Question 1

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

Accepted Answer

Some economists argue that in certain circumstances, national security concerns may justify trade restrictions for strategic industries, such as defense or critical infrastructure. However, others believe that national security should not be used as an excuse for protectionism and that trade restrictions often do more harm than good for national security in the long run.

Question 2

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

Accepted Answer

Free trade allows firms to access larger markets, which can result in economies of scale and lower costs of production. Therefore, free trade generally leads to lower costs rather than higher costs.

Question 3

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

Comparing the world price of aluminum and the domestic price of aluminum before trade only indicates whether the country has a comparative advantage in producing aluminum. It does not necessarily indicate whether the demand for aluminum in that country exceeds the demand for aluminum in other countries. Factors such as tariffs, transportation costs, and other trade barriers can affect the domestic price of aluminum and therefore cannot be used as a sole indicator of demand.

Question 4

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

Accepted Answer

Policymakers may implement trade restrictions such as tariffs or quotas to limit the amount of imports entering a domestic market, in order to protect domestic producers from foreign competition.

Question 5

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

The statement indicates that the percentage of Americans who believe trade is harmful exceeds the percentage of Americans who believe trade is beneficial, suggesting a greater number of people have negative views on trade.

Question 6

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 7

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

The Swedish economy would benefit from being able to purchase wool blankets at lower prices, which would increase consumer surplus and potentially stimulate demand for other goods and services. However, the Honduran economy may be negatively impacted if they are selling the wool blankets at prices below their production costs due to the subsidies, which could lead to inefficiencies and market distortions.

Question 8

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, sellers in Country A can export textiles and receive a higher price than they would in the domestic market. This results in an increase in producer surplus for these sellers.

Question 9

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

Accepted Answer

Most economists actually do not support the infant-industry argument, as it can lead to protectionism and inefficiencies in the long run. While it may be tempting to implement in practice, it can have negative consequences for the overall economy.

Question 10

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 approach to achieving free trade, as it involved negotiations and agreements between multiple countries.

Question 11

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

If the price of bananas increased, it means that William is receiving a higher price for the bananas he sells, making him better off. Jamal, on the other hand, is paying more for the bananas he buys, making him worse off. Therefore, William is a seller and Jamal is a buyer of bananas.

Question 12

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 13

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

Accepted Answer

NAFTA (North American Free Trade Agreement) involves three countries (Mexico, Canada, and the United States) and is considered a multilateral trade agreement.

Question 14

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 with multiple countries to remove trade barriers, which can lead to reductions in trade restrictions abroad as well as at home. This can result in larger gains from trade than a unilateral approach, which involves only one country unilaterally reducing its own trade barriers.

Question 15

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 16

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

Accepted Answer

Economists generally believe that free trade allows countries to specialize in producing goods they are best at, leading to a more efficient use of resources and ultimately raising living standards for all involved.

Question 17

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 producing goods in which they have a comparative advantage, leading to increased efficiency and competitiveness. However, this can lead to job losses in industries where they do not have a comparative advantage. Overall, free trade tends to increase economic growth and create jobs in the long run.

Question 18

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 along with other agreements related to international trade.

Question 19

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 and argue that the benefits of free trade outweigh the costs. While there may be short-term job losses in certain industries, overall free trade can lead to better economic growth and higher wages. Additionally, there are ways to support workers who are negatively impacted by trade, such as retraining programs and wage insurance.

Question 20

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

Accepted Answer

This statement is not supported by most economists, as the majority still believe in the benefits of free trade for economic growth and development. While there may be debates about specific policies and their implementation, the overall concept of free trade is still widely accepted in the field of economics.

Quiz 9: Application: International Trade