chapter 5

29. Suppose, to produce $200,000 worth of finished cloth in the US, textile producers import $150,000 of raw materials. The raw materials are imported duty free. However, the US has imposed a 5% nominal tariff on imports of finished cloth. What is the effective rate of protection enjoyed by the domestic cloth producers in the US? a. 20% b. 10% c. 5% d. 6%

a. 20%

15.________________ refers to the real loss in a small nation's welfare due to inefficiencies in production and distortions in consumption resulting from the imposition of a tariff. a. Deadweight loss b. Protection loss c. Consumer loss d. Economic loss

a. Deadweight loss

30. If we consider the interests of both consumers and producers, then a policy of tariff reduction in the U.S. auto industry is: a. In the interest of the United States as a whole, but not in the interest of auto-producing states b. In the interest of the United States as a whole, and in the interest of auto-producing states c. Not in the interest of the United States as a whole, nor in the interest of auto-producing states d. Not in the interest of the United States as a whole, but is in the interest of auto-producing states

a. In the interest of the United States as a whole, but not in the interest of auto-producing states

8. When an ad valorem tariff is imposed on commodity X, there is a(n) ____________ in consumer surplus and a(n) _________ in producer surplus. a. decrease, increase b. increase, decrease c. decrease, decrease d. increase, increase

a. decrease, increase

3. What type of tariff is prohibited by the U.S. Constitution? a. export tariff b. ad valorem tariff c. compound tariff d. import tariff

a. export tariff

24. The ______________ is the tariff that maximizes the positive difference between gains associated with improvement in terms of trade and the losses resulting from reduction in the volume of trade. a. optimum tariff b. prohibitive tariff c. nominal tariff d. absolute tariff

a. optimum tariff

13. The loss of surplus associated with the expansion of domestic production resulting from the tariff is attributed to the: a. production effect of a tariff b. terms of trade effect of a tariff c. revenue effect of a tariff d. consumption effect of a tariff

a. production effect of a tariff

22. The effects attributed to the decline in the volume of trade in a large nation, considered independently of changes in terms of trade, will a. reduce the nation's welfare b. increase the nation's welfare c. not change the nation's welfare d. have ambiguous outcomes with respect to gain or loss of welfare

a. reduce the nation's welfare

17. The consumption component of the deadweight loss in a small nation arises with a tariff because a. the tariff causes consumers to consume less of the good than they normally would have without the tariff. b. the tariff causes consumers to consume more of the good than they normally would have without the tariff. c. consumers continue to consume the same quantity of the good as before the tariff, but they receive less utility than before the tariff d. the marginal utility of the consumption of each good is less after the imposition of the tariff than before, resulting in a loss of consumer surplus

a. the tariff causes consumers to consume less of the good than they normally would have without the tariff.

4. A tariff expressed as a fixed percentage of the value of a traded commodity is a(n): a. export tariff b. ad valorem tariff c. compound tariff d. import tariff

b. ad valorem tariff

1. Since the restrictions and regulations that a nation imposes on international trade deal with the nation's trade or commerce, they are generally known as _________________. a. tariff policies b. commercial policies c. non-tariff barriers d. globalization policies

b. commercial policies

23. The change in welfare attributed to the terms of trade effect, when considered independently of changes in welfare associated with the decline in trade volume, will: a. reduce the nation's welfare b. increase the nation's welfare c. not change the nation's welfare d. have ambiguous outcomes with respect to gain or loss of welfare

b. increase the nation's welfare

27. The nominal tariff is the tariff calculated on the a. price of the input used in the production of the commodity b. price of the commodity or service c. value added d. all of the above

b. price of the commodity or service

25. A(n) _____________ is a tariff sufficiently high to stop all international trade so that the nation returns to autarky. a. optimum tariff b. prohibitive tariff c. nominal tariff d. ad valorem

b. prohibitive tariff

9. A defining characteristic of a "small nation" relative to a "large nation" with respect to identifying the welfare effects of a tariff is that the: a. small nation has less land mass than a large nation b. small nation cannot influence world price of imported goods but a large nation can c. small nation has a smaller trade deficit than the large nation d. none of the above

b. small nation cannot influence world price of imported goods but a large nation can In this regard, a small nation is like a perfectly competitive firm (takes price as given), and a large nation is like an oligopolistic firm (can influence price by changing supply)

16. The production component of the deadweight loss in a small nation arises with a tariff because a. some domestic resources are transferred from the production of an import-competing commodity to the more efficient use in the production of an exportable good. b. some domestic resources are transferred from a more efficient use to less efficient production of an importable commodity c. domestic producers are unhappy with the imposition of the tariff, and therefore refuse to produce a higher level of output. d. domestic producers allocate fewer resources into the production of the import-competing good than they should based on their costs

b. some domestic resources are transferred from a more efficient use to less efficient production of an importable commodity

14. In a small nation, the portion of the loss in consumer surplus found by multiplying the tariff amount by the volume of imports is __________________. a. Transferred to the foreign exporter of the good b. earned by the producers c. accrued by the government as a tax revenue d. not transferred to another party and therefore considered a loss to the nation.

c. accrued by the government as a tax revenue Thus, a tariff has a positive dimension in generating revenue for the government, unlike a quota. However, a tariff of course generates distortions in consumption and production decisions given it changes the price of the imported good.

6. When a specific tariff is used instead of an ad valorem tariff: a. higher priced goods enjoy a greater degree of protection than cheaper goods b. domestic consumers are encouraged to purchase cheaper goods c. cheaper goods enjoy a greater degree of protection than higher priced goods d. domestic producers enjoy a greater degree of protection in periods of rising prices

c. cheaper goods enjoy a greater degree of protection than higher priced goods

21. When a large nation imposes an import tariff, the volume of trade will ___________, and the nation's terms of trade will __________. a. increase, improve b. decline, deteriorate c. decline, improve d. increase, remain unchanged

c. decline, improve

18. A tariff redistributes income in a small nation from the _____________ to the _____________ of the commodity. a. domestic producers, domestic consumers b. government, domestic producers c. domestic consumers, domestic producers d. domestic consumers, government

c. domestic consumers, domestic producers

26. A(n) ______________ is a tariff calculated on the price of a final commodity. a. optimum tariff b. prohibitive tariff c. nominal tariff d. terms of trade effect on a tariff

c. nominal tariff

5. The _______________ is expressed as a fixed sum per physical unit of the traded commodity. a. ad valorem tariff b. export tariff c. specific tariff d. compound tariff

c. specific tariff

28. The effective tariff rate is the tariff calculated on the a. price of the input used in the production of the commodity b. commodity or service c. value added in the nation d. all of the above

c. value added in the nation

tariff effects in a small country

causes losses in a nation's welfare because of inefficiencies in production and distortions in consumption

10. A small nation is one: a. which does not affect world price by its trading b. which faces an infinitely elastic world supply curve for its import commodity c. whose consumers will pay a price that exceeds the world price by the amount of the tariff d. all of the above

d. all of the above

12. The reduction in domestic quantity demanded, and therefore reduction in consumer surplus, of a commodity resulting from the increase in its price due to a tariff is attributed to the: a. production effect of a tariff b. trade effect of a tariff c. revenue effect of a tariff d. consumption effect of a tariff

d. consumption effect of a tariff

19. In a large nation, who bears the burden of the import tariff? a. domestic import-competing producers b. foreign producers of the imported good c. domestic consumers only d. domestic consumers and foreign producers of the imported good

d. domestic consumers and foreign producers of the imported good

2. A(n) __________ is a tax or duty levied on the traded commodity as it enters a nation. a. ad valorem tariff b. compound tariff c. optimum tariff d. import tariff

d. import tariff

11. If a small nation increases the tariff on its import commodity, its: a. consumption of the commodity increases b. production of the commodity decreases c. imports of the commodity increase d. none of the above

d. none of the above

20. The reduction in the price of the import commodity that results when a large nation imposes an import tariff is attributed to the ____________________ and constitutes a ________ of welfare for the nation. a. consumption effect of the tariff, loss b. terms of trade effect of the tariff, loss c. protective effect, gain d. terms of trade effect, gain

d. terms of trade effect, gain

7. Which of the following statements is incorrect? a. an ad valorem tariff is expressed as a percentage of the price of the traded commodity. b. a specific tariff is expressed as a fixed sum of the value of the traded commodity. c. export tariffs are prohibited by the U.S. Constitution d. the U.S. uses exclusively the specific tariff

d. the U.S. uses exclusively the specific tariff

ad valorem tariff

import tariff with fixed percent of value of good

specific tariff

import tariff with fixed sum per unit of good

nominal tariffs

includes all tariffs mentioned calculated on the price of the imported good

optimum tariff

maximizes the benefit from improvement of the nation's terms of trade against the negative effect of the reduction in the volume of trade. however, if a nation imposes an optimum tariff, its trading partner is likely to retaliate, and so both nations are likely to lose is such a tariff war

effective tariff

measures the actual protection provided to the domestic industry, is calculated on the domestic value added (price of the final commodity - cost of the imported inputs)

deadweight loss from the tariff in the small country

net loss (a+b+c+d)-a-c = b+d

export tariffs

prohibited in US, but used by some developing countries.

prohibitive tariff

raises the domestic price of the imported good up to the intersection of the domestic demand and supply of the good very high, stops all international trade

When a large nation imposes an import tariff,

the burden of the tariff falls partly on domestic consumers (they pay a higher price for the imported good) and partly on foreign producers (they receive a lower price for the good), the latter because of terms of trade (TOT) effect

the large nation benefits from the tariff if

the welfare loss to the nation resulting from the decline in the volume of trade is smaller than the welfare benefit that the nation receives from the improvement in its terms of trade