Chapter 9 , 10 & 11

A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country's government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year. If the government auctions the quota licenses, calculate the revenue collected by the government.

$40 million

A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country's government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year. If the import licenses are allocated for free based on fixed favoritism, how much will be gained by the importers with the quota licenses?

$40 million

Which of the following statements about an export subsidy on a particular product is accurate?

An export subsidy reduces the amount available in the domestic market of the exporting country and increases the amount imported by the foreign country.

The United States produces some of the electronic components used as inputs in its fighter planes. But due to the limited number of companies that produce these items, it imports these parts from Japan as well. There is concern that in the case of a prolonged war, these important imports may not be available. Fearing that the Air Force may be unable to fulfill its tasks in the case of a prolonged war, the specificity rule suggests that the United States should

subsidize the domestic production of these electronics parts.

With a voluntary export restraint (VER), the markup revenue (economic rent) created for the quantitatively limited trade is collected by

the exporting firms in the foreign countries

A firm maximizes profits by charging a lower price to foreign buyers if

the foreign demand for its good is more elastic than the domestic demand.

Direct democracy makes tariffs less likely to be voted into law because

the number of people who are hurt by protectionist measures exceeds the number of people who gain from protectionist measures.

When a large country imposes an import quota

the product's world price falls.

Instead of placing a tariff on the imports of steel, a government has decided to offer steel workers trade adjustment assistance which will allow them to pre-qualify for unemployment benefits and retraining. Such a policy is consistent with

the specificity rule.

Import tariff rates are typically higher on final consumption goods than on intermediate goods and raw materials sold to manufacturing firms. This tendency is known as

the tariff escalation pattern.

An export subsidy imposed by a large country can be more damaging to national welfare than an export subsidy imposed by a small country because

the terms of trade worsen for the large country but not for the small country.

The French highly value domestic production of traditional French cheese made by high-cost, traditional production methods. According to the specificity rule, the most efficient policy tool to protect this traditional industry would be

to provide a production subsidy to the domestic firms.

Which of the following refers to dumping?

Selling domestic goods in the international market at much lower prices

Which of the following is NOT true of nontariff barriers to imports?

Unlike tariffs, nontariff barriers do not increase the price of imported goods in the domestic markets.

What is the moral hazard that trade assistance can create?

Workers, companies, and industries that are provided financial assistance in the face of difficult economic situations may change their behavior to rely on that assistance.

A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country's government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year. If the government auctions the import licenses, the national well-being will _____ by

decrease; $12 million.

The _____ arises when the results acquired through the efforts of a group benefit others who did not contribute to the efforts to obtain those benefits.

free-rider problem

Whenever the benefits of group effort fall on every member of a large dispersed group, regardless of individual contributions, there can be a

free-rider problem.

A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country's government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year. The quota on T-shirts causes domestic producers to

gain $25 million.

Suppose a small country sets all of its tariffs at 40 percent which causes a reduction in imports by 20 percent. If the total imports affected by the tariffs are 40 percent of the gross domestic product (GDP), the net national loss from the tariffs as a percentage of GDP is

1.6%.

What is the percent reduction in import quantity in a country due to the tariffs imposed by the government, if the country's import tariffs are all 10 percent, the total imports affected by the tariffs are 40 percent of the GDP, and the net national loss from the tariffs as a percentage of GDP is 0.6 percent?

30%

Country X imports rice from the world market. Which of the following policy instruments, if adopted by its government, may result in a switch from rice being imported to being exported?

An agricultural price support that includes the government selling any excess production to foreign buyers

Which of the following is true of a quota?

A quota is a quantitative restriction on imports.

Which of the following statements is true?

If young firms are struggling to retain their trained workers, then government should offer a subsidy to offset the costs of training workers.

Which of the following is said to occur when a firm lowers its price to limit the decline in the quantity sold during a period of recession?

Cyclical dumping

Which of the following asserts that temporary protection from international competition is needed for a nascent industry that initially has high costs?

The infant industry argument

An export subsidy imposed in a large exporting country will cause the country's international terms of trade to improve.

FALSE

If markets are competitive, policies that restrict imports are usually harmful to the importing country while policies that encourage exports are usually beneficial to the exporting country.

FALSE

The revenue earned by the government in allocating quota licenses through resource-using application procedures is approximately equal to the revenue it would earn from a tariff that resulted in the same import quantity.

FALSE

Unlike a tariff, a quota does not cause either a production effect or a consumption effect.

FALSE

When an importing country compels the foreign exporting country to agree "voluntarily" to restrict its exports to this country, the exporting firms in the foreign country are worse off than they would be if the importing country had instead imposed a comparable import quota.

FALSE

Which of the following is a means of allocating import licenses by assigning the licenses without competition, applications, or negotiation?

Fixed favoritism

Which of the following statements is correct?

If we want to help workers who lose jobs when a domestic industry shrinks, the specificity rule suggests that the government should provide subsidies to those workers to retrain or to relocate to areas where jobs are available.

Under which of the following situations will the infant industry argument for protection be valid?

New firms are unable to obtain funds from the financial market owing to inherent imperfections in the banking system.

Which of the following is the least efficient method of allocating import licenses by the government?

Resource-using application procedures

How does the fact that each state has two senators regardless of the population of the state affect protectionist policies with regard to agricultural industries?

States with agricultural industries are usually less-populated than other states, so the states with agricultural industries are over-represented in the Senate and are often better-protected from imports than other products.

Are these statements true or false? Like tariffs, nontariff barriers result in a net welfare loss in a small country. Some nontariff barriers create uncertainty about the conditions under which imports will be permitted. Nontariff barriers can limit imports with greater certainty than tariffs.

TRUE

Firms that are engaging in persistent dumping need to be able to prevent resale between the foreign and domestic markets.

TRUE

Government loans are more efficient than production subsidies if a young industry faces financial markets that are unwilling to provide funding to the industry due to the high risk.

TRUE

Monopoly power can create distortions because a powerful seller can raise prices and profits by restricting output.

TRUE

Which of the following is NOT true of the Uruguay Round of the multilateral trade negotiations?

The Uruguay Round narrowed down the set of nontariff barrier (NTB) codes as set up by the Kennedy Round and the Tokyo Round.

Which of the following arguments for protection is derived from the fact that funding of public goods in some countries is difficult given little or no means to collect income or sales taxes?

The developing government argument

Under which of the following situations will a tariff imposed by a country fail to reduce imports by as much as expected?

The domestic quantity demanded of the imported product is less responsive to price changes than was expected.

How do import-competing producers overcome the free-rider problem?

They join together in a well-organized and well-financed group to lobby for protection for their industry.

In the United States, trade adjustment assistance

provides workers who have been displaced from import-competing firms with additional months of unemployment compensation.

A domestic monopoly producing a close substitute of an imported product would prefer to be protected by a quota than a tariff that results in the same amount of imports because

a quota allows the monopoly to charge a higher price.

The infant-industry argument asserts that

a temporary tariff is justified when it reduces imports while a new domestic industry develops to the point that it can produce at low enough costs to compete internationally.

One of the reasons protectionists and government officials may favor using a quota instead of a tariff is

quotas ensure that the quantities of imports are strictly limited.

If the emerging automobile industry in Botswana requests tariff protection because their costs will be temporarily high until the industry is better established, the automobile industry is using the

infant industry argument.

A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country's government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year. The quota on T-shirts causes domestic consumers to

lose $77 million.

One of the few arguments which Adam Smith saw as valid for the use of trade protection was the

national defense argument.

Often, governments in developing countries will impose tariffs because tariffs are

often the cheapest and most effective means available of generating government revenues.

Restricting imports into a small country by the government

protects domestic producers from foreign competition.

If the objective of government policy is to protect a domestic industry for national defense purposes, the best policy strategy is to

provide subsidies to the industry.