Question 1

Policymakers often consider trade restrictions in order to protect domestic producers from foreign competitors.

Accepted Answer

Trade restrictions such as tariffs and quotas are often implemented by policymakers to protect domestic industries from foreign competition. These restrictions can make foreign goods more expensive or limit the amount of foreign goods that can be imported, giving domestic producers an advantage in the marketplace. However, trade restrictions can also lead to higher prices for consumers and may hinder economic growth by limiting access to foreign markets.

Question 2

Economists feel that national security concerns never provide a legitimate rationale for trade restrictions.

Accepted Answer

While economists generally advocate for free trade and caution against using national security concerns as an excuse for protectionism, there are circumstances where national security can be considered a legitimate rationale for trade restrictions. For example, certain critical industries or technologies may be viewed as essential to national security and thus subject to controls on foreign ownership, exports, or imports. However, the use of national security as a justification for trade restrictions should be carefully balanced against the potential economic costs and unintended consequences.

Question 3

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

Accepted Answer

The statement is true. The WTO enforces the rules established under the GATT, which was replaced by the WTO in 1995.

Question 4

For Country A, the world price of textiles exceeds the domestic equilibrium price of textiles. As a result, international trade allows sellers of textiles in Country A to experience greater producer surplus than they otherwise would experience.

Accepted Answer

When the world price of textiles exceeds the domestic equilibrium price of textiles, it becomes profitable for sellers of textiles in Country A to export their goods. By exporting, they can sell their textiles at the higher world price, which results in a greater producer surplus than they would experience if they only sold domestically at the lower equilibrium price. Therefore, international trade allows sellers of textiles in Country A to experience greater producer surplus.

Question 5

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.

Accepted Answer

If Honduras were to subsidize the production of wool blankets and sell them in Sweden at artificially low prices, this would create competition for Swedish wool blanket producers. This competition may lead to a decrease in the price of wool blankets in Sweden, making them more affordable for Swedish consumers. This could potentially give the Swedish economy a boost, rather than making it worse off.

Question 6

Most economists support the infant-industry argument because it is so easy to implement in practice.

Accepted Answer

Most economists do not support the infant-industry argument because it can lead to protectionist policies and market inefficiencies. While it may seem easy to implement in practice, it can ultimately harm both domestic and international economic growth.

Question 7

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.

Accepted Answer

A multilateral approach involves negotiations and agreements among multiple countries to reduce trade barriers, which can lead to increased access to foreign markets for domestic producers and reduced barriers for consumers. This can result in greater gains from trade than a unilateral approach, which only focuses on reducing one country's trade barriers without addressing those of other countries.

Question 8

Economists view free trade as a way to raise living standards both at home and abroad.

Accepted Answer

Economists generally support free trade as it leads to increased competition, specialization, and efficiency, resulting in lower prices and increased consumer surplus. This, in turn, can lead to higher economic growth and living standards both domestically and globally.

Question 9

The results of a 2008 Los Angeles Times poll suggest that a significant majority of Americans believe that free international trade helps the American economy.

Accepted Answer

The 2008 Los Angeles Times poll actually found that a significant majority of Americans believed that free international trade was bad for the American economy, reflecting concerns about job losses and the impact on domestic industries.

Question 10

For Country A, the world price of soybeans exceeds the domestic equilibrium price of soybeans. As a result, international trade allows buyers of soybeans in Country A to experience greater consumer surplus than they otherwise would experience.

Accepted Answer

International trade under these conditions would lead to Country A exporting soybeans, as the world price is higher than the domestic price, benefiting domestic producers more and potentially reducing consumer surplus due to higher prices.

Question 11

Economists agree that trade ought to be restricted if free trade means that domestic jobs might be lost because of foreign competition.

Accepted Answer

Economists generally support free trade as they believe it leads to overall economic benefits. While free trade can lead to some job losses in certain industries, economists argue that the gains from increased efficiency and cheaper goods for consumers outweigh these costs. Additionally, economists often advocate for government policies to help displaced workers find new employment or receive training to succeed in different industries, rather than restricting trade.

Question 12

Most economists view the United States as an ongoing experiment that raises serious doubts about the virtues of free trade.

Accepted Answer

Most economists actually support the virtues of free trade and view the United States as a strong advocate for it. However, there are some economists who have raised concerns about the impact of free trade on certain industries and jobs in the United States.

Question 13

For a given country, comparing the world price of aluminum and the domestic price of aluminum before trade indicates whether that country's demand for aluminum exceeds the demand for aluminum in other countries.

Accepted Answer

The comparison of world price and domestic price alone does not provide information about the relative demand for aluminum in the country and other countries. Other factors such as production costs and trade policies also influence the price of aluminum.

Question 14

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.

Accepted Answer

Free trade allows countries to specialize in the production of goods and services in which they have a comparative advantage, resulting in increased efficiency and productivity. This can lead to job losses in industries in which the country does not have a comparative advantage, but it also creates new job opportunities in industries in which the country has a comparative advantage. Overall, free trade tends to create more jobs than it destroys in the long run.

Question 15

William and Jamal live in the country of Dumexia. When Dumexia legalized international trade in bananas, the price of bananas in Dumexia increased. As a result, William became better off and Jamal became worse off. It follows that William is a seller, and Jamal is a buyer, of bananas.

Accepted Answer

The increase in the price of bananas implies that the supply of bananas in Dumexia is lower than the demand, which benefits sellers like William who can now charge higher prices. On the other hand, buyers like Jamal now have to pay more for bananas, making them worse off. Therefore, William is a seller and Jamal is a buyer of bananas.

Question 16

Free trade allows firms to realize economies of scale, resulting in higher costs of production.

Accepted Answer

Free trade allows firms to benefit from economies of scale, resulting in lower costs of production. Free trade reduces barriers and restrictions on imports and exports, allowing firms to expand their markets and increase their production levels, resulting in lower costs per unit produced. This increased efficiency can lead to lower prices for consumers as well.

Question 17

The results of a 2008 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.

Accepted Answer

According to the information given, the poll suggests 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. This implies that more people think trade has a negative impact on the economy than a positive one, making option A the correct answer.

Question 18

William and Jamal live in the country of Dumexia. As a result of Dumexia's legalization of international trade in bananas, William becomes better off and Jamal becomes worse off. It follows that William is a seller, and Jamal is a buyer, of bananas.

Accepted Answer

The statement does not necessarily follow because the impact of international trade on individuals depends on their roles in the market. William could be a more efficient producer benefiting from export opportunities, while Jamal could be a less efficient producer facing increased competition. Alternatively, Jamal could be a consumer facing higher prices due to import tariffs or supply constraints, not necessarily a buyer in the sense of a commercial purchaser.

Question 19

GATT is an example of a successful unilateral approach to achieving free trade.

Accepted Answer

GATT (General Agreement on Tariffs and Trade) was a multilateral agreement between various countries to reduce trade barriers and promote free trade. It was not a unilateral approach, and it required cooperation and agreement between participating countries.

Question 20

NAFTA is an example of a multilateral approach to achieving free trade.

Accepted Answer

NAFTA, or the North American Free Trade Agreement, is a trade agreement between Canada, the United States, and Mexico, making it a multilateral approach to achieving free trade among the three countries.

Quiz 9: Application: International Trade