Ch. 9: The instruments of trade policy

Question 1

Specific tariffs are
A) import taxes stated in specific legal statutes.
B) import taxes calculated as a fixed charge for each unit of imported goods.
C) import taxes calculated as a fraction of the value of the imported goods.
D) the same as import quotas.
E) import taxes calculated based solely on the origin country.

Answer 1

B) import taxes calculated as a fixed charge for each unit of imported goods.

Question 2

Ad valorem tariffs are
A) import taxes stated in ads in industry publications.
B) import taxes calculated as a fixed charge for each unit of imported goods.
C) import taxes calculated as a fraction of the value of the imported goods.
D) the same as import quotas.
E) import taxes calculated solely on the origin country.

Answer 2

C) import taxes calculated as a fraction of the value of the imported goods.

Question 3

The excess supply curve of a product we (H) import from foreign countries (F) increases as
A) excess demand of country H increases.
B) excess demand of country F increases.
C) excess supply of country H increases.
D) excess supply of country F increases.
E) excess supply of country F decreases.

Answer 3

D) excess supply of country F increases.

Question 4

Suppose the United States eliminates its tariff on ball bearings used in producing exports. Ball bearing prices in the United States would be expected to
A) increase, and the foreign demand for U.S. exports would increase.
B) decrease, and the foreign demand for U.S. exports would increase.
C) increase, and the foreign demand for U.S. exports would decrease.
D) decrease, and the foreign demand for U.S. exports would decrease.
E) decrease, and the foreign demand would be unchanged

Answer 4

C) increase, and the foreign demand for U.S. exports would decrease.

Question 5

A specific tariff provides home producers more protection when
A) the home market buys cheaper products rather than expensive products.
B) it is applied to a commodity with many grade variations.
C) the home demand for a good is elastic with respect to price changes.
D) it is levied on manufactured goods rather than primary products.
E) the home supply outnumbers the foreign imports.

Answer 5

A) the home market buys cheaper products rather than expensive products.

Question 6

A lower tariff on imported steel would most likely benefit
A) foreign producers at the expense of domestic consumers.
B) domestic manufacturers of steel.
C) domestic consumers of steel.
D) workers in the steel industry. E) foreign consumers of steel.

Answer 6

C) domestic consumers of steel.

Question 7

Which of the following is a fixed percentage of the value of an imported product? 
A) specific tariff
B) ad valorem tariff
C) nominal tariff
D) effective protection tariff 
E) infant industry tariff

Answer 7

B) ad valorem tariff

Question 8

A tax of 20 cents per unit of imported garlic is an example of a(n) 
A) specific tariff.
B) ad valorem tariff.
C) nominal tariff.
D) effective protection tariff. 
E) a disadvantageous tariff.

Answer 8

A) specific tariff.

Question 9

A tax of 20 percent per unit of imported garlic is an example of a(n) 
A) specific tariff.
B) ad valorem tariff.
C) nominal tariff.
D) effective protection tariff. 
E) a disadvantageous tariff

Answer 9

B) ad valorem tariff.

Question 10

Tariffs are NOT defended on the grounds that they
A) improve the terms of trade of foreign nations.
B) protect jobs and reduce unemployment.
C) promote growth and development of young industries.
D) prevent over-dependence of a country on only a few industries.
E) protect domestic producers from foreign low prices.

Answer 10

A) improve the terms of trade of foreign nations.

Question 11

The most vocal political pressure for tariffs is generally made by
A) consumers lobbying for export tariffs.
B) consumers lobbying for import tariffs.
C) consumers lobbying for lower import tariffs.
D) producers lobbying for export tariffs.
E) producers lobbying for import tariffs.

Answer 11

E) producers lobbying for import tariffs.

Question 12

Tariff rates on products imported into the U.S.
A) have dropped substantially over the past 50 years.
B) were prohibited by the Constitution.
C) reached an all time high in 2002.
D) have risen steadily since 1920.
E) were the government’s main source of income in 2006.

Answer 12

A) have dropped substantially over the past 50 years.

Question 13

What is a TRUE statement concerning the imposition in the U.S. of a tariff on cheese?
A) It lowers the price of cheese domestically.
B) It raises the price of cheese internationally.
C) It raises revenue for the government.
D) It will always result in retaliation from abroad.
E) It leads to higher domestic demand for cheese.

Answer 13

C) It raises revenue for the government.

Question 14

The tariff levied in a “large country” (Home), lowers the world price of the imported good. This causes
A) foreign consumers to demand less of the good on which was levied a tariff.
B) domestic demand for imports to decrease.
C) domestic demand for imports to increase.
D) foreign suppliers to produce less of the good on which was levied a tariff.
E) no change in the foreign price of the good it imports.

Answer 14

D) foreign suppliers to produce less of the good on which was levied a tariff.

Question 15

It is argued that a tariff may help promote employment in a single industry, but is not likely to help employment in general. Discuss.

Answer 15

A general tariff on all imports is equivalent to a depreciation in the value of the country’s currency. It would raise the prices of all imports, and have a considerable income effect. This income effect will have a negative effect on total consumption of the import- competing sector (as well as the exportables and non-tradables). In addition, under conditions of a flexible exchange rate regime (assuming the Marshal-Lerner Conditions hold) it will lower the supply of the country’s currency in the foreign exchange market, and hence cause an appreciation of the currency. This will harm the country’s exports, and negatively affect this sector’s employment.

Question 16

(Fig. 3) Refer to above figure. In the absence of trade, how many Widgets does this country produce?

Answer 16

60

Question 17

(Fig. 3) Refer to above figure. In the absence of trade, how many Widgets does this country consume?

Answer 17

60

Question 18

(Fig. 3) Refer to above figure. With free trade and no tariffs, what is the quantity of Widgets imported?

Answer 18

90

Question 19

(Fig. 3) Refer to above figure. With a specific tariff of $3 per unit, what is the quantity of Widgets imported?

Answer 19

40

Question 20

(Fig. 3) Refer to above figure. With free trade and no tariffs, what is the quantity of Widgets produced domestically?

Answer 20

10

Question 21

(Fig. 3) Refer to above figure. The lowest specific tariff which would be considered prohibitive is ________.

Answer 21

5

Question 22

(Fig. 3) Refer to above figure. With a specific tariff of $3 per unit, what is the quantity of Widgets produced domestically?

Answer 22

40

Question 23

(Fig. 3) Refer to above figure. With free trade and no tariffs, what is the quantity of Widgets consumed domestically?

Answer 23

100

Question 24

(Fig. 3) Refer to above figure. With a specific tariff of $3 per unit, what is the quantity of Widgets consumed domestically?

Answer 24

80

Question 25

The effective rate of protection measures
A) the “true” ad valorem value of a tariff.
B) the quota equivalent value of a tariff.
C) the efficiency with which the tariff is collected at the customhouse.
D) the protection given by the tariff to domestic value added.
E) the difference between domestic and foreign prices of the import.

Answer 25

D) the protection given by the tariff to domestic value added.

Question 26

If the tariff on computers is not changed, but domestic computer producers shift from domestically produced semiconductors to imported components, then the effective rate of protection in the computer industry will
A) increase.
B) decrease
C) remain the same.
D) depend on whether computers are PCs or “Supercomputers.”
E) no longer apply.

Answer 26

A) increase.

Question 27

If the tariff on computers is not changed, but the government then adds hitherto nonexistent tariffs on imported semiconductor components, then the effective rate of protection in the computer industry will
A) increase.
B) decrease.
C) remain the same.
D) depend on whether computers are PCs or “Supercomputers.”
E) no longer apply.

Answer 27

B) decrease.

Question 28

When a government allows raw materials and other intermediate products to enter a country duty free, this generally results in a(an)
A) effective tariff rate less than the nominal tariff rate.
B) nominal tariff rate less than the effective tariff rate.
C) rise in both nominal and effective tariff rates.
D) fall in both nominal and effective tariff rates.
E) rise in only the effective tariff rate.

Answer 28

B) nominal tariff rate less than the effective tariff rate.

Question 29

As globalization tends to increase the proportion of imported inputs relative to domestically supplied components
A) the nominal tariff automatically increases.
B) the rate of (effective) protection automatically decreases.
C) the nominal tariff automatically decreases.
D) the rate of (effective) protection automatically increases.
E) the amount of tariffs levied increases.

Answer 29

D) the rate of (effective) protection automatically increases.

Question 30

In an inflationary environment, then over time
A) a specific tariff will tend to raise more revenue than an ad valorem tariff.
B) an ad valorem tariff will tend to raise more revenue than a specific tariff.
C) an optimum tariff will tend to raise more revenue than an escalating tariff.
D) a tariff quota will tend to raise more revenue than a specific tariff.
E) an import quota would raise more revenue than a specific tariff.

Answer 30

B) an ad valorem tariff will tend to raise more revenue than a specific tariff.

Question 31

Some argue that tariffs always hurt the imposing country’s economic welfare, and are typically designed to shift resources from one sector to another, protected or preferred one, within an economy. Find and discuss a counter example to this argument.

Answer 31

The optimum tariff is theoretically a first-best trade policy.

Question 32

The effective rate of protection is a weighted average of nominal tariffs and tariffs on imported inputs. It has been noted that in most industrialized countries, the nominal tariffs on raw materials or intermediate components or products are lower than on final-stage products meant for final markets. Why would countries design their tariff structures in this manner? Who tends to be helped, and who is harmed by this cascading tariff structure?

Answer 32

The cascading tariff structure is probably the result of systematic lobbying on the part of manufacturing interests and lobbies to lower costs of production (in terms of imported inputs). The end result is in fact to create effective rates of protection for downstream, or final manufacturing processes that are often much higher than nominal tariffs on these products. An important group, which is hurt by this are exporters of raw materials and components in developing countries.

Question 33

Throughout the post-World War II era, the importance of tariffs as a trade barrier has
A) increased.
B) decreased.
C) remained the same.
D) fluctuated wildly.
E) demonstrated a classic random walk with a mean-reversion tendency.

Answer 33

B) decreased.

Question 34

If a good is imported into (large) country H from country F, then the imposition of a tariff in country H
A) raises the price of the good in both countries (the “Law of One Price”).
B) raises the price in country H and cannot affect its price in country F.
C) lowers the price of the good in both countries.
D) lowers the price of the good in H and could raise it in F.
E) raises the price of the good in H and lowers it in F.

Answer 34

E) raises the price of the good in H and lowers it in F.

Question 35

If a good is imported into (small) country H from country F, then the imposition of a tariff In country H
A) raises the price of the good in both countries (the “Law of One Price”).
B) raises the price in country H and does not affect its price in country F.
C) lowers the price of the good in both countries.
D) lowers the price of the good in H and could raise it in F.
E) raises the price of the good in H and lowers it in F.

Answer 35

B) raises the price in country H and does not affect its price in country F.

Question 36

If a small country imposes a tariff, then
A) the producers must suffer a loss.
B) the consumers must suffer a loss.
C) the government revenue must suffer a loss.
D) the demand curve must shift to the left.
E) the world price on that item will shift.

Answer 36

B) the consumers must suffer a loss.

Question 37

The imposition of tariffs on imports results in deadweight (triangle) losses. These are
A) production and consumption distortion effects.
B) redistribution effects.
C) revenue effects
D) efficiency effects.
E) distortion of incentives.

Answer 37

E) distortion of incentives.

Question 38

The main redistribution effect of a tariff is the transfer of income from
A) domestic producers to domestic buyers.
B) domestic buyers to domestic producers.
C) domestic producers to domestic government.
D) domestic government to domestic consumers.
E) foreign producers to domestic consumers.

Answer 38

B) domestic buyers to domestic producers.

Question 39

The principle benefit of tariff protection goes to
A) domestic consumers of the good produced.
B) foreign consumers of the good produced.
C) domestic producers of the good produced.
D) foreign producers of the good produced.
E) the domestic government.

Answer 39

C) domestic producers of the good produced.

Question 40

Should the home country be “large” relative to its trade partners, its imposition of a tariff on imports would lead to an increase in domestic welfare if the terms of the trade rectangle exceed the sum of the
A) revenue effect plus redistribution effect.
B) protective effect plus revenue effect.
C) consumption effect plus redistribution effect.
D) production distortion effect plus consumption distortion effect.
E) terms of trade gain.

Answer 40

D) production distortion effect plus consumption distortion effect.

Question 41

The deadweight loss of a tariff
A) is a social loss because it promotes inefficient use of national resources.
B) is a social loss because it reduces the revenue of the government.
C) is not a social loss because it merely redistributes revenue from one sector to another.
D) is not a social loss because it is paid for by rich corporations.
E) is not a social loss because it aids domestic consumers.

Answer 41

A) is a social loss because it promotes inefficient use of national resources.

Question 42

A policy of tariff reduction in the computer industry is
A) in the interest of the United States as a whole and in the interest of computer producing regions of the country.
B) in the interest of the United States as a whole but not in the interest of computer producing regions of the country.
C) not in the interest of the United States as a whole but in the interests of computer producing regions of the country.
D) not in the interest of the United States as a whole and not in the interests of computer consumers.
E) not in the interest of the United States as a whole but in the interests of foreign computer producers.

Answer 42

B) in the interest of the United States as a whole but not in the interest of computer producing regions of the country.

Question 43

10) The fact that industrialized countries levy very low or no tariff on raw materials and semi
processed goods
A) helps developing countries export manufactured products.
B) has no effect on developing country exports.
C) hurts developing country efforts to export manufactured goods.
D) hurts developing country efforts to export raw materials.
E) does not affect industrialized countries’ exports.

Answer 43

C) hurts developing country efforts to export manufactured goods.

Question 44

The imposition of tariffs will help a nation attain which of the following goals?
A) decreased domestic consumer prices
B) increased domestic employment
C) increased amount and variety of goods available for consumers
D) increased competition between domestic and foreign producers
E) gains for domestic producers

Answer 44

E) gains for domestic producers

Question 45

The change in the economic welfare of a country associated with an increase in a tariff equals
A) efficiency loss - terms of trade gain.
B) efficiency gain - terms of trade loss.
C) efficiency loss + tax revenue gain.
D) efficiency loss + tax revenue gain + terms of trade gain.
E) efficiency loss - tax revenue gain.

Answer 45

A) efficiency loss - terms of trade gain.

Question 46

The two deadweight triangles are the Consumption distortion and Production distortion losses. It is easy to understand why the Consumption distortion constitutes a loss for society. After all, it raises the prices of goods to consumers, and even causes some consumers to drop out of the market altogether. It seems paradoxical that the Production distortion is considered an equivalent burden on society. After all, in this case, profits increase, and additional production (with its associated employment) comes on line. This would seem to be an offset rather than an addition to the burden or loss borne by society. Explain why the Production distortion is indeed a loss to society, and what is wrong with the logic that leads to the apparent paradox.

Answer 46

The Production Distortion represents an inefficient shift of society’s resources to produce a good, which it could not sell profitably at world prices. Since (with full employment assumed) these resources were formerly used to produce export goods, which could compete profitably, the net result is a loss in real income to the country.

Question 47

In the country levying the tariff, the tariff will
A) increase both consumer and producer surplus.
B) decrease both the consumer and producer surplus.
C) decrease consumer surplus and increase producer surplus.
D) increase consumer surplus and decrease producer surplus.
E) decrease consumer surplus but leave producers surplus unchanged.

Answer 47

C) decrease consumer surplus and increase producer surplus.

Question 48

(Fig. 4) Refer to above figure. In the absence of trade, what is the country’s consumer surplus?

Answer 48

180

Question 49

(Fig. 4) Refer to above figure. In the absence of trade, what is the country’s producer surplus?

Answer 49

180

Question 50

(Fig. 4) Refer to above figure. The loss of Consumer Surplus due to the tariff equals ________.

Answer 50

230

Question 51

(Fig. 4) Refer to above figure. In the absence of a tariff and in the presence of trade, what is the country’s consumer surplus?

Answer 51

550

Question 52

(Fig. 4) Refer to above figure. Given a tariff of $3 per unit, what is the country’s consumer surplus?

Answer 52

320

Question 53

(Fig. 4) Refer to above figure. What is the amount of efficiency loss resulting from imposition of the tariff?

Answer 53

75

Question 54

(Fig. 4) Refer to above figure. What is the amount of government revenue resulting from imposition of the tariff?

Answer 54

120

Question 55

An important difference between tariffs and quotas is that tariffs
A) raise the price of the good.
B) generate tax revenue for the government.
C) stimulate international trade.
D) help domestic producers.
E) are paid by foreign producers.

Answer 55

B) generate tax revenue for the government.

Question 56

In the exporting country, an export subsidy will
A) help consumers and raise the overall economic welfare of the exporting country.
B) hurt consumers but raise the overall economic welfare of the exporting country.
C) hurt consumers and lower the overall economic welfare of the exporting country.
D) help consumers but lower economic welfare of the exporting country.
E) help consumers and have no effect on the economic welfare of the exporting country.

Answer 56

C) hurt consumers and lower the overall economic welfare of the exporting country.

Question 57

Economic theory in general, and trade theory in particular are replete with equivalencies. For example, it is argued that for any specific tariff one can find an equivalent ad valorem tariff; and that for any quota one can calculate a tariff equivalent. Discuss conditions or situations under which a specific and an ad valorem tariff are not equivalent. Discuss conditions or situations when a tariff and a quota are not equivalent.

Answer 57

E.g., during a period of price inflation, an ad valorem tariff would become increasingly more effective. The government does not receive any of the quota revenues, unless the import licenses are sold or auctioned.

Question 58

An export subsidy is
A) a payment to a firm or individual that ships a good abroad.
B) a fee that is charged to a country that ships goods to the U.S.
C) a payment made to a foreign government in return for preferential trade treatment.
D) illegal in the U.S. but is fairly common in the rest of the world.
E) a limit on the quantity of a good or service that can be sold abroad.

Answer 58

A) a payment to a firm or individual that ships a good abroad.

Question 59

An export subsidy differs from a tariff in each of the following ways EXCEPT
A) a tariff generates revenue.
B) a tariff is applied to imports.
C) a tariff results in an efficiency loss.
D) a tariff is a tax.
E) a tariff discourages imports.

Answer 59

C) a tariff results in an efficiency loss.

Question 60

The European Union’s Common Agricultural Policy (CAP) is, in effect
A) a tariff imposed on agricultural exports.
B) a tariff imposed on agricultural imports.
C) a subsidy that reduces the cost of agricultural exports.
D) a subsidy that increases the cost of agricultural exports.
E) a quota that limits production of agricultural goods by EU nations.

Answer 60

C) a subsidy that reduces the cost of agricultural exports.

Question 61

An import quota is similar to a ________ in its effect on imports, EXCEPT that an import quota ________.
A) tariff; does not generate revenue
B) tariff; generates revenue
C) subsidy; does not generate revenue
D) subsidy; generates revenue
E) tariff; does not result in an efficiency loss.

Answer 61

A) tariff; does not generate revenue

Question 62

The U.S. sugar quota
A) generates government revenue.
B) results in net welfare benefits to the U.S. economy.
C) results in benefits to sugar producers that exceed the cost to consumers.
D) results in costs to consumers that exceed the benefits to sugar producers.
E) does not result in an efficiency loss.

Answer 62

D) results in costs to consumers that exceed the benefits to sugar producers.

Question 63

Which of the following are examples of goods that have been subject to voluntary export restraints?
A) Japanese cars and Chinese solar panels
B) Belgian chocolates and French wines
C) French wines and cheeses
D) Japanese sushi and German cars
E) Taiwanese electronics and Canadian barley

Answer 63

A) Japanese cars and Chinese solar panels

Question 64

An export tariff will ________ producer surplus, ________ consumer surplus, ________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on

Answer 64

A) increase; decrease; increase; have an ambiguous effect on

Question 65

An export subsidy will ________ producer surplus, ________ consumer surplus, ________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on

Answer 65

B) increase; decrease; decrease; decrease

Question 66

An import quota will ________ producer surplus, ________ consumer surplus, ________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on

Answer 66

C) increase; decrease; have no effect on; have an ambiguous effect on

Question 67

A voluntary export restraint will ________ producer surplus, ________ consumer surplus, ________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on

Answer 67

D) increase; decrease; have no effect on; decrease

Question 68

If an import-competing firm is imperfectly competitive, then under free trade an export tariff will ________ domestic market price, ________ producer surplus, ________ consumer surplus, ________ government revenue, and ________ overall domestic national welfare.
A) have no effect on; have no effect on; decrease; increase; decrease
B) increase; have no effect on; increase; decrease; increase
C) increase; have no effect on; decrease; increase; decrease D) decrease; increase; decrease; increase; decrease
E) decrease; decrease; increase; decrease; have no effect on

Answer 68

C) increase; have no effect on; decrease; increase; decrease

Question 69

If an import-competing firm is imperfectly competitive, than under free trade an import quota
will ________ domestic market price, ________ producer surplus, ________ consumer surplus, ________ government revenue, and ________ overall domestic national welfare.
A) decrease; decrease; increase; decrease; have no effect on
B) increase; have no effect on; decrease; increase; decrease
C) have no effect on; have no effect on; decrease; increase; decrease
D) increase; increase; decrease; have no effect on; decrease
E) decrease; increase; decrease; increase; decrease

Answer 69

D) increase; increase; decrease; have no effect on; decrease

Question 70

Suppose an import-competing firm is imperfectly competitive. Replacement of an export tariff with an import quota that yields the same level of imports will ________ market price, ________ producer surplus, ________ consumer surplus, ________ government revenue, and ________ overall domestic national welfare.
A) have no effect on; have no effect on; have no effect on; decrease; decrease
B) increase; increase; increase; decrease; have an ambiguous effect on
C) decrease; decrease; increase; decrease; increase
D) increase; increase; decrease; decrease; decrease
E) increase; have no effect on; decrease; decrease; increase

Answer 70

D) increase; increase; decrease; decrease; decrease

Question 71

If an import-competing firm is the only domestic producer of a good, then a transition from autarky to free trade will ________ domestic price, ________ producer surplus, ________ consumer surplus, and ________ overall domestic national welfare.
A) increase; increase; increase; increase
B) decrease; decrease; decrease; decrease
C) decrease; decrease; increase; increase
D) increase; increase; decrease; decrease
E) increase; increase; decrease; increase

Answer 71

C) decrease; decrease; increase; increase