chapter 5.2.1

Question 1

t or f

The first case for free trade is the argument
that producers and consumers allocate
resources most efficiently when
governments do not distort market prices
through trade policy.

Answer 1

t

Question 2

National welfare of a small country is highest
with WHAT

Answer 2

free trade.

Question 3

With WHAT, consumers pay higher
prices and consume too little while firms
produce too much.

Answer 3

restricted trade

Question 4

T OR F

because tariff rates are already
low for most countries, the estimated
benefits of moving to free trade are only a
small fraction of national income for most
countries.

Answer 4

T

Question 5

Free trade allows firms or industry to take
advantage of

Answer 5

economies of scale.

Question 6

Protected markets limit gains from external
economies of scale by inhibiting the
concentration of industries:

Answer 6

Too many firms to enter the protected
industry.

The scale of production of each firm
becomes inefficient.

Question 7

Free trade provides _ AND _

Answer 7

competition and
opportunities for innovation (dynamic
benefits).

Question 8

Free trade avoids the loss of resources
through

Answer 8

RENT SEEKING

Question 9

says that free trade is the best feasible
political policy, even though there may be
better policies in principle.

Answer 9

political argument for free trade

Question 10

T OR F

Any policy that deviates from free trade would
be quickly manipulated by political groups,
leading to decreased national welfare.

Answer 10

T

Question 11

For a “large” country, a tariff lowers the
price of imports in world markets and
generates a WHAT

Answer 11

terms of trade gain.

Question 12

t or f

A large tariff will lead to an increase in
national welfare for a large country.

Answer 12

f - small tariff

Question 13

A tariff rate that completely prohibits
imports leaves a country worse off, but
tariff rate to may exist that maximizes
national welfare: an _

Answer 13

optimum tariff.

Question 14

An __ (a negative export subsidy)
that completely prohibits exports leaves a
country worse off, but an export tax rate
may exist that maximizes national welfare
through the terms of trade.

Answer 14

export tax

Question 15

t or f

export subsidy lowers the terms of trade for
a large country; an export tax raises the terms
of trade for a large country.

Answer 15

t

Question 16

t or f

export tax may raise the price of exports in
the world market, increasing the terms of trade.

Answer 16

t

Question 17

A second argument against free trade is
that ___ may exist
that cause free trade to be a suboptimal
policy.

Answer 17

domestic market failures

Question 18

The economic efficiency loss calculations using
consumer and producer surplus assume that
markets __

Answer 18

function well.

Question 19

Types of market failures include

Answer 19

Persistently high underemployment of workers

Persistently high underutilization of structures,
equipment, and other forms of capital

Property rights not well defined or well enforced

technological benefits for society discovered
through private production, but from which
private firms cannot fully profit

environmental costs for society caused by
private production, but for which private firms
do not fully pay

sellers that are not well informed about the
(opportunity) cost of production or buyers that
are not well informed about value from
consumption

Question 20

Economists calculate the __
to represent the additional benefit to society from
private production.

Answer 20

marginal social benefit

Question 21

With a market failure, __ is not
accurately measured by the producer surplus of private
firms, so that economic efficiency loss calculations are
misleading.

Answer 21

marginal social benefit

Question 22

t or f

It’s possible that when a tariff increases domestic
production, the benefit to domestic society will
decrease due to a market failure.

Answer 22

f - increase

It’s possible that when a tariff increases domestic
production, the benefit to domestic society will
increase due to a market failure.

Question 23

The domestic market failure argument
against free trade is an example of a more
general argument called the

Answer 23

theory of the
second best.

Question 24

t or f

Government intervention that distorts
market incentives in one market may
increase national welfare by offsetting the
consequences of market failures elsewhere.

Answer 24

t

Question 25

t or f If the best policy, fixing the market failures, is not feasible, then government intervention in another market may be the “third-best” way of fixing the problem.

Answer 25

f; second-best

Question 26

a domestic policy aimed directly at the source of the problem.

Answer 26

“first-best” policy:

Question 27

Government policies to address market failures are likely to be manipulated by WHAT

Answer 27

politically powerful groups.

Question 28

Due to distorting the incentives of producers and consumers, trade policy may have ___ that make a situation worse, not better.

Answer 28

unintended consequences

Question 29

Models of governments maximizing political success rather than national welfare:

Answer 29

1. Median voter theorem 2. Collective action 3. A model that combines aspects of collective action and the median voter theorem

Question 30

predicts that democratic political parties pick their policies to court the voter in the middle of the ideological spectrum (i.e., the median voter).

Answer 30

median voter theorem

Question 31

Assumptions of the Median Voter model:

Answer 31

1. There are two competing political parties. 2. The objective of each party is to get elected by majority vote.

Question 32

What policies will the parties promise to follow?

Answer 32

Both parties will offer the same tariff policy to court the median voter (the voter in the middle of the spectrum) in order to capture the most votes.

Question 33

implies that a two-party democracy should enact trade policy based on how many voters it pleases.

Answer 33

median voter theorem

Question 34

A policy that inflicts large losses on a few people (import-competing producers) but benefits a large number of people (consumers) should be chosen.

Answer 34

median voter theorem

Question 35

Political activity is often described as a

Answer 35

collective action problem:

Question 36

T OR F While consumers as a group have an incentive to advocate free trade, each individual consumer has incentive because his benefit is not large compared to the cost and time required to advocate free trade.

Answer 36

F - While consumers as a group have an incentive to advocate free trade, each individual consumer has "no incentive" because his benefit is not large compared to the cost and time required to advocate free trade.

Question 37

T OR F for groups who suffer large losses from free trade (for example, unemployment), each individual in that group has a strong incentive to advocate the policy he desires.

Answer 37

T

Question 38

was begun in 1947 as a provisional international agreement and was replaced by a more formal international institution called the World Trade Organization in 1995.

Answer 38

General Agreement of Tariffs and Trade

Question 39

T OR F Multilateral negotiations mobilize exporters to support free trade if they believe export markets will expand.

Answer 39

T

Question 40

THIS also help avoid a trade war between countries, where each country enacts trade restrictions.

Answer 40

Multilateral negotiations