Question 1

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 presented in the question is known as the infant-industry case for tariffs. This argument suggests that temporary protection is necessary to shield a new industry from foreign competition until it is mature enough to compete on a level playing field. Once the industry is established and can compete, prices will go down and consumers will benefit.

Question 2

A tariff is

Accepted Answer

A tariff is a tax imposed on imported goods. This is done by the government of a country with the aim of protecting domestic industries from foreign competition. The idea is to make imported goods more expensive and less attractive to consumers, thereby encouraging them to buy locally produced goods. Tariffs are also used to generate revenue for the government.

Question 3

Many people argue that the imposition of tariffs in industry X will increase factor incomes in that industry and therefore be good for the country as a whole. The counter- argument is that

Accepted Answer

The counter-argument is that while factor incomes in industry X might increase due to tariffs, the overall effect would be negative as the increase would be offset by reductions in real incomes for other domestic residents, leading to a net loss for the country.

Question 4

The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.
  FIGURE 34- 4
-Refer to Figure 34- 4. Suppose the world price of bicycles is $200 and Canada has in place a 50- percent tariff on this good. The deadweight loss to the Canadian economy resulting from this tariff is per year.

Accepted Answer

The deadweight loss is the area of the triangle formed by the world price, the domestic price, and the quantity demanded at the domestic price. This area is equal to 1/2 * (domestic price - world price) * (quantity demanded at domestic price). In this case, the domestic price is $200 * 1.50 = $300, and the quantity demanded at the domestic price is 1 million units. Therefore, the deadweight loss is 1/2 * ($300 - $200) * (1 million) = $50 million.

Question 5

The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PS1U1B1WS1U1B0. Assume that all cotton towels are identical.
  FIGURE 34- 3
-Refer to Figure 34- 3. If Canada imposes a tariff of $t per cotton towel, Canadian towel producers' revenues will be equal to the amount

Accepted Answer

Canadian towel producers' revenues will be equal to the amount of A + B + C + E + F + G. This is because the tariff will increase the price of imported towels, making Canadian towels more competitive. As a result, Canadian towel producers will be able to sell more towels at a higher price, increasing their revenues.

Question 6

Consider the following statement: "Canada is unambiguously better off if it is exporting more, in dollar value, to the rest of the world than it is importing." This statement is because .

Accepted Answer

The statement is incorrect because it fails to recognize that the gains from trade come from the volume rather than the balance of trade. The benefits of trade arise from the ability to specialize and exchange goods and services, not merely from having a trade surplus.

Question 7

The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.
  FIGURE 34- 4
-Refer to Figure 34- 4. Suppose there is free trade in bicycles and the world price is $200. If Canada then imposes a 50- percent import tariff on bicycles, domestic consumption will

Accepted Answer

A 50% import tariff increases the price of imported bicycles, reducing domestic consumption as consumers face higher prices.

Question 8

If a tariff is imposed in a country that is too small to have global market power, the domestic consumer will face a price, and the price paid to foreign producers will .

Accepted Answer

When a small country imposes a tariff, it cannot influence world prices. Therefore, the domestic consumer price increases by the amount of the tariff, but the price paid to foreign producers remains unchanged.

Question 9

A country can impose a tariff to improve its own terms of trade if it

Accepted Answer

If a country constitutes a large fraction of the world demand for some commodity that it imports, it has some bargaining power to negotiate better terms of trade. By imposing a tariff, it can force foreign firms to lower the prices of their goods or increase the quantity supplied, which can improve the country's terms of trade. This is particularly true if the commodity is inelastic in demand, meaning that consumers (in this case, the country) are willing to pay a high price for it even if the quantity demanded is not very responsive to changes in price.

Question 10

Suppose the Canadian government began subsidizing wheat farmers by paying them $25 per bushel of wheat produced. According to existing international trade agreements, other countries would be allowed to react to this subsidy by imposing a

Accepted Answer

Countervailing duty is a tariff imposed by a country on imported goods that have received subsidies in their country of origin. In this case, if the Canadian government began subsidizing wheat farmers, other countries can react by imposing a countervailing duty on Canadian wheat imports to neutralize the competitive advantage created by the subsidy. A quota, non-tariff barrier, trade diversion, and VER (Voluntary Export Restriction) are all ways of restricting imports, but they are not specifically targeted at addressing subsidies.

Question 11

The imposition of a tariff on an imported good causes consumer surplus

Accepted Answer

A tariff on an imported good raises the price of that good, leading to a decrease in consumer surplus as consumers pay more. However, it benefits domestic producers by reducing foreign competition, thus increasing producer surplus.

Question 12

If all countries try to expand their exports and restrict their imports through the use of export subsidies and import tariffs, the net effect will probably be

Accepted Answer

When countries restrict imports and expand exports using tariffs and subsidies, it leads to retaliation by other countries which often results in a decrease in the volume of international trade. This can also lead to a decline in the average living standards as the cost of goods increases due to higher tariffs. Therefore, choice D is the correct answer.

Question 13

Which of the following methods of import protection leads to the largest deadweight loss for the importing country?

Accepted Answer

Quotas lead to the largest deadweight loss because they restrict the quantity of imports, causing higher prices and reduced consumer surplus without generating government revenue like tariffs do.

Question 14

Mercosur is

Accepted Answer

Mercosur is a customs union that was established in 1991 between four countries in South America: Argentina, Brazil, Paraguay, and Uruguay. It aims to promote free trade, coordinate macroeconomic policies, and increase economic integration among its member states.

Question 15

If Canada reduces the tariff imposed on a commodity from 10 percent to 5 percent, we would expect to observe

Accepted Answer

When Canada reduces the tariff on a commodity, it becomes relatively cheaper for Canadian consumers to import the commodity. As a result, the demand for that commodity may increase, leading to an increase in the amount of the commodity imported into Canada. Therefore, the correct answer is B. There would be no effect on the demand curve, terms of trade, or tariff revenue for the Government of Canada in this scenario.

Question 16

The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.
  FIGURE 34- 4
-Refer to Figure 34- 4. Suppose the world price of bicycles is $500 and Canada has in place a 50- percent tariff on this good. The deadweight loss to the Canadian economy resulting from this tariff is per year.

Accepted Answer

The answer of The diagram below shows supply and demand...

Question 17

A $1 per- litre tariff on all wine imported into Canada will

Accepted Answer

A $1 per-litre tariff represents a larger percentage of the price of low-quality wines compared to high-quality wines, thus providing more protection to low-quality wine producers.

Question 18

A common argument for the use of tariffs when the objective is to maximize a country's national income would be to

Accepted Answer

Tariffs can improve a country's terms of trade by increasing the price of imported goods, thereby making domestic production more competitive. This can lead to higher income for domestic producers and government revenue from tariff collections.

Question 19

The effect of imposing a tariff on a specific imported good is to the domestic price of the good and the domestic production of the good.

Accepted Answer

Imposing a tariff on an imported good increases its domestic price, making domestic production more competitive, thus increasing domestic production.

Question 20

The diagram below shows the demand and supply curves for refrigerators in Canada. FIGURE 34- 1 -Refer to Figure 34- 1. Suppose that P₀is the world price. If Canada imposes a tariff causing the price of refrigerators in Canada to rise from P₀to P₁, the Canadian government will collect tariff revenues equal to

Accepted Answer

The tariff-induced quantity of refrigerators imported into Canada is Q₂Q₄, which is the difference in quantity demanded and quantity supplied at the new price (P₁). Thus, the Canadian government will collect tariff revenues equal to (P₁-P₀) multiplied by Q₂Q₄.

Quiz 34: Trade Policy