Question 1

To promote stability in commodity markets,International Commodity Agreements have utilized production and export controls,buffer stocks,and multilateral contracts.

Accepted Answer

International Commodity Agreements have indeed utilized production and export controls, buffer stocks, and multilateral contracts in order to promote stability in commodity markets.

Question 2

A multilateral contract stipulates the maximum price at which importing nations will purchase guaranteed quantities from producing nations and the minimum price at which producing nations will sell guaranteed amounts to importing nations.

Accepted Answer

A multilateral contract as described refers to a commodity agreement or price band mechanism, not the general definition of a multilateral contract. A multilateral contract typically involves three or more parties with obligations or rights, not specifically about price guarantees for import/export quantities.

Question 3

If the demand for coffee is price inelastic,an increase in the supply of coffee leads to falling prices and rising sales revenues.

Accepted Answer

When demand is price inelastic, an increase in supply will lead to lower prices, but the total revenue from sales will decrease because the percentage drop in price will be greater than the percentage increase in quantity demanded.

Question 4

The purpose of a cartel is to support prices higher than would occur under more competitive conditions,thus increasing the profits of cartel members.

Accepted Answer

This is the main purpose of a cartel - to limit competition and raise prices for the benefit of its members.

Question 5

A cartel tends to be most successful in maximizing the profits of its members when there are a large number of producers in the cartel and these producers' cost and demand conditions greatly differ from each other.

Accepted Answer

A cartel tends to be most successful in maximizing the profits of its members when there are a small number of producers in the cartel and these producers' cost and demand conditions are similar to each other. This makes it easier for the cartel to coordinate their production levels and enforce the agreed-upon price.

Question 6

During periods of falling demand for coffee,an International Commodity Agreement could offset downward pressure on price by implementing policies to increase the supply of coffee.

Accepted Answer

An International Commodity Agreement cannot control or influence the supply of coffee as it is determined by various factors such as weather conditions, production costs, and land availability. Therefore, it cannot implement policies to increase the supply of coffee during periods of falling demand.

Question 7

Developing countries have often felt that it is easier to protect their manufacturers,via import-substitution policies,against foreign competitors than to force industrial nations to reduce trade restrictions on products exported by developing countries.

Accepted Answer

Developing countries have often implemented import-substitution policies, which involve limiting imports and promoting domestic production of goods. This is perceived as a way to protect their own industries from foreign competition. On the other hand, industrial countries often maintain trade restrictions on products exported by developing countries, making it difficult for these countries to access foreign markets. This is a more challenging issue to address as it involves the policies and barriers put in place by more powerful nations.

Question 8

Rather than conduct massive stabilization operations,buffer stock officials will periodically revise target prices should they move out of line with long-term price trends.

Accepted Answer

This statement is true. Rather than conducting massive stabilization operations, buffer stock officials will periodically revise target prices if they move out of line with long-term price trends. This allows for more flexible management of buffer stocks and helps to prevent drastic price swings.

Question 9

The "newly industrializing countries" of East Asia have emphasized the implementation of import-substitution policies to insulate their industries from international competition.

Accepted Answer

The newly industrializing countries of East Asia, such as South Korea and Taiwan, actually implemented export-oriented policies, not import-substitution policies. They focused on producing goods for export to earn foreign currency and stimulate economic growth.

Question 10

Under the Generalized System of Preferences program,the major industrial countries agree to temporarily reduce tariffs on designated imports from other industrial countries.

Accepted Answer

The Generalized System of Preferences (GSP) program is designed to promote economic growth in developing countries by providing duty-free or reduced-duty treatment for certain products imported from designated beneficiary countries. It is not a program for industrial countries to reduce tariffs on each other.

Question 11

In recent decades,the East Asian "newly industrializing countries" have pursued export-led growth (outward orientation)as an industrialization strategy.

Accepted Answer

This statement is true. East Asian countries such as South Korea, Taiwan, Singapore, and Hong Kong have followed an export-led growth strategy in order to industrialize and develop their economies. This strategy involves producing goods and services for export to other countries, which can lead to a greater inflow of foreign investment, increased productivity, and higher economic growth.

Question 12

To prevent the market price of tin from rising above the target price,the manager of a buffer stock will purchase excess supplies of tin from the market.

Accepted Answer

To prevent the market price of tin from rising above the target price, the manager of a buffer stock would release tin into the market, not purchase excess supplies. Purchasing excess supplies would be done to support or raise the price, not to prevent it from rising.

Question 13

It is widely agreed that import-substitution policies have been a main contributor to above-average growth rates in developing countries.

Accepted Answer

Import-substitution policies, which aim to replace foreign imports with domestic production, have not consistently led to above-average growth rates in developing countries. In many cases, these policies have led to inefficiency, a lack of competitiveness, and economic stagnation.

Question 14

Prolonged defense of a price ceiling tends to increase the supply of a commodity held by a buffer stock manager,thus putting downward pressure on price.

Accepted Answer

A price ceiling, when set below the equilibrium price, typically results in a shortage rather than a surplus because the price is too low to encourage suppliers to increase their supply. This would not lead to an increase in the supply held by a buffer stock manager, nor would it put downward pressure on price; instead, it could exacerbate the shortage.

Question 15

Empirical research indicates that the demand and supply schedules for most primary products are relatively inelastic to changes in price.

Accepted Answer

Empirical research shows that the demand and supply schedules for most primary products, such as agricultural goods and natural resources, are relatively inelastic to changes in price. This means that changes in price do not significantly affect the quantity demanded or supplied.

Question 16

When cartel members agree to restrict output to increase the price of their product,a single member of the cartel has an economic incentive to violate the agreement by increasing its output so as to increase profits.

Accepted Answer

This is known as the "cheating incentive" and is a common problem with cartels, as a member can increase its profits by producing more while the rest of the cartel keeps output restricted, leading to a breakdown of the agreement.

Question 17

To prevent the market price of tin from falling below the target price,the manager of a buffer stock would purchase any excess supply of tin that exists at the target price.

Accepted Answer

This statement is true. A buffer stock manager would purchase excess supply in order to prevent the market price from falling below the target price. This excess supply would be stored and released back into the market when there is a shortage, helping to stabilize the price.

Question 18

Developing countries have complained that because their commodity terms of trade has deteriorated in recent decades,they should receive preferential tariff treatment from industrialized countries.

Accepted Answer

Developing countries have indeed made this complaint about the deterioration of their commodity terms of trade and the need for preferential tariff treatment.

Question 19

Not only do changes in demand induce relatively wide fluctuations in price when supply is inelastic,but changes in supply induce relatively wide fluctuations in price when demand is inelastic.

Accepted Answer

When supply is inelastic (not responsive to changes in price), a small change in demand can cause a large change in price. Similarly, when demand is inelastic (not responsive to changes in price), a small change in supply can also cause a large change in price. Therefore, changes in demand and supply can both cause relatively wide fluctuations in price when the opposite factor is inelastic.

Question 20

Import-substitution policies are supported by the fact that many developing countries have small domestic markets and thus their producers enjoy the benefits of diseconomies of small-scale production.

Accepted Answer

Import-substitution policies are typically implemented to encourage domestic production and reduce dependency on imports, not because of the benefits of diseconomies of scale, but rather to try to overcome them by expanding domestic industries.

Quiz 7: Trade Policies for the Developing Nations