ECO 305 Week 3 Quiz – Strayer

ECO/305 Week 3 Quiz – Strayer

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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?