Question 1

Suppose a national government chooses to impose barriers to trade in an effort to promote a more diversified economy.This objective would be particularly important to,for example,an economy largely dependent on one or two agricultural products because

Accepted Answer

An economy largely dependent on one or two agricultural products is vulnerable to fluctuations in world prices of those commodities, which can lead to great volatility in national income. By promoting a more diversified economy through trade barriers, the government can reduce this vulnerability and create a more stable economy. However, this may not necessarily increase net exports or maximize national income and raise average living standards.

Question 2

Any policy designed to benefit domestic industries at the expense of foreign export industries is called

Accepted Answer

The term used to describe policies designed to benefit domestic industries at the expense of foreign export industries is protectionism. Protectionist policies include tariffs, import quotas, and subsidies, which are designed to protect domestic industries by making imported goods more expensive or less competitive. The aim is to reduce imports and increase domestic production and employment. Therefore, the best answer is E, protection.

Question 3

A country can improve its own terms of trade by imposing a tariff if that country

Accepted Answer

By imposing a tariff, a large country can influence world prices because it constitutes a significant portion of the demand for the product, potentially improving its terms of trade by reducing the price of imports relative to exports.

Question 4

Does free trade improve the living standards of all residents of a country?

Accepted Answer

In theory, free trade can result in net gains for a country as a whole, but in practice, the distribution of these gains may not be equal among all individuals. Some may benefit greatly from new opportunities in export industries, while others may suffer if their jobs in import-competing industries are lost. So, while free trade may improve the overall living standards of a country, it may not benefit everyone equally.

Question 5

According to the infant-industry argument for trade protection,a new small industry

Accepted Answer

According to the infant-industry argument, a new small industry may need protection temporarily until it can exploit its economies of scale. This is because a new industry may not be able to compete initially with established industries that have already achieved economies of scale. However, once the new industry is able to achieve similar economies of scale, it will be able to compete on a level playing field and no longer require protection.

Question 6

Wages in Mexico are lower than those in Canada.As a result,

Accepted Answer

The lower wages in Mexico means that they can produce goods at a lower cost, which makes them more competitive in the international market. Canadian consumers can benefit by purchasing some of these low-cost goods from Mexico, which can lead to lower prices and increased variety of products. Imposing tariffs on imports from Mexico to raise Canadian living standards is not a viable solution as it will ultimately lead to higher prices for consumers. Comparative advantage depends on the opportunity cost of producing different goods, and the wages in Mexico do not necessarily mean that Canada has a comparative advantage in all products. Lastly, the low labour costs in Mexico do not necessarily mean that they have an absolute advantage in all products, as other factors such as technology and natural resources can also play a role.

Question 7

Continued tariff protection for industries that have already attained all the possible economies of scale will likely

Accepted Answer

Continued tariff protection for industries that have already achieved economies of scale tends to maintain high prices for consumers. This is because tariffs act as a tax on imports, reducing competition from abroad and allowing domestic producers to keep prices higher than they would be in a more competitive market.

Question 8

Consider the infant-industry argument for trade protection.In the past few decades,an example of this argument at work has been promotion of the

Accepted Answer

The European commercial aircraft industry is a classic example of the infant-industry argument for trade protection. The industry was heavily subsidized by European governments in its early days to enable it to compete with established American firms such as Boeing. Over time, the industry grew and matured, and today, Airbus (the major European aircraft manufacturer) competes on equal footing with Boeing for market share. However, without the initial protection and support from their governments, the European aircraft industry may not have been able to survive and thrive.

Question 9

Consider trade between country A and country B.If country A has wages that are substantially less than those in country B,

Accepted Answer

The pattern of comparative advantage will depend on the relative productivities of labor in the two countries, meaning that even if country A has lower wages, they may still not have an absolute advantage in all industries. Country B may have higher productivity levels in certain industries, making it more advantageous for them to specialize in those industries and trade with country A. Tariffs and subsidies may come into play depending on the trade agreements and policies of the two countries, but they are not necessary outcomes simply based on wage differences.

Question 10

A common argument for the use of tariffs (for a large economy)when the objective is to maximize a country's national income is to

Accepted Answer

Tariffs can improve a country's terms of trade by making foreign goods more expensive and encouraging domestic producers to sell more of their goods domestically. This can lead to a shift in consumption towards domestic goods, increasing national income.

Question 11

What is typically the main objective of protectionist trade policies?

Accepted Answer

The main objective of protectionist trade policies is to shield local producers from foreign competition, usually through measures such as tariffs or quotas on imported goods. This is done to protect domestic industries and jobs, and to ensure that they are not at a disadvantage compared to foreign competitors who may have lower production costs.

Question 12

A business which contends that it needs temporary protection so that it can expand significantly and thereby reduce its costs so as to enable it to compete with foreign producers is using an argument known as the

Accepted Answer

The argument being used is known as the infant-industry case for tariffs, which suggests that a new or fledgling industry needs temporary protection from foreign competition in order to become established and eventually compete on its own. This protection allows the industry to achieve economies of scale, become more efficient, and reduce costs, making it more competitive with foreign producers in the long term.

Question 13

Economists would tend to accept which of the following arguments in favour of tariffs?

Accepted Answer

Economists might accept the argument that temporary tariff protection may help to generate an eventual comparative advantage for the protected product. This is because a temporary tariff may provide domestic producers with time to achieve economies of scale and technological improvements, ultimately improving their international competitiveness. However, economists generally do not agree with the other arguments listed. A) exporting jobs from low-wage countries to high-wage countries can lead to greater efficiency and economic growth overall; B) limiting imports can lead to higher prices for consumers and reduced competition, while reducing capital flows can limit access to foreign investment and loans; C) tariffs may actually increase inflation by raising the cost of imported goods; and E) tariffs can potentially harm the domestic economy by reducing access to imported goods and triggering retaliation from trade partners.

Question 14

Suppose you are an economist advising the Canadian government as to whether to erect trade barriers for the protection of Canada's textile industry.You are likely to study the gains to be realized in this industry and weigh those against

Accepted Answer

As an economist, the cost in terms of higher prices to Canadian consumers should be a top consideration when advising the Canadian government on erecting trade barriers. While protecting the textile industry may bring gains to that specific sector, the overall impact on Canadian consumers should not be overlooked. Trade barriers could result in higher prices for textiles, which could lead to a decrease in consumer spending and potentially harm the overall economy. Therefore, the potential cost to Canadian consumers should be carefully analyzed and weighed against any potential gains in the textile industry.

Question 15

Continued tariff protection for industries that have already attained all potential economies of scale and opportunities for learning by doing is likely to

Accepted Answer

Continued tariff protection for industries that have already achieved economies of scale and learning opportunities tends to redistribute income in favor of the factors used in the protected industries. This is because the protection allows these industries to maintain higher prices and profits than they would in a competitive market, benefiting owners and possibly workers in the protected sectors at the expense of consumers and other sectors.

Question 16

Continued tariff protection for industries that have already attained all potential economies of scale and possibilities for learning by doing is likely to

Accepted Answer

Continued tariff protection for mature industries can lead to inefficiencies and higher prices, which may reduce average real income as resources are not allocated to their most productive uses. It might temporarily increase employment in the protected industries due to the artificial support, but at the cost of overall economic welfare.

Question 17

Which of the following states the "infant industry" argument for trade protection?

Accepted Answer

The "infant industry" argument for trade protection states that in the presence of unexploited scale economies, tariff protection may permit a country to develop future comparative advantage in certain products. This argument suggests that temporary trade protection is necessary to allow industries to grow and become competitive before facing international competition. This protection is typically in the form of tariffs or quotas that limit imports and encourage domestic production.

Question 18

Many of the world's industrialized countries initially developed their industries with heavy tariff protection.In Canada's case,this was the basis for

Accepted Answer

The National Policy of 1876 was Canada's economic strategy based on heavy tariff protection to encourage trade within Canada and to protect Canadian industries from foreign competition.

Question 19

Suppose a country is exporting more goods and services than it is importing.We should consider this to be "beneficial" only in the sense that it

Accepted Answer

The answer of Suppose a country is exporting more goods...

Question 20

A common,but invalid argument for using tariffs to maximize national income and raise domestic living standards is to

Accepted Answer

The argument to "keep Canadian currency in Canada" is a common but invalid justification for using tariffs to maximize national income and raise domestic living standards. It reflects a misunderstanding of how trade and economies work, suggesting a protectionist approach that doesn't necessarily lead to the intended outcomes.

Quiz 33: Trade Policy