Question 1

Industries with the highest level of nominal tariff rates on their competing imports do not necessarily receive the greatest incentive to expand domestic production. Explain why this is so and how you might go about arriving at a more revealing measure of tariff-based incentives for expanding production.

Accepted Answer

The level of nominal tariff rates on competing imports does not necessarily provide the greatest incentive for industries to expand domestic production because there are other factors at play. For example, industries may face non-tariff barriers such as quotas, licensing requirements, or technical standards that can also affect their ability to compete with imports. Additionally, the overall market conditions, including consumer demand, production costs, and access to capital, can also impact a company's decision to expand domestic production.

To arrive at a more revealing measure of tariff-based incentives for expanding production, one approach could be to conduct a comprehensive analysis of the overall trade environment for a specific industry. This could include not only nominal tariff rates, but also an assessment of non-tariff barriers, market demand, production costs, and access to capital. Additionally, conducting surveys or interviews with industry stakeholders to understand their decision-making process and the factors that influence their production expansion decisions could provide valuable insights.

Furthermore, a comparative analysis of industries within the same country or across different countries could also help to identify the relative impact of tariff rates on production expansion incentives. By considering a broader range of factors and conducting a more in-depth analysis, a more revealing measure of tariff-based incentives for expanding production can be developed.

Question 2

Which of the following is NOT an example of a nontariff barrier to the free flow of goods and services in accordance with comparative advantage?
A) import quotas
B) government procurement provisions that favor home products
C) specific duty of $1.00 per unit on each imported item
D) voluntary export quotas (VERs)

Accepted Answer

Import quotas (A), government procurement provisions that favor home products (B), and voluntary export quotas (D) are all examples of nontariff barriers that restrict the free flow of goods and services in accordance with comparative advantage. However, a specific duty of $1.00 per unit on each imported item (C) is a tariff, not a nontariff barrier.

Question 3

Suppose that a country's nominal tariff rate on imports of good X is 20% and that the country's nominal tariff rate on good A [a raw material and the only input (an imported input) used in making good X] is 5%. In this situation, the Effective Rate of Protection (ERP or "effective tariff rate") for the country's domestic X industry will be __________, and this type of escalated tariff structure __________ the type of tariff structures that high-income, developed countries actually have in place on goods imported from low-income, developing countries.
A) less than 20%; characterizes
B) less than 20%; does not characterize
C) greater than 20%; characterizes
D) greater than 20%; does not characterize

Accepted Answer

The Effective Rate of Protection (ERP) takes into account not only the nominal tariff on the final good but also the tariffs on inputs. In this case, the ERP for the domestic X industry is greater than the nominal tariff rate because the input (good A) has a lower tariff rate, effectively providing greater protection to the domestic industry by increasing the value added domestically. This escalated tariff structure, where finished goods have higher tariffs than their inputs, is characteristic of the tariff structures that high-income, developed countries often have in place on goods imported from low-income, developing countries, to protect their industries.

Question 4

The situation in the United States (and other developed countries) whereby an import Good faces a lower tariff if the good comes from a developing country than if the good Comes from a developed country is known as __________.
A) GSP treatment
B) MFN (or NTR) treatment
C) OAP treatment
D) ERP treatment

Accepted Answer

GSP (Generalized System of Preferences) treatment is the situation where developed countries give lower tariffs to imported goods from developing countries as a form of trade preference. This is to promote the growth of developing countries' economies by making their products more competitive in the global market. The other choices are not relevant to this specific situation.

Question 5

Suppose that the nominal tariff rate on final good X is 8 percent and that the weighted average of the nominal tariff rates on the inputs used in producing good X is 12 percent. In this situation, the effective rate of protection (ERP) for final good industry X
A) must be greater than 12 percent.
B) must be between 8 percent and 12 percent.
C) must be less than 8 percent and greater than zero percent.
D) must be less than 8 percent and can be negative.

Accepted Answer

The formula for calculating the effective rate of protection is (1+τn)/(1-Σwi(1-τi)), where τn is the nominal tariff rate on the final good, Σwi(1-τi) is the weighted average of the nominal tariff rates on the inputs, and i represents each input. Plugging in the given values, we get (1+0.08)/(1-0.12) = 1.091, which means the effective rate of protection for final good X is 9.1%. Since this is less than the nominal tariff rate on X, the ERP is less than 8% and can even be negative. Therefore, choice D is the correct answer.

Question 6

Suppose that a country has a nominal tariff rate of 10 percent on good A and imports $100,000 of good A, has a nominal rate of 5 percent on good B and imports $120,000 of good B, has a nominal rate of 12 percent on good C and imports $80,000 worth of good C, and has a prohibitive tariff rate of 50 percent on good D. These are the only four goods in existence. Calculate the country's unweighted-average nominal rate and its weighted-average nominal rate. Explain in economic terms the relationship you have found between the unweighted- and weighted-average rates.

Accepted Answer

The answer of Suppose that a country has a nominal...

Question 7

(a) Suppose that a country has a nominal tariff rate of 10 percent on good A and imports $1,000 of good A, has a nominal rate of 5 percent on good B and imports $1,400 of good B, and has a nominal tariff rate of 15 percent on good C and imports $600 of good C.These are the only three goods in existence. Calculate the country's unweighted-average nominal tariff rate and its weighted-average nominal tariff rate. Explain in economic terms the relationship you have found between the two rates.
(b) Suppose that, for a country, the free trade price of good X is $1,000 and the free trade prices of the only two inputs (both of which are imported) to the production process of good X are $400 for good W and $200 for good Y. Assume that one unit each of good W and good Y is necessary for the production of one unit of good X. Suppose now that the country, which is a "small" country, introduces a tariff structure that imposes a 20 percent nominal tariff on good X, an 8 percent tariff on good W, and a 6% tariff on good Y. Calculate the Effective Rate of Protection (ERP), or "effective tariff rate," that this tariff structure provides to the domestic producers of good X. Explain the economic meaning of your result. For what purpose might the ERP of an industry be more useful to an economist than the nominal tariff rate on imports of the industry's product?

Accepted Answer

The answer of (a) Suppose that a country has a...

Question 8

Suppose that the free-trade offer curve of country I is drawn with country I's exports of good A on the horizontal axis and country I's imports of good B on the vertical axis. If country I now places an import quota of 100 units of good B, country I's offer curve
A) will have its normal free-trade appearance up to 100 units on the vertical axis and then will become a horizontal line back to the vertical axis.
B) will have its normal free-trade appearance up to 100 units on the horizontal axis and then will become a vertical line going upward and parallel to the vertical axis.
C) will shift to the left or vertically upward by 100 units at each level of exports of good A.
D) will shift to the right or vertically downward by 100 units at each level of exports of good A.

Accepted Answer

An import quota limits the amount of goods that can be imported. In this case, with a quota of 100 units on good B, country I's willingness to trade (offer curve) remains unchanged up to the point of 100 units of good B. Beyond this quota, country I cannot import more of good B regardless of how much more of good A it is willing to export, hence the offer curve becomes a horizontal line indicating no further increase in imports of good B beyond the quota.

Question 9

An import quota specifies the __________ amount of a good that can be imported into a country; a step to becoming more protectionist would involve __________ in the quota.
A) maximum; a reduction
B) maximum; an enlargement
C) minimum; a reduction
D) minimum; an enlargement

Accepted Answer

An import quota specifies the maximum amount of a good that can be imported into a country. Becoming more protectionist involves reducing the quota, hence the correct answer is a reduction.

Question 10

The 2012 U.S. MFN/normal trade relations tariff on men's knitted wool blazers was 38.6¢ per kilogram of weight plus 10 percent of the value of the blazer. This is an example of __________.
A) a specific tariff
B) an ad valorem tariff
C) a combination of a specific tariff and an ad valorem tariff
D) a nontariff barrier

Accepted Answer

The given tariff is a combination of a specific tariff, which is 38.6¢ per kilogram of weight, and an ad valorem tariff, which is 10 percent of the value of the blazer.

Question 11

The United States now gives China permanent most-favored-nation (MFN) treatment [or Normal trade relations (NTR)]. This means that the tariff schedules applicable to U.S. Imports from China
A) have lower tariff rates than the rates applicable to other countries to which the United States grants permanent MFN treatment.
B) have the same tariff rates as the rates applicable to other countries to which the United States grants permanent MFN treatment.
C) have lower tariff rates than the rates applicable to any other country sending goods to The United States.
D) have tariff rates of zero percent.

Accepted Answer

Permanent most-favored-nation (MFN) treatment or Normal trade relations (NTR) means that the United States grants the same tariff rates to China as it does to other countries to which it grants permanent MFN treatment.

Question 12

If offshore assembly provisions were extended to include more goods, what would this do to the actual level of protection provided by a country's nominal tariff schedule? Explain. If the extension of the provisions is made to final goods but not to intermediate goods, what would this do to the effective rate of protection (ERP) for the country provided by its tariff schedule? Explain.

Accepted Answer

The answer of If offshore assembly provisions were extended to...

Question 13

Given the following information for industry X in country A, and assuming that input Y Is imported, that one unit of Y is required for each one unit of X, and that country A is a "small" country:
$\begin{array}{lcc}
&\text { free trade price }&\text {nominal tariff rate }\
\text { final product X } & \$ 120 & 10 \% \
\text { input Y (only input to X) } & \$ 80 & 15 \%
\end{array}$

The "effective tariff rate" or "Effective Rate of Protection (ERP)" for industry X in Country A is __________ percent.
A) 0
B) 10
C) 12.5
D) 25

Accepted Answer

The answer of Given the following information for industry X...

Question 14

Given the following information for industry X in country A, and assuming that at least some of input Y is imported, that one unit of Y is required for each unit of X, and that country A is a "small" country:
$\begin{array}{lcc}
&\text { free trade price }&\text {nominal tariff rate }\
\text { final product X } & \$ 100 & 19 \% \
\text { input Y (only input to X) } & \$ 70 & 10 \%
\end{array}$
The effective rate of protection (ERP) for industry X is __________ percent.
A) 9
B) 19
C) 30
D) 40

Accepted Answer

The answer of Given the following information for industry X...

Question 15

Other things equal, which one of the following will cause an increase in the effective rate of protection (ERP) in the automobile industry?
A) a decrease in the nominal tariff rate on automobiles
B) an increase in the nominal tariff rates on imported inputs used in making automobiles
C) an increase in the world price of imported inputs used in making automobiles
D) a decrease in the nominal tariff rates on imported inputs used in making automobiles

Accepted Answer

A decrease in the nominal tariff rates on imported inputs reduces the cost of inputs, thereby increasing the value added in the domestic production process, which raises the effective rate of protection.

Question 16

Suppose that a country's "unweighted-average (nominal) tariff rate" (call it "t_U") and "weighted-average (nominal) tariff rate" (call it "t_W") are calculated both with and without the inclusion of prohibitive tariffs, and that the country does in fact have some prohibitive tariffs. In this situation, the t_U that includes the prohibitive tariffs __________ the same as the t_U that excludes the prohibitive tariffs, and the t_W that includes the prohibitive tariffs __________ the same as the t_W that excludes the prohibitive tariffs. A) would not be; would not be B) would not be; would be C) would be; would not be D) would be; would be

Accepted Answer

Prohibitive tariffs are tariffs that prohibit imports completely. When calculating the unweighted-average tariff rate, the prohibitive tariffs are included in the calculation because they are, technically, tariffs. Therefore, including prohibitive tariffs in the calculation will increase the unweighted-average tariff rate, and the t_U that includes prohibitive tariffs would be greater than the t_U that excludes prohibitive tariffs. However, when calculating the weighted-average tariff rate, the prohibitive tariffs are excluded from the calculation because they do not allow for any trade. Therefore, including prohibitive tariffs in the calculation would have no effect on the weighted-average tariff rate, and the t_W that includes prohibitive tariffs would be the same as the t_W that excludes prohibitive tariffs.

Question 17

In general, a country's unweighted-average nominal tariff rate tends to be __________ than the country's weighted-average nominal tariff rate. The difference between the two would be __________ if the goods with the highest tariffs became imported relatively more heavily.
A) lower; smaller
B) lower; larger
C) higher; smaller
D) higher; larger

Accepted Answer

The unweighted-average nominal tariff rate is generally higher than the weighted-average nominal tariff rate because the latter takes into account the actual volume of imports of each good. If goods with the highest tariffs are imported more heavily, the difference between the two averages would become smaller, as the weighted-average would increase closer to the unweighted-average.

Question 18

Although a given set of tariff rates exists for a given country, not all of its trading partners necessarily face the same tariff rate structure. Discuss several reasons why this is the case.

Accepted Answer

The answer of Although a given set of tariff rates...

Question 19

There is often heated debate over what qualifies as a nontariff barrier to trade and how large any trade-distorting effects of NTBs are. Why might this be so? Why do you suppose such debate is less common for tariffs?

Accepted Answer

The answer of There is often heated debate over what...

Question 20

How would you go about calculating an "implicit" or "equivalent" nominal tariff rate on an imported good that faces a nontariff barrier such as an import quota? What difficulties would you encounter?

Accepted Answer

The answer of How would you go about calculating an...

Quiz 13: The Instruments of Trade Policy

Which of the following is NOT an example of a nontariff barrier to the free flow of goods and services in accordance with comparative advantage?

The situation in the United States (and other developed countries) whereby an import Good faces a lower tariff if the good comes from a developing country than if the good Comes from a developed country is known as __________.

Suppose that the nominal tariff rate on final good X is 8 percent and that the weighted average of the nominal tariff rates on the inputs used in producing good X is 12 percent. In this situation, the effective rate of protection (ERP) for final good industry X

Suppose that the free-trade offer curve of country I is drawn with country I's exports of good A on the horizontal axis and country I's imports of good B on the vertical axis. If country I now places an import quota of 100 units of good B, country I's offer curve

An import quota specifies the amount of a good that can be imported into a country; a step to becoming more protectionist would involve in the quota.

The 2012 U.S. MFN/normal trade relations tariff on men's knitted wool blazers was 38.6¢ per kilogram of weight plus 10 percent of the value of the blazer. This is an example of __________.

The United States now gives China permanent most-favored-nation (MFN) treatment [or Normal trade relations (NTR) ]. This means that the tariff schedules applicable to U.S. Imports from China

Other things equal, which one of the following will cause an increase in the effective rate of protection (ERP) in the automobile industry?

In general, a country's unweighted-average nominal tariff rate tends to be than the country's weighted-average nominal tariff rate. The difference between the two would be if the goods with the highest tariffs became imported relatively more heavily.

Although a given set of tariff rates exists for a given country, not all of its trading partners necessarily face the same tariff rate structure. Discuss several reasons why this is the case.

There is often heated debate over what qualifies as a nontariff barrier to trade and how large any trade-distorting effects of NTBs are. Why might this be so? Why do you suppose such debate is less common for tariffs?

How would you go about calculating an "implicit" or "equivalent" nominal tariff rate on an imported good that faces a nontariff barrier such as an import quota? What difficulties would you encounter?