Chapter 9: Application internatonal trade

Chapter 9 Application: International Trade

TRUE/FALSE

1. Trade decisions are based on the principle of absolute advantage.

1 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Absolute advantage MSC: Interpretive

2. The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive from participating in a market. 2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Total surplus MSC: Interpretive

3. According to the principle of comparative advantage, all countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best.

1 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Comparative advantage MSC: Interpretive

4. The world price of cotton is the highest price of cotton observed anywhere in the world.

1 REF: 91

ANS: F NAT: Analytic TOP: Prices DIF: LOC: Gains from trade, specialization, and trade MSC: Definitional

5. If the world price of a good is greater than the domestic price in a country that can engage in international trade, then that country becomes an importer of that good. 2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: International trade | Prices MSC: Interpretive

6. Without free trade, the domestic price of a good must be equal to the world price of a good. 2 REF: 91

ANS: F NAT: Analytic TOP: Prices DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

The nation of Aviana soon will abandon its notrade policy and adopt a freetrade policy. If the world price of goose meat is $3 per pound and the domestic price of goose meat without trade is $2 per pound, then Aviana should export goose meat. REF: 91 2 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Prices | Comparative advantage | Exports MSC: Interpretive

8. If Argentina exports oranges to the rest of the world, Argentina's producers of oranges are worse off, and Argentina's consumers of oranges are better off, as a result of trade.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Trade | Economic welfare MSC: Applicative

9. If a country’s domestic price of a good is lower than the world price, then that country has a comparative advantage in producing that good. 2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Comparative advantage | Prices MSC: Interpretive

82

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10. When a country allows international trade and becomes an importer of a good, domestic producers of the good are better off, and domestic consumers of the good are worse off.

2 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: F NAT: Analytic TOP: Gains from trade MSC: Interpretive

11. If the United Kingdom imports tea cups from other countries, then U.K. producers of tea cups are better off, and U.K. consumers of tea cups are worse off, as a result of trade. 2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Trade | Economic welfare MSC: Applicative

12.

If Belgium exports chocolate to the rest of the world, then Belgian chocolate producers benefit from higher producer surplus, Belgian chocolate consumers are worse off because of lower consumer surplus, and total surplus in Belgium increases because of the exports of chocolate. 2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Trade | Economic welfare MSC: Applicative

13. In principle, trade can make a nation better off, because the gains to the winners exceed the losses to the losers.

1 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Trade | Economic welfare MSC: Interpretive

14.

Suppose the Ivory Coast, a small country, imports wheat at the world price of $4 per bushel. If the Ivory Coast imposes a tariff of $1 per bushel on imported wheat, then, other things equal, the price of wheat in Ivory Coast will increase, but by less than $1.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Tariffs | Prices MSC: Interpretive

15. The smalleconomy assumption is necessary to analyze the gains and losses from international trade.

1 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: International trade | Assumptions MSC: Interpretive

16. The greater the elasticities of supply and demand, the smaller are the gains from trade.

REF: 92 3 DIF: LOC: Gains from trade, specialization and trade

ANS: F NAT: Analytic TOP: Gains from trade | Price elasticities of demand and supply MSC: Applicative

17. If a tariff is placed on watches, the price of both domestic and imported watches will rise by the amount of the tariff.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Tariffs | Prices MSC: Interpretive

18. When a government imposes a tariff on a product, the domestic price will equal the world price.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Tariffs | Prices MSC: Interpretive

19. A tariff increases the quantity of imports and moves the market farther from its equilibrium without trade.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Tariffs | Imports MSC: Applicative

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20. When a country abandons notrade policies in favor of freetrade policies and becomes an importer of steel, then the domestic price of steel will increase as a result.

2 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: F NAT: Analytic TOP: Imports | Prices MSC: Interpretive

21. When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off. 1 REF: 92

ANS: T NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization, and trade MSC: Interpretive

22. When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off and sellers of shoes in that country become better off.

2 REF: 92

ANS: T NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization, and trade MSC: Interpretive

23. Deadweight loss measures the decrease in total surplus that results from a tariff or quota.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Deadweight losses MSC: Interpretive

24. If a small country imposes a tariff on an imported good, domestic sellers will gain producer surplus, the government will gain tariff revenue, and domestic consumers will gain consumer surplus. 2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Tariffs | Economic welfare MSC: Applicative

25. Domestic consumers gain and domestic producers lose when the government imposes a tariff on imports. 2 REF: 92

ANS: F NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

26. The imposition of a tariff on imported wine will increase the domestic price of wine, decrease the quantity of wine imported, and increase the quantity of wine produced domestically.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Prices | Imports | Tariffs MSC: Interpretive

27.

Suppose that Australia imposes a tariff on imported beef. If the increase in producer surplus is $100 million, the increase in tariff revenue is $200 million, and the reduction in consumer surplus is $500 million, the deadweight loss of the tariff is $300 million.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Tariffs | Deadweight losses MSC: Applicative

28.

Suppose Ecuador imposes a tariff on imported bananas. If the increase in producer surplus is $50 million, the reduction in consumer surplus is $150 million, and the deadweight loss of the tariff is $30 million, then the tariff generates $130 million in revenue for the government.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Tariffs | Deadweight losses MSC: Applicative

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29. Tariffs cause deadweight loss because they move the price of an imported product closer to the equilibrium without trade, thus reducing the gains from trade.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Tariffs | Deadweight losses MSC: Interpretive

30. Import quotas and tariffs both cause the quantity of imports to fall.

1 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Tariffs | Import quotas MSC: Interpretive

31. Import quotas and tariffs make domestic sellers better off and domestic buyers worse off.

REF: 92 2 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Tariffs | Import quotas | Economic welfare MSC: Interpretive

32. Economists agree that trade ought to be restricted if free trade means that domestic jobs might be lost because of foreign competition. 2 REF: 93 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Trade policy | Employment MSC: Interpretive

33. Free trade causes job losses in industries in which a country does not have a comparative advantage, but it also causes job gains in industries in which the country has a comparative advantage.

REF: 93 2 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Comparative advantage | Employment MSC: Interpretive

34. Most economists support the infantindustry argument because it is so easy to implement in practice.

1 REF: 93 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Trade policy MSC: Interpretive

35. If Honduras were to subsidize the production of wool blankets and sell them in Sweden at artificially low prices, the Swedish economy would be worse off. 2 REF: 93 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Trade policy | Economic welfare MSC: Interpretive

36. Policymakers often consider trade restrictions in order to protect domestic producers from foreign competitors. 1 REF: 93 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Trade policy MSC: Interpretive

37. GATT is an example of a successful unilateral approach to achieving free trade. 2 REF: 93

ANS: F NAT: Analytic TOP: GATT DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

38. NAFTA is an example of a multilateral approach to achieving free trade. 2 REF: 93

ANS: T NAT: Analytic TOP: NAFTA DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

39. The rules established under the General Agreement on Tariffs and Trade (GATT) are enforced by an international body called the World Trade Organization (WTO).

1 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: T NAT: Analytic TOP: GATT | WTO MSC: Definitional

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40. A multilateral approach to free trade has greater potential to increase the gains from trade than a unilateral approach, because the multilateral approach can reduce trade restrictions abroad as well as at home.

2 REF: 93 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Trade policy MSC: Interpretive

41. The results of a 2007 Los Angeles Times poll suggest that a significant majority of Americans believe that free international trade helps the American economy. 2 REF: 94 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Trade policy MSC: Interpretive

42. The results of a 2007 Los Angeles Times poll suggest that the percentage of Americans who believe trade is harmful to the economy exceeds the percentage of Americans who believe trade is beneficial to the economy.

2 REF: 94 DIF: LOC: Gains from trade, specialization and trade ANS: T NAT: Analytic TOP: Trade policy MSC: Interpretive

43. Most economists view the United States as an ongoing experiment that raises serious doubts about the virtues of free trade. 1 REF: 94 DIF: LOC: Gains from trade, specialization and trade ANS: F NAT: Analytic TOP: Trade policy MSC: Interpretive

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SHORT ANSWER

1. Use the graph to answer the following questions about CDs.

a. What is the equilibrium price of CDs before trade? b. What is the equilibrium quantity of CDs before trade? c. What is the price of CDs after trade is allowed? d. What is the quantity of CDs exported after trade is allowed? e. What is the amount of consumer surplus before trade? f. What is the amount of consumer surplus after trade? g. What is the amount of producer surplus before trade? h. What is the amount of producer surplus after trade? i. What is the amount of total surplus before trade? j. What is the amount of total surplus after trade? k. What is the change in total surplus because of trade?

ANS:

a. b. c. d. e. f. g. h. i. j. k. $12 50 $15 30 $250 $122.50 $250 $422.50 $500 $545 $45

2 REF: 92 NAT: Analytic TOP: Exports | Economic welfare DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

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2. Using the graph below, answer the following questions about hammers.

a. What is the equilibrium price of hammers before trade? b. What is the equilibrium quantity of hammers before trade? c. What is the price of hammers after trade is allowed? d. What is the quantity of hammers imported after trade is allowed? e. What is the amount of consumer surplus before trade? f. What is the amount of consumer surplus after trade? g. What is the amount of producer surplus before trade? h. What is the amount of producer surplus after trade? i. What is the amount of total surplus before trade? j. What is the amount of total surplus after trade? k. What is the change in total surplus because of trade?

ANS:

a. b. c. d. e. f. g. h. i. j. k. $14 90 $10 85 $360 $810 $405 $125 $765 $935 $170

2 REF: 92 NAT: Analytic TOP: Imports | Economic welfare DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

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3. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questions given this information.

a. What is the domestic price and quantity demanded of hammers after the tariff is imposed? b. What is the quantity of hammers imported before the tariff? c. What is the quantity of hammers imported after the tariff? d. What would be the amount of consumer surplus before the tariff? e. What would be the amount of consumer surplus after the tariff? f. What would be the amount of producer surplus before the tariff? g. What would be the amount of producer surplus after the tariff? h. What would be the amount of government revenue because of the tariff? i. What would be the total amount of deadweight loss due to the tariff?

ANS:

a. b. c. d. e. f. g. h. i. $6, 84 66 44 $384 $294 $45 $80 $44 $11

2 REF: 92 NAT: Analytic TOP: Tariffs | Economic welfare DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

4. How does an import quota differ from an equivalent tariff?

ANS: Both the import quota and the tariff raise the domestic price of the good, reduce the welfare of domestic consumers, increase the welfare of domestic producers, and cause deadweight losses. The only difference for the economy is that the tariff raises revenue for the government, while the import quota creates surplus for license holders.

2 REF: 92 NAT: Analytic TOP: Tariffs | Import quotas DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

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5. Characterize the two different approaches a nation can take to achieve free trade. Does one approach have an advantage over the other?

ANS: A unilateral approach is when a country removes its trade restrictions on its own. A multilateral approach is when a country removes its trade restrictions while other countries do the same. A multilateral approach has two advantages. The first is that it has the potential to result in freer trade because it can reduce trade restrictions abroad as well as at home. If international negotiations fail, however, the result could be more restricted trade than under a unilateral approach. Also, the multilateral approach may have a political advantage and can sometimes win political support when a unilateral reduction cannot.

2 REF: 93 NAT: Analytic TOP: Trade policy DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

6. What are the arguments in favor of trade restrictions, and what are the counterarguments? According to most economists, do any of these arguments really justify trade restrictions? Explain.

ANS: Arguments mentioned in the text include the jobs argument, the national security argument, the infant industry argument, the unfair competition argument, and the protectionasabargainingchip argument. These arguments and counterarguments are outlined in section 93 of the text. Most economists would dismiss the jobs argument, the infant industry argument, and the unfair competition argument on strictly economic grounds. The bargainingchip argument carries high risks of economic harm if the threat doesn't work. The nationalsecurity argument balances economic loss from trade restriction against the benefit of longterm national survival, and is probably the argument that economists would most likely buy if it were clear that the industry being protected was clearly crucial to national security.

2 REF: 93 NAT: Analytic TOP: Trade policy Interpretive

DIF: LOC: Gains from trade, specialization and trade MSC: Sec00 Application: International Trade

MULTIPLE CHOICE

An important factor in the decline of the U.S. textile industry over the past 100 or so years is a. b. c.

foreign competitors that can produce quality textile goods at low cost. lower prices of goods that are substitutes for clothing. a decrease in Americans’ demand for clothing, due to increased incomes and the fact that clothing is an inferior good. the fact that the minimum wage in the U.S. has failed to keep pace with the cost of living. d.

1 REF: 90 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade MSC: Interpretive

2. With which of the Ten Principles of Economics is the study of international trade most closely connected?

a. People face tradeoffs. b. Trade can make everyone better off. c. Governments can sometimes improve market outcomes. d. Prices rise when the government prints too much money.

1 REF: 90 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade MSC: Interpretive

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3. Which of the following tools and concepts is useful in the analysis of international trade?

total surplus domestic supply equilibrium price a. b. c. d. All of the above are correct.

1 REF: 90 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade MSC: Interpretive

A logical starting point from which the study of international trade begins is a. b.

the recognition that not all markets are competitive. the recognition that government intervention in markets sometimes enhances the economic welfare of the society. the principle of absolute advantage. the principle of comparative advantage. c. d.

REF: 90 1 DIF: LOC: Gains from trade, specialization and trade International trade | Comparative advantage Interpretive MSC:

ANS: D NAT: Analytic TOP: Sec01 Application: International Trade The Determinants of Trade

MULTIPLE CHOICE

1. What is the fundamental basis for trade among nations? shortages or surpluses in nations that do not trade

a. b. misguided economic policies c. d. absolute advantage comparative advantage

1 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Comparative advantage MSC: Interpretive

Patterns of trade among nations are primarily determined by a. b. c. d. cultural considerations. political considerations. comparative advantage. differences in the income elasticity of demand among nations.

1 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Comparative advantage MSC: Interpretive

The nation of Pineland forbids international trade. In Pineland, you can buy 1 pound of fish for 2 pounds of beef. In other countries, you can buy 1 pound of fish for 1.5 pounds of beef. These facts indicate that a. Pineland has a comparative advantage, relative to other countries, in producing fish. b. c. d. other countries have a comparative advantage, relative to Pineland, in producing beef. the price of beef in Pineland exceeds the world price of beef. if Pineland were to allow trade, it would import fish.

REF: 91 2 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Comparative advantage | World price MSC: Applicative

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if Waterland were to allow trade, it would export computers.

The nation of Waterland forbids international trade. In Waterland, you can obtain a computer by trading 2 bicycles. In other countries, you can obtain a computer by trading 3 bicycles. These facts indicate that a. b. Waterland has an absolute advantage, relative to other countries, in producing computers. c. Waterland has a comparative advantage, relative to other countries, in producing bicycles. d. All of the above are correct.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Comparative advantage MSC: Applicative

The principle of comparative advantage asserts that a. b.

not all countries can benefit from trade with other countries. the world price of a good will prevail in all countries, regardless of whether those countries allow international trade in that good. countries can become better off by exporting goods, but they cannot become better off by importing goods. countries can become better off by specializing in what they do best. d.

1 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Comparative advantage MSC: Interpretive

A tax on an imported good is called a a. b. c. d. quota. tariff. supply tax. trade tax.

1 REF: 91

ANS: B NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization and trade MSC: Definitional

A tariff is a a. b. c. d. limit on how much of a good can be exported. limit on how much of a good can be imported. tax on an exported good. tax on an imported good.

1 REF: 91

ANS: D NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization and trade MSC: Definitional

absolute price. relative price. comparative price. The price of a good that prevails in a world market is called the a. b. c. d. world price.

1 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Price | International trade MSC: Definitional

export price of sugar. import price of sugar. comparativeadvantage price of sugar. The price of sugar that prevails in international markets is called the a. b. c. d. world price of sugar.

1 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Price | International trade MSC: Definitional

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10.

the country will be an exporter of the good. the country will be an importer of the good. the country will be neither an exporter nor an importer of the good. If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price, a. b. c. d. Additional information is needed about demand to determine whether the country will be an exporter of the good, an importer of the good, or neither.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Prices | Imports MSC: Interpretive

11.

the country will be an exporter of the good. the country will be an importer of the good. the country will be neither an exporter nor an importer of the good. If a country allows trade and, for a certain good, the domestic price without trade is lower than the world price, a. b. c. d. Additional information is needed about demand to determine whether the country will be an exporter of the good, an importer of the good, or neither.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Prices | Exports MSC: Interpretive

12.

For any country, if the world price of zinc is higher than the domestic price of zinc without trade, that country should a. b. c. d. export zinc, since that country has a comparative advantage in zinc. import zinc, since that country has a comparative advantage in zinc. neither export nor import zinc, since that country cannot gain from trade. neither export nor import zinc, since that country already produces zinc at a low cost compared to other countries.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Exports | Comparative advantage MSC: Applicative

13.

If the world price of textiles is higher than Vietnam’s domestic price of textiles without trade, then Vietnam a. b. c. d. should import textiles. has a comparative advantage in textiles. should produce just enough textiles to meet its domestic demand. should refrain altogether from producing textiles.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Prices | Comparative advantage MSC: Interpretive

14. Assume, for Singapore, that the domestic price of soybeans without international trade is higher than the world

price of soybeans. This suggests that, in the production of soybeans, a. Singapore has a comparative advantage over other countries and Singapore will import soybeans. b. Singapore has a comparative advantage over other countries and Singapore will export soybeans. c. d. other countries have a comparative advantage over Singapore and Singapore will import soybeans. other countries have a comparative advantage over Singapore and Singapore will export soybeans.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Prices | Comparative advantage MSC: Applicative

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15. Assume, for the U.S., that the domestic price of beef without international trade is lower than the world price

of beef. This suggests that, in the production of beef, a. b. c. d. the U.S. has a comparative advantage over other countries and the U.S. will export beef. the U.S. has a comparative advantage over other countries and the U.S. will import beef. other countries have a comparative advantage over the U.S. and the U.S. will export beef. other countries have a comparative advantage over the U.S. and the U.S. will import beef.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Prices | Comparative advantage MSC: Applicative

16.

Suppose the United States exports cars to France and imports cheese from Switzerland. This situation suggests that a.

d. the United States has a comparative advantage relative to Switzerland in producing cheese, and France has a comparative advantage relative to the United States in producing cars. the United States has a comparative advantage relative to France in producing cars, and Switzerland has a comparative advantage relative to the United States in producing cheese. the United States has an absolute advantage relative to Switzerland in producing cheese, and France has an absolute advantage relative to the United States in producing cars. the United States has an absolute advantage relative to France in producing cars, and Switzerland has an absolute advantage relative to the United States in producing cheese.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Comparative advantage MSC: Interpretive

17. Trade among nations is ultimately based on

a. b. c. d. absolute advantage. strategic advantage. comparative advantage. technical advantage.

1 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Comparative advantage MSC: Interpretive

18. A country has a comparative advantage in a product if the world price is lower than that country’s domestic price without trade. higher than that country’s domestic price without trade. equal to that country’s domestic price without trade. not subject to manipulation by organizations that govern international trade. a. b. c. d.

2 REF: 91 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Price | Comparative advantage MSC: Interpretive

19.

Suppose Puerto Rico has a comparative advantage over other countries in producing sugar, but other countries have an absolute advantage over Puerto Rico in producing sugar. If trade in sugar is allowed, Puerto Rico a. will import sugar. b. will export sugar. c. will either export sugar or export sugar, but it is not clear from the given information. d. would have nothing to gain either from exporting or importing sugar.

REF: 91 2 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Comparative advantage | Absolute advantage MSC: Interpretive

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20.

Suppose Haiti has an absolute advantage over other countries in producing oranges, but other countries have a comparative advantage over Haiti in producing oranges. If trade in oranges is allowed, Haiti a. will import oranges. b. will export oranges. c. will either export oranges or export oranges, but it is not clear from the given information. d. would have nothing to gain either from exporting or importing oranges.

REF: 91 2 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Comparative advantage | Absolute advantage MSC: Interpretive

Sec02 Application: International Trade The Winners and Losers from Trade

MULTIPLE CHOICE

1. When a country that imported a particular good abandons a freetrade policy and adopts a notrade policy,

a. b. c. d. producer surplus increases and total surplus increases in the market for that good. producer surplus increases and total surplus decreases in the market for that good. producer surplus decreases and total surplus increases in the market for that good. producer surplus decreases and total surplus decreases in the market for that good.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Producer surplus | Total surplus MSC: Interpretive

2. When, in our analysis of the gains and losses from international trade, we assume that a country is small, we

cannot experience significant gains or losses by trading with other countries. cannot have a significant comparative advantage over other countries. cannot affect world prices by trading with other countries. are in effect assuming that the country a. b. c. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Prices | International trade MSC: Interpretive

3. When, in our analysis of the gains and losses from international trade, we assume that a particular country is

small, we are a.

assuming the domestic price before trade will continue to prevail once that country is opened up to trade with other countries. assuming there is no demand for that country’s domesticallyproduced goods by other countries. assuming international trade can benefit producers, but not consumers, in that country. b. c. d. making an assumption that is not necessary to analyze the gains and losses from international trade.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Assumptions | International trade MSC: Interpretive

In analyzing international trade, we often focus on a country whose economy is small relative to the rest of the world. We do so a.

because it is impossible to analyze the gains and losses from international trade without making this assumption. because then we can assume that world prices of goods are unaffected by that country’s participation in international trade. in order to rule out the possibility of tariffs or quotas. c. d. All of the above are correct.

1 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Assumptions | International trade MSC: Interpretive

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In analyzing the gains and losses from international trade, to say that Moldova is a small country is to say that a. Moldova can only import goods; it cannot export goods. b. Moldova’s choice of which goods to export and which goods to import is not based on the principle

of comparative advantage. only the domestic price of a good is relevant for Moldova; the world price of a good is irrelevant. c. d. Moldova is a price taker.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Prices | International trade MSC: Interpretive

6. When a country allows trade and becomes an exporter of a good,

a. b. c. d. domestic producers gain and domestic consumers lose. domestic producers lose and domestic consumers gain. domestic producers and domestic consumers both gain. domestic producers and domestic consumers both lose.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Exports | Gains from trade MSC: Interpretive

7. Trade enhances the economic wellbeing of a nation in the sense that a.

both domestic producers and domestic consumers of a good become better off with trade, regardless of whether the nation imports or exports the good in question. the gains of domestic producers of a good exceed the losses of domestic consumers of a good, regardless of whether the nation imports or exports the good in question. trade results in an increase in total surplus. trade puts downward pressure on the prices of all goods. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Gains from trade MSC: Interpretive

8. When a country allows trade and becomes an importer of a good,

both domestic producers and domestic consumers become better off. domestic producers become better off, and domestic consumers become worse off. domestic producers become worse off, and domestic consumers become better off. both domestic producers and domestic consumers become worse off. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Imports | Gains from trade MSC: Interpretive

9. When a country allows trade and becomes an importer of a good,

a. b. c. d. everyone in the country benefits. the gains of the winners exceed the losses of the losers. the losses of the losers exceed the gains of the winners. everyone in the country loses.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Imports | Gains from trade MSC: Interpretive

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10. When the nation of Worldova allows trade and becomes an exporter of silk, a.

d. residents of Worldova who produce silk become worse off; residents of Worldova who buy silk become better off; and the economic wellbeing of Worldova rises. residents of Worldova who produce silk become worse off; residents of Worldova who buy silk become better off; and the economic wellbeing of Worldova falls. residents of Worldova who produce silk become better off; residents of Worldova who buy silk become worse off; and the economic wellbeing of Worldova rises. residents of Worldova who produce silk become better off; residents of Worldova who buy silk become worse off; and the economic wellbeing of Worldova falls.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Exports | Economic welfare MSC: Applicative

11. When the nation of Duxembourg allows trade and becomes an importer of software, a.

d. residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy software become better off; and the economic wellbeing of Duxembourg rises. residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy software become better off; and the economic wellbeing of Duxembourg falls. residents of Duxembourg who produce software become better off; residents of Duxembourg who buy software become worse off; and the economic wellbeing of Duxembourg rises. residents of Duxembourg who produce software become better off; residents of Duxembourg who buy software become worse off; and the economic wellbeing of Duxembourg falls.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Imports | Economic welfare MSC: Applicative

12. When a nation first begins to trade with other countries and the nation becomes an importer of corn, a.

b. c. this is an indication that the world price of corn exceeds the nation’s domestic price of corn in the absence of trade. this is an indication that the nation has a comparative advantage in producing corn. the nation’s consumers of corn become better off and the nation’s producers of corn become worse off. d. All of the above are correct.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Imports | Economic welfare MSC: Applicative

b. c. 13. When a nation first begins to trade with other countries and the nation becomes an exporter of soybeans, this is an indication that the world price of soybeans exceeds the nation’s domestic price of soybeans in the absence of trade. this is an indication that the nation has a comparative advantage in producing soybeans. the nation’s consumers of soybeans become worse off and the nation’s producers of soybeans become better off. d. All of the above are correct.

REF: 92 3 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Exports | Comparative advantage | Economic welfare MSC: Applicative

14. Trade raises the economic wellbeing of a nation in the sense that

a. b. c.

d. the gains of the winners exceed the losses of the losers. everyone in an economy gains from trade. since countries can choose what products to trade, they will pick those products that are most beneficial to society. the nation joins the international community when it begins to engage in trade.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Economic welfare MSC: Interpretive

Chapter 9 /Application: International Trade (cid:0) 98

15. When a country allows trade and becomes an exporter of a good, a.

d. the gains of the domestic producers of the good exceed the losses of the domestic consumers of the good. the gains of the domestic consumers of the good exceed the losses of the domestic producers of the good. the losses of the domestic producers of the good exceed the gains of the domestic consumers of the good. the losses of the domestic consumers of the good exceed the gains of the domestic producers of the good.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Exports | Economic welfare MSC: Applicative

16. When a country allows trade and becomes an importer of steel,

a. b. c. d. the losses of the domestic producers of steel exceed the gains of the domestic consumers of steel. the losses of the domestic consumers of steel exceed the gains of the domestic producers of steel. the gains of the domestic producers of steel exceed the losses of the domestic consumers of steel. the gains of the domestic consumers of steel exceed the losses of the domestic producers of steel.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Imports | Economic welfare MSC: Applicative

17. When a country allows trade and becomes an exporter of a good, which of the following is not a consequence?

a. The price paid by domestic consumers of the good increases. b. The price received by domestic producers of the good increases. c. The losses of domestic consumers of the good exceed the gains of domestic producers of the good. d. The gains of domestic producers of the good exceed the losses of domestic consumers of the good.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Exports | Economic welfare MSC: Applicative

18. When a country allows trade and becomes an importer of bottled water, which of the following is not a

consequence? a. The gains of domestic consumers of bottled water exceed the losses of domestic producers of bottled water. b. The losses of domestic producers of bottled water exceed the gains of domestic consumers of bottled water.

c. The price paid by domestic consumers of bottled water decreases. d. The price received by domestic producers of bottled water decreases.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Imports | Economic welfare MSC: Applicative

19. When a country allows trade and becomes an exporter of a good,

a. b. c. d. consumer surplus and producer surplus both increase. consumer surplus and producer surplus both decrease. consumer surplus increases and producer surplus decreases. consumer surplus decreases and producer surplus increases.

REF: 92 2 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Exports | Consumer surplus | Producer surplus MSC: Interpretive

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20. When a country allows trade and becomes an importer of a good,

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade Imports | Consumer surplus | Producer surplus MSC: Interpretive ANS: C NAT: Analytic TOP:

Figure 91

Price

Domestic supply

World price

Domestic demand

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Quantity

The figure illustrates the market for wool in New Zealand.

21. Refer to Figure 91. From the figure it is apparent that

a. New Zealand will experience a shortage of wool if trade is not allowed. b. New Zealand will experience a surplus of wool if trade is not allowed. c. New Zealand has a comparative advantage in producing wool, relative to the rest of the world. d. foreign countries have a comparative advantage in producing wool, relative to New Zealand.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Comparative advantage MSC: Interpretive

22. Refer to Figure 91. From the figure it is apparent that

a. New Zealand will export wool if trade is allowed. b. New Zealand will import wool if trade is allowed. c. New Zealand has nothing to gain either by importing or exporting wool. d. the world price will fall if New Zealand begins to allow its citizens to trade with other countries.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Exports | Gains from trade MSC: Interpretive

Chapter 9 /Application: International Trade (cid:0) 100

23. Refer to Figure 91. With trade, New Zealand will

a. b. c. d. export 11 units of wool. export 5 units of wool. import 15 units of wool. import 6 units of wool.

2 REF: 92

ANS: A NAT: Analytic TOP: Exports DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

24. Refer to Figure 91. In the absence of trade, the equilibrium price of wool in New Zealand is

$15. $45. $55. $70. a. b. c. d.

1 REF: 92

ANS: B NAT: Analytic TOP: Equilibrium DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

25. Refer to Figure 91. In the absence of trade, total surplus in New Zealand is represented by the area

a. A + B + C. b. A + B + C + D + F. c. A + B + C + D + F + G. d. A + B + C + D + F + G + H.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Total surplus MSC: Interpretive

26. Refer to Figure 91. When trade in wool is allowed, consumer surplus in New Zealand

a. b. c. d. increases by the area B + D. increases by the area C + F. decreases by the area B + D. decreases by the area D + G.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Consumer surplus MSC: Interpretive

27. Refer to Figure 91. When trade in wool is allowed, producer surplus in New Zealand

a. b. c. d. increases by the area B + D. increases by the area B + D + G. decreases by the area C + F. decreases by the area G.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Producer surplus MSC: Interpretive

28. Refer to Figure 91. When trade is allowed, a. New Zealand producers of wool become better off and New Zealand consumers of wool become worse off. b. New Zealand consumers of wool become better off and New Zealand producers of wool become

worse off. both New Zealand producers and consumers of wool become better off. both New Zealand producers and consumers of wool become worse off. c. d.

1 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Economic welfare MSC: Interpretive

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29. Refer to Figure 91. Relative to the notrade situation, trade with the rest of the world results in

a decrease in producer surplus in New Zealand. a decrease in total surplus in New Zealand. a. New Zealand consumers paying a higher price for wool. b. c. d. All of the above are correct.

1 REF: 92

ANS: A NAT: Analytic TOP: Price DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

30. Refer to Figure 91. In the absence of trade, total surplus in the New Zealand wool market amounts to

a. b. c. d. 187.5 275.0 378.5 412.5

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Total surplus MSC: Applicative

31. Refer to Figure 91. With trade, total surplus in the New Zealand wool market amounts to

a. b. c. d. 312.5. 367.0. 467.5. 495.0.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Total surplus MSC: Applicative

32. Which of the following statements is true?

a. Free trade benefits a country when it exports but harms it when it imports. b. "Voluntary" limits on Canadian exports of hogs are better for the United States than U.S. tariffs placed on Canadian hog exports. c. Tariffs and quotas differ in that tariffs work like a tax and therefore impose deadweight losses, whereas quotas do not impose deadweight losses. d. Free trade benefits a country both when it exports and when it imports.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Gains from trade MSC: Applicative

33. When a country allows international trade and becomes an exporter of a good,

domestic producers of the good become better off. domestic consumers of the good become worse off. the gains of the winners exceed the losses of the losers. a. b. c. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Exports | Economic Welfare MSC: Applicative

34.

Suppose Scotland goes from being an isolated country to being an exporter of wool. As a result, a. b. c. d. consumer surplus of Scottish consumers of wool increases. producer surplus of Scottish producers of wool increases. total surplus of Scottish wool consumers and producers remains constant. it is reasonable to infer that other countries have a comparative advantage over Scotland in wool production.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Exports | Economic Welfare MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 102

35. When a country allows international trade and becomes an importer of a good,

domestic producers of the good become better off. domestic consumers of the good become worse off. the gains of the winners exceed the losses of the losers. a. b. c. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Imports | Economic Welfare MSC: Applicative

36. Assume, for France, that the domestic price of tea without international trade is higher than the world price of

other countries have a comparative advantage over France in producing tea.

tea. This suggests that a. b. France has an absolute advantage over other countries in producing tea. c. France will export tea if international trade is allowed. d. French tea buyers will become worse off if international trade is allowed.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Comparative advantage | Prices MSC: Applicative

37.

Suppose a country begins to allow international trade in steel. Which of the following outcomes will be observed regardless of whether the country finds itself importing steel or exporting steel? a. The sum of consumer surplus and producer surplus for domestic traders of steel increases. b. The quantity of steel demanded by domestic consumers increases. c. Domestic producers of steel receive a higher price for steel. d. The losses of the losers exceed the gains of the winners.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Economic Welfare MSC: Applicative

38. After a country goes from disallowing trade in coffee with other countries to allowing trade in coffee with

the domestic price of coffee will be greater than the world price of coffee. the domestic price of coffee will be lower than the world price of coffee. the domestic price of coffee will equal the world price of coffee. other countries, a. b. c. d. The world price of coffee does not matter; the domestic price of coffee prevails.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Prices MSC: Interpretive

39. Within a country, the domestic price of a product will equal the world price if

a. b. c. d. trade restrictions are imposed on the product. the country allows free trade. the country chooses to import, but not export, the product. the country chooses to export, but not import, the product.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Prices MSC: Interpretive

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40. The world price of a simple electronic calculator is $5.00. Before Singapore allowed trade in calculators, the

price of a calculator there was $4.00. Once Singapore began allowing trade in calculators with other countries,Singapore began a. b. c. d. importing calculators and the price of a calculator in Singapore increased to $5.00. importing calculators and the price of a calculator in Singapore remained at $4.00. exporting calculators and the price of a calculator in Singapore increased to $5.00. exporting calculators and the price of a calculator in Singapore remained at $4.00.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Exports | Prices MSC: Applicative

41. The world price of a pound of Tbone steak is $9.00. Before Latvia allowed trade in beef, the price of a pound of Tbone steak there was $7.50. Once Latvia began allowing trade in beef with other countries, Latvia began a. b. c. d. exporting Tbone steak and the price per pound in Latvia remained at $7.50. exporting Tbone steak and the price per pound in Latvia increased to $9.00. importing Tbone steak and the price per pound in Latvia remained at $7.50. importing Tbone steak and the price per pound in Latvia increased to $9.00.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Exports | Prices MSC: Applicative

42.

Suppose a country abandons a notrade policy in favor of a freetrade policy. If, as a result, the domestic price of beans increases to equal the world price of beans, then a. b. c. that country becomes an exporter of beans. that country has a comparative advantage in producing beans. at the world price, the quantity of beans supplied in that country exceeds the quantity of beans demanded in that country. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Exports | Comparative advantage MSC: Applicative

43.

Suppose a country abandons a notrade policy in favor of a freetrade policy. If, as a result, the domestic price of pistachios decreases to equal the world price of pistachios, then a. b. c. that country becomes an importer of pistachios. that country has a comparative advantage in producing pistachios. at the world price, the quantity of pistachios supplied in that country exceeds the quantity of pistachios demanded in that country. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Imports | Prices MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 104

Figure 92

44. Refer to Figure 92. Without trade, consumer surplus is

$210. $245. $455. $490. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Consumer surplus MSC: Applicative

45. Refer to Figure 92. Without trade, producer surplus is

$210. $245. $455. $490. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Producer surplus MSC: Applicative

46. Refer to Figure 92. With free trade, this country will

a. b. c. d. import 40 baskets. import 70 baskets. export 35 baskets. export 65 baskets.

2 REF: 92

ANS: D NAT: Analytic TOP: Exports DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

47. Refer to Figure 92. If this country chooses to trade, the price of baskets in this country will be

a. b. c. d. $10 and 40 baskets will be sold domestically. $10 and 105 baskets will be sold domestically. $7 and 70 baskets will be sold domestically. $7 and 40 baskets will be sold domestically.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Price | Quantity demanded MSC: Applicative

Chapter 9 /Application: International Trade

105 (cid:0)

48. Refer to Figure 92. With free trade, consumer surplus is

$45. $80. $210. $245. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Consumer surplus MSC: Applicative

49. Refer to Figure 92. With free trade, producer surplus is

$80.00. $210.00. $245.50. $472.50. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

50. Refer to Figure 92. As a result of trade, total surplus increases by

$80. $97.50. $162.50. $495.50. a. b. c. d.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

51. Refer to Figure 92. This country

has a comparative advantage in baskets. should export baskets. is a price taker in the world economy. a. b. c. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Exports | Comparative advantage MSC: Applicative

52. Refer to Figure 92. The world price for baskets represents

a. b. c. d. the demand for baskets from the rest of the world. the supply of baskets from the rest of the world. the level of inefficiency in the domestic market caused by trade. the gap between domestic quantity demanded and domestic quantity supplied and the resulting shortage.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Price MSC: Interpretive

53. Refer to Figure 92. At the world price and with free trade, a.

b. c. d. the domestic quantity of baskets demanded is greater than the domestic quantity of baskets supplied. the basket market is in equilibrium. the domestic demand for baskets is perfectly inelastic. both domestic producers of baskets and domestic consumers of baskets are better off than they were without free trade.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Trade | Equilibrium MSC: Interpretive

Chapter 9 /Application: International Trade (cid:0) 106

Figure 93. The domestic country is China.

54. Refer to Figure 93. With no international trade,

a. b. c. d. the equilibrium price is $12 and the equilibrium quantity is 300. the equilibrium price is $16 and the equilibrium quantity is 200. the equilibrium price is $16 and the equilibrium quantity is 300. the equilibrium price is $16 and the equilibrium quantity is 450.

REF: 92 1 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Equilibrium price | Equilibrium quantity MSC: Interpretive

55. Refer to Figure 93. If China were to abandon a notrade policy in favor of a freetrade policy,

total surplus in the Chinese economy would increase. a. Chinese producers of pencil sharpeners would become worse off. b. Chinese consumers of pencil sharpeners would become better off. c. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Total surplus MSC: Interpretive

56. Refer to Figure 93. With trade, China will import 100 pencil sharpeners. import 250 pencil sharpeners. export 150 pencil sharpeners. export 250 pencil sharpeners. a. b. c. d.

2 REF: 92

ANS: D NAT: Analytic TOP: Exports DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

57. Refer to Figure 93. With trade, producer surplus in China is

a. b. c. d. $800. $1,200. $1,800. $2,700.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

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58. Refer to Figure 93. Relative to a notrade situation, which of the following comes with trade?

a. Consumer surplus increases by $1,800 and producer surplus increases by $1,600. b. Consumer surplus decreases by $1,000 and producer surplus increases by $1,500. c. Consumer surplus decreases by $1,000 and producer surplus increases by $1,750. d. Total surplus increases by $400.

REF: 92 3 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Consumer surplus | Producer surplus MSC: Applicative

59. Refer to Figure 93. The increase in total surplus in China when trade is allowed is

a. b. c. d. $400. $500. $600. $750.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Total surplus MSC: Applicative

Figure 94. The domestic country is Jamaica.

60. Refer to Figure 94. With trade, Jamaica

imports 150 calculators. imports 250 calculators. exports 100 calculators. exports 250 calculators. a. b. c. d.

2 REF: 92

ANS: B NAT: Analytic Imports TOP: DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

61. Refer to Figure 94. Consumer surplus in Jamaica without trade is

a. b. c. d. $375. $2,000. $2,250. $8,700.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Consumer surplus MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 108

62. Refer to Figure 94. The change in total surplus in Jamaica because of trade is

a. b. c. d. $625, and this is an increase in total surplus. $750, and this is an increase in total surplus. $625, and this is a decrease in total surplus. $750, and this is a decrease in total surplus.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

63. Refer to Figure 94. Which of the following statements is accurate?

a. Consumer surplus with trade is $3,200. b. Producer surplus with trade is $375. c. The gains from trade amount to $800. d. The gains from trade are represented on the graph by the area bounded by the points (0, $12), (300, $12), (300, $7) and (0, $7).

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Gains from trade MSC: Applicative

Scenario 91 The beforetrade domestic price of tomatoes in the United States is $500 per ton. The world price of tomatoes is $600 per ton. The U.S. is a pricetaker in the market for tomatoes.

64. Refer to Scenario 91. If trade in tomatoes is allowed, the United States

a. will become an importer of tomatoes. b. will become an exporter of tomatoes. c. may become either an importer or an exporter of tomatoes, but this cannot be determined. d. will experience increases in both consumer surplus and producer surplus.

2 REF: 92

ANS: B NAT: Analytic TOP: Exports DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

65. Refer to Scenario 91. If trade in tomatoes is allowed, the price of tomatoes in the United States

a. will increase, and this will cause consumer surplus to decrease. b. will decrease, and this will cause consumer surplus to increase. c. will be unaffected, and consumer surplus will be unaffected as well. d. could increase or decrease or be unaffected; this cannot be determined.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Prices | Consumer surplus MSC: Applicative

66. Refer to Scenario 91. If trade in tomatoes is allowed, the price of tomatoes in the United States

a. will be greater than the world price. b. will be equal to the world price. c. will be less than the world price. d. could be greater than, equal to, or less than the world price; this cannot be determined.

DIF: ANS: B TOP: 2 International trade | Prices REF: MSC: 92 Interpretive

67. Refer to Scenario 91. If trade in tomatoes is allowed, U.S. producers of tomatoes

a. will be better off. b. will be worse off. c. will be unaffected. d. will experience a decrease in their collective producer surplus.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Producer surplus MSC: Interpretive

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68. Refer to Scenario 91. If trade in tomatoes is allowed, the

a. b. c. d. price paid by American consumers of tomatoes is unchanged relative to the notrade situation. total wellbeing of American producers of tomatoes is diminished relative to the notrade situation. total wellbeing of American consumers of tomatoes is enhanced relative to the notrade situation. total wellbeing of the United States is enhanced relative to the notrade situation.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade International trade | Economic Welfare MSC: Applicative ANS: D NAT: Analytic TOP:

Figure 95

69. Refer to Figure 95. The horizontal line at the world price of wagons represents the

demand for wagons from the rest of the world. supply of wagons from the rest of the world. level of inefficiency in the domestic market caused by trade. surplus in the domestic wagon market. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Prices MSC: Interpretive

70. Refer to Figure 95. With trade, this country

a. b. c. d. exports 20 wagons. exports 50 wagons. imports 30 wagons. imports 50 wagons.

2 REF: 92

ANS: D NAT: Analytic Imports TOP: DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

71. Refer to Figure 95. Without trade, consumer surplus amounts to

a. b. c. d. $210.50. $245.50. $367.50. $607.50.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Consumer surplus MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 110

72. Refer to Figure 95. Without trade, producer surplus amounts to

$210. $245. $450. $455. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Producer surplus MSC: Applicative

73. Refer to Figure 95. Without trade, total surplus amounts to

$122.50. $245. $367.50. $612.50. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Total surplus MSC: Applicative

74. Refer to Figure 95. With trade, the price of wagons in this country is

a. b. c. d. $8, with 70 wagons produced in this country, 20 of which are exported. $8, with 90 wagons produced in this country, 50 of which are exported. $5, with 40 wagons produced in this country and another 30 wagons imported. $5, with 40 wagons produced in this country and another 50 wagons imported.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Imports | Prices MSC: Applicative

75. Refer to Figure 95. With trade, consumer surplus is

$245. $362.50. $367.50. $607.50. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Consumer surplus MSC: Applicative

76. Refer to Figure 95. With trade, producer surplus is

$80. $150. $210. $245. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

77. Refer to Figure 95. With trade, total surplus is

$245. $367.50. $607.50. $687.50. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

Chapter 9 /Application: International Trade

111 (cid:0)

78. Refer to Figure 95. Total surplus with trade exceeds total surplus without trade by

$60. $75. $135. $210. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

79. Refer to Figure 95. The increase in total surplus resulting from trade is

a. b. c. d. $60, since producer surplus increases by $180 and consumer surplus falls by $240. $60, since consumer surplus increases by $180 and producer surplus falls by $240. $75, since consumer surplus increases by $240 and producer surplus falls by $165. $75, since consumer surplus increases by $300 and producer surplus falls by $225.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

80. Refer to Figure 95. If this country allows free trade in wagons,

a. b. c. d. consumers will gain and producers will lose. consumers will lose and producers will gain. both consumers and producers will gain. both consumers and producers will lose.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Economic welfare MSC: Interpretive

81. Refer to Figure 95. If this country allows free trade in wagons, consumers will gain more than producers will lose. producers will gain more than consumers will lose. producers and consumers will both gain equally. producers and consumers will both lose equally. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Economic welfare MSC: Interpretive

82. Refer to Figure 95. Bearing in mind that this country is “small,” which of the following events conceivably

Incomes of domestic citizens increase, and wagons are a normal good.

could cause the country to switch from being an importer of wagons to an exporter of wagons? a. b. Within this country, the price of a substitute for wagons decreases. c. Within this country, the price of a complement to wagons decreases. d. Wages increase for domestic workers who produce wagons.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Substitutes | Imports | Exports MSC: Analytical

83. Refer to Figure 95. Bearing in mind that this country is “small,” what would happen if there were a decrease

in the price of horses within this country, given that wagons and horses are complements? a. The quantity of wagons that this country imports would increase. b. The quantity of wagons that this country imports would decrease, but the country would still be an importer of wagons.

c. This country would switch from being an importer of wagons to an exporter of wagons. d. The domestic price without trade would move closer to the world price.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Complements | Imports MSC: Analytical

Chapter 9 /Application: International Trade (cid:0) 112

Figure 96

84. Refer to Figure 96. Without trade, the equilibrium price of carnations is

a. b. c. d. $8 and the equilibrium quantity is 300. $6 and the equilibrium quantity is 200. $6 and the equilibrium quantity is 400. $4 and the equilibrium quantity is 500.

REF: 92 1 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Equilibrium price | Equilibrium quantity MSC: Interpretive

85. Refer to Figure 96. With trade and without a tariff,

a. b. c. d. the domestic price is equal to the world price. carnations are sold at $8 in this market. there is a shortage of 400 carnations in this market. this country imports 200 carnations.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Prices MSC: Interpretive

86. Refer to Figure 96. Before the tariff is imposed, this country

a. b. c. d. imports 200 carnations. imports 400 carnations. exports 200 carnations. exports 400 carnations.

2 REF: 92

ANS: B NAT: Analytic Imports TOP: DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

Chapter 9 /Application: International Trade

113 (cid:0)

87. Refer to Figure 96. The size of the tariff on carnations is

a. b. c. d. $8 per dozen. $6 per dozen. $4 per dozen. $2 per dozen.

1 REF: 92

ANS: D NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

88. Refer to Figure 96. The imposition of a tariff on carnations

increases the number of carnations imported by 100. increases the number of carnations imported by 200. decreases the number of carnations imported by 200. decreases the number of carnations imported by 400. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Imports MSC: Applicative

89. Refer to Figure 96. The amount of revenue collected by the government from the tariff is

a. b. c. d. $200. $400. $500. $600.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Government MSC: Applicative

90. Refer to Figure 96. When a tariff is imposed in the market, domestic producers

a. b. c. d. gain by $100. gain by $200. gain by $300. lose by $100.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Producer surplus MSC: Applicative

91. Refer to Figure 96. The amount of deadweight loss caused by the tariff equals

a. b. c. d. $100. $200. $400. $500.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Deadweight losses MSC: Applicative

92. Refer to Figure 96. When the tariff is imposed, domestic consumers

a. b. c. d. lose by $500. lose by $900. gain by $500. gain by $900.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Consumer surplus MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 114

93. The beforetrade price of fish in Germany is $8.00 per pound. The world price of fish is $6.00 per pound. Germany is a pricetaker in the fish market. If Germany allows trade in fish, then Germany will become an a. b. c. d. importer of fish and the price of fish in Germany will be $6.00. importer of fish and the price of fish in Germany will be $8.00. exporter of fish and the price of fish in Germany will be $6.00. exporter of fish and the price of fish in Germany will be $8.00.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Imports | Prices MSC: Applicative

94. The beforetrade price of fish in Denmark is $10.00 per pound. The world price of fish is $6.00 per pound.

Denmark is a pricetaker in the fish market. If Denmark begins to allow trade in fish, its consumers of fish will become a. better off, its producers of fish will become better off, and on balance the citizens of Denmark will become better off. b. worse off, its producers of fish will become better off, and on balance the citizens of Denmark will become worse off. c. worse off, its producers of fish will become better off, and on balance the citizens of Denmark will

d. become worse off. better off, its producers of fish will become worse off, and on balance the citizens of Denmark will become better off.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Imports | Prices | Economic welfare MSC: Applicative

Figure 97. The figure applies to the nation of Wales and the good is cheese.

95. Refer to Figure 97. The equilibrium price and the equilibrium quantity of cheese in Wales before trade are

a. P1 and Q2. b. P1 and Q1. c. P0 and Q0. d. P0 and Q1.

REF: 92 1 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Equilibrium price | Equilibrium quantity MSC: Interpretive

Chapter 9 /Application: International Trade

115 (cid:0)

96. Refer to Figure 97. With trade, the Welsh price of cheese and the Welsh quantity of cheese demanded are

a. P1 and Q2. b. P1 and Q1. c. P0 and Q0. d. P3 and Q1.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Equilibrium MSC: Interpretive

97. Refer to Figure 97. With trade, Wales

a. b. c. d. imports Q2 Q1 units of cheese. exports Q2 Q1 units of cheese. imports Q2 Q0 units of cheese. exports Q2 Q0 units of cheese.

2 REF: 92

ANS: B NAT: Analytic TOP: Exports DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

98. Refer to Figure 97. Which of the following is a valid equation for Welsh consumer surplus with trade?

a. Consumer surplus with trade = (1/2)(Q0)(P1 P0). b. Consumer surplus with trade = (1/2)(Q0)(P3 P0). c. Consumer surplus with trade = (1/2)(Q1)(P3 P1). d. None of the above is correct.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Consumer surplus MSC: Analytical

99. Refer to Figure 97. Which of the following is a valid equation for Welsh producer surplus with trade?

a. Producer surplus with trade = (1/2)P0Q0. b. Producer surplus with trade = (1/2)P1Q1. c. Producer surplus with trade = (1/2)P1Q2. d. None of the above is correct.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Producer surplus MSC: Analytical

100. Refer to Figure 97. Which of the following is a valid equation for the gains from trade?

a. Gains from trade = (1/2)(P1 P0)(Q2 Q1). b. Gains from trade = (1/2)(P1 P0)(Q2 Q0) c. Gains from trade = (1/2)(P1 P0)(Q1 + Q2). d. Gains from trade = (1/2)(Q1)(P3 P1).

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Gains from trade MSC: Analytical

Chapter 9 /Application: International Trade (cid:0) 116

Figure 98. On the diagram below, Q represents the quantity of cars and P represents the price of cars.

101. Refer to Figure 98. The price corresponding to the horizontal dotted line on the graph represents the price of

cars a. b. c. d. after trade is allowed. before trade is allowed. that maximizes total surplus when trade is allowed. that minimizes the wellbeing of domestic car producers when trade is allowed.

1 REF: 92

ANS: B NAT: Analytic TOP: Prices DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

102. Refer to Figure 98. The country for which the figure is drawn a.

d. has a comparative advantage relative to other countries in the production of cars and it will export cars. has a comparative advantage relative to other countries in the production of cars and it will import cars. has a comparative disadvantage relative to other countries in the production of cars and it will export cars. has a comparative disadvantage relative to other countries in the production of cars and it will import cars.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Comparative advantage | Imports MSC: Applicative

103. Refer to Figure 98. When the country for which the figure is drawn allows international trade in cars,

consumer surplus increases by the area B. producer surplus decreases by the area B + D. total surplus increases by the area D. a. b. c. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Imports | Economic Welfare MSC: Applicative

Chapter 9 /Application: International Trade

117 (cid:0)

104. Refer to Figure 98. In the country for which the figure is drawn, total surplus with international trade in cars

a. b. c. d. is represented by the area A + B + C. is represented by the area A + B + D. is smaller than producer surplus without international trade in cars. is larger than total surplus without international trade in cars.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade Imports | Economic Welfare MSC: Applicative ANS: D NAT: Analytic TOP:

Figure 99

105. Refer to Figure 99. Consumer surplus in this market before trade is

a. A. b. A + B. c. A + B + D. d. C.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Consumer surplus MSC: Applicative

106. Refer to Figure 99. Consumer surplus in this market after trade is

a. A. b. A + B. c. A + B + D. d. C.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Consumer surplus MSC: Applicative

107. Refer to Figure 99. Producer surplus in this market before trade is

a. A. b. A + B. c. B + C + D. d. C.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Producer surplus MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 118

108. Refer to Figure 99. Producer surplus in this market after trade is

a. A. b. A + B. c. B + C + D. d. C.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

109. Refer to Figure 99. Total surplus in this market before trade is

a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Total surplus MSC: Applicative

110. Refer to Figure 99. Total surplus in this market after trade is

a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

111. Refer to Figure 99. The change in total surplus in this market because of trade is

a. D, and this area represents a loss of total surplus because of trade. b. D, and this area represents a gain in total surplus because of trade. c. B + D, and this area represents a loss of total surplus because of trade. d. B + D, and this area represents a gain in total surplus because of trade.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

Chapter 9 /Application: International Trade

119 (cid:0)

Figure 910. The figure applies to the nation of Australia and the good is cameras.

112. Refer to Figure 910. The price and quantity of cameras in Australia before trade is

a. P0 and Q0. b. P1 and Q1. c. P2 and Q2. d. P1 and Q0.

REF: 92 1 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Equilibrium price | Equilibrium quantity MSC: Interpretive

113. Refer to Figure 910. With trade, the equilibrium price of cameras and the equilibrium quantity of cameras

demanded in Australia are a. P1 and Q1. b. P1 and Q2. c. P2 and Q2. d. P0 and Q0.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade

ANS: B NAT: Analytic TOP: MSC: International trade | Equilibrium price | Equilibrium quantity Interpretive

114. Refer to Figure 910. When trade takes place, the quantity Q2 Q1 is the number of cameras bought and sold in Australia. the number of cameras produced in Australia. the number of cameras exported by Australia. the number of cameras imported by Australia. a. b. c. d.

2 REF: 92

ANS: D NAT: Analytic Imports TOP: DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

115. Refer to Figure 910. Australia’s gains from trade are represented by the area that is bounded by the points

a. b. c. d. (0, P0), (Q0, P0), (Q2, P1), and (0, P1). (0, P1), (0, P2), (Q0, P0), and (Q1, P1). (Q0, P0), (Q2, P1), and (Q1, P1). (0, P0), (0, P2), and (Q0, P0).

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Gains from trade MSC: Analytical

Chapter 9 /Application: International Trade (cid:0) 120

116. Refer to Figure 910. The area bounded by the points (Q0, P0), (Q2, P1), and (Q1, P1) represents

a. Australia’s gains from trade. b. the amount by which Australia’s gain in consumer surplus exceeds its loss in producer surplus due to trade.

c. Australia’s gain in total surplus due to trade. d. All of the above are correct.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Gains from trade MSC: Analytical

117. Refer to Figure 910. The area bounded by the points (Q0, P0), (Q2, P1), and (Q1, P1) represents

a. Australia’s gains from trade. b. the amount by which Australia’s gain in producer surplus exceeds its loss in consumer surplus due to trade.

c. Australia’s loss in total surplus due to trade. d. All of the above are correct.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Gains from trade MSC: Analytical

Figure 911

118. Refer to Figure 911. Consumer surplus in this market before trade is

a. A. b. B + C. c. A + B + D. d. C.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Consumer surplus MSC: Applicative

Chapter 9 /Application: International Trade

121 (cid:0)

119. Refer to Figure 911. Consumer surplus in this market after trade is

a. A. b. C + B. c. A + B + D. d. B + C + D.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Consumer surplus MSC: Applicative

120. Refer to Figure 911. Producer surplus in this market before trade is

a. C. b. B + C. c. A + B + D. d. B + C + D.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Producer surplus MSC: Applicative

121. Refer to Figure 911. Producer surplus in this market after trade is

a. C. b. C + B. c. A + B + D. d. B + C + D.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

122. Refer to Figure 911. Producer surplus plus consumer surplus in this market before trade is

a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Total surplus MSC: Applicative

123. Refer to Figure 911. Producer surplus plus consumer surplus in this market after trade is

a. A + B. b. A + B + C. c. B + C + D. d. A + B + C + D.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

124. Refer to Figure 911. The change in total surplus in this market because of trade is

a. A, and this area represents a loss of total surplus. b. B, and this area represents a gain in total surplus. c. C, and this area represents a loss of total surplus. d. D, and this area represents a gain in total surplus.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 122

Figure 912

125. Refer to Figure 912. Equilibrium price and equilibrium quantity without trade are

a. b. c. d. $18 and 400. $18 and 800. $14 and 400. $14 and 600.

REF: 92 1 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Equilibrium price | Equilibrium quantity MSC: Interpretive

126. Refer to Figure 912. With trade, the domestic price and domestic quantity demanded are

a. b. c. d. $18 and 400. $18 and 800. $14 and 400. $14 and 600.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Equilibrium MSC: Interpretive

127. Refer to Figure 912. With trade, domestic production and domestic consumption, respectively, are

a. b. c. d. 600 and 400. 800 and 400. 400 and 600. 400 and 800.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Equilibrium quantity MSC: Applicative

128. Refer to Figure 912. Consumer surplus before trade is

a. b. c. d. $1,600. $2,400. $3,200. $3,600.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Consumer surplus MSC: Applicative

Chapter 9 /Application: International Trade

123 (cid:0)

129. Refer to Figure 912. Consumer surplus after trade is

$1,600. $2,400. $3,200. $3,600. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Consumer surplus MSC: Applicative

130. Refer to Figure 912. Producer surplus before trade is

$3,600. $4,400. $5,200. $6,600. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Producer surplus MSC: Applicative

131. Refer to Figure 912. Producer surplus after trade is

$4,800. $5,600. $6,400. $7,000. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

132. Refer to Figure 912. With trade allowed, this country

exports 200 units of the good. exports 400 units of the good. imports 200 units of the good. exports 800 units of the good. a. b. c. d.

2 REF: 92

ANS: B NAT: Analytic TOP: Exports DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 124

Figure 913

133. Refer to Figure 913. The price and domestic quantity demanded after trade are

a. b. c. d. $8 and 300. $8 and 900. $14 and 900. $14 and 600.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade International trade | Equilibrium price | Equilibrium quantity ANS: B NAT: Analytic TOP: MSC: Applicative

134. Refer to Figure 913. With trade, domestic production and domestic consumption, respectively, are

600 and 600. 600 and 300. 300 and 900. 600 and 900. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Trade | Equilibrium MSC: Applicative

135. Refer to Figure 913. Consumer surplus before trade is

a. b. c. d. $1,600. $,2400. $3,200. $3,600.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Consumer surplus MSC: Applicative

136. Refer to Figure 913. Consumer surplus after trade is

a. b. c. d. $3,600. $5,400. $7,200. $8,100.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Consumer surplus MSC: Applicative

Chapter 9 /Application: International Trade

125 (cid:0)

137. Refer to Figure 913. Producer surplus before trade is

a. b. c. d. $3,600. $4,400. $5,200. $6,600.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Producer surplus MSC: Applicative

138. Refer to Figure 913. With trade, producer surplus is

a. b. c. d. $900. $1,100. $1,500. $2,000.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

139. Refer to Figure 913. With trade, the country exports 200 units of the good. exports 400 units of the good. imports 400 units of the good. imports 600 units of the good. a. b. c. d.

2 REF: 92

ANS: D NAT: Analytic Imports TOP: DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 126

Figure 914. On the diagram below, Q represents the quantity of computers and P represents the price of computers.

140. Refer to Figure 914. When the country for which the figure is drawn allows international trade in

computers, a. b. c. d. consumer surplus for domestic computer consumers decreases. the demand for computers by domestic computer consumers decreases. the losses of the domestic losers outweigh the gains of the domestic winners. domestic computer producers sell fewer computers.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Exports | Economic Welfare MSC: Applicative

141. Refer to Figure 914. When the country for which the figure is drawn allows international trade in computers,

consumer surplus changes from the area A + B + D to the area A. producer surplus changes from the area C to the area B + C + D. total surplus decreases by the area D. a. b. c. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Exports | Economic Welfare MSC: Applicative

142. Refer to Figure 914. The country for which the figure is drawn a.

d. has a comparative advantage relative to other countries in the production of computers and it will export computers. has a comparative advantage relative to other countries in the production of computers and it will import computers. has a comparative disadvantage relative to other countries in the production of computers and it will export computers. has a comparative disadvantage relative to other countries in the production of computers and it will import computers.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Comparative advantage | Exports MSC: Applicative

Chapter 9 /Application: International Trade

127 (cid:0)

143. Refer to Figure 914. A result of this country allowing international trade in computers is as follows: a. The wellbeing of domestic computer producers is now higher in that they now sell more computers at a higher price per computer. b. The effect on the wellbeing of domestic computer consumers is unclear in that they now buy more computers, but at a higher price per computer. c. The effect on the wellbeing of the country is unclear in that domestic producer surplus increases, while the effect on domestic consumer surplus is unclear. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Exports | Economic welfare MSC: Applicative

144. A tariff on a product makes

a. b. c. d. domestic sellers better off and domestic buyers worse off. domestic sellers worse off and domestic buyers worse off. domestic sellers better off and domestic buyers better off. domestic sellers worse off and domestic buyers better off.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Tariffs | Economic welfare MSC: Interpretive

145. A tariff on a product

is a direct quantitative restriction on the amount of a good that can be imported. increases the domestic quantity supplied. increases domestic consumer surplus. a. b. c. d. All of the above are correct.

2 REF: 92

ANS: B NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

146. A tariff on a product

a. b. c. d. enhances the economic wellbeing of the domestic economy. increases the domestic quantity supplied. increases the domestic quantity demanded. results in an increase in producer surplus that is greater than the resulting decrease in consumer surplus.

2 REF: 92

ANS: B NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

147. If the United States imposes a tariff on automobiles, then

total surplus in the American automobile market decreases. producer surplus in the American automobile market increases.

a. b. c. U.S. imports of foreign automobiles decrease. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Tariffs | Economic welfare MSC: Interpretive

148. When a country that imports a particular good imposes a tariff on that good,

a. b. c. d. consumer surplus increases and total surplus increases in the market for that good. consumer surplus increases and total surplus decreases in the market for that good. consumer surplus decreases and total surplus increases in the market for that good. consumer surplus decreases and total surplus decreases in the market for that good.

REF: 92 2 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Tariffs | Consumer surplus | Total surplus MSC: Interpretive

Chapter 9 /Application: International Trade (cid:0) 128

149. When a country that imports a particular good imposes a tariff on that good,

producer surplus increases and total surplus increases in the market for that good. producer surplus increases and total surplus decreases in the market for that good. producer surplus decreases and total surplus increases in the market for that good. producer surplus decreases and total surplus decreases in the market for that good. a. b. c. d.

REF: 92 2 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Producer surplus | Total surplus MSC: Interpretive

150. When a country that imports a particular good imposes an import quota on that good,

consumer surplus increases and total surplus increases in the market for that good. consumer surplus increases and total surplus decreases in the market for that good. consumer surplus decreases and total surplus increases in the market for that good. consumer surplus decreases and total surplus decreases in the market for that good. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Import quotas | Consumer surplus | Total surplus MSC: Interpretive

151. When a country that imports a particular good imposes an import quota on that good, producer surplus increases and total surplus increases in the market for that good. producer surplus increases and total surplus decreases in the market for that good. producer surplus decreases and total surplus increases in the market for that good. producer surplus decreases and total surplus decreases in the market for that good. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade Import quotas | Producer surplus | Total surplus MSC: Interpretive ANS: B NAT: Analytic TOP:

152. A tariff is a tax placed on

a. b.

c. d. an exported good and it lowers the domestic price of the good below the world price. an exported good and it ensures that the domestic price of the good stays the same as the world price. an imported good and it lowers the domestic price of the good below the world price. an imported good and it raises the domestic price of the good above the world price.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Tariffs | Prices MSC: Interpretive

153. A tariff a. b. c. d. lowers the domestic price of the exported good below the world price. keeps the domestic price of the exported good the same as the world price. raises the domestic price of the imported good above the world price. lowers the domestic price of the imported good below the world price.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Prices MSC: Interpretive

154. When a country moves away from a free trade position and imposes a tariff on imports, it causes

a. b. c. d. a decrease in total surplus in the market. a decrease in producer surplus in the market. an increase in consumer surplus in the market. a decrease in revenue to the government.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Tariffs | Economic welfare MSC: Interpretive

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155. If the demand curve and the supply curve for a good are straight lines, then the deadweight loss that results

from a tariff is represented on the supplyanddemand graph by a. b. c. d. the area of one triangle. the area of one rectangle. the combined areas of two different triangles. the combined areas of two different rectangles.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Deadweight losses MSC: Interpretive

156. Suppose Mexico imposes a tariff on lumber. For the tariff to have any effect, it must be the case that

a. Mexico is an exporter of lumber. b.

the domestic quantity of lumber supplied exceeds the domestic quantity of lumber demanded at the world price without the tariff. the world price without the tariff is less than the price of lumber without trade. the world price without the tariff is greater than the price of lumber without trade. c. d.

2 REF: 92

ANS: C NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization and trade MSC: Interpretive

157. Spain is an importer of computer chips, taking the world price of $12 per chip as given. Suppose Spain

imposes a $5 tariff on chips. As a result, a. Spanish consumers of chips and Spanish producers of chips both gain. b. Spanish consumers of chips gain and Spanish producers of chips lose. c. Spanish consumers of chips lose and Spanish producers of chips gain. d. Spanish consumers of chips and Spanish producers of chips both lose.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Economic welfare MSC: Interpretive

158. Denmark is an importer of computer chips, taking the world price of $12 per chip as given. Suppose Denmark

imposes a $5 tariff on chips. Which of the following outcomes is possible? a. More Danishproduced chips are sold in Denmark. b. More foreignproduced chips are sold in Denmark. c. Danish consumers of chips become better off. d. Total surplus in the Danish chip market increases.

2 REF: 92

ANS: A NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

159. Chile is an importer of computer chips, taking the world price of $12 per chip as given. Suppose Chile

imposes a $7 tariff on chips. Which of the following outcomes is possible? a. The price of chips in Chile increases to $19; the quantity of Chileanproduced chips decreases; and the quantity of chips imported by Chile decreases. b. The price of chips in Chile increases to $16; the quantity of Chileanproduced chips increases; and the quantity of chips imported by Chile decreases. c. The price of chips in Chile increases to $19; the quantity of Chileanproduced chips increases; and the quantity of chips imported by Chile decreases. d. The price of chips in Chile increases to $16; the quantity of Chileanproduced chips increases; and the quantity of chips imported by Chile does not change.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Prices MSC: Analytical

Chapter 9 /Application: International Trade (cid:0) 130

160. Honduras is an importer of goosedown pillows. The world price of these pillows is $50. Honduras imposes a $7 tariff on pillows. Honduras is a pricetaker in the pillow market. As a result of the tariff, the price of goose down pillows in Honduras a. b. c.

d. remains at $50 and the quantity of goosedown pillows purchased in Honduras decreases. increases to $57 and the quantity of goosedown pillows purchased in Honduras decreases. increases to a new price between $50 and $57 and the quantity of goosedown pillows purchased in Honduras decreases. increases to a new price above $57 and the quantity of goosedown pillows purchased in Honduras remains the same.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Equilibrium MSC: Applicative

161. Turkey is an importer of wheat. The world price of a bushel of wheat is $7. Turkey imposes a $3perbushel

tariff on wheat. Turkey is a pricetaker in the wheat market. As a result of the tariff, a. Turkish consumers of wheat become worse off and Turkish producers of wheat become worse off. b. Turkish consumers of wheat become worse off and Turkish producers of wheat become better off. c. Turkish consumers of wheat become better off and Turkish producers of wheat become worse off. d. Turkish consumers of wheat become better off and Turkish producers of wheat become better off.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Economic welfare MSC: Interpretive

162. When the nation of Brownland first permitted trade with other nations, domestic producers of wheat

experienced an increase in producer surplus of $4 million and total surplus in Brownland’s wheat market increased by $1 million. We can conclude that a. Brownland became an exporter of wheat. b. c. d. consumer surplus in Brownland increased by $3 million. the opening of trade caused the domestic supply curve for wheat in Brownland to shift to the left. this example is inconsistent with the economic theory of international trade.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Exports | Gains from trade MSC: Applicative

163. When the nation of Mooseland first permitted trade with other nations, domestic producers of sugar

experienced a decrease in producer surplus of $5 million and total surplus in Mooseland’s sugar market increased by $2 million. We can conclude that a. Mooseland became an exporter of sugar. b.

the overall economic wellbeing of participants in the sugar market in Mooseland fell because of trade. consumer surplus in Mooseland increased by $7 million. the opening of trade caused the domestic demand curve for sugar in Mooseland to shift to the right. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Imports | Gains from trade MSC: Applicative

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Figure 915

164. Refer to Figure 915. With trade and without a tariff, the price and domestic quantity demanded are

a. P1 and Q1. b. P1 and Q4. c. P2 and Q2. d. P2 and Q3.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Trade | Equilibrium MSC: Interpretive

165. Refer to Figure 915. With the tariff, the domestic price and domestic quantity demanded are

a. P1 and Q1. b. P1 and Q4. c. P2 and Q2. d. P2 and Q3.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Tariffs | Equilibrium MSC: Applicative

166. Refer to Figure 915. With the tariff, the quantity of saddles imported is

a. Q3 Q1. b. Q3 Q2. c. Q4 Q1. d. Q4 Q2.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Imports MSC: Applicative

167. Refer to Figure 915. A result of the tariff is that, relative to the freetrade situation, the quantity of saddles

imported decreases by a. Q2 Q1. b. Q3 Q2. c. Q4 Q3. d. Q4 Q3 + Q2 Q1.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Tariffs | Imports MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 132

168. Refer to Figure 915. Consumer surplus with trade and without a tariff is

a. A. b. A + B. c. A + C + G. d. A + B + C + D + E + F.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Consumer surplus MSC: Applicative

169. Refer to Figure 915. Producer surplus with trade and without a tariff is

a. G. b. C + G. c. A + C + G. d. A + B + C + G.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

170. Refer to Figure 915. Consumer surplus with the tariff is

a. A. b. A + B. c. A + C + G. d. A + B + C + D +E + F.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Consumer surplus MSC: Applicative

171. Refer to Figure 915. Producer surplus with the tariff is

a. G. b. C + G. c. A + C + G. d. A + B + C + G.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Producer surplus MSC: Applicative

172. Refer to Figure 915. The amount of government revenue created by the tariff is

a. B. b. E. c. D + F. d. B + D + E + F.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Government MSC: Applicative

173. Refer to Figure 915. As a result of the tariff, there is a deadweight loss that amounts to

a. B. b. E. c. D + F. d. B + D + E + F.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Deadweight losses MSC: Applicative

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174. Refer to Figure 915. For the saddle market, area B represents

government’s revenue from the tariff. the deadweight loss of the tariff. the increase in producer surplus, relative to the freetrade situation, as a result of the tariff. a. b. c. d. None of the above is correct.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Tariffs MSC: Applicative

175. Refer to Figure 915. For the saddle market, area E represents

a. b. c. d. government’s revenue from the tariff. producer surplus after the tariff becomes effective. the decrease in consumer surplus, relative to the freetrade situation, as a result of the tariff. the decrease in total surplus, relative to the freetrade situation, as a result of the tariff.

3 DIF: ANS: A TOP: Tariffs | Government 92 REF: MSC: Applicative

Figure 916. The figure below illustrates a tariff. On the graph, Q represents quantity and P represents price.

176. Refer to Figure 916. Government revenue raised by the tariff is represented by the area

a. E. b. B + E. c. D + E + F. d. B + D + E + F.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Tariffs | Government MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 134

177. Refer to Figure 916. The tariff a.

d. decreases producer surplus by the area C and decreases consumer surplus by the area C + D + E + F. decreases producer surplus by the area C + D and decreases consumer surplus by the area D + E + F. increases producer surplus by the area C and decreases consumer surplus by the area C + D + E + F. increases producer surplus by the area B + C and decrease consumer surplus by the area D + E + F.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Economic Welfare MSC: Applicative

178. Refer to Figure 916. The tariff a.

d. decreases producer surplus by the area C, decreases consumer surplus by the area C + D + E, and decreases total surplus by the area D + F. increases producer surplus by the area C, decreases consumer surplus by the area C + D + E + F, and decreases total surplus by the area D + F.. creates government revenue represented by the area B + E and decreases total surplus by the area D + E + F. increases producer surplus by the area C + G and creates government revenue represented by the area D + E + F.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Economic Welfare MSC: Applicative

179. Refer to Figure 916. The deadweight loss created by the tariff is represented by the area

a. B. b. D + F. c. D + E + F. d. B + D + E + F.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Deadweight losses MSC: Applicative

180. Refer to Figure 916. The area C + D + E + F represents the decrease in consumer surplus caused by the tariff. the decrease in total surplus caused by the tariff. the deadweight loss of the tariff minus government revenue raised by the tariff. the deadweight loss of the tariff plus government revenue raised by the tariff. a. b. c. d.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Tariffs | Economic welfare MSC: Applicative

181. A quota is

a. b. c. d. a tax placed on imports. a limit on the quantity of imports. a tax on exports to other countries. an excess of exports over imports.

1 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Import quotas MSC: Definitional

Chapter 9 /Application: International Trade

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182. Both tariffs and import quotas

increase the quantity of imports and raise the domestic price of the good. increase the quantity of imports and lower the domestic price of the good. decrease the quantity of imports and raise the domestic price of the good. decrease the quantity of imports and lower the domestic price of the good. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Import quotas MSC: Interpretive

183. A major difference between tariffs and import quotas is that

a. b. c. tariffs create deadweight losses, but import quotas do not. tariffs help domestic consumers, and import quotas help domestic producers. tariffs raise revenue for the government, but import quotas create surplus for those who get the licenses to import. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Import quotas MSC: Interpretive

184. Tariffs and quotas are different in the sense that

a. b. c.

d. tariffs cause deadweight losses, while quotas do not cause deadweight losses. tariffs raise revenue for the government, while quotas do not raise revenue for the government. tariffs enhance the wellbeing of domestic consumers, while quotas diminish the wellbeing of domestic consumers. tariffs enhance the wellbeing of domestic producers, while quotas diminish the wellbeing of domestic producers.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Import quotas MSC: Interpretive

185. Import quotas and tariffs produce similar results. Which of the following is not one of those results?

a. The domestic price of the good increases. b. Consumer surplus of domestic consumers increases. c. Producer surplus of domestic producers increases. d. A deadweight loss is experienced by the domestic country.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Import quotas MSC: Interpretive

186. Import quotas and tariffs produce some common results. Which of the following is not one of those common

results? a. Total surplus in the domestic country falls. b. Producer surplus in the domestic country increases. c. The domestic country experiences a deadweight loss. d. Revenue is raised for the domestic government.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Tariffs | Import quotas MSC: Interpretive

187. An import quota

a. b. c. d. is preferable to a tariff since an import quota does not create a deadweight loss. is a tax on imported goods. reduces the welfare of domestic consumers. reduces the welfare of domestic producers.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Import quotas MSC: Interpretive

Chapter 9 /Application: International Trade (cid:0) 136

188. The nation of Zelzar has decided to end its policy of not trading with the rest of the world. When it ends its

trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that Zelzar’s new freetrade policy has a. b.

increased consumer surplus and producer surplus in the incense market. increased consumer surplus in the steel market and left producer surplus in the rug market unchanged. decreased consumer surplus in both the steel and rug markets. decreased consumer surplus in the steel market and increased total surplus in the incense market. c. d.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Economic welfare MSC: Applicative

189. The nation of Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing rice, exporting steel, and neither importing nor exporting TVs. We can conclude that producer surplus in Aquilonia is now a. b. c. d. higher in the steel market, lower in the rice market, and unchanged in the TV market. higher in the rice and steel markets, and unchanged in the TV market. lower in the rice and TV markets, and higher in the steel market. lower in the rice and steel markets, and the same in the TV market.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Producer surplus MSC: Applicative

190. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade

restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. Which groups in Aquilonia are better off as a result of the new freetrade policy? a. b. c. d. producers of incense and consumers of steel consumers of all three goods consumers of incense and producers of rugs producers of steel and consumers of incense

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Economic welfare MSC: Applicative

191. The United States has imposed taxes on some imported goods that have been sold here by foreign countries at

below their cost of production. These taxes a.

d. benefit the United States as a whole, because they generate revenue for the government. In addition, because the goods are priced below cost, the taxes do not harm domestic consumers. benefit the United States as a whole, because they generate revenue for the government and increase producer surplus. harm the United States as a whole, because they reduce consumer surplus by an amount that exceeds the gain in producer surplus and government revenue. harm the United States as a whole, because they reduce producer surplus by an amount that exceeds the gain in consumer surplus and government revenue.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Economic welfare MSC: Applicative

192. Some goods can be produced at low cost only if they are produced in large quantities. This phenomenon is

called a. marginal cost of production. b. marginal benefit of size. economies of scale. c. economies of production. d.

1 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Economies of scale MSC: Definitional

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193. Relative to a situation in which domestic firms do not compete with foreign firms, firms in countries that

can realize economies of scale more fully. have greater market power. experience larger producer surplus. engage in free trade a. b. c. d. All of the above are correct.

REF: 92 2 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Economies of scale | International trade MSC: Interpretive

Price

Domestic Supply

World price + tariff

World Price

Domestic Demand

25 Quantity

Figure 917

194. Refer to Figure 917. Without trade, consumer surplus is

a. b. c. d. $100 and producer surplus is $50. $100 and producer surplus is $200. $400 and producer surplus is $50. $400 and producer surplus is $200.

REF: 92 2 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Consumer surplus | Producer surplus MSC: Applicative

195. Refer to Figure 917. With free trade, consumer surplus is

a. b. c. d. $100 and producer surplus is $50. $100 and producer surplus is $200. $400 and producer surplus is $50. $400 and producer surplus is $200.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Consumer surplus | Producer surplus MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 138

196. Refer to Figure 917. With trade and a tariff, consumer surplus is

$202 and producer surplus is $50. $202 and producer surplus is $98. $256 and producer surplus is $50. $256 and producer surplus is $98. a. b. c. d.

REF: 92 2 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Tariffs | Consumer surplus | Producer surplus MSC: Applicative

197. Refer to Figure 917. Without trade, total surplus is

$150. $300. $450. $600. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Total surplus MSC: Applicative

198. Refer to Figure 917. With free trade, total surplus is

$150. $300. $450. $600. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Total surplus MSC: Applicative

199. Refer to Figure 917. With trade and a tariff, total surplus is

$306. $354. $378. $426. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: Tariffs | Total surplus MSC: Applicative

200. Refer to Figure 917. With free trade, the country imports

5 units of the good. 10 units of the good. 15 units of the good. 20 units of the good. a. b. c. d.

2 REF: 92

ANS: C NAT: Analytic Imports TOP: DIF: LOC: Gains from trade, specialization and trade MSC: Applicative

201. Refer to Figure 917. The imposition of the tariff

decreases imports of the good by 4 units and increases domestic production of the good by 2 units. decreases imports of the good by 4 units and increases domestic production of the good by 4 units. decreases imports of the good by 6 units and increases domestic production of the good by 2 units. decreases imports of the good by 6 units and increases domestic production of the good by 6 units. a. b. c. d.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Tariffs | Imports MSC: Applicative

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202. Refer to Figure 917. The amount of revenue collected by the government from the tariff is

$8. $72. $180. $252. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Government MSC: Applicative

203. Refer to Figure 917. The deadweight loss caused by the tariff is

$24. $72. $96. $150. a. b. c. d.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: Tariffs | Deadweight loss MSC: Applicative

204. Refer to Figure 917. When comparing no trade to free trade, the gain from trade is

$72. $100. $150. $450. a. b. c. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: Gains from trade MSC: Applicative

205. Refer to Figure 917. When the country moves from no trade to free trade, consumer surplus

increases by $300 and producer surplus increases by $150. increases by $300 and producer surplus decreases by $150. decreases by $300 and producer surplus increases by $150. decreases by $300 and producer surplus decreases by $150. a. b. c. d.

3 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Economic welfare MSC: Applicative

206. Refer to Figure 917. When the country moves from free trade to trade and a tariff, consumer surplus

decreases by $144 and producer surplus does not change. decreases by $144 and producer surplus increases by $48. decreases by $198 and producer surplus does not change. decreases by $198 and producer surplus increases by $48. a. b. c. d.

REF: 92 3 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Tariffs | Consumer surplus | Producer surplus MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 140

207. When a certain nation abandoned a policy of prohibiting international trade in automobiles in favor of a free tree policy, the result was that the country began to import automobiles. The change in policy improved the wellbeing of that nation in the sense that a.

d. both producers of automobiles and consumers of automobiles in that nation became better off as a result. the gains to automobile producers in that nation exceeded the losses of the automobile consumers in that nation. the gains to automobile consumers in that nation exceeded the losses of the automobile producers in that nation. even though total surplus in that nation decreased, it was still true that consumer surplus and producer surplus increased.

2 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Gains from trade MSC: Interpretive

208. After a certain nation changed its policy from one that banned international trade in wheat to one that allowed international trade in wheat, the nation began importing wheat. As a result, total surplus in the wheat market increased by $10 million. Which of the following changes could have occurred as well? a. The price of wheat in that nation increased with the adoption of the new policy. b. The domestic quantity of wheat supplied increased with the adoption of the new policy. c. Consumer surplus in the wheat market increased by $7 million and producer surplus in the wheat market increased by $3 million. d. Consumer surplus in the wheat market increased by $15 million and producer surplus in the wheat market decreased by $5 million.

REF: 92 2 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Gains from trade | Economic welfare MSC: Applicative

209. When the nation of Isoland opens up its steel market to international trade, that change

a. b.

c. d. creates winners and losers, regardless of whether Isoland ends up exporting or importing steel. results in a decrease in total surplus, regardless of whether Isoland ends up exporting or importing steel. creates winners, but no losers, if Isoland ends up exporting steel. creates losers, but no winners, if Isoland ends up importing steel.

1 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: A NAT: Analytic TOP: Gains from trade MSC: Interpretive

210. Some time ago, the nation of Republica opened up its paper market to international trade. Which of the

following results of this policy change is consistent with the notion that Republica has a comparative advantage over other countries in producing paper? a. The price of paper in Republica decreased as a result of the policy change. b. Republica began exporting paper as a result of the policy change. c. The domestic demand curve for paper shifted to the right as a result of the policy change. d. The domestic quantity of paper demanded increased as a result of the policy change.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Comparative advantage MSC: Interpretive

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211. Domestic producers of a good become better off, and domestic consumers of a good become worse off, when

a country begins allowing international trade in that good and the country becomes an importer of the good as a result. a. the world price exceeds the domestic price of the good that prevailed before international trade was b. allowed. other countries have a comparative advantage, relative to the country in question, in producing the good. total surplus does not change as a result. d.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: Gains from trade | Prices MSC: Interpretive

Figure 918. On the diagram below, Q represents the quantity of peaches and P represents the price of peaches. The domestic country is Isoland.

P

7

6 Domestic supply

5

4

3

2 Domestic demand

1 Q

10

20

30

40

50

60

212. Refer to Figure 918. If Isoland allows international trade and if the world price of peaches is $5, then Isoland has a comparative advantage, relative to other countries, in producing peaches. Isoland will import peaches. consumer surplus with trade exceeds consumer surplus without trade. a. b. c. d. All of the above are correct.

2 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: A NAT: Analytic TOP: Comparative advantage | Price MSC: Applicative

213. Refer to Figure 918. If Isoland allows international trade and if the world price of peaches is $3, then Isoland has a comparative advantage, relative to other countries, in producing peaches. Isoland will export peaches. producer surplus with trade exceeds producer surplus without trade. consumer surplus with trade exceeds consumer surplus without trade. a. b. c. d.

REF: 92 2 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Gains from trade | Consumer surplus MSC: Applicative

214. Refer to Figure 918. If Isoland allows international trade, then it will be an exporter of peaches if and only if

the world price of peaches is a. b. c. d. above $2. below $4. above $4. below $7.

2 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Price | Exports MSC: Interpretive

Chapter 9 /Application: International Trade (cid:0) 142

215. Refer to Figure 918. If Isoland allows international trade and the world price of peaches is $5, then

a. b. c. d. producer surplus will be smaller than it would be if Isoland banned trade. consumer surplus will be smaller than it would be if Isoland banned trade. the domestic quantity of peaches demanded will exceed the domestic quantity of peaches supplied. Isoland will be an importer of peaches.

REF: 92 2 DIF: LOC: Gains from trade, specialization, and trade ANS: B NAT: Analytic TOP: Prices | Consumer surplus | Producer surplus MSC: Applicative

216. Refer to Figure 918. Suppose Isoland changes from a notrade policy to a policy that allows international

trade. If the world price of peaches is $5, then the policy change results in a decrease in consumer surplus. a. an increase in producer surplus. b. c. an increase in total surplus. d. All of the above are correct.

REF: 92 2 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Prices | Consumer surplus | Producer surplus MSC: Applicative

217. Refer to Figure 918. Suppose Isoland changes from a notrade policy to a policy that allows international

trade. If the world price of peaches is $5, then the policy change results in a a. b. c. d. $25 decrease in consumer surplus. $20 increase in consumer surplus. $25 decrease in producer surplus. $20 increase in producer surplus.

3 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: A NAT: Analytic TOP: Consumer surplus MSC: Analytical

218. Refer to Figure 918. Suppose Isoland changes from a notrade policy to a policy that allows international

trade. If the world price of peaches is $3, then the policy change results in a a. b. c. d. $15.00 decrease in producer surplus. $45.00 increase in consumer surplus. $20.00 increase in total surplus. $12.50 increase in total surplus.

REF: 92 3 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Gains from trade | Economic welfare MSC: Analytical

219. Suppose a certain country imposes a tariff on a good. Which of the following results of the tariff is possible? a. Consumer surplus decreases by $100; producer surplus increases by $100; and government revenue from the tariff amounts to $50. b. Consumer surplus decreases by $200; producer surplus increases by $100; and government revenue from the tariff amounts to $50. c. Consumer surplus increases by $100; producer surplus decreases by $200; and government revenue from the tariff amounts to $50. d. Consumer surplus decreases by $50; producer surplus increases by $200; and government revenue from the tariff amounts to $150.

REF: 92 3 DIF: LOC: Gains from trade, specialization, and trade

ANS: B NAT: Analytic TOP: Tariffs | Consumer surplus | Producer surplus | Government MSC: Applicative

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220. Suppose France imposes a tariff on wine of 3 euros per bottle. If government revenue from the tariff amounts to 30 million euros per year and if the quantity of wine supplied by French wine producers, with the tariff, is 8 million bottles per year, then we can conclude that a. b. c. d. the quantity of wine demanded by France, with the tariff, is 18 million bottles per year. the quantity of wine demanded by France, without the tariff, would be 24 million bottles per year. the amount of the deadweight loss is 24 million euros per year. the tariff causes French buyers of wine to pay 2 euros more per bottle than they would pay without the tariff.

3 REF: 92

ANS: A NAT: Analytic TOP: Tariffs DIF: LOC: Gains from trade, specialization, and trade MSC: Analytical

221. For a country that is considering the adoption of either a tariff or an import quota on a particular good, an

important difference is that a. b. c. d. an import quota has no effect on consumer surplus, while a tariff decreases consumer surplus. an import quota has no effect on producer surplus, while a tariff decreases producer surplus. a tariff raises total surplus, while an import quota does not. a tariff raises revenue for that country’s government, while an import quota does not.

2 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Tariffs | Import quotas MSC: Interpretive

222. For any country that allows free trade,

a. b. c.

d. domestic quantity demanded is equal to domestic quantity supplied at the world price. domestic quantity demanded is greater than domestic quantity supplied at the world price. both producers and consumers in that country gain when domestic products are exported, but both groups lose when foreign products are imported. the domestic price is equal to the world price.

DIF: ANS: D TOP: 2 International trade | Prices REF: MSC: 92 Interpretive

Figure 919. On the diagram below, Q represents the quantity of textiles and P represents the price of textiles.

24 P 21

Domestic supply

18

15

12

9 World Price Domestic demand

6

3 Q

20

40

60

80

100

120

140

223. Refer to Figure 919. With free trade, the country for which the figure is drawn will

a. b. c. d. export 30 units of textiles. export 50 units of textiles. import 30 units of textiles. import 50 units of textiles.

2 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: International trade | Imports MSC: Applicative

Chapter 9 /Application: International Trade (cid:0) 144

224. Refer to Figure 919. With free trade, consumer surplus in the textile market amounts to

a. b. c. d. $210. $320. $405. $910.

2 REF: 92 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: International trade | Consumer surplus MSC: Applicative

225. When a country abandons a notrade policy, adopts a freetrade policy, and becomes an exporter of a

particular good, a. b. c. d. consumer surplus increases and total surplus increases in the market for that good. consumer surplus increases and total surplus decreases in the market for that good. consumer surplus decreases and total surplus increases in the market for that good. consumer surplus decreases and total surplus decreases in the market for that good.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Consumer surplus | Total surplus MSC: Interpretive

226. When a country abandons a notrade policy, adopts a freetrade policy, and becomes an exporter of a

particular good, a. b. c. d. producer surplus increases and total surplus increases in the market for that good. producer surplus increases and total surplus decreases in the market for that good. producer surplus decreases and total surplus increases in the market for that good. producer surplus decreases and total surplus decreases in the market for that good.

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Producer surplus | Total surplus MSC: Interpretive

227. When a country abandons a notrade policy, adopts a freetrade policy, and becomes an importer of a

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: A NAT: Analytic TOP: International trade | Consumer surplus | Total surplus MSC: Interpretive

228. When a country abandons a notrade policy, adopts a freetrade policy, and becomes an importer of a

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: C NAT: Analytic TOP: International trade | Producer surplus | Total surplus MSC: Interpretive

229. When a country that exported a particular good abandons a freetrade policy and adopts a notrade policy,

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: B NAT: Analytic TOP: International trade | Consumer surplus | Total surplus MSC: Interpretive

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230. When a country that exported a particular good abandons a freetrade policy and adopts a notrade policy,

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Producer surplus | Total surplus MSC: Interpretive

231. When a country that imported a particular good abandons a freetrade policy and adopts a notrade policy,

2 REF: 92 DIF: LOC: Gains from trade, specialization and trade ANS: D NAT: Analytic TOP: International trade | Consumer surplus | Total surplus MSC: Interpretive

Sec03 Application: International Trade The Arguments for Restricting Trade

MULTIPLE CHOICE

Congressman Smith cites the “jobs argument” when he argues in favor of restrictions on trade; he argues that everything can be produced at lower cost in other countries. The likely flaw in Congressman Smith’s reasoning is that he ignores the fact that a. b. c. d. there is no evidence that any worker ever lost his or her job because of free trade. unemployment of labor is not a serious problem relative to other economic problems. the gains from trade are based on comparative advantage. the gains from trade are based on absolute advantage.

1 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Trade restriction MSC: Interpretive

“Owners of firms in young industries should be willing to incur temporary losses if they believe that those firms will be profitable in the long run.” This observation helps to explain why many economists are skeptical about the a. b. c. d. nationalsecurity argument. infantindustry argument. unfaircompetition argument. jobs argument.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: B NAT: Analytic TOP: Trade restriction MSC: Interpretive

representatives of industry. representatives of the defense establishment.

One should be especially wary of the nationalsecurity argument for restricting trade when that argument is made by a. b. c. members of households. d. foreign government officials.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: A NAT: Analytic TOP: Trade restriction MSC: Interpretive

Chapter 9 /Application: International Trade (cid:0) 146

4. The “unfaircompetition” argument might be cited by an American who believes that a.

b. c.

d. almost every country has a comparative advantage, relative to the United States, in producing almost all goods. young industries should be protected against foreign competition until they become profitable. the American automobile industry should be protected against Japanese firms that are able to produce automobiles at relatively low cost. the French government’s subsidies to French farmers justify restrictions on American imports of French agricultural products.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Trade restriction MSC: Interpretive

better off no matter how Germany responds. better off if Germany gives in, and will be no worse off if it doesn't.

If the United States threatens to impose a tariff on German cars if Germany does not remove agricultural subsidies, the United States will be a. b. c. worse off if Germany doesn't give in to the threat. d. worse off no matter how Germany responds.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Trade policy MSC: Interpretive

6. Which of the following arguments for trade restrictions is often advanced?

a. Trade restrictions make all Americans better off. b. Trade restrictions increase economic efficiency. c. Trade restrictions are necessary for economic growth. d. Trade restrictions are sometimes necessary for national security.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Trade policy MSC: Interpretive

About what percent of total world trade is accounted for by countries that belong to the World Trade Organization? 54 percent a. 72 percent b. 89 percent c. 97 percent d.

1 REF: 93

ANS: D NAT: Analytic TOP: WTO DIF: LOC: Gains from trade, specialization, and trade MSC: Definitional

At present, the United States uses a system of quotas to limit the amount of sugar imported into the country. Which of the following statements is most likely true? a. The quotas are probably the result of lobbying from U.S. consumers of sugar. The quotas increase consumer surplus for the United States, reduce producer surplus for the United States, and harm foreign sugar producers. b. The quotas are probably the result of lobbying from U.S. producers of sugar. The quotas increase

producer surplus for the United States, reduce consumer surplus for the United States, and harm foreign sugar producers.

c. The quotas are probably the result of lobbying from foreign producers of sugar. The quotas reduce producer surplus for the United States, increase consumer surplus for the United States, and benefit foreign sugar producers. d. U.S. lawmakers did not need to be lobbied to impose the quotas because total surplus for the United States is higher with the quotas than without them.

REF: 93 3 DIF: LOC: Gains from trade, specialization, and trade ANS: B NAT: Analytic TOP: Trade policy MSC: Applicative

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increase the consumer surplus of German buyers of wheat. increase the total surplus of the German people. Suppose France subsidizes French wheat farmers, while Germany offers no subsidy to German wheat farmers. As a result of the French subsidy, sales of French wheat to Germany a. may prompt German farmers to invoke the unfaircompetition argument. b. c. d. All of the above are correct.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Trade policy | Economic Welfare MSC: Applicative

10.

Senator Blowhard represents a state in which many textile firms are located. He wants to impose tariffs on all imported textiles. Which of the following is the least likely consequence of such tariffs? a. Domestic textile buyers will lose consumer surplus, have less variety, and will pay higher prices. b. Domestic textile sellers will gain producer surplus. c. Domestic textile sellers will have a higher rate of technological advance. d. Domestic textile sellers will have more market power.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Tariffs | Technology MSC: Applicative

11. Countries that restrict foreign trade are likely to

a. b.

c. d. forgo the additional surplus that trade allows, but will probably enjoy economies of scale. forgo the additional surplus that trade allows, but will be compensated by a higher rate of technological change. forgo the additional surplus that trade allows, but will have a lower rate of unemployment. have more firms with domestic market power.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Trade policy MSC: Interpretive

12. Opponents of free trade often want the United States to prohibit the import of goods made in overseas

factories that pay wages below the U.S. minimum wage. Prohibiting such goods is likely to a. b.

cause these factories to pay the U.S. minimum wage. increase the rate of technological advance in poor countries so that they can afford to pay higher wages. increase poverty in poor countries and benefit U.S. firms which compete with these imports. harm U.S. firms which compete with these imports. c. d.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Trade policy MSC: Interpretive

13.

Several arguments for restricting trade have been advanced. Those arguments do not include a. b. c. d. the jobs argument. the protectionasabargainingchip argument. the nodeadweightloss argument. the infantindustry argument.

1 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Trade policy MSC: Interpretive

Chapter 9 /Application: International Trade (cid:0) 148

14. Critics of free trade sometimes argue that allowing imports from foreign countries causes a reduction in the

number of domestic jobs. An economist would argue that a.

c. d. foreign competition may cause unemployment in importcompeting industries, but the effect is temporary because other industries, especially exporting industries, will be expanding. foreign competition may cause unemployment in importcompeting industries, but the increase in consumer surplus due to free trade is more valuable than the lost jobs. the critics are correct, so countries must protect their industries with tariffs or quotas. foreign competition may cause unemployment in importcompeting industries, but the increase in the variety of goods consumers can choose from is more valuable than the lost jobs.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: A NAT: Analytic TOP: Trade policy | Employment MSC: Interpretive

15. Which of the following is not a commonlyadvanced argument for trade restrictions?

a. b. c. d. the jobs argument the nationalsecurity argument the infantindustry argument the efficiency argument

REF: 93 1 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Trade policy MSC: Definitional

16.

In a December 2007 New York Times column, Paul Krugman noted that a. b.

d. it is difficult to find instances of trade between highwage countries in the modern era. it is difficult to find instances of trade between highwage countries and lowwage countries in the modern era. the United States now imports more oil and other raw materials from other advanced countries than from the third world. the United States now imports more manufactured goods from the third world than from other advanced countries.

1 REF: 93

ANS: D NAT: Analytic TOP: Trade DIF: LOC: Gains from trade, specialization, and trade MSC: Definitional

17. Workers displaced by trade eventually find jobs in

another country. the government sector. the industries in which the country has a comparative advantage. a different company in the same industry. a. b. c. d.

1 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Trade | Employment MSC: Interpretive

18. The infantindustry argument

a. b.

c. d. is based on the belief that protecting industries when they are young will pay off later. is based on the belief that protecting industries producing goods and services for infants is necessary if a country is to have healthy children. has the support of most economists. is an argument that is advanced by advocates of free trade.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: A NAT: Analytic TOP: Trade policy MSC: Interpretive

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19. Which of the following is the most accurate statement?

a. Protection is necessary in order for young industries to grow up and be successful. b. Protection is not necessary for an industry to grow. c. Protection is necessary because if young industries are not protected, they may suffer losses. d. Protection may not always be necessary for infant industries, but it has proven to be useful in most cases.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: B NAT: Analytic TOP: Trade policy MSC: Interpretive

20.

If the Japanese steel industry subsidizes the steel that it sells to the United States, the a. United States should protect its domestic steel industry from this unfair competition. b.

harm done to U.S. steel producers from this unfair competition exceeds the gain to U.S. consumers of cheap Japanese steel. harm done to U.S. steel producers is less than the benefit that accrues to U.S. consumers of steel. c. d. United States should subsidize the products it sells to Japan.

REF: 93 2 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Trade policy MSC: Applicative

21. The two basic approaches that a country can take as a means to achieve free trade are the

a. b. c. d. unilateral approach and the multilateral approach. shortrun approach and the longrun approach. continental approach and the global approach. industry approach and the security approach.

1 REF: 93

ANS: A NAT: Analytic TOP: Trade DIF: LOC: Gains from trade, specialization, and trade MSC: Interpretive

22. When a country takes a multilateral approach to free trade, it

a. b. c. d. removes trade restrictions on its own. reduces its trade restrictions while other countries do the same. does not remove trade restrictions no matter what other countries do. is willing to trade with multiple countries at once.

REF: 93 1 DIF: LOC: Gains from trade, specialization, and trade ANS: B NAT: Analytic TOP: Trade policy MSC: Definitional

23. Which of the following is not an advantage of a multilateral approach to free trade over a unilateral approach?

a. A multilateral approach can reduce trade restrictions abroad as well as at home. b. A multilateral approach has the potential to result in freer trade. c. A multilateral approach requires the agreement of two or more nations. d. A multilateral approach may have political advantages.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Trade policy MSC: Interpretive

24. When a country takes a unilateral approach to free trade, it

REF: 93 1 DIF: LOC: Gains from trade, specialization, and trade ANS: A NAT: Analytic TOP: Trade policy MSC: Definitional

Chapter 9 /Application: International Trade (cid:0) 150

25. A possible outcome of the multilateral approach to free trade is that such an approach can

result in more restricted trade than under a unilateral approach, when international negotiations fail. result in drastic reductions in tariffs for many countries. a. win political support when a unilateral approach cannot. b. c. d. All of the above are correct.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: D NAT: Analytic TOP: Trade policy MSC: Interpretive

26. Which of the following assertions is not correct about the multilateral approach to free trade?

a. The multilateral approach has the potential to result in freer trade than does the unilateral approach. b. The multilateral approach may have a political advantage over the unilateral approach. c. The multilateral approach is simpler than the unilateral approach. d. NAFTA and GATT both represent multilateral approaches to free trade.

2 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: Trade policy MSC: Interpretive

27. The North American Free Trade Agreement

is an example of the unilateral approach to free trade. eliminated tariffs on imports to North America from the rest of the world. reduced trade restrictions among Canada, Mexico and the United States. a. b. c. d. All of the above are correct.

1 REF: 93

ANS: C NAT: Analytic TOP: NAFTA DIF: LOC: Gains from trade, specialization, and trade MSC: Definitional

28.

Since World War II, GATT has been responsible for reducing the average tariff among member countries from about a. b. c. d. 40 percent to about 5 percent. 40 percent to about 20 percent. 80 percent to about 20 percent. 20 percent to about 10 percent.

1 REF: 93

ANS: A NAT: Analytic TOP: GATT DIF: LOC: Gains from trade, specialization, and trade MSC: Definitional

29. The General Agreement on Tariffs and Trade (GATT) was initiated in response to

a. b. c.

d. in increase in exports of lowpriced goods from developing countries to developed countries. the replacement of manufacturing jobs with service jobs in developed countries. economic dislocations caused by the North American Free Trade Agreement (NAFTA) in the 1990s. high tariffs imposed during the Great Depression of the 1930s.

2 REF: 93

ANS: D NAT: Analytic TOP: GATT DIF: LOC: Gains from trade, specialization, and trade MSC: Definitional

30. The rules established under GATT are enforced by the governments of the nations that are involved in GATT.

a. b. North American Free Trade Association. c. World Trade Organization. d. European Union.

1 REF: 93 DIF: LOC: Gains from trade, specialization, and trade ANS: C NAT: Analytic TOP: GATT | WTO MSC: Definitional

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Sec04 Application: International Trade Conclusion

MULTIPLE CHOICE

In December 2007, the Los Angeles Times asked members of the American public whether free international trade has helped or hurt the economy. Of those surveyed, a. b. c. d. 57 percent said free international trade helped the economy. 27 percent said free international trade helped the economy. 30 percent said free international trade hurt the economy. 16 percent said free international trade hurt the economy.

1 REF: 94

ANS: B NAT: Analytic TOP: Trade DIF: LOC: Gains from trade, specialization, and trade MSC: Definitional

2. Most economists view the United States’ experience with trade as a.

c. d. one from which no firm conclusions about the virtues of free trade can be reached, due to the relatively short history of international trade in the U.S. one from which no firm conclusions about the virtues of free trade can be reached, due to the lack of trade within the U.S. throughout most of the early history of the U.S. an ongoing experiment that confirms the virtues of free trade. an ongoing experiment that calls into serious question the notion that free trade enhances the economic wellbeing of a nation.

1 REF: 94

ANS: C NAT: Analytic TOP: Trade DIF: LOC: Gains from trade, specialization, and trade MSC: Interpretive