Econ 335 Exam #2

Which of the following features does a free trade area necessarily have? A. Absence of any trade barriers among the member nations B. Equal tariffs rates C. Free movement of factors of production across the member nations D. Harmonization of all economic policies

A. Absence of any trade barriers among the member nations

Which of the following is a means of allocating import licenses by assigning the licenses without competition, applications, or negotiation? A. Fixed favoritism B. Resource-using application procedures C. Import-license auctions D. Domestic content requirements

A. Fixed favoritism

Which of the following has overseen the global rules of government policy toward international trade since 1995? A. The World Trade Organization B. The General Agreement on Tariffs and Trade C. The International Monetary Fund D. The World Bank

A. The World Trade Organization

Restricting imports into a small country by the government: A. protects domestic producers from foreign competition. B. increases consumer welfare in the country. C. increases the general welfare of the importing nation. D. increases well-being of the global economy.

A. protects domestic producers from foreign competition.

A country can actually improve its well-being if it is in a position to impose a non-zero "optimal tariff". Explain what an optimal tariff is, what conditions must be in place in order to implement an optimal tariff, and how such a tariff will increase national welfare. Assuming a country could impose an optimal tariff, would you suggest it do so? Justify your answer.

An optimal tariff is a tariff which maximizes the well-being of a country. It is measured by the gain in tariff revenue that is essentially paid by the foreign exporters to the government of the importing country minus the loss associated with the consumption and production effects arising from the tariff. A country can gain by a tariff only if the country is large enough to influence the international price of the imported product by restricting its imports. In other words, the country must collectively have monopsony power (it is large), even in cases in which no individual buyer within the nation has it. By imposing a tariff the country can improve its terms of trade, and may experience a net gain. One needs to exert caution when advising government officials on the implementation of a tariff. Such a decision should incorporate the eventuality that the trading partners of this country may retaliate by imposing trade restrictions on its exports.

Which of the following mandates that an import distributor must buy a certain percentage of the product locally? A. An import quota B. A mixing requirement C. A voluntary export restraint D. A domestic content requirement

B. A mixing requirement

Which of the following features does a customs union have? A. Free trade among those members which have similar economic policies B. Common set of external tariffs C. Free movement of factors of production D. Harmonization of all economic policies

B. Common set of external tariffs

Which of the following oversaw the global rules of government policy toward international trade between 1947 and 1995? A. The World Trade Organization B. The General Agreement on Tariffs and Trade C. The International Monetary Fund D. The World Bank

B. The General Agreement on Tariffs and Trade

Which of the following correctly identifies the impact of tariffs on the producers of import-competing products in the imposing country? A. They can price their products higher than the imported goods. B. They can expand their production and sales. C. They are forced to go out of business in the long run. D. They are forced to charge a price equal to the average cost of prod

B. They can expand their production and sales.

Which of the following is NOT true of nontariff barriers to imports? A. Nontariff barriers can limit imports with greater certainty than tariffs. B. Unlike tariffs, the nontariff barriers do not increase the price of the imported goods in the domestic markets. C. Some nontariff barriers create uncertainty about the conditions under which imports will be permitted. D. Like tariffs, nontariff barriers also result in a net welfare loss in a small country.

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

If a large country imposes a tariff on imported motorcycles, the world price of motorcycles will _____ and the domestic price of motorcycles will _____. A. rise; fall B. fall; rise C. remain constant; rise D. remain constant; fall

B. fall; rise

One of the reasons that protectionists and government officials may favor using a quota instead of a tariff is: A. quotas generate more revenue for the government than tariffs. B. quotas ensure that the quantities of imports are strictly limited. C. quotas create less market distortions than tariffs. D. quotas give less power to politicians than tariffs.

B. quotas ensure that the quantities of imports are strictly limited.

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. A. 50 percent B. 40 percent C. 30 percent D. 20 percent

C. 30 percent

Which of the following is true of a quota: A. Imposition of a quota causes domestic prices to fall below world prices. B. Imposition of a quota by a country causes the world price of the good imported by this country to rise. C. A quota is a quantitative restriction on imports. D. A quota is always more efficient than a tariff.

C. A quota is a quantitative restriction on imports.

Which of the following NTBs may generate revenue for the government? A. Government procurement B. Voluntary export restraint C. Import quota D. Domestic content requirement

C. Import quota

Country A is a large country that imports good-quality processed chicken from country B. Suddenly, country A's government decides to impose a tariff on this import. Who among the following will be adversely affected by this policy? A. Consumers of chicken in country B B. Consumers of ham in country B C. Producers of chicken in country B D. Suppliers of chicken in Country A

C. Producers of chicken in country B

_____ determine(s) which products have been produced within a free-trade area and which products have been produced outside the area and therefore are subject to trade barriers. A. Trade diversion B. Trade creation C. Rules of origin D. The most favored nation principle

C. Rules of origin

Which of the following is an impact of tariffs on the country imposing them? A. The domestic producers of import-competing products are forced to charge a lower price for their products to retain market share. B. The supply of the domestic import-competing products declines. C. The domestic consumers pay a higher price for the imported products. D. The demand for the imported goods by the domestic consumers increases.

C. The domestic consumers pay a higher price for the imported products.

Which of the following states that any trade concession given to any foreign country must be given to all other countries having the same status? A. The principle of retaliation B. The structural adjustment program C. The most favored nation principle D. The purchasing power parity theory

C. The most favored nation principle

If a small country imposes a tariff on imported motorcycles, the world price of motorcycles will _____ and the domestic price of motorcycles will _____. A. rise; fall B. fall; rise C. remain constant; rise D. remain constant; fall

C. remain constant; rise

Which of the following is true of an economic union? A. Free movement of resources, but restricted movement of goods among the member countries B. The members have a common set of tariffs among themselves but the external tariff rates are determined independently C. Free movement of goods, but restricted movement of resources across the member countries D. Harmonization of all economic policies in the member countries

D. Harmonization of all economic policies in the member countries

Formation of trade blocs can be considered beneficial because it: A. encourages purchases from higher-cost producers. B. causes international friction when certain countries are let in the bloc and others are left out. C. diverts world trade from low-cost producers to high-cost producers by encouraging too much trade within blocs. D. encourages increased total trade by each member country.

D. encourages increased total trade by each member country.

With a voluntary export restraint (VER), the economic rent created for the quantitatively limited on trade is collected by: A. the government of the importing county. B. the consumers in the importing country. C. the producers in the importing country. D. the exporting firms in the foreign countries

D. the exporting firms in the foreign countries

Embargoes are likely to be effective when: A. the supply curve of the embargoing country is highly inelastic. B. the demand for imports by the target country is relatively elastic. C. a small county imposes an embargo on a large country. D. the sanctions are sudden and comprehensive when first imposed.

D. the sanctions are sudden and comprehensive when first imposed.

trade embargo harms: A. only the target country. B. only the country that initiates the embargo. C. both the target country and the country initiating the embargo. D. the target country and the nonembargoing countries.

D. the target country and the nonembargoing countries.

The nationally optimal tariff for a large country is the tariff for which: A. the price in the importing country is the lowest. B. the government collects the highest tariff revenue. C. deadweight loss from the tariff is the lowest D. total surplus of the importing country is the highest.

D. total surplus of the importing country is the highest.