Quizlette
Under free-trade conditions, suppose Australia imports TV sets at a price of $100 each. Determine the free-trade equilibrium, and illustrate graphically. How many TV sets will be produced, consumed, and imported? Calculate the dollar value of Australian consumer surplus and producer surplus.
Qs = 10, Qd = 40, Imports = 30. Consumer surplus = $8000; producer surplus = $500.
Suppose Venezuela imports TV sets at a price of $150 each. Under free trade, how many sets does Venezuela produce, consume, and import? Determine Venezuela's consumer surplus and producer surplus.
Qs = 100, Qd = 800, Imports = 700. Consumer surplus = $160,000, producer surplus = $2500.
Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel. If Mexican steel importers behave as monopoly buyers and foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico equals:
$400
Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel. If the Mexican government auctions import licenses to the highest foreign bidder, the overall welfare loss of the quota to Mexico equals:
$400
With free trade, the equilibrium price of steel is $___ per ton. At this price, ____ tons are purchased by U.S. buyers, _____ tons are supplied by U.S. producers, and _____ tons are imported.
$400, 12 tons, 2 tons, 10 tons.
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.
$475, 10 tons, 50 tons, 40 tons
Consider Figure 4.1. The tariff would be prohibitive (i.e., eliminate imports) if it equaled:
$5
Consider Figure 4.1. With free trade, Mexico's producer surplus and consumer surplus respectively equal:
$5, $605
Consider Table 4.1. Prior to the tariff, domestic value added equals:
$50
According to Figure 4.2, the tariff's terms-of-trade effect equals:
$500
Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). As a result of the subsidy Mexican steel producers gain ____ of producer surplus.
$600
With the tariff, the domestic price of steel rises to $ _____ per ton. At this price, U.S. buyers purchase _____ tons, U.S. producers supply _____ tons, and _____ tons are imported.
$600, 10 tons, 4 tons, 6 tons.
Consider Table 4.1. After the tariff, domestic value added equals:
$75
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:
$75, $25, improve
Referring to Figure 4.2, the tariff's deadweight welfare loss to the United States totals:
$750
Consider Figure 5.4. The production subsidy results in an overall welfare loss for Venezuela totaling:
$8
Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The total cost of the subsidy to the Mexican government equals:
$800
Consider Figure 5.1. Suppose the rest of the world voluntarily agrees to reduce steel shipments to Mexico vis-a-vis an export quota equal to 2 tons. Assuming Mexican importers behave as competitive buyers while foreign exporters behave as monopoly sellers, the overall welfare loss of the quota to Mexico is:
$800
Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel. If foreign exporters behave as monopoly sellers, and Mexican importers behave as competitive buyers, the overall welfare loss of the quota to Mexico equals:
$800
According to Figure 4.1, the deadweight cost of the tariff totals:
$90
Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the US demands at $8 per bottle. If the US imposes a quota of 15 bottles of wine , how much revenue will the US government collect?
0
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:
10 percent
Consider Figure 4.1. With free trade, Mexico imports:
100 calculators
Consider Figure 5.2. With international dumping, ABC Inc. sells ____ calculators to Canadian buyers at a price of $____ and ____ calculators to French buyers at a price of $____.
15, $7, 12, $4
Consider Figure 5.4. Assume the Venezuelan government grants its manufacturers a production subsidy of $4 per calculator. After the subsidy is granted, Venezuelan imports total:
16 calculators
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:
18 percent
Referring to Figure 5.2, consider if ABC Inc. sells 27 calculators at a price of $5 each, realizing profits totaling $54. Of this quantity, ABC Inc. sells ____ calculators in Canada and realizes revenues totaling $____; the firm sells ____ calculators in France and realizes revenues totaling $____.
21, $105, 6, $30
Consider Figure 5.2. In the absence of international dumping, ABC Inc. maximizes profits by selling ____ calculators at a price of $____; the firm realizes profits totaling $____.
27, $5, $54
Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the US demands at $8 per bottle. IF the US imposes a quota of 15 bottles of wine, how much wine will US consumers demand, how much wine will US producers produce and how much wine will be imported?
30 bottles, 15 bottles, 15 bottles
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:
32 percent
Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The quantity of imports equals:
4 tons
Consider Figure 4.1. With a per-unit tariff of $3, the quantity of imports decreases to:
40 calculators
Consider Figure 5.3. Suppose the rest of the world can supply apples to Sweden at a price of $0.60 per pound. With free trade, Sweden produces ____ pounds of apples and imports ____ pounds of apples.
6, 16
Consider Figure 4.1. In the absence of trade, Mexico produces and consumes:
60 calculators
Consider Figure 5.3. If SSweden+Quota represents the supply schedule after a quota is levied, Sweden's imports will equal:
8 apples
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
False
Consider Figure 5.5. Compared to free trade, the Japanese export quota leads to an increase in Mexican consumer surplus of $3150.
False
Consider Figure 5.5. The deadweight welfare loss to Mexico, as a result of the Japanese export quota, totals $1200.
False
Consider Figure 5.5. The government of Mexico collects 50 percent of the export quota's revenue effect, or $600, in the form of tax revenue.
False
Consider Figure 5.5. With free trade, Mexican producer surplus equals $2450 and Mexican consumer surplus equals $200.
False
During periods of growing demand, a tariff more effectively restricts the volume of imports than an equivalent import quota.
False
During the 1980s, U.S. steel-using companies (Caterpillar) actively supported the U.S. government's negotiation of voluntary export agreements with foreign steel-exporting countries.
False
For an export quota applied to manufactured goods, foreign exporters tend to capture only a negligible share of the quota's revenue effect.
False
For most nations, the ratio of imports to total purchases in the public sector is much higher than in the private sector.
False
For the United States, the Buy American Act has tended to increase consumer surplus for U.S. buyers of protected merchandise.
False
Graphically, consumer surplus is represented by the area above the demand curve and below the product's market price.
False
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.
False
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.
False
If the Australian government imposes a domestic content requirement of 75 percent on autos, at least 25 percent of an auto's value must be produced in a foreign country if that auto is to be sold in Australia.
False
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.
False
Import tariffs and import quotas yield identical protection effects, consumption effects, redistribution effects, and revenue effects.
False
International dumping occurs when foreign buyers are charged higher prices than domestic buyers for an identical product, after allowing for transportation costs and tariff duties.
False
Local content laws stipulate the maximum percentage of a product's total value that must be produced domestically for that product to be sold domestically.
False
Refer to Exhibit 4.2. The tariff leads to a deadweight welfare loss for Canada totaling $1,000.
False
Refer to Exhibit 4.2. The tariff leads to an increase in Canadian consumer surplus totaling $11,000.
False
Refer to Exhibit 4.2. The tariff's revenue effect equals $6,000.
False
Relatively low wages in Mexico make it impossible for U.S. manufacturers of labor-intensive goods to compete against Mexican manufacturers.
False
The margin of dumping equals the amount by which the foreign price is greater than the domestic price, or the amount by which the foreign price exceeds the cost of production.
False
The nominal tariff rate signifies the total increase in domestic productive activities compared to what would occur under free-trade conditions.
False
The purpose of international dumping is to decrease a firm's costs and increase its profits, compared to what would be realized in the absence of dumping.
False
The redistribution effect is the transfer of producer surplus to domestic consumers of the import-competing product.
False
There is widespread agreement among economists that import tariffs increase overall employment in the levying country.
False
To protect domestic producers from foreign competition, the U.S. government levies both import tariffs and export tariffs.
False
Today most industrial countries protect their industries via global import quotas rather than selective import quotas.
False
Voluntary export restraint agreements typically apply to all of the world's exporting nations rather than only the most important exporting nations.
False
With a quota placed on imported sugar, increased domestic demand leads to increased sugar imports but not to higher sugar prices.
False
With a specific tariff, the degree of protection afforded domestic producers varies directly with changes in import prices.
False
With a tariff on auto imports, increased domestic demand leads to a fall in the number of autos imported and a rise in the number of autos produced domestically.
False
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:
Deceptive since Koreans eventually spend the dollars on U.S. goods
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:
Decrease, and the foreign demand for U.S. exports would increase
A firm would increase profits from dumping if it charges a lower price at home, where demand is inelastic, and a higher price abroad where demand is elastic.
False
A limitation of a specific tariff is that it provides a constant level of protection from domestic commodities regardless of fluctuations in their prices over time.
False
A subsidy granted to an import-competing producer imposes a deadweight loss on the domestic economy equal to the redistribution effect plus consumption effect.
False
A subsidy granted to import-competing producers reduces overall domestic welfare by the same amount as would a tariff or quota that restricts imports by the same amount.
False
A subsidy granted to import-competing producers results in a welfare loss to the economy by an amount equal to the protective effect plus the consumption effect.
False
A tariff on steel imports tends to improve the competitiveness of domestic automobile companies.
False
A tariff quota is a combination of a specific tariff and an ad valorem tariff.
False
According to the U.S. Buy American Act, federal government agencies cannot purchase materials and products from U.S. suppliers if their prices are higher than those of foreign competitors.
False
According to the cost-based definition of dumping, dumping begins to occur when a firm sells a product at a price that is less than average variable cost.
False
According to the tariff escalation effect, industrial countries apply low tariffs to imports of finished goods and high tariffs to imports of raw materials.
False
Although an import tariff provides the domestic government additional tax revenue, it benefits domestic consumers at the expense of domestic producers.
False
An import quota tends to reduce the overall welfare of the importing nation by an amount equal to the protective effect, consumption effect, and the portion of the revenue effect that is captured by the domestic government.
False
An import tariff reduces the welfare of a "small" country by an amount equal to the redistribution effect plus the revenue effect.
False
An import tariff will worsen the terms of trade for a "small" country but improve the terms of trade for a "large" country.
False
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.
False
If we consider the impact on both consumers and producers, then protection of the steel industry is:
Not in the interest of the United States as a whole, but it might be in the interest of the state of Pennsylvania
Tariff Escalation
Occurs when tariff structures of industrialized nations are characterized by rising rates that give greater protection to intermediate and finished products than to primary commodities
Which of the following refers to a market-sharing pact negotiated by trading partners to moderate the intensity of international competition?
Orderly marketing agreement
Would a tariff imposed on U.S. oil imports promote energy development and conservation for the United States?
Our trade model predicts that by forcing up the price of oil in the United States, domestic production would be encouraged, while domestic consumption would be discouraged.
In the absence of international dumping, BTI would charge a uniform price to U.K. and Canadian customers (ignoring transportation costs). Determine the firm's profit maximizing output and price, as well as total profit. How much profit accrues to BTI on its U.K. sales and on its Canadian sales?
Output = 9, price = $5, profit = $18. Profits on U.K. sales = $14 while profits on Canadian sales = $4.
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:
Protective effect plus consumption effect
The imposition of tariffs on imports results in deadweight welfare losses for the home economy. These losses consist of the:
Protective effect plus consumption effect
The offshore assembly provision in the U.S.
Provides favorable treatment to products assembled abroad from U.S. manufactured components
Empirical studies show that because voluntary export quotas are typically administered by exporting countries, foreign exporters tend to:
Raise their export prices, thus capturing much of the quota's revenue effect
Revenue Effect
Represents the government's collections of tariff revenue; found by multiplying the number of imports times the tariff
Domestic Content Requirements
Requirements that stipulate the minimum percentage of a product's total value that must be produced domestically if the product is to qualify for zero tariff rates
Consider Figure 5.2. Compared with the total revenue and total profit that ABC Inc. realizes in the absence of dumping, with dumping the firm attains a:
Rise in revenue of $18, rise in profits of $18
Show graphically the effect of the tariff on the overall supply schedule of steel.
SUS+F shifts upward by the amount of the tariff, $250.
What would be the likely effects of export restraints imposed by Japan on its auto shipments to the United States?
Same general answer as Question 12. The distribution of the revenue effect tends to accrue to foreign auto-makers.
What are the major forms of subsidies that governments grant to domestic producers?
Subsidies include domestic subsidies and export subsidies. Methods used to subsidize producers include tax concessions, low interest rate loans, and loan guarantees.
Domestic content legislation applied to autos would tend to:
Support wage levels of America autoworkers
If import licenses are auctioned off to domestic importers in a competitive market, their scarcity value (revenue effect) accrues to:
The domestic government
A nation whose imports constitute a very small portion of the world market supply is a price taker, facing a constant would price for its import commodity.
True
A subsidy granted to an import-competing producer shifts its supply schedule outward to the right.
True
A subsidy granted to import-competing producers is intended to lead to increased domestic production and decreased imports for the home country.
True
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 affect.
True
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.
True
Although tariffs on imported steel may lead to job gains for domestic steel workers, they can lead to job losses for domestic auto workers.
True
Although the Tokyo Round of international trade negotiations reduced the Buy-American restrictions of the U.S. government, many state governments have maintained restrictive Buy-American policies.
True
An effective Buy American law results in deadweight welfare losses for the United States in the form of the protective effect and consumption effect.
True
An effective Buy American law would tend to increase U.S. producer surplus at the expense of U.S. consumer surplus.
True
An elimination of nontariff barriers on apples tends to increase apple imports, reduce profits of import-competing apple producers, and generate job losses for domestic apple workers.
True
An import quota is a physical restriction on the quantity of goods that may be imported during a specified time period.
True
An orderly marketing agreement is a market-sharing pact negotiated by trading nations, and its effect is to moderate the intensity of international competition.
True
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 2- 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 consumer after the tariff has been levied is $220.
True
Bonded warehouses and foreign trade zones have the effect of allowing domestic importers to postpone and prorate over time their import duty obligations.
True
By limiting the amount of foreign sourcing, local content laws are viewed as a means of jobs preservation for domestic workers.
True
Changes in a "large" country's economic conditions or trade policies can affect the terms at which it trades with other countries.
True
Consider Figure 5.5. Assuming that the revenue effect of the export quota accrues to Japanese firms, the overall welfare loss to Mexico equals $2100 as a result of the quota.
True
Consider Figure 5.5. Compared to free trade, the Japanese export quota leads to an increase in Mexican producer surplus of $1050.
True
Consider Figure 5.5. Suppose that the governments of Mexico and Japan negotiate a voluntary export agreement in which Japanese TV exports to Mexico are limited to 8 units. Under the quota, the price of TVs in Mexico equals $250 while Mexicans produce 10 TVs and purchase 18 TVs.
True
Consider Figure 5.5. The Japanese export quota's revenue effect totals $1200.
True
Consider Figure 5.5. With free trade, Mexicans produce 4 TVs, consume 24 TVs, and import 20 TVs.
True
During a business recession, when cheaper products are purchased, a specific tariff provides domestic producers a greater amount of protection against import-competing goods.
True
During the 1980s, the U.S. government imposed sugar import quotas in an attempt to reduce its costs of maintaining price supports for U.S. sugar growers.
True
Export quotas, placed on Japanese auto shipments to the United States in the 1980s, led to rising prices of both Japanese autos and U.S.-produced autos purchased by the U.S. consumer.
True
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.
True
For a "small" country, a tariff raises the domestic price of an imported product by the full amount of the duty.
True
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.
True
If the Japanese demand for computers is elastic and the Canadian demand for computers is inelastic, a profit-maximizing firm would charge a higher price to Canadian buyers than to Japanese buyers.
True
If the U.S. demand for Korean steel is price elastic, an export subsidy granted to Korean steel firms will increase Korea's export revenue.
True
Import quotas can yield revenue for the domestic government if it auctions import licenses to the highest bidder in a competitive market.
True
Local content laws are consistent with the principle of import substitution, in which domestic production replaces the importation of goods from abroad.
True
Predatory dumping would occur if Toyota Inc. of Japan sells autos to U.S. consumers at lower prices than to Japanese consumers in order to put Chrysler Inc. out of business.
True
Producer surplus is the revenue producers receive over and above the minimum necessary for production.
True
Refer to Exhibit 4.2. All of the import tariff is shifted to the Canadian consumer via a higher price of motorcycles.
True
Refer to Exhibit 4.2. As a result of the tariff, the price of imported motorcycles equals $13,000 and imports total 4 cycles.
True
Refer to Exhibit 4.2. The tariff's redistribution effect equals $7,000.
True
Sporadic (distress) dumping would occur if domestic orange producers dispose of an excess quantity of oranges, resulting from an abnormally large harvest, by selling them at lower prices abroad than at home.
True
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.
True
The deadweight losses of an import tariff consist of the protection effect plus the consumption effect.
True
The distribution of an import quota's revenue effect depends on the relative concentration of bargaining power between foreign exporters and domestic importers.
True
The protective effect of a tariff occurs to the extent that less efficient domestic production is substituted for more efficient foreign production.
True
The sugar import quotas of the U.S. government have tended to increase the market price of sugar, thus reducing the costs to the government of maintaining sugar price supports for domestic growers.
True
To the extent that a local content requirement forces firms to locate production in a high-cost nation, product price rises and consumer surplus falls.
True
To the extent that domestic importing companies organize as a monopoly buyer, and foreign exporting companies behave as competitive sellers, the importing companies capture the revenue effect of a quota.
True
To the extent that subsidies granted to exporting firms reduce the foreign price of their goods, the subsidizing country's terms of trade worsen.
True
Under U.S. antidumping law, an antidumping duty can be levied when the U.S. Commerce Department determines that a foreign product is being sold in the United States at less than fair value and the U.S. International Trade Commission determines that the dumped product is causing economic harm to domestic producers.
True
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.
True
Unlike a specific tariff, an ad valorem tariff differentiates between commodities with different values.
True
When increases in nonrestraint supply offset part of the cutback in shipments that occur under an export quota, the overall inefficiency loss for the importing country is less than that which would have occurred in the absence of nonrestrained exports.
True
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.
True
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.
True
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.
True
What methods do customs appraisers use to determine the values of commodity imports?
Two commonly used valuation concepts used by customs appraisers are the free-on-board technique and the cost-insurance-freight technique
Should U.S. antidumping laws be stated in terms of average total production costs or average variable costs?
While antidumping laws are typically defined in terms of full cost, it may be rational for a firm to sell its product overseas at losses, provided that prices are sufficiently high to cover variable cost.
Redistributive Effect
With a tariff, the transfer of consumer surplus in monetary terms to the domestic producers of the import-competing product
Can import duties have unintended side affects?
Yes. Duties may discourage a company from importing goods in amounts large enough to take advantage of quantity discount pricing. Also, up-front payment of these duties may impose financial hardships on importers.
Is a tariff-rate quota a two-tier tariff? Why?
Yes. It allows a specified number of goods to be imported at one tariff rate, whereas any imports above this level face a higher tariff rate.
When voluntary export limits are imposed on the world's chief exporter
both a and b: the exports of the non-restrained suppliers may be stimulated and a trade diversion effect may occur
Consider Figure 5.3. After the quota is levied, the price of apples in Sweden will equal:
$1.00 per pound
Consider Figure 5.3. In the absence of trade, Sweden's equilibrium price and quantity of apples would be:
$1.40 and 14 pounds
Consider Figure 5.3. The quota leads to a deadweight welfare loss for Sweden of an amount equaling:
$1.60
Figure 4.4 represents the market for gasoline in a small nation. The free trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The change in producer surplus would be
$12.5
Consider Figure 5.1. Suppose instead that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). As a result of the subsidy, the welfare loss to Mexico due to inefficient domestic production equals:
$200
Consider Table 4.1. Prior to the tariff, the total price of domestically-produced VCRs is:
$200
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.
$550, 20 tons
Figure 4.3 represents the domestic market for gasoline in the United States. What is the consumer surplus in the market?
$60
Figure 4.3 represents the domestic market for gasoline in the United States. What is the producer surplus in this market?
$60
According to Figure 4.1, Mexican manufactures gain _____ because of the tariff.
$75
Consider Figure 5.4. Suppose the rest of the world supplies calculators to Venezuela at a price of $4 each. With free trade, Venezuelan imports total:
20 calculators
Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the US demands at $8 per bottle. How much will the US produce and import in these circumstances?
5 bottles, 35 bottles
Consider Table 4.1. The effective tariff rate equals:
50.0 percent
Consider Figure 5.1. With free trade, the quantity of steel imported by Mexico equals:
6 tons
What is meant by the terms bonded warehouse and foreign-trade zone? How does each of these help importers mitigate the effects of domestic import duties?
A bonded warehouse 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. A foreign trade zone is a site where foreign merchandise can be imported with no import duty; merchandise in the zone can be stored or used in the manufacturing of final products.
Antidumping Duty
A duty levied against commodities a home nation believes are being dumped into its markets from abroad
Revenue Tariff
A tariff imposed for the purpose of generating tax revenues and may be placed on either exports or imports
Optimum Tariff
A tariff rate at which the positive difference between the gain of improving terms of trade and the loss of declining import
Compound Tariff
A tariff that is a combination of a specific tariff and an ad valorem tariff
Infant-industry Argument
A tariff that temporarily shields newly developing industries from foreign competition
Protective Effect
A tariff's loss to the domestic economy resulting from wasted resources when less efficient domestic production is substituted for more efficient foreign production
Concerning international dumping, distinguish between the price- and cost-based definitions of foreign market value.
According to the priced-based definition, dumping occurs whenever a foreign firm sells a product in the importing country's market at a price below that for which the product is sold in the firm's home market. According to the cost-based definition, dumping occurs when foreign merchandise is sold in the domestic market at "less than fair value" (i.e., price is less than average total cost).
A specification of a maximum amount of a foreign produced good that will be allowed to enter the country over a given time period is referred to as:
An import quota
Selective Quota
An import quota allocated to specific countries
Large Nation
An importing nation that is large enough so that changes in the quantity of its imports, by means of tariff policy, influence the world price of the product
A decrease in the import tariff will result in:
An increase in imports but a decrease in domestic production
Concerning the restrictive impact of an import quota, assume there occurs an increase in the domestic demand for the import product. As long as the quota falls short of what would be imported under free market conditions, the economy's adjustment to the increase in demand would take the form of:
An increase in the domestic price of the import good
Concerning international dumping, many economists argue that "fair value" should be based on
Average variable cost
Why might U.S. steel using firms lobby against the imposition of quotas on foreign steel sold in the United States?
By contributing to a scarcity of steel in the domestic market, quotas lead to higher steel prices and production costs for domestic steel-using firms. Such cost increases detract from their international competitiveness.
Although tariffs may improve the welfare of a single nation, the world's welfare may decline. Under what conditions would this be true?
By increasing the price of trade goods, tariffs lower the volume of trade. For the world as a whole, there is no favorable terms-of-trade effect to offset the trade volume effect.
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):
Compound tariff
Distinguish between consumer surplus and producer surplus. How do these concepts relate to a country's economic welfare?
Consumer surplus (producer surplus) refers to the difference between the amount actually paid by the buyer (received by the producer) and the maximum (minimum) that the buyer (producer) would have been willing to pay (receive) for the product. By influencing market prices, trade restrictions influence consumer and producer surplus.
Consider Figure 5.3. As a result of the quota, Sweden's consumer surplus:
Decreases by $8
A firm that faces problems of falling sales and excess productive capacity might resort to international dumping if it:
Earns revenues on foreign sales that at least cover variable costs
Which of the arguments for tariffs do you feel are most relevant in today's world?
Economists generally contend that most arguments for trade restrictions cannot withstand searching analysis. The infant industry and national security arguments may have some validity, but they must be highly qualified
Assume that Hong Kong and Taiwan can supply computers to Ecuador at a per unit price of $300 and $500, respectively. With free trade, how many computers does Ecuador import? From which nation does it import?
Ecuador imports 80 computers from Hong Kong.
When the production of a commodity does not utilize imported inputs, the effective tariff rate on the commodity:
Equals the nominal tariff rate on the commodity
Which type of tariff is not used by the American government?
Export tariff
According to Figure 4.2, the tariff leads to the overall welfare of the United States:
Falling by $250
A specific tariff is expressed as a fixed percentage of the total value of an imported product.
False
In the post-World War II era, Nontariff trade barriers have decreased in importance relative to tariff barriers.
False
Compared to an import quota, an equivalent tariff may provide a less certain amount of protection for home producers since:
Foreign firms may absorb the tariff by offering exports at lower prices
Consider Figure 5.3. Assume that Swedish import companies behave as a monopoly buyer while foreign export companies behave as competitive sellers. Compared to free trade, Sweden's import quota results in domestic welfare:
Losses totaling $1.60
A tax of 20 cents per unit of imported cheese would be an example of:
Specific tariff
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?
Tariff quota
A $100 specific tariff provides home producers more protection from foreign competition when:
The home market buys cheaper products rather than expensive products
Customs Valuation
The process of determining the value of an imported product
Nominal Tariff Rate
The tariff rate published in a country's tariff schedule
Free traders point out that:
There is usually an efficiency loss from having tariffs
A tariff can be thought of as a tax on imported goods.
True
A voluntary export agreement
Typically applies only to the world's most important exporting nation(s)
Figure 4.4 represents the market for gasoline in a small nation. The free trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The change in producer surplus would be area
area a
Government subsidies may take the form of all of these EXCEPT:
bank credits
The U.S.-Japaneses agreement in 1981 to limit imports of small Japanese cars to the U.S.
cost the U.S.consumer an extra $660 or so per Japanese import purchased
Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the US demands at $8 per bottle. IF the US imposes a quota of 15 bottles of wine what will happen to consumer surplus?
decreases by $245
Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the US demands at $8 per bottle. What will happen to the price of a bottle of wine in the US if a quota of 15 bottles of wine is imposed?
increase to $15
Anti-dumping law has been called unfair for all of the following reasons EXCEPT:
they are based on average variable cost
A "large" country, that levies a tariff on imports, cannot improve the terms at which it trades with other countries.
False
A ad valorem tariff provides domestic producers a declining degree of protection against import-competing goods during periods of changing prices.
False
Consider Table 4.1. The nominal tariff rate on imported VCRs equals:
$12.5 percent
According to Figure 4.1, the tariff results in the Mexican government collecting:
$120
Consider Figure 4.1. In the absence of trade, Mexico's producer surplus and consumer surplus respectively equal:
$180, $180
Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The overall deadweight welfare loss to Mexico equals:
$200
Consider Table 4.1. Prior to the tariff, the total price of imported VCRs is:
$200
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:
$22,000
Calculate the reduction in U.S. consumer surplus due to the tariff-induced price of steel, as well as the consumption, protective, redistribution, and domestic revenue effects. The deadweight welfare loss of the tariff equals $_____.
$2200, $200, $200, $600, $1200, $400.
Consider Figure 5.4. The increase in Venezuelan producer surplus under the production subsidy totals:
$24
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:
$24,000
Consider Figure 5.3. At the free-trade price of $0.60 per pound, Sweden's consumer surplus totals $____ and producer surplus totals $____.
$24.20, $1.80
Figure 4.4 represents the market for gasoline in a small nation. The free trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The change in consumer surplus would be
$27.50
According to Figure 4.1, the loss in Mexican consumer surplus due to the tariff equals:
$285
Consider Figure 5.3. If the Swedish government auctions import licenses to the highest bidder in a competitive market, it could realize revenues of up to:
$3.20
Consider Figure 5.3. The quota's revenue effect equals:
$3.20
Consider Figure 4.1. With free trade, the total value of Mexico's imports equal:
$300
Consider Figure 5.4. The cost of the production subsidy to the Venezuelan government totals:
$32
Consider Figure 5.1. With free trade, Mexico's consumer surplus and producer surplus respectively equal:
$3200 and $200
By reducing the volume of imports with the tariff, the United States forces the price of imported steel down to $_____. The U.S. terms of trade (improves/worsens), that leads to (an increase/a decrease) in U.S. welfare. Calculate the terms-of-trade effect.
$350, improve, increase, $300.
Consider Figure 5.1. Suppose the rest of the world voluntarily agrees to reduce steel shipments to Mexico vis-a-vis an export quota equal to 2 tons. Assuming Mexican importers behave as monopoly buyers while foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico is:
$400
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.
False
Small Nation
A nation whose imports constitute a very small portion of the world market supply
Absolute Quota
A physical restriction on the quantity of goods that can be imported during a specific time period
A producer successfully practicing international dumping would charge:
A relatively higher price in the more inelastic market
For the United States, a foreign trade zone (FTZ) is
A site within the United States
Describe a specific tariff, an ad valorem tariff, and a compound tariff. What are the advantages and disadvantages of each?
A specific tariff is expressed as a fixed amount of money per unit of the imported product. An ad valorem tariff is a fixed percentage of the value of the imported product as it enters the country. A compound tariff combines a specific tariff and an ad valorem tariff.
Bonded Warehouse
A storage facility operated under the lock and key of (in the case of the United States) the U.S. Customs Service
Export Subsidy
A subsidy paid to exporters so they can sell goods abroad at the lower world price but still receive the higher support price
Domestic Production Subsidy
A subsidy that is sometimes granted to producers of import-competing goods
Protective Tariff
A tariff designed to insulate import-competing producers from foreign competition
When a nation imposes a tariff on the importation of a commodity, economic inefficiencies develop that detract from the national welfare. Explain.
A tariff detracts from the nation's welfare via its consumption effect and protective effect.
Ad Valorem Tariff
A tariff expressed as a fixed percentage of the value of the imported product
Specific Tariff
A tariff expressed in terms of a fixed amount of money per unit of the imported product
Why is a tariff-rate quota viewed as a compromise between the interests of the domestic consumer and those of the domestic producer? How does the revenue effect of a tariff-rate quota differ from that of an import tariff?
A tariff-rate quota attempts to minimize the consumer costs of protectionism by applying a modest within- quota tariff rate; it also shields home producers from severe import competition with a stiffer over-quota tariff rate. Of a tariff quota's revenue effect, a portion accrues to the domestic government while the remainder is captured by domestic importers or foreign exporters as windfall profits.
Tariff
A tax levied on a product when it crosses national boundaries
Global Quota
A technique permitting a specified number of goods to be imported each year, but does not specify where the product is shipped from or who is permitted to import
Consumption Effect
A trade restriction's loss of welfare that occurs
A tax of 15 percent per imported item would be an example of:
Ad valorem tariff
Which of the following is a fixed percentage of the value of an imported product as it enters the country?
Ad valorem tariff
The redistribution effect of an import tariff is the transfer of income from the domestic:
Buyers to domestic producers of the good
The imposition of a domestic content requirement by the United States would cause consumer surplus for Americans to:
Fall
Less developed nations sometimes argue that the industrialized nations' tariff structures discourage the less developed nations from undergoing industrialization. Explain.
Developing countries have argued that industrial countries allow raw materials to be imported at low nominal tariff rates while maintaining high nominal tariff rates on finished products.
Tariffs and quotas on imports tend to involve larger sacrifices in national welfare than would occur under domestic subsidies. This is because, unlike domestic subsidies, import tariffs and quotas:
Distort choices for domestic consumers
A lower tariff on imported aluminum would most likely benefit:
Domestic consumers of aluminum
The principal benefit of tariff protection goes to:
Domestic producers of the good produced
Import quotas tend to lead to all of the following except:
Domestic producers of the imported good being harmed
A subsidy may provide import-competing producers the same degree of protection as tariffs or quotas but at a lower cost in terms of national welfare. Explain.
Domestic subsidies avoid the deadweight losses due to the consumption effect.
In certain industries, Japanese employers do not lay off workers. Therefore, they sometimes have excess supplies of goods that they cannot sell on the home market without lowering prices. To hold down losses, they sell goods in overseas markets at prices well beneath those in Japan. This practice is best referred to as:
Dumping
Suppose that the production of $1 million worth of steel in Canada requires $100,000 worth of taconite. Canada's nominal tariff rates for importing these goods are 20 percent for steel and 10 percent for taconite. Given this information, calculate the effective rate of protection for Canada's steel industry.
Effective tariff rate equals 21 percent.
Suppose the government grants a subsidy to its export firms that permits them to charge lower prices on goods sold abroad. The export revenue of these firms would rise if the foreign demand is:
Elastic in response to the price reduction
Free-trade-biased Sector
Generally comprises exporting companies, their workers, and their suppliers; it also consists of consumers, including wholesalers and retail merchants of imported goods
A nation that imposes tariffs on imported goods may find its welfare improving should the tariff result in a favorable shift in the terms of trade. Explain.
Given a large-country model, a country which imposes a tariff on imports finds its terms of trade improving. Should the favorable terms-of-trade effect more than offset the deadweight losses resulting from the tariff, national welfare improves.
Social Regulation
Governmental attempts to correct a variety of undesirable side effects in an economy that relate to health, safety, and the environment
Subsidies
Granted by governments to domestic producers to improve their trade competitiveness; include outright cash disbursements, tax concessions, insurance arrangements, and loans at below-market interest rates
From the perspective of the American public as a whole, export subsidies levied by overseas governments on goods sold to the United States:
Help more than they hurt
The imposition of a tariff on imported steel for the home country results in:
Higher steel prices and falling steel consumption
Subsidies to domestic firms may lead to
Higher volume of exports
Free-Trade Argument
If each nation produces what it does best and permits trade, over the long-term each party will enjoy lower prices and higher levels of output, income, and consumption than could be achieved in isolation
Tariffs are not defended on the ground that they:
Improve the terms of trade of foreign nations
Arguments for U.S. trade restrictions include all of the following except
Improving incomes for developing countries
What factors influence the size of the revenue, protective, consumption, and redistributive effects of a tariff?
In general, the size of the welfare responses to tariffs is determined by the impact of the tariffs on domestic prices and the response of domestic producers and consumers to these price changes.
If we consider the interests of both consumers and producers, then a policy of tariff reduction in the U.S. auto industry is:
In the interest of the United States as a whole, and in the interest of auto-producing states
If the home country's government grants a subsidy on a domestically produced good, domestic producers tend to:
Increase their level of production
Of the many arguments in favor of tariffs, the one that has enjoyed the most significant economic justification has been the:
Infant industry argument
The deadweight loss of a tariff:
Is a social loss since it promotes inefficient production
Which of the following is true concerning a specific tariff?
It affords less protection to home producers during eras of rising prices
Suppose the United States and Japan enter into a voluntary export agreement in which Japan imposes an export quota on its automakers. The largest share of the export quota's "revenue effect" would tend to be captured by:
Japanese automakers
To maintain that South Koreans are dumping their VCRs in the United States is to maintain that:
Koreans are selling VCRs in the United States below their production cost
Export subsidies levied by foreign governments on products in which the United States has a comparative disadvantage:
Lead to increase in U.S. consumer surplus
Export Quotas
Limitations on export sales administered by one or more exporting nations or industries
The United Auto Workers union attempted to win the approval of legislation that would moderate the practice of foreign sourcing on the part of American auto manufacturers. Which of the following best represents this legislation?
Local content laws
Which trade restriction stipulates the percentage of a product's total value that must be produced domestically in order for that product to be sold domestically?
Local content requirement
Consider Figure 5.3. Assume that Swedish import companies behave as competitive buyers while foreign export companies behave as a monopoly seller. Compared to free trade, Sweden's import quota results in domestic welfare:
Losses totaling $4.80
Effective Tariff Rate
Measures the total increase in domestic production that a tariff makes possible, compared to free trade
When a government allows raw materials and other intermediate products to enter a country duty free, its tariff policy generally results in a:
Nominal tariff rate less than the effective tariff rate
In the past two decades, NTBs have gained in importance as protectionist devices. What are the major NTBs?
Nontariff trade barriers include import quotas, voluntary export agreements, subsidies, buy-national policies, product and safety standards, and content requirements.
Suppose the government grants a subsidy to domestic producers of an import-competing good. The subsidy tends to result in deadweight losses for the domestic economy in the form of the:
Protective affect
Again assume that Hong Kong imposes an export quota on its producers that restricts shipments to Ecuador to 40 computers, but now suppose that Taiwan, a non-restrained exporter, ships an additional 20 computers to Ecuador. Ecuador thus imports 60 computers. Determine the overall welfare loss to Ecuador as a result of the quota.
Overall welfare loss = $14,000; of this amount, the revenue effect = $12,000, consumption effect = $1000, protection effect = $1000.
To protect its producers from foreign competition, suppose the Australian government levies a specific tariff of $100 on imported TV sets. Determine and show graphically the effects of the tariff on the price of TV sets in Australia, the quantity of TV sets supplied by Australian producers, the quantity of TV sets demanded by Australian consumers, and the volume of trade. Calculate the reduction in Australian consumer surplus due to the tariff induced increase in the price of TV sets. Calculate the value of the tariff's consumption, protective, redistributive, and revenue effects. What is the amount of deadweight welfare loss imposed on the Australian economy by the tariff?
P = $200, Qs = 20, Qd = 30, Imports = 10. $3500. Consumption effect = $500, protective effect = $500, redistribution effect = $1500, revenue effect = $1000. Deadweight welfare loss = $1000.
Determine Australia's market equilibrium for TV sets. What are the equilibrium price and quantity? Calculate the value of Australian consumer surplus and producer surplus.
P = $250; Q = 25. Consumer surplus = $3125; producer surplus = $3125.
Nontariff Trade Barriers
Policies other than tariffs that restrict international trade
A problem encountered when implementing an "infant industry" tariff is that:
Political pressure may prevent the tariff's removal when the industry matures
Suppose now that BTI engages in international dumping. Determine the price that BTI charges its U.K. buyers and the profits that accrue on U.K. sales. Also determine the price that BTI charges its Canadian buyers and the profits that accrue on Canadian sales. Does the practice of international dumping yield higher profits than the uniform pricing strategy and if so, by how much?
Price = $7 and profits = $20. Price = $4 and profit = $4. With dumping, total profits rise by $6.
Suppose that, instead of a quota, Venezuela grants its import-competing producers a subsidy of $100 per TV set. In your diagram, draw the subsidy-adjusted supply schedule for Venezuelan producers. Does the subsidy result in a rise in the price of TV sets above the free trade level? Determine Venezuela's production, consumption, and imports of TV sets under the subsidy. What is the total cost of the subsidy to the Venezuelan government? Of this amount, how much is transferred to Venezuelan producers in the form of producer surplus, and how much is absorbed by higher production costs due to inefficient domestic production? Determine the overall welfare loss to Venezuela under the subsidy.
Price remains at the free trade level. Qs = 300, Qd = 800, imports = 500. Total cost of subsidy = $30,000 of which $20,000 is absorbed by producer surplus and $10,000 is absorbed by higher domestic production costs. Overall welfare loss = $10,000.
Assume that Venezuela imposes a quota that limits imports to 300 TV sets. Determine the quota induced price increase and the resulting decrease in consumer surplus. Calculate the quota's redistributive, consumption, protective, and revenue effects. Assuming that Venezuelan import companies organize as buyers and bargain favorably with competitive foreign exporters, what is the overall welfare loss to Venezuela as a result of the quota? Suppose that foreign exporters organize as a monopoly seller. What is the overall welfare loss to Venezuela as a result of the quota?
Price rises by $100 and consumer surplus falls by $70,000. Redistribution effect = $20,000, consumption effect = $10,000, protective effect = $10,000, revenue effect = $30,000. Overall welfare loss = $50,000.
Suppose Ecuador and Hong Kong negotiate a voluntary export agreement in which Hong Kong imposes on its exporters a quota that limits shipments to Ecuador to 40 computers. Assume Taiwan does not take advantage of the situation by exporting computers to Ecuador. Determine the quota induced price increase and the reduction in consumer surplus for Ecuador. Determine the quota's redistributive, protective, consumption, and revenue effects. Because the export quota is administered by Hong Kong, its exporters will capture the quota's revenue effect. Determine the overall welfare loss to Ecuador as a result of the quota.
Price rises by $400 and consumer surplus falls by $30,000. Redistribution effect = $6000, protective effect = $4000, consumption effect = $4000, revenue effect = $16,000. Overall welfare loss = $24,000.
What is the price-based definition of dumping?
Price-based dumping occurs when a foreign firm sells a good at a price in a foreign country which is below the price for which it sells the product at home.
Assume the U.S. has a competitive advantage in producing calculators, while the rest of the world has a competitive advantage in steel. Suppose the U.S. and the rest of the world enter into an agreement to lower import quotas below existing levels on calculators and steel. Which of the following would least likely occur for the U.S.? Rising levels of:
Producer surplus for American steelmakers
The most vocal political pressure for tariffs is generally made by:
Producers lobbying for import tariffs
Which is a more restrictive trade barrier—an import tariff or an equivalent import quota?
Since import quotas directly limit the number of goods that can enter the home nation, they tend to be more restrictive than import tariffs which may be circumvented by foreign producers absorbing the tariff as a lower selling price. During periods of rising domestic demand, quotas hold down imports more effectively than tariffs
In general, when increases in non-restrained supply offset part of the cutback in shipments that occur under an export quota, will the overall welfare loss for the importing country be greater or smaller than that which occurs in the absence of non-restrained supply? Determine the amount in the example of Ecuador
Smaller by $10,000.
Foreign-trade Zone
Special zones that enlarge the benefits of a bonded warehouse by eliminating the restrictive aspects of customs surveillance and by offering more suitable manufacturing facilities; FTZs are intended to stimulate international trade, attract industry, and create jobs by providing an area that gives users tariff and tax breaks
A compound tariff is a combination of a (an):
Specific tariff and an ad valorem tariff
Differentiate among sporadic, persistent, and predatory dumping.
Sporadic dumping--firms with temporary inventories sell their products overseas at lower prices than at home. Predatory dumping--firms cut prices overseas to eliminate competitors. Persistent dumping--in an effort to maximize profits, firms continuously sell abroad at lower prices than at home.
Rather than generating tax revenue as do tariffs, subsidies require tax revenue. Therefore, they are not an effective protective device for the home economy. Do you agree?
Subsidies are not free goods since they are financed by taxpayer dollars. In return for granting subsidies, governments often pressure management and labor to adopt measures to lower costs of production so as to become more competitive.
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?
Tariff escalation effect
Which trade policy results in the government levying a "two-tier" tariff on imported goods?
Tariff quota
What impact does the imposition of a tariff normally have on a nation's terms of trade and volume of trade?
Terms of trade improve, while trade volume declines.
Should Canada impose a tariff on imports, one would expect Canada's:
Terms of trade to improve and volume of trade to decrease
Because export subsidies tend to result in domestic exporters charging lower prices on their goods sold overseas, the home country's:
Terms of trade will worsen
Assume the United States adopts a tariff quota on steel in which the quota is set a 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:
The U.S. government only
What impact does the tariff have on the overall welfare of the United States?
The United States suffers a welfare loss of $100 since the welfare reduction of the consumption and protective effects ($400) exceeds the welfare gain of the terms-of-trade effect ($300)
Domestic Revenue Effect
The amount of tariff revenue shifted from domestic consumers to the tariff-levying government
Margin Of Dumping
The amount the domestic price of a firm's product exceeds its foreign price, or the amount the foreign price of a firm's product is less than the cost of producing it
What happens to effective protection when the value added by the domestic producer declines?
The degree of effective protection increases
Consumer Surplus
The difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay
In 1980, the U.S. auto industry proposed that import quotas be imposed on foreign-produced cars sold in the United States. What would be the likely benefits and costs of such a policy?
The import quota tends to permit domestic firms and workers to enjoy higher sales, profits, and employment levels. Consumers tend to face higher prices and expenditure levels. The economy as a whole faces deadweight losses in production and consumption.
Tariff Avoidance
The legal utilization of the tariff system to one's own advantage in order to reduce the amount of tariff that is payable by means that are within the law
Deadweight Loss
The net loss of economic benefits to a domestic economy because of the protective and consumption effect of a trade barrier
When a tariff on imported inputs exceeds that on the finished good,
The nominal tariff rate on the finished product would tend to overstate its protective effect
Beggar-thy-neighbor Policy
The practice of imposing protectionist policies to achieve gains from trade at the expense of other nations
How does the revenue effect of an import quota differ from that of a tariff?
The revenue effect of a tariff is captured by the government, while a quota's revenue tends to be captured by domestic or foreign firms.
Producer Surplus
The revenue producers receive over and above the minimum amount required to induce them to supply the good
Why did the U.S. government in 1982 provide import quotas as an aid to domestic sugar producers?
The sugar import quota was viewed as a method of increasing the domestic price of sugar, so as to offset the adverse effects of falling prices for U.S. sugar producers.
Terms-of-trade Effect
The tariff revenue extracted from foreign producers in the form of a lower supply price
If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then:
They have different impacts on how income is distributed
If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then:
They have identical impacts on how much is produced and consumed
A beggar-thy-neighbor policy is the imposition of:
Trade barriers to increase domestic demand and employment
A firm granting lifetime employment to its workers has the incentive to engage in international dumping during periods of business recession and excess production capacity.
True
A firm suffering idle plant capacity would minimize losses by selling its product abroad at a lower price than at home, provided that the foreign price more than covers average variable cost.
True
A global import quota permits a specified number of goods to be imported each year, but does not specify where the product is shipped from and who is permitted to import.
True
Which tends to result in a greater welfare loss for the home economy: an import quota levied by the home government or a voluntary export quota imposed by the foreign government?
Under an import quota, the distribution of the revenue effect is indeterminate, depending on the relative bargaining power of foreign producers and domestic buyers. Because voluntary export quotas are typically administered from the supply side of the market, the largest share of the revenue effect tends to be captured by foreign exporters.
Import Licenses
Used to administer an import quota; a license specifying the volume of imports allowed
What is meant by voluntary export restraints and how do they differ from other protective barriers?
Voluntary export restraints are market-sharing agreements negotiated by producing and consuming countries. Because voluntary export quotas are typically administered from the supply side of the market, the foreign exporter tends to capture the largest share of the quota revenue
Sporadic Dumping
When a firm disposes of excess inventories on foreign markets by selling abroad at lower prices than at home
Persistent Dumping
When a producer consistently sells products abroad at lower prices than at home
Predatory Dumping
When a producer temporarily reduces the prices charged abroad to drive foreign competitors out of business
Free-on-board Valuation
When a tariff is applied to a product's value as it leaves the exporting country
Cost-insurance-freight Valuation
When ad valorem tariffs are levied as a percentage of the imported commodity's total value as it arrives at its final destination
Outsourcing
When certain aspects of a product's manufacture are performed in more than one country
Dumping
When foreign buyers are charged lower prices than domestic buyers for an identical product after allowing for transportation costs and tariff duties
Offshore-assembly Provision
When import duties apply only to the value added in the foreign assembly process provided that domestically made components are used by overseas companies in their assembly operations
Tariff Evasion
When individuals or firms evade tariffs by illegal means such as smuggling imported goods into a country
Under what conditions does a nominal tariff applied to an import product overstate or understate the actual, or effective, protection afforded by the nominal tariff?
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 overstates the effective rate of protection. The opposite also applies.
Figure 4.4 represents the market for gasoline in a small nation. The free trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The change in producer surplus would be area
area a + b + f + g + h
