $14,000 and 10 units respectively. Assuming that
Canada is a small country that is unable to affect the world price of
motorcycles, suppose its market is opened to international trade. As a result,
the price of motorcycles falls to $12,000 and the total quantity demanded rises
to 14 units; out of this total, 6 units are produced in Canada while 8 units
are imported. Now assume that the Canadian government levies an import tariff of
$1,000 on motorcycles.
33. Refer
to Exhibit 4.2. As a result of the tariff, the price of imported motorcycles
equals $13,000 and imports total 4 cycles.
34. Refer
to Exhibit 4.2. The tariff leads to an increase in Canadian consumer surplus
totaling $11,000.
35. Refer
to Exhibit 4.2. The tariff's redistribution effect equals $7,000.
36. Refer
to Exhibit 4.2. The tariff's revenue effect equals $6,000.
37. Refer
to Exhibit 4.2. All of the import tariff is shifted to the Canadian consumer
via a higher price of motorcycles.
38. Refer
to Exhibit 4.2. The tariff leads to a deadweight welfare loss for Canada
totaling $1,000.
39. Unlike
a specific tariff, an ad valorem tariff differentiates between commodities with
different values.
40. A
limitation of a specific tariff is that it provides a constant level of
protection for domestic commodities regardless of fluctuations in their prices
over time.
41. A
tariff quota is a combination of a specific tariff and an ad valorem tariff.
42. A
specific tariff is expressed as a fixed percentage of the total value of an
imported product.
43. The
protective effect of a tariff occurs to the extent that less efficient domestic
production is substituted for more efficient foreign production.
44. A
tariff can increase the welfare of a "large" levying country if the
favorable terms-of-trade effect more than offsets the unfavorable protective
effect and consumption effect.
45. If
the world price of steel is $600 per ton, a specific tariff of $120 per ton is
equivalent to an ad valorem tariff of 25 percent.
46. An
import tariff will worsen the terms of trade for a "small" country
but improve the terms of trade for a "large" country.
47. Suppose
that the tariff on imported steel is 40 percent, the tariff on imported iron
ore is 20 percent, and 30 percent of the cost of producing a ton of steel
consists of the iron ore it contains. The effective rate of protection of steel
is approximately 49 percent.
48. There
is widespread agreement among economists that import tariffs increase overall
employment in the levying country.
49. Assume
that the United States imports VCRs from South Korea at a price of $200 per
unit and that these VCRs are subject to an import tariff of 20 percent. Also
assume that U.S. components are used in the VCRs assembled by South Korea and
that these components have a value of $100. Under the Offshore Assembly
Provision of U.S. tariff policy, the price of an imported VCR to the U.S. consumer
after the tariff has been levied is $220.
50. Assume
that the United States imports televisions from Taiwan at a price of $300 per
unit and that these televisions are subject to an import tariff of 25 percent.
Also assume that U.S. components are used in the televisions assembled by
Taiwan and that these components have a value of $100. Under the Offshore
Assembly Provision of U.S. tariff policy, the price of an imported television
to the U.S. consumer after the tariff has been levied is $375
SHORT ANSWER
1. Can
import duties have unintended side effects?
2. What
happens to effective protection when the value added by the domestic producer
declines?
ESSAY
1. Is
it possible for a low nominal tariff rate to understate the effective rate of
protection? What is tariff escalation?
2. How
can tariffs be justified?
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