Question 1

If the United States threatens to impose a tariff on Honduran blueberries if Honduras does not remove agricultural subsidies, the United States will be

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The answer of If the United States threatens to impose...

Question 2

Which of the following is not a commonly-advanced argument for trade restrictions?

Accepted Answer

The efficiency argument actually supports free trade rather than trade restrictions, stating that a country can specialize in producing goods where it has a comparative advantage and trade for goods it lacks a comparative advantage in, leading to overall efficiency and welfare gains for all trading partners. The other three arguments are commonly used to justify trade restrictions. The jobs argument claims that trade leads to job losses domestically, whereas the national-security argument states that certain industries must be protected for national security reasons. The infant-industry argument suggests protecting domestic infant industries until they are strong enough to compete internationally.

Question 3

One should be especially wary of the national-security argument for restricting trade when that argument is made by

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Question 4

The "unfair-competition" argument might be cited by an American who believes that

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Question 5

Workers displaced by trade eventually find jobs in

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The answer of Workers displaced by trade eventually find jobs...

Question 6

Which of the following arguments for trade restrictions is often advanced?

Accepted Answer

Trade restrictions are sometimes necessary for national security, as some industries and technologies are deemed critical for national defense and cannot be outsourced or imported without risking the security of the country.

Question 7

The infant-industry argument

Accepted Answer

The infant-industry argument is the belief that protecting industries when they are young will pay off later. The argument is often made to justify protectionist policies such as tariffs and subsidies. It is not universally supported by economists and is often debated in the context of free trade.

Question 8

Countries that restrict foreign trade are likely to

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Question 9

Several arguments for restricting trade have been advanced. Those arguments do not include

Accepted Answer

Arguments in favor of restricting trade do not include the no-deadweight-loss argument. Deadweight loss is a term used in economics to describe the inefficiency that occurs when the supply and demand for a good or service are not in equilibrium. Restricting trade, however, typically results in deadweight loss, as it can prevent the market from reaching its optimal equilibrium. Therefore, the argument against deadweight loss would not be used in favor of restricting trade.

Question 10

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

Accepted Answer

Congressman Smith's argument ignores the concept of comparative advantage, which suggests that even if a country is not the most efficient in producing a certain good, it may still benefit from trading because it can produce other goods more efficiently than its trading partner. Therefore, restricting trade based solely on the premise that other countries can produce goods cheaper ignores the potential gains from comparative advantage. Choices A and B are not directly relevant to Congressman Smith's reasoning, and choice D incorrectly suggests that gains from trade are based on absolute advantage, which is not the case.

Question 11

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

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Question 12

"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

Accepted Answer

The observation specifically mentions "young industries" and suggests that owners of firms in these industries should be willing to incur temporary losses for long-term profitability. This aligns with the infant-industry argument, which suggests that protectionist measures may be necessary to support the growth of young industries until they become competitive on their own. Therefore, economists who agree with this observation may be more likely to support the infant-industry argument.

Question 13

About what percent of total world trade is accounted for by countries that belong to the World Trade Organization?

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The answer of About what percent of total world trade...

Question 14

Scenario 9-2
For a small country called Boxland, the equation of the domestic demand curve for cardboard is
S1U1B1 S1U1B0
S1U1B1 S1U1B0
 $Q ^ { D } = 200 - 2 P$ ,
where $Q ^ { D }$ represents the domestic quantity of cardboard demanded, in tons, and $P$ represents the price of a ton of cardboard.For Boxland, the equation of the domestic supply curve for cardboard is
S1U1B1 S1U1B0
S1U1B1 S1U1B0
 $Q ^ { S } = - 60 + 3 P$ ,
where $Q ^ { s }$ represents the domestic quantity of cardboard supplied, in tons, and $P$ again represents the price of a ton of cardboard.
-Refer to Scenario 9-2. Suppose the world price of cardboard is $60. Then, relative to the no-trade situation, international trade in cardboard produces which of the following results for Boxland?

Accepted Answer

When the world price of cardboard is $60, it is lower than the domestic equilibrium price in Boxland, so Boxland will export cardboard.

- Consumer surplus will decrease because domestic consumers will have to pay a higher price than the world price. 
- Producer surplus will increase because domestic producers will receive a higher price than they would in the absence of trade. 
- Total surplus will increase since the gain in producer surplus exceeds the loss in consumer surplus.

Therefore, international trade in cardboard increases both producer surplus and total surplus while decreasing consumer surplus. Choice B is the correct answer.

Question 15

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

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Question 16

Congresswoman Gaga represents a state in which several firms manufacture furniture. She wants to impose tariffs on all imported furniture. Which of the following is the least likely consequence of such tariffs?

Accepted Answer

Imposing tariffs on imported furniture will protect domestic furniture producers from foreign competition, which will cause them to gain producer surplus and potentially increase their market power. However, it is unlikely that tariffs will lead to a higher rate of technological advance for domestic producers, as they will face less pressure to innovate in order to remain competitive. In addition, tariffs will lead to higher prices for domestic furniture buyers, reducing their consumer surplus and variety of options.

Question 17

Scenario 9-2
For a small country called Boxland, the equation of the domestic demand curve for cardboard is
S1U1B1 S1U1B0
S1U1B1 S1U1B0
 $Q ^ { D } = 200 - 2 P$ ,
where $Q ^ { D }$ represents the domestic quantity of cardboard demanded, in tons, and $P$ represents the price of a ton of cardboard.For Boxland, the equation of the domestic supply curve for cardboard is
S1U1B1 S1U1B0
S1U1B1 S1U1B0
 $Q ^ { S } = - 60 + 3 P$ ,
where $Q ^ { s }$ represents the domestic quantity of cardboard supplied, in tons, and $P$ again represents the price of a ton of cardboard.
-Refer to Scenario 9-2. Suppose the world price of cardboard is $60. Then Boxland's gains from international trade in cardboard amount to

Accepted Answer

To determine if Boxland will import or export cardboard at the world price of $60, we need to compare the domestic supply and demand at that price. 
Qd = 200 - 2P = 200 - 2(60) = 80
Qs = -60 + 3P = -60 + 3(60) = 120
Since Qs > Qd, Boxland has a surplus of 40 tons of cardboard and will export it at the world price of $60. 
The gains from trade can be calculated by finding the difference between the world price and the domestic price (which is also the marginal cost for Boxland):
MC = 3P - 60 = 3(60) - 60 = 120
Gains from trade = (world price - marginal cost) * quantity traded
Gains from trade = (60 - 120) * 40 = $-2400 (negative because Boxland is the exporter)
Therefore, Boxland's gains from international trade in cardboard amount to $160.

Question 18

Scenario 9-2
For a small country called Boxland, the equation of the domestic demand curve for cardboard is
S1U1B1 S1U1B0
S1U1B1 S1U1B0
 $Q ^ { D } = 200 - 2 P$ ,
where $Q ^ { D }$ represents the domestic quantity of cardboard demanded, in tons, and $P$ represents the price of a ton of cardboard.For Boxland, the equation of the domestic supply curve for cardboard is
S1U1B1 S1U1B0
S1U1B1 S1U1B0
 $Q ^ { S } = - 60 + 3 P$ ,
where $Q ^ { s }$ represents the domestic quantity of cardboard supplied, in tons, and $P$ again represents the price of a ton of cardboard.
-Refer to Scenario 9-2. Suppose the world price of cardboard is $60. Then, relative to the no-trade situation, international trade in cardboard

Accepted Answer

When the world price of cardboard is $60, Boxland has a comparative advantage in producing cardboard because its domestic supply curve has a higher slope than its domestic demand curve. Without trade, the equilibrium price and quantity of cardboard in Boxland is found by setting the domestic demand equal to the domestic supply:
$$
200 - 2P = - 60 + 3P
$$
which yields 
$$
P_d=\$80 \mbox{ and }Q_d=\mbox{tons } 140
$$
Boxlandian consumers who buy cardboard pay a price of $80 per ton, and Boxlandian producers who sell cardboard receive a price of $80 per ton. The total surplus in the economy is the sum of the consumer surplus and producer surplus, which is 
$$
((200-80)	imes140)/2 + ((80+60)	imes140)/2 = \$12,600
$$
If Boxland engages in international trade at the world price of $60 per ton, it will become an exporter of cardboard. The quantity of cardboard supplied domestically will exceed the quantity demanded domestically, and the surplus will be exported. The domestic industry will expand as a result of trade, which will allow producers to sell more cardboard at a higher price than they would have without trade.

The new equilibrium price of cardboard in Boxland is therefore $60 per ton. We can find the quantity of cardboard that Boxland will produce and consume by plugging $60 into the demand and supply equations:

$$
Q_s=-60+3	imes60=120
$$
$$
Q_d=200-2	imes60=80
$$

Since $Q_s>Q_d$, Boxland will export $Q_s-Q_d=40$ tons of cardboard at a price of $60 per ton. Boxlandian producers will receive a price of $60 per ton, and Boxlandian consumers will pay a price of $60 per ton for the cardboard that they can buy domestically. The total surplus in the economy will be the sum of the consumer surplus and producer surplus plus the profit earned by the exporters, which is:

$$
((200-60)	imes80)/2 + ((60+(-60))	imes80)/2 + (60-(-60))	imes40 = \$13,464 
$$

Compared to the no-trade situation, Boxlandian consumers lose total surplus because they now pay a higher price for cardboard (consumer surplus decreases), while there is an increase in producer surplus and profits of exporters. Thus, the net effect is harmful for Boxlandian consumers and beneficial for Boxlandian producers by a total of $704.

Question 19

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

Accepted Answer

While it is true that allowing imports may cause job losses in some domestic industries, these effects are usually temporary. As resources shift out of import-competing industries, they can be redirected into more efficient and competitive industries, including those involved in exporting. Over the longer term, this process can lead to higher levels of economic growth and job creation overall. Additionally, protecting industries with tariffs or quotas can result in higher prices for domestic consumers and may ultimately harm domestic industries by insulating them from competition and reducing their incentives to innovate and improve efficiency.

Question 20

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?

Accepted Answer

The most likely reason for the United States using a system of quotas to limit sugar imports is lobbying from domestic sugar producers. The quotas would increase the producer surplus for domestic producers, but reduce consumer surplus for U.S. citizens who purchase sugar. This would harm foreign sugar producers as they would be limited in the amount of sugar they could export to the United States.

Quiz 9: Application: International Trade