Question 1

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 and importing cars may lead to lower prices and more choices for domestic consumers, but it can also lead to competition and potential layoffs for domestic car producers. Therefore, the gains to domestic producers do not necessarily outweigh the losses to domestic consumers.

Question 2

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 revenue for the government is calculated as the increase in producer surplus plus the deadweight loss minus the reduction in consumer surplus, which does not match the $130 million stated. The correct calculation for tariff revenue is based on the quantity of imports multiplied by the tariff rate, not directly derived from changes in surplus and deadweight loss.

Question 3

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 increase the price of imported products, reducing the quantity demanded and causing a deadweight loss. The deadweight loss represents the loss of consumer and producer surplus that occurs when the quantity sold decreases due to the tariff, compared to the situation with free trade. The closer the price of the imported product gets to the equilibrium price without trade, the smaller the gains from trade become, as trade allows buyers and sellers to benefit from specialization and comparative advantage.

Question 4

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 a tariff, which is essentially a tax on imported goods, will make the imported wine more expensive, making it less attractive to consumers. As a result, they may switch to domestically produced wine, leading to an increase in domestic production. With a decrease in the quantity of wine imported, the domestic supply of wine will increase, leading to a decrease in the quantity of imported wine and an increase in the domestic price of wine.

Question 5

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 should be equal to the reduction in total surplus, which is the sum of producer surplus, consumer surplus and tariff revenue. In this case, the reduction in total surplus would be $500 million - $100 million - $200 million = $200 million, not $300 million. Therefore, the answer is false.

Question 6

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 7

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, it increases the cost of importing the product, which raises the domestic price above the world price.

Question 8

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

Accepted Answer

Both import quotas and tariffs restrict or discourage imports, leading to a decrease in the quantity of imports.

Question 9

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

Accepted Answer

A tariff is a tax on imports, which increases their price and reduces the quantity demanded. This moves the market closer to its equilibrium without trade, as the domestic supply is pushed up and the demand is pushed down. As a result, the quantity of imports decreases and the domestic producers benefit from higher prices.

Question 10

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

Accepted Answer

Import quotas and tariffs restrict the quantity of imported goods and increase the price of imported goods, which makes domestic sellers better off as they face less competition and can charge higher prices. However, domestic buyers are worse off as they have fewer options and must pay higher prices for the same goods.

Question 11

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

Accepted Answer

When a tariff is imposed on imported shoes, the price of shoes increases in the importing country. This leads to a decrease in the quantity of shoes demanded and an increase in the quantity of shoes supplied domestically. However, the domestic shoe industry may not be able to produce enough shoes to meet the increased demand, leading to shortages and inefficiencies. In addition, consumers in the importing country have to pay higher prices for shoes, which makes them worse off.

Question 12

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

Allowing international trade means that Spritzland can now access a larger market for their wristwatches, leading to potentially higher demand and higher prices. This can increase producer surplus and consumer surplus, leading to an overall increase in total surplus in the market for wristwatches.

Question 13

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 14

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, the price of shoes in that country increases. This makes buyers worse off as they have to pay a higher price for the same product. On the other hand, sellers of shoes in that country become better off as they face less competition from imported shoes and can now sell their shoes at a higher price.

Question 15

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 gain producer surplus and the government gains tariff revenue, domestic consumers lose consumer surplus because they have to pay higher prices for the imported goods.

Question 16

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 due to free-trade policies, the domestic price of steel is likely to decrease rather than increase due to increased competition among importers.

Question 17

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

Accepted Answer

Deadweight loss is a concept in economics that measures the loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved or when it is not Pareto optimal. Tariffs and quotas typically cause a decrease in total surplus, resulting in deadweight loss.

Question 18

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

A tariff is a tax placed on imported goods, which means the price of imported watches will rise by the amount of the tariff. However, domestic watch manufacturers may also raise their prices to match the higher prices of imported watches due to the decreased competition, resulting in a rise in the price of both domestic and imported watches.

Question 19

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 20

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.

Quiz 9: Application: International Trade