ECO 370 Final
Assume there are only two countries, the United States and Canada. Suppose that the autarky price in the United States for beer is $10. Also suppose that the autarky price in Canada for beer is $18. If the both countries decide to participate in trade, which of the following could be the world price of beer?
$15
A country currently has a tariff of $5 in place. With this tariff, the country imports 50 units of a good. For political reasons, the country is considering removing the tariff and replacing it with an import quota of 50 units. If the country does so, how much should it charge for the quota licenses to be sure that it brings in the same amount of government revenue as it gets with the tariff?
$5 per license.
Under free trade, a large country produces one million leather bags per year and imports another two million bags per year at the world price of $60 per bag. Assume the country imposes a specific tariff of $5 per bag. As a result, the per-unit price of leather bags decreases to $58 in the international market and the import of leather bags drops to 1.6 million. The domestic production, on the other hand, increases to 1.1 million. Following the imposition of the tariff, the domestic consumers pay a price of _____ for each bag.
$63
Under free trade, a large country produces one million leather bags per year and imports another two million bags per year at the world price of $60 per bag. Assume the country imposes a specific tariff of $5 per bag. As a result, the per-unit price of leather bags decreases to $58 in the international market and the import of leather bags drops to 1.6 million. The domestic production, on the other hand, increases to 1.1 million. Calculate the tariff revenue collected by the domestic government.
$8 million
Consider a world with two goods, beer and pizza. If the opportunity cost of 1 pizza is 3 beers for a country, then what is the country's opportunity cost of 1 beer in terms of pizza?
1/3 pizzas.
Suppose that demand and supply for widgets in a country are given by the following: QD=100−5P QS=−50+10P If the country is in Autarky, what is the value of total surplus at the equilibrium?
375
The North American Free Trade Agreement is an example of what type of trade agreement?
A free trade area/agreement.
Which of the following mandates that an import distributor must buy a certain percentage of the product locally?
A mixing requirement
Which of the following is true of a quota?
A quota is a quantitative restriction on imports.
Consider a world with two countries, A and B, and two goods, X and Y. Suppose that for country A the opportunity cost of one Y is 5 X's. What can you say about country A's opportunity cost of one X in terms of Y?
A's opportunity cost of one X must be equal to 1/5 Y.
Suppose the world price of a product is $80 and suppose that a small country's autarky price is $110. The country is considering imposing a tariff. Which of the following tariffs would be prohibitive?
An ad valorem tariff of 50%
Which of the following will cause a shift of the market supply curve for a good?
An increase in the cost of labor used to produce the good.
In which of the following industries could the dying industry argument possibly make a strong case for the need for trade barriers/protection?
An industry in which workers are low-skilled and may have a hard time finding new work if they lose their jobs.
The table below shows the number of labor hours needed in a country to produce one unit of output:: Country A: Beer 3 Pizza 1 Country B: Beer 9 Pizza 2 Based on this table, country A has a comparative advantage in which good?
Beer
Suppose a country exports televisions, which are relatively intensive in capital. Hecksher-Ohlin Theory would predict which of the following?
Capital must be relatively abundant in the country.
China has 20 percent of the world's working population and 10 percent of the world's farmable land. Which of the following would be predicted by the Heckscher-Ohlin Theory if China begins to trade with other countries?
China will shift resources from the production of agricultural goods to the production of labor-intensive goods.
In consumer theory, the consumer's problem is to maximize their own happiness. Which of the following explains why a consumer doesn't just consume an infinite amount of all goods to achieve infinite happiness?
Consumers are constrained by their budget line.
If Country XYZ has higher labor productivity in the production of umbrellas (i.e., takes them less workers to produce one umbrella) than the rest of the world, then which of the following must be true?
Country XYZ has an absolute advantage in the production of umbrellas.
Which of the following is a reason why a country might want to enter into a trade agreement?
Doing so will increase business investment opportunities.
Suppose that a country opens up to free trade and begins exporting apples, which are land intensive. At the same time, it starts to import televisions, which are labor intensive. In the short-run, which of the following would you expect to happen?
Domestic Landowners in the apple industry will get higher rents.
Let's assume that cloth-making (labor-intensive) and farming (land-intensive) are the only two sectors of production in a country. If this country is labor-abundant, and if trade corresponds to the Heckscher-Ohlin theory, which of the following groups will gain in the short run, but lose in the long run, from the opening of trade?
Domestic landowners in the domestic cloth-making sector.
Suppose that a country in autarky opens up to free trade. Suppose with free trade the country starts to export oranges to the rest of the world. Based on this information, which group of individuals most likely benefit as a result of free trade?
Domestic orange producers.
Which of the following best summarizes the Mercantilist theory of trade?
Exports are good for a country while imports are bad for a country.
Consider a two-country two-good setup with one factor of production. True or False: It is possible for one of the countries to have a comparative advantage in both goods.
False
True or False: Consider a standard two-good (X and Y), two-country setup (A and B). Assume that at the optimal point in autarky marginal rate of substitution (MRS) for Country A is equal to 0.5 and assume that if the country trades with Country B, then the world relative price of X in terms of Y (PX/PY) is equal to 0.75. Therefore, Country A will import X.
False
True or False: If a country has a comparative advantage in a good, then it must have an absolute advantage in the good.
False
True or False: If the government does not charge anything for quota licenses, then a quota will always be better (in terms of its effects on welfare) compared to a tariff.
False
True or False: If two countries enter into a common market, then the two countries will adopt the same currency.
False
True or False: So long as a tariff is not too high, a small country can improve welfare by imposing a tariff.
False
True or False: Suppose a country that was engaging in free trade decides to transition to autarky (i.e., it stops engaging in any kind of trade). As a result of this decision, the country ends up at a lower community indifference curve compared to the community indifference curve it was at with trade. This must mean that everyone in the country is worse off.
False
True or False: Suppose a small country has a tariff in place. If the country removes the tariff, then we should expect domestic production to increase.
False
True or False: Suppose that a certain group benefits from free trade in the long-run. Then, this group must have also benefited in the short-run.
False
True or False: Suppose that after opening up to trade, a nation ends up at a higher community indifference curve. Then, it must be the case that every individual in the nation is better off as a result of trade.
False
True or False: Tariffs are often the most direct way to resolve a distortion and result in an outcome closest to the first-best result.
False
True or False: The specificity rule says that countries should use specific tariffs as opposed to ad valorem tariffs.
False
True or False: The winners and losers of free trade in the short-run and the long-run are the same.
False
True or False: Trade agreements will generally completely eliminate all barriers amongst member nations.
False
Which of the following statements is true?
Free trade causes contraction in the import-competing sector.
Which of the following assumptions will result in production possibilities curves being "bowed out"?
Increasing marginal costs
Consider a world with two countries, A and B; two goods, X and Y; and two factors of production, labor and capital. Suppose that X is relatively capital intensive compared to Y. If country A imports X, then based on Heckscher-Ohlin theory, country A should be relatively abundant in which factor of production?
Labor
Which of the following is true at the equilibrium price and quantity?
Marginal Benefit = Marginal Cost
Assume that Australia and New Zealand form a custom union. Which of the following will definitely be true?
New Zealand and Australia will set the same barriers/restrictions on trade for non-members.
Consider a world with two goods, X and Y. Let PX be the price of X and let PY be the price of Y. In Autarky, what is the condition for general equilibrium?
PX/PY = MRS = MRT
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 benefit from the tariff?
Producers of chicken in Country A
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?
Producers of chicken in Country B
Suppose that two countries, A and B, enter into a free-trade agreement. Suppose that country A has tariffs (taxes on imports) against country C but country B has no tariffs against country C. To get around this, country C ships goods to country B and then ships the goods to country A to avoid paying tariffs. What type of regulation seeks to prevent this kind of tariff evasion from happening?
Rule or Origin Regulation
A proponent of the specificity rule might argue for which of the following in response to the infant industry argument?
Since the problem is that firms cannot compete internationally due to high costs, it would be best if the government subsidized the industry.
Which of the following policies often tends to be more efficient at solving most distortions compared to imposing a tariff?
Subsidies
Which of the following statements is FALSE?
Tariffs hurt producers and help consumers in the country imposing the tariff.
Which of the following is closest to being a full economic union?
The European Union (EU)
Assume a two-country, two-good, and two-input model. Let the countries in this model be the United States and the Rest of the World and two goods being produced by each of the countries be televisions and shirts. The two factors of production used in producing the goods in each country are high-skilled labor and low-skilled labor. Assume that televisions are relatively intensive in high-skilled labor. Suppose that in the long run the wages of high-skilled workers (in both industries) increase in the Rest of the World while the wages of low-skilled workers (in both industries) decrease in the Rest of the World. Assume the opposite happens in the United States. Assuming trade patterns reflect Hecksher-Ohlin theory, this information is consistent with which of the following statements?
The Rest of the World exports televisions.
The table below shows the number of labor hours required to produce one television and one shirt in the United States and the Rest of the World. Labor Hours to Make:In the United StatesIn the Rest of the World1 Television3.002.001 Shirt1.000.25 Based on this table, which of the following statements is true?
The United States has a comparative advantage in the production of televisions.
Which of the following do a free-trade agreement and a common market have in common?
The absence of trade barriers (or at least a substantial reduction of barriers) among the member nations.
The following figure shows the production point with trade (S1) and the consumption point with trade (C1) for a country. Based on the figure, which of the following is true?
The country exports 50 pounds of cheese.
Which of the following is a critical assumption that we make when saying it is possible for a large country to improve its welfare by imposing a tariff?
The foreign country will not retaliate with its own set of tariffs.
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
Which of the following refers to trade diversion?
The volume of trade redirected from low-cost exporters to higher-cost trade agreement member countries
Assume a two-country, two-good, and two-input model. Let the two countries in this model be the United States and the Rest of the World and the two goods being produced by each of the countries be beer and pizza. The two factors of production used in producing the goods in each country are capital and labor. Assume the United States is abundant in capital. Suppose that the United States opens up to free trade with the rest of the world and starts exporting beer. In the short-run, which of the following do you expect to happen? (Assume that trade patterns follow the predictions of Hecksher-Ohlin Theory).
The wages of pizza workers will fall.
Suppose that in Autarky, consumer surplus is $100. Now, suppose that with trade consumer surplus decreases to $90. Which of the following must be true?
The world price must be higher than the Autarky price.
Which of the following correctly identifies the impact of tariffs on the producers of import-competing products in the country that imposed the tariff? I.e., what is the impact for domestic producers?
They can expand their production and sales.
Which of the following is a reason why a country might enter into a trade agreement?
Trade agreements can result in a higher variety of goods available to consumers.
Which of the following best describes the main conclusion of the trade theory known as mercantilism?
Trade is a zero sum game.
True or False. David Ricardo's theory of comparative advantage guarantees that trade will always be mutually beneficial.
True
True or False: A country in autarky that opens up to free trade will see an increase in total surplus. In other words, trade will always improve welfare.
True
True or False: In an attempt to restrict imports into a country, using a tariff is likely to be less costly to the country than using a voluntary export restraint.
True
True or False: Member nations of the World Trade Organization are responsible for enforcing the rules set by the organization.
True
True or False: One reason that many countries have trade barriers is due to the fact that supporting them may be politically popular and make reelection easier - especially if losses from trade are concentrated among groups that tend to be swing voters.
True
True or False: Product standards have been used by governments as a means to restrict imports of some products.
True
True or False: Suppose a small country imposes a tariff such that the domestic price exceeds its autarky price. Therefore, this tariff will be prohibitive - meaning, the country will not import the good at all.
True
True or False: While free trade increases the welfare of a developed country relative to no trade, free trade has been shown to increase the income inequality within the developed country.
True
Assume there are two goods (clothing and airplanes) and two countries (United States and China). The United States engages in free trade with China and now imports clothing (which is intensive in low-skilled labor) while exporting airplanes (which is intensive in high-skilled labor). In the long run, the winners of free trade will include _____________ while the losers will include ______________.
US high-skilled labor; US low-skilled labor
Assume there are two goods (clothing and airplanes) and two countries (United States and China). The United States engages in free trade with China and now imports clothing (which is intensive in low-skilled labor) while exporting airplanes (which is intensive in high-skilled labor). In the short run, the winners of free trade will include _____________ while the losers will include ______________.
US producers of airplanes; Chinese producers of airplanes
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.
Which of the following made voluntary export restraints (VERs) an attractive trade barrier for governments during the 1970s through 1990s?
VERs were not subject to World Trade Organization regulations since they are "voluntary."
Chile and the United States use land and labor to produce wheat and automobiles. The United States is land abundant, and Chile is labor abundant. Wheat production is more land intensive than automobile production. Which of the following would best explain why U.S. workers might oppose United States-Chile free trade?
Wages in the United States are expected to fall as. a result of United States-Chile free trade.
Suppose two countries, A and B enter into a trade-agreement that includes the following characteristics: 1. A and B agree to substantially reduce trade barriers between themselves. 2. A and B agree to impose a common set of barriers against non-members. 3. A and B agree to allow factors of production to move freely between the two countries. Based on these characteristics, this trade agreement would be most likely be classified as
a Common Market
The North American Free Trade Agreement (NAFTA) is an example of
a free-trade area/agreement.
The table below shows the number of labor hours required to produce one umbrella and one bushel of corn in the United Kingdom and the rest of the world. Labor Hours to Make:In the United KingdomIn the Rest of the World1 Umbrella4.002.001 Bushel of Corn5.003.00 Based on this table, the Rest of the World has an absolute advantage in the production of ___________.
both corn and umbrellas.
In the long-run, the winners and losers of free trade in a country mostly depends on
changes in demand and supply of the factors of production.
International trade allows countries to
consume outside/above their production possibilities curve.
Suppose demand and supply for a product in a large country are given respectively by the following equations: Qd=100−5P Qs=−50+20P Assume that the world price with free trade is $3. Now, suppose the large country imposes a tariff equal to $2. As a result, the world price falls to $2. As a result of the tariff, the number of units imported will ____________.
decrease by 25 units
Tariffs make a considerable portion of government revenue in ____________ countries.
developing
We say that a country is an Autarky if it
does not engage in any kind of trade
Demand curves slope ___________ and supply curves slope ___________.
downward; upward
Assume a two-country, two-commodity, and two-input model. Let the two countries in this model be the United States and the Rest of the World and the two goods being produced by each of the countries be steel and wheat. The two factors of production used in producing the goods in each country are capital and land. If the United States is capital-abundant and steel production is capital-intensive, the Heckscher-Ohlin model would predict that the United States would
export steel and import wheat.
The figure below shows the market for computers in a small importing country. Dd and Sd are the domestic demand and supply curves of computers, respectively. The imposition of a tariff on computers caused economic well-being in the country to _____ by
fall; $6 million.
The figure below shows the market for computers in a small importing country. Dd and Sd are the domestic demand and supply curves of computers, respectively. The imposition of a tariff on computers caused the surplus of the country's consumers to _____ by
fall; $78 million.
If a large country imposes a tariff on imported motorcycles, the world price of motorcycles will _____ and the domestic price of motorcycles will
fall; equal the new world price plus the amount of the tariff.
In a "first-best" world
free trade is economically efficient.
In a "first-best" world, which of the following will be true?
free trade is economically efficient.
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.
In the short-run, following the opening of trade
groups tied to declining (i.e., contracting) sectors of the economy will suffer from lower returns.
Suppose the domestic supply (QS) and demand (QD) for laptops in the United States is represented by the following set of equations: QS=−25+10P QD=875−5P Suppose that if the United States engages in trade that the world price is $50. At the world price, the United States will _______________________.
import 150 laptops.
Suppose that with trade, quantity demanded in a country is greater than quantity supplied. Consequently, the country must be
importing the good
Government revenue from any policy like a tariff is ____________.
included in total welfare.
The demand and supply for a product in a small country are given respectively by the following equations: Qd=200−10P Qs=−100+40P Assume the world price is $3. Suppose that the small country imposes an import quota of 100 units. As a result, the domestic price will _________ and the world price will ________.
increase by $1; remain constant
Suppose that a country produces two goods - sugar and shoes - and suppose that the country's production possibilities curve is "bowed-out." Based on this information, as the country produces more sugar, the opportunity cost of sugar in terms of shoes foregone will
increase.
The figure below shows the market for shoes in a small importing country. Dd and Sd are the domestic demand and supply curves of shoes, respectively. Following the imposition of a tariff, the domestic producer surplus _____ by the area ______.
increases; a.
A lobbyist for a certain industry argues that the government must impose barriers to trade because firms in the industry are young and unable to compete at the international level. This lobbyist is appealing to the _________________ argument.
infant industry
Canada has a regulation requiring that radio and TV stations devote a certain percentage of airtime to songs and shows recorded in Canada. This is an example of a ______________.
mixing requirement
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, many politicians argue that import barriers must be imposed. The argument being made here is called the __________________ argument.
national defense
Suppose that the price elasticity of supply for a certain good is equal to 5. If the price of this good increases by 1%, then
quantity supplied will increase by 5%.
If a small country imposes a tariff on imported motorcycles, the world price of motorcycles will _____ and the domestic price of motorcycles will
remain constant; rise.
Voluntary export restraint have been attractive to governments - especially before the 1990s - because
since they are "voluntary," they are not subject to World Trade Organization regulations.
A(n)_____ is a tax on imports that is stipulated as a money amount per unit.
specific tariff
With a voluntary export restraint (VER), the "quota rent" region is collected by
the exporting firms in the foreign countries
The effects of a quota and a tariff are nearly identical if _______________.
the government charges an amount for quota licenses that would bring in the same amount of revenue as a tariff.
If Social Marginal Cost (SMC) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Benefit (SMB), it implies that
the product is oversupplied.
If Social Marginal Benefit (SMB) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Cost (SMC), it implies that
the product is undersupplied.
When a large country imposes an import quota
the product's world price falls.
A quota will be binding if ______________.
the quota is less than the number of imports a country currently demands.
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.
Suppose that the cost of labor increases for an industry. Then, in this industry you should expect
the supply curve to shift left.
If a small country imposes a tariff on imported motorcycles
the surplus of the domestic producers of motorcycles will increase, but the surplus of the domestic consumers will decline.
Suppose a country that was in Autarky opens up to free trade. Suppose that with free trade, it starts to import apples from another country. Based on this information, we can conclude that
the world price of apples is below the country's autarky price of apples.
Suppose that the domestic production of computer games creates enjoyment for those who play the games. Domestic production of computer games also results in knowledge spillovers that positively impact many other industries. One possible policy that could be employed to encourage increased production of computer games by domestic firms is
to impose tariffs on computer game imports.
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.
Suppose that a country enters into a trade agreement in which it starts to import a good from a higher cost country compared to where it originally imported the good. This would be an example of
trade diversion.
In a two-country, two-good model, if a country has a comparative advantage in the production of a certain good, it implies that this country
will export the good.