Ch 4 Practice HW

Suppose that the production of $1 million worth of steel in Canada requires $100,000 worth of imported taconite. Canada's nominal tariff rates for importing these goods are 20% for steel and 10% for taconite. Given this information, the effective rate of protection for Canada's steel industry is ____

*21%* The effective rate of protection can be determined using the following formula: e = (n - ab) / (1 - a) *Where:* *n*= the nominal tariff rate on the final product; *a*= the ratio of the value of the imported input to the value of the finished product; *b*= is the nominal tariff rate on the imported input. The ratio of imported inputs to finished product (*a*) is: *$100,000/$1,000,000 = 0.1* Plugging the above values into the formula yields the effective rate of protection for Canada's steel industry: e = [0.2 - (0.1 * 0.1)] / (1 - 0.1) e = (0.2 - 0.01) / 0.9 e = 0.19 / 0.9 e = 0.21 or *21%*

Which of the following are the methods customs appraisers use to determine the values of commodity imports? Check all that apply. 1. The nominal tariff methods 2. An ad valorem valuation 3. A free-on-board valuation 4. A cost-insurance-freight valuation

3. A free-on-board valuation 4. A cost-insurance-freight valuation

Under a ____ valuation, an ad valorem tariff is levied as a percentage of the imported commodity's total value as it arrives at its final destination.

CIF or cost-insurance-freight valuation

____ valuation includes transportation costs.

CIF or cost-insurance-freight valuation

____ is the difference between the amount that buyers would be willing and able to pay for a good and the actual amount the buyer pays. I.e., the difference between the amount actually paid by the buyer and the maximum that the buyer would have been willing to pay for the product

Consumer surplus

____ is the difference between the maximum amount buyers are willing to pay for a given quantity of a good and the amount actually paid.

Consumer surplus

The effective rate of protection will be ____ than the nominal tariff rate whenever the nominal tariff on finished goods is larger than the tariff on inputs.

The effective rate of protection will be *larger* than the nominal tariff rate whenever the nominal tariff on finished goods is larger than the tariff on inputs.

The effective rate of protection will be ____ than the nominal tariff rate whenever the nominal tariff on finished goods is smaller than the tariff on inputs.

The effective rate of protection will be *smaller* than the nominal tariff rate whenever the nominal tariff on finished goods is smaller than the tariff on inputs.

The effective rate of protection will be larger than the nominal tariff rate whenever the nominal tariff on ____ is larger than the tariff on ____.

The effective rate of protection will be larger than the nominal tariff rate whenever the nominal tariff on *finished goods* is larger than the tariff on *inputs*.

The effective rate of protection will be smaller than the nominal tariff rate whenever the nominal tariff on ____ is smaller than the tariff on ____.

The effective rate of protection will be smaller than the nominal tariff rate whenever the nominal tariff on *finished goods* is smaller than the tariff on *inputs*.

Which of the following defines a specific tariff? a. A fixed amount of money per unit of the imported product b. A fixed amount of money per unit combined with a fixed percentage of the value of the imported product c. A fixed percentage of the value of the imported product as it enters the country

a. A fixed amount of money per unit of the imported product

What impact does the imposition of a tariff normally have on a large nation's terms of trade and volume of trade? a. Both terms of trade and trade volume improve. b. Terms of trade improve, while trade volume declines. c. Both terms of trade and trade volume decline. d. Terms of trade worsen, while trade volume increases.

b. Terms of trade improve, while trade volume declines

A ____ is a storage facility for imported goods; it allows imported goods to be put into storage without the payment of duties. Goods may be later sold overseas duty free or withdrawn for domestic sale upon payment of import duties.

bonded warehouse

Industrialized nations' low tariffs on primary commodities ____ developing nations to expand operations in these sectors. The high protective rates levied on manufactured goods ____ for developing nations wishing to compete in this area.

encourage; create entry barriers

An ____ is an area where foreign merchandise can be repackaged, repaired, or assembled into finished products

foreign trade zone

The ____ is the tariff revenue extracted from foreign producers in the form of a lower supply price

terms-of-trade effect

If the favorable ____ more than offsets the ____ resulting from the tariff, national welfare will improve.

terms-of-trade effect; deadweight losses

Since a large nation faces an ____ product supply curve, when it imposes a tariff, the reduction in quantity demanded puts ____ pressure on the supply price, improving the importing country's terms of trade.

upward-sloping; downward

Bonded warehouses and FTZs are similar in that customs duties are due only ____

when goods are transferred from the these facilities for U.S. consumption.

*T/F* A tariff adds to the nation's welfare via its consumption effect and protective effect.

False

A ____ tariff is expressed as a fixed amount of money per unit of the imported product.

specific tariff

Suppose that the production of $1 million worth of steel in Canada requires $100,000 worth of imported taconite. Canada's nominal tariff rates for importing these goods are 30% for steel and 10% for taconite. Given this information, the effective rate of protection for Canada's steel industry is ____

*32%* The effective rate of protection can be determined using the following formula: e = (n - ab) / (1 - a) *Where:* *n*= the nominal tariff rate on the final product; *a*= the ratio of the value of the imported input to the value of the finished product; *b*= is the nominal tariff rate on the imported input. The ratio of imported inputs to finished product (*a*) is: *$100,000/$1,000,000 = 0.1* Plugging the above values into the formula yields the effective rate of protection for Canada's steel industry: e = [0.3 - (0.1 * 0.1)] / (1 - 0.1) e = (0.3 - 0.01) / 0.9 e = 0.29 / 0.9 e = 0.32 or *32%*

Suppose that the production of $1 million worth of steel in Canada requires $100,000 worth of imported taconite. Canada's nominal tariff rates for importing these goods are 40% for steel and 10% for taconite. Given this information, the effective rate of protection for Canada's steel industry is ____

*43%* The effective rate of protection can be determined using the following formula: e = (n - ab) / (1 - a) *Where:* *n*= the nominal tariff rate on the final product; *a*= the ratio of the value of the imported input to the value of the finished product; *b*= is the nominal tariff rate on the imported input. The ratio of imported inputs to finished product (*a*) is: *$100,000/$1,000,000 = 0.1* Plugging the above values into the formula yields the effective rate of protection for Canada's steel industry: e = [0.4 - (0.1 * 0.1)] / (1 - 0.1) e = (0.4 - 0.01) / 0.9 e = 0.39 / 0.9 e = 0.43 or *43%*

Which of the following tariffs provide protection to both domestic manufacturers and the finished goods industry? Check all that apply. o A compound tariff o An ad valorem tariff o A specific tariff

*A compound tariff* A compound tariff is applied to manufactured products embodying raw materials that are subject to tariffs. In this case, the specific portion of the duty 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.

Which of the following tariffs provide protection to domestic producers during a business recession? Check all that apply. a. A compound tariff b. A specific tariff c. An ad valorem tariff

*A specific tariff* Since a specific tariff is a fixed monetary duty per unit of imported product, the degree of protection afforded by a specific tariff varies inversely with changes in import prices. Thus, during a recession, when cheaper products are purchased, a specific tariff provides better protection than an ad valorem or a compound tariff. More generally, specific tariffs cushion domestic producers progressively against foreign competitors who cut their prices.

Which of the following tariffs provide protection to domestic producers during periods of changing prices? Check all that apply. a. A compound tariff b. A specific tariff c. An ad valorem tariff

*An ad valorem tariff* One of the advantages of an ad valorem tariff is that it allows for a constant degree of protection for domestic producers during periods of changing prices. For example, if the tariff rate is 20% ad valorem and the imported product price is $200, the duty is $40. If the product's price increases to $300, the duty collected rises to $60. If the product price falls to $100, the duty drops to $20. An ad valorem tariff yields revenues proportionate to values, maintaining a constant degree of relative protection at all price levels. In recent decades, in response to global inflation and the rising importance of world trade in manufactured products, ad valorem duties have been used more often than specific duties.

*T/F* If a small nation imposes a tariff on an imported good, the volume of international trade will decline, and world welfare will suffer.

*False* Since a small nation is a price taker and faces a horizontal world supply schedule, neither the price nor quantity of world output would be affected by the tariff. Thus, the world's welfare will not be affected.

*T/F* Two common valuation concepts used by customs appraisers are the free-on-board (FOB) technique and the cost-insurance-freight (CIF) technique. Under an FOB valuation, an ad valorem tariff is levied as a percentage of the imported commodity's total value as it arrives at its final destination. Under a CIF valuation, an ad valorem tariff is applied to a product's value as it leaves the exporting country.

*False* Two common valuation concepts used by customs appraisers are the free-on-board (FOB) technique and the cost-insurance-freight (CIF) technique. Under an FOB valuation, an ad valorem tariff is applied to a product's value as it leaves the exporting country. Under a CIF valuation, an ad valorem tariff is levied as a percentage of the imported commodity's total value as it arrives at its final destination. Thus, the latter includes transportation costs.

*T/F* A tariff detracts from the nation's welfare via its consumption effect and protective effect.

*True* Import tariffs increase the domestic market price of an item, and the higher price discourages domestic consumption and encourages producers to expand output. A tariff thus detracts from a nation's welfare via its consumption effect (the loss of welfare caused by increased prices and lower consumption) and protective effect (the loss of welfare resulting from wasted resources when less efficient domestic production is substituted for more efficient foreign production). An import tariff does should be just high enough to reduce the price differential between the imported products and the domestically made products.

*T/F* The imposition of a tariff on a large nation improves its terms of trade, while trade volume declines.

*True* The terms of trade improve, while the trade volume declines. Since a large nation faces an upward-sloping (rather than a horizontal) product supply curve, when it imposes a tariff, the reduction in quantity demanded puts downward pressure on the supply price, improving the importing country's terms of trade. However, a tariff causes the volume of imports to decrease, which reduces the nation's welfare by reducing its consumption of low-cost imports. In sum, there is a gain because of improved terms of trade and a loss due to a reduced import volume

The formula for the effective rate of protections is as follows: e = (n - ab) / (1 - a) What do *e*, *n*, *a*, and *b* represent?

*e* = the effective rate of protection *n* = the nominal tariff on final product *a* = the ratio of the value of the imported input to the value of the finished product *b* = the nominal tariff rate on the imported input

Suppose KiddoComp, which makes thin computers, adds value by assembling thin computer components that are produced abroad. Suppose the imported components can enter the United States on a duty-free basis (zero tariff). Suppose also that 20% of a thin computer's final value can be attributed to domestic assembly activities (value added). The domestic price of a thin computer is $500. The remaining 80% reflects the value of the imported components. Let the cost of the thin computer's components be the same for both KiddoComp and its foreign competitor, which can produce and sell a thin computer for $500. When material inputs or intermediate products enter a country at a low duty while the final imported product is protected by a high duty, the nominal tariff rate on the final product ____ the effective rate of protection.

*understates* If the tariff on inputs is small (0%) relative to the tariff on finished goods, then the nominal tariff rate will understates the effective rate of protection.

What is meant by the term bonded warehouse?

A storage facility for imported goods

Importers who use ____ can conduct a broader range of business activities than can occur in ____ that permit only the storage of imported goods and limited repackaging and processing activities.

FTZs; bonded warehouses

During a recession, when cheaper products are purchased, a ____ tariff provides better protection than an ____ or a ____ tariff

During a recession, when cheaper products are purchased, a *specific* tariff provides better protection than an ad valorem or a compound tariff

Under an ____ valuation, an ad valorem tariff is applied to a product's value as it leaves the exporting country.

FOB or free-on-board valuation

For a small nation, a tariff placed on an imported product is shifted to the ____ via a ____. Consumer surplus ____ as a result of the ____. The small nation's welfare ____ by an amount equal to the ____ and ____. Therefore, the result is ____ due to a tariff.

For a small nation, a tariff placed on an imported product is shifted to the *domestic consumer* via a *higher product price*. Consumer surplus *falls* as a result of the *price increase*. The small nation's welfare *decreases* by an amount equal to the *protective effect* and *consumption effect*. Therefore, the result is *deadweight losses* due to a tariff.

Graphically, ____ is represented by the area under the demand curve and above the good's market price.

Graphically, *consumer surplus* is represented by the area under the demand curve and above the good's market price.

Graphically, ____ is represented by the area above the supply curve and below the good's market price.

Graphically, *producer surplus* is represented by the area above the supply curve and below the good's market price.

If the tariff on inputs is small relative to the tariff on finished goods, then the nominal tariff rate will ____ the effective rate of protection. For example, suppose the tariff on imported parts is 0%, the tariff on the finished product is 10%, and 80% of the product's value is imported inputs. The effective rate of protection would be ____. Thus, the nominal tariff rate of 10% ____ the effective rate of protection of ____.

If the tariff on inputs is small relative to the tariff on finished goods, then the nominal tariff rate will *understate* the effective rate of protection. For example, suppose the tariff on imported parts is 0%, the tariff on the finished product is 10%, and 80% of the product's value is imported inputs. The effective rate of protection would be *e = (n − ab) / (1 − a) = 0.10.2 = 50%* Thus, the nominal tariff rate of 10% *understates*the effective rate of protection of *50%*.

____ is the between the minimum amount that producers would be willing sell their products for and the actual amount they receive I.e., the difference between the amount actually received by the producer and the minimum that the producer would have been willing to sell the product for

Producer surplus

____ is the revenue producers receive over and above the minimum necessary for production.

Producer surplus

Since a small nation is a price ____ and faces a ____ world supply schedule

Since a small nation is a price *taker* and faces a *horizontal* world supply schedule

____ tariffs cushion domestic producers progressively against foreign competitors who cut their prices

Specific

Suppose the tariff on imported parts is 20%, the tariff on the finished product is 10%, and 80% of the product's value is imported units. The effective rate of protection is ____. In this case, the nominal tariff rate of 10% ____ the effective rate of protection of ____.

Suppose the tariff on imported parts is 20%, the tariff on the finished product is 10%, and 80% of the product's value is imported units. The effective rate of protection is: *e = (b - ab) / (1 - a)* *e = (0.1 - 0.8 * 0.2) / (1 - 0.8)* *e = 0.06 / 0.2* *e = -30%* In this case, the nominal tariff rate of 10% *overstates* the effective rate of protection of *-30%*.

The benefits and costs of protecting domestic producers from foreign competition are based on the direct effects of an import tariff. On the one hand, ____ and ____ can benefit from tariffs through increases in ____, ____, ____, and ____. On the other hand, a tariff imposes costs on ____ in the form of ____ for protected products and reductions in the ____

The benefits and costs of protecting domestic producers from foreign competition are based on the direct effects of an import tariff. On the one hand, *import-competing producers* and *workers* can benefit from tariffs through increases in *output, profits, jobs*, and *compensation*. On the other hand, a tariff imposes costs on *domestic consumers* in the form of *higher prices* for protected products and reductions in the *consumer surplus.*

The degree of protection afforded by a ____ tariff varies inversely with changes in import prices. This is because:

The degree of protection afforded by a *specific* tariff varies inversely with changes in import prices. This is *because a specific tariff is a fixed monetary duty per unit of imported product*

How do bonded warehouses help importers mitigate the effects of domestic import duties?

They allow imported goods to be put into storage without the payment of duties until the goods are withdrawn for domestic consumption.

How do foreign trade zones help importers mitigate the effects of domestic import duties?

They allow imported goods to be put into storage without the payment of duties until the goods are withdrawn for domestic consumption.

*T/F* A reduction in tariffs will increase national welfare by increasing consumption and reducing inefficient domestic production.

True

*T/F* If a tariff triggers retaliatory tariffs by other countries, the volume of international trade will decline, and world welfare will suffer.

True

*T/F* Two common valuation concepts used by customs appraisers are the free-on-board (FOB) technique and the cost-insurance-freight (CIF) technique. Under an FOB valuation, an ad valorem tariff is applied to a product's value as it leaves the exporting country. Under a CIF valuation, an ad valorem tariff is levied as a percentage of the imported commodity's total value as it arrives at its final destination.

True

*T/F* When material inputs or intermediate products enter a country at a low duty while the final imported product is protected by a high duty, the nominal tariff rate on the final product *understates* the effective rate of protection.

True

An ____ tariff is a fixed percentage of the value of the imported product as it enters the country

ad valorem

One of the advantages of a(n) ____ tariff is that it allows for a constant degree of protection for domestic producers during periods of changing prices

ad valorem

Which of the following defines a compound tariff? a. A fixed amount of money per unit of the imported product b. A fixed amount of money per unit combined with a fixed percentage of the value of the imported product c. A fixed percentage of the value of the imported product as it enters the country

b. A fixed amount of money per unit combined with a fixed percentage of the value of the imported product

Which of the following would be in the best interest of less developed nations? a. Greater exports of raw materials from industrialized countries to less developed countries b. Avoidance by industrialized countries of disproportionate tariff reductions on raw materials c. Avoidance by industrialized countries of disproportionate tariff reductions on manufactured goods

b. Avoidance by industrialized countries of disproportionate tariff reductions on raw materials

Let *e* be the effective rate of protection, *n* be the nominal tariff rate on the final product, *a* be the ratio of the value of the imported input to the value of the finished product, and *b* be the nominal tariff rate on the imported input. Which of the following is the correct formula for the effective rate of protection? a. e = (1 - a) / ab b. e = ab / (1 - a) c. e = (n - ab) / (1 - a) d. e = (1 - a) / (n - ab)

c. e = (n - ab) / (1 - a)

Which of the following defines an ad valorem tariff? a. A fixed amount of money per unit combined with a fixed percentage of the value of the imported product b. A fixed amount of money per unit of the imported product c. A fixed percentage of the value of the imported product as it enters the country

c. A fixed percentage of the value of the imported product as it enters the country

Economists generally contend that most arguments for trade restrictions ____withstand empirical analysis

cannot

A ____ tariff combines a specific tariff and an ad valorem tariff.

compound

A ____ tariff is applied to manufactured products embodying raw materials that are subject to tariffs.

compound

____ is the loss of welfare caused by increased prices and lower consumption

consumption effect

Suppose that to protect its producers from foreign competition, the U.S. government levies a specific tariff of $250 per ton on steel imports. Which of the following best describes the effect of the tariff? a. The free trade demand curve shifts to the left by an amount greater than the amount of the tariff. b. The free trade supply curve shifts to the left by an amount greater than the amount of the tariff. c. The free trade demand curve shifts to the left by an amount equal to the amount of the tariff. d. The free trade supply curve shifts to the left by an amount equal to the amount of the tariff.

d. The free trade supply curve shifts to the left by an amount equal to the amount of the tariff.

What is the formula for the effective rate of protection?

e = (n - ab) / (1 - a)

A ____ is a site where foreign merchandise can be imported with no import duty; merchandise in this can be stored or used in the manufacturing of final products. Once merchandise has moved into this, the merchandise can be repackaged, repaired or damaged goods destroyed, component parts assembled into finished products, and either the parts or finished products exported. The manufacturing of goods is also allowed in this.

foreign trade zone (FTZ)

Two common valuation concepts used by customs appraisers are the ____ technique and the ____ technique.

free-on-board (FOB); cost-insurance-freight (CIF)

Assume a large nation imposes a specific tariff of $1,500 on imported computers. This country's welfare will increase if the terms-of-trade effect is ____ than the deadweight losses resulting from the tariff.

greater than

Which of the following accurately describe the effects of an import tariff imposed on oil? Check all that apply. i. An increase in output of domestic oil producers ii. A loss of international competitiveness iii. Lower output of domestic oil producers iv. A decrease in jobs and compensation in the domestic energy industry v. Lower manufacturers' prices vi. Higher manufacturers' prices vii. Higher energy prices on domestic consumers and energy-consuming manufacturers

i. An increase in output of domestic oil producers ii. A loss of international competitiveness vi. Higher manufacturers' prices vii. Higher energy prices on domestic consumers and energy-consuming manufacturers

Which of the following arguments do less developed nations make about why the industrialized nations' tariff structures discourage the less developed nations from undergoing industrialization? Check all that apply. i. Industrialized nations' low tariffs on primary commodities encourage developing nations to expand operations in these sectors. ii. Industrialized nations' high tariffs on primary commodities encourage developing nations to expand operations in these sectors. iii. The low protective rates levied on manufactured goods create entry barriers for developing nations wishing to compete in this area. iv. The high protective rates levied on manufactured goods create entry barriers for developing nations wishing to compete in this area.

i. Industrialized nations' low tariffs on primary commodities encourage developing nations to expand operations in these sectors. iv. The high protective rates levied on manufactured goods create entry barriers for developing nations wishing to compete in this area.

Generally, what factors influence the size of the revenue, protective, consumption, and redistributive effects of a tariff? Check all that apply. i. The impact of the tariffs on domestic prices ii. The beggar-thy-neighbor policy iii. The size of the government iv. The response of domestic producers and consumers to price changes

i. The impact of the tariffs on domestic prices iv. The response of domestic producers and consumers to price changes

Which of the following results from an increase in the market price? Check all that apply. i. A decrease in producer surplus ii. A decrease in consumer surplus iii. An increase in consumer surplus iv. An increase in producer surplus

ii. A decrease in consumer surplus iv. An increase in producer surplus

Which of the following accurately describe the effects of an import tariff imposed on steel? Check all that apply. i. A decrease in jobs and compensation in the domestic steel industry ii. Domestic consumers and steel-using manufacturers that are better off iii. An increase in jobs and compensation in the domestic steel industry iv. Higher manufacturers' prices

iii. An increase in jobs and compensation in the domestic steel industry iv. Higher manufacturers' prices

Which of the following are arguments for trade restrictions that might be considered valid in today's world? Check all that apply. i. Protection against cheap foreign labor argument ii. Equalization of production costs argument iii. Infant-industry argument iv. National security argument

iii. Infant-industry argument iv. National security argument

Although tariffs may improve the welfare of a single nation, the world's welfare may decline. Under what conditions would this be true? Check all that apply. i. An increase in tariffs reduces the deadweight loss. ii. A tariff increases a nation's producer surplus. iii. Tariffs lower the volume of trade. iv. A tariff sparks retaliatory tariffs by other nations. v. A small nation imposes a tariff on an imported good.

iii. Tariffs lower the volume of trade. iv. A tariff sparks retaliatory tariffs by other nations.

The benefits and costs of protecting domestic producers from foreign competition are based on the direct effects of an ____

import tariff

Suppose a large economy imposes a specific tariff of $1,000 on imported autos. If the terms-of-trade effect exceeds the deadweight losses resulting from the tariff, its national welfare ____

increases

____ is the loss of welfare resulting from wasted resources when less efficient domestic production is substituted for more efficient foreign production

protective effect