Question 1

Import quotas and tariffs both cause the quantity of imports to fall.

Accepted Answer

Both import quotas and tariffs aim to reduce the amount of imports coming into a country, and therefore both cause a decrease in the quantity of imports. Import quotas directly limit the amount of goods that can be imported, while tariffs increase the cost of imports, making them less attractive to consumers and businesses.

Question 2

If a small country imposes a tariff on an imported good, domestic sellers will gain producer surplus, the government will gain tariff revenue, and domestic consumers will gain consumer surplus.

Accepted Answer

While domestic sellers may gain producer surplus and the government may gain tariff revenue, domestic consumers will actually lose consumer surplus due to the increased cost of the imported good. This is known as deadweight loss.

Question 3

When a country abandons no-trade policies in favor of free-trade policies and becomes an importer of steel, then the domestic price of steel will increase as a result.

Accepted Answer

When a country becomes an importer of steel, the domestic price of steel will actually decrease as they will have access to cheaper foreign steel. Therefore, the statement is false.

Question 4

The greater the elasticities of supply and demand, the smaller are the gains from trade.

Accepted Answer

Greater elasticities of supply and demand typically lead to larger gains from trade because they allow for more substantial adjustments in quantities traded in response to price changes, enhancing the efficiency and benefits of trade.

Question 5

If a country allows free trade and imports cars, then it is the case that the gains to domestic producers outweigh the losses to domestic consumers.

Accepted Answer

Free trade allows for lower prices for consumers, but may lead to competition and potential job losses for domestic producers. Therefore, the gains and losses are not always equal and can vary based on the specific circumstances.

Question 6

If a tariff is placed on watches, the price of both domestic and imported watches will rise by the amount of the tariff.

Accepted Answer

Tariffs are taxes placed on imported goods by a country's government to protect local industries from foreign competition. The purpose of imposing tariffs is to make imported goods more expensive and thus less attractive to consumers, which then benefits local manufacturers. When a tariff is placed on watches, the price of both domestic and imported watches will increase by the same amount as the tariff, as both types of watches will then be subject to the same taxes.

Question 7

The nation of Cranolia used to prohibit international trade, but now trade is allowed, and Cranolia is exporting furniture. Relative to the previous no-trade situation, buyers of furniture in Cranolia are now better off.

Accepted Answer

Allowing trade and exporting furniture means Cranolia is specializing in furniture production, likely increasing prices domestically as some of the supply is now directed to international markets, potentially making domestic buyers worse off due to higher prices.

Question 8

A tariff increases the quantity of imports and moves the market farther from its equilibrium without trade.

Accepted Answer

A tariff increases the price of imports, which decreases the quantity of imports and moves the market closer to its equilibrium without trade.

Question 9

Suppose Ecuador imposes a tariff on imported bananas. If the increase in producer surplus is $50 million, the reduction in consumer surplus is $150 million, and the deadweight loss of the tariff is $30 million, then the tariff generates $130 million in revenue for the government.

Accepted Answer

The tariff would generate $70 million in revenue for the government ($50 million increase in producer surplus + $30 million deadweight loss). This is less than the reduction in consumer surplus, so the net effect on welfare is negative. Therefore, a tariff would not generate revenue for the government in this case.

Question 10

Suppose that Australia imposes a tariff on imported beef. If the increase in producer surplus is $100 million, the increase in tariff revenue is $200 million, and the reduction in consumer surplus is $500 million, the deadweight loss of the tariff is $300 million.

Accepted Answer

The deadweight loss of the tariff is equal to the reduction in consumer surplus minus the increase in producer surplus plus the increase in tariff revenue.

Deadweight loss = CS reduction - PS increase + TR increase 
Deadweight loss = $500m - $100m + $200m 
Deadweight loss = $600m

Therefore, the deadweight loss of the tariff is $600 million, not $300 million.

Question 11

Import quotas and tariffs make domestic sellers better off and domestic buyers worse off.

Accepted Answer

Import quotas and tariffs increase the price of imported goods, making them less competitive with domestic products. This results in domestic sellers being able to charge higher prices and earn more profits. However, domestic buyers must pay the higher prices, which makes them worse off.

Question 12

The small-economy assumption is necessary to analyze the gains and losses from international trade.

Accepted Answer

The small-economy assumption simplifies analysis by assuming the economy cannot influence world prices, but it is not necessary to analyze gains and losses from international trade. Larger economies can also be analyzed for their trade effects, though the analysis may be more complex.

Question 13

The imposition of a tariff on imported wine will increase the domestic price of wine, decrease the quantity of wine imported, and increase the quantity of wine produced domestically.

Accepted Answer

This is because the tariff increases the cost of imported wine, making it less competitive with domestically produced wine. Consumers will purchase less imported wine due to the higher price, while domestic producers will increase production to take advantage of the higher prices they can now charge.

Question 14

When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off.

Accepted Answer

When a country imposes a tariff on imported shoes, the price of shoes in that country increases. This makes buyers of shoes in that country worse off as they have to pay a higher price for shoes. Additionally, domestic shoe producers may be able to increase their prices as they face less competition from the cheaper imported shoes, further harming buyers.

Question 15

Tariffs cause deadweight loss because they move the price of an imported product closer to the equilibrium without trade, thus reducing the gains from trade.

Accepted Answer

Tariffs reduce the gains from trade by increasing the price of an imported product, thus reducing the quantity demanded and causing a deadweight loss. The deadweight loss represents the value of the lost gains from trade that could have been obtained if the tariff was not imposed.

Question 16

Domestic consumers gain and domestic producers lose when the government imposes a tariff on imports.

Accepted Answer

When a government imposes a tariff on imports, domestic producers generally gain because the tariff offers them protection from cheaper foreign competition, potentially increasing their sales and market share. Conversely, domestic consumers tend to lose because the tariff increases the price of imported goods, making them more expensive and reducing consumer choice and purchasing power.

Question 17

When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off and sellers of shoes in that country become better off.

Accepted Answer

When a country imposes a tariff on imported shoes, it raises the price of shoes for buyers in that country. This makes them worse off since they have to pay more for the same product. On the other hand, sellers of shoes in that country benefit because the tariff makes imported shoes more expensive, and therefore their own shoes become relatively cheaper. This increases their sales and profits.

Question 18

Deadweight loss measures the decrease in total surplus that results from a tariff or quota.

Accepted Answer

Deadweight loss is a measure of the efficiency loss that occurs when a regulation or policy causes the quantity supplied and quantity demanded to become different from their market equilibrium levels. In the case of a tariff or quota, these measures can result in a decrease in total surplus, as some transactions that would have taken place in an unregulated market no longer occur.

Question 19

When a government imposes a tariff on a product, the domestic price will equal the world price.

Accepted Answer

When a government imposes a tariff on a product, the domestic price will increase, and it will be higher than the world price. This happens because the tariff adds an extra cost to the foreign product, making it more expensive for domestic consumers. As a result, domestic producers will be more competitive, and they can increase their prices to the level of the world price plus the tariff.

Question 20

The nation of Spritzland used to prohibit international trade, but now trade is allowed, and Spritzland is exporting wristwatches. Relative to the previous no-trade situation, total surplus in the market for wristwatches in Spritzland has increased.

Accepted Answer

With the lifting of the trade ban, Spritzland can now engage in international trade, which can lead to increases in total surplus. By exporting wristwatches, Spritzland can sell them at a higher price in international markets than was possible in their domestic market, thus increasing their revenue and creating a surplus. Additionally, consumers in other countries may benefit from access to Spritzland's wristwatches and may be willing to pay a premium price, increasing the demand for the products, which also increases total surplus.

Quiz 9: Application: International Trade