CHAPTER 5NONTARIFF TRADE BARRIERS

MULTIPLE CHOICE

1.The imposition of a tariff on imported steel for the home country results in:

a.

Improving terms of trade and rising volume of trade

b.

Higher steel prices and falling steel consumption

c.

Lower profits for domestic steel companies

d.

Higher unemployment for domestic steel workers

ANS:BPTS:1

2.Which of the following refers to a market-sharing pact negotiated by trading partners to moderate the intensity of international competition?

a.

Orderly marketing agreement

b.

Local content requirements

c.

Import quota

d.

Trigger price mechanism

ANS:APTS:1

3.Suppose the United States and Japan enter into a voluntary export agreement in which Japan imposes an export quota on its automakers. The largest share of the export quota's "revenue effect" would tend to be captured by:

a.

The U.S. government

b.

Japanese automakers

c.

American auto consumers

d.

American autoworkers

ANS:BPTS:1

4.Suppose the government grants a subsidy to domestic producers of an import-competing good. The subsidy tends to result in deadweight losses for the domestic economy in the form of the:

a.

Consumption effect

b.

Redistribution effect

c.

Revenue effect

d.

Protective effect

ANS:DPTS:1

5.Tariffs and quotas on imports tend to involve larger sacrifices in national welfare than would occur under domestic subsidies. This is because, unlike domestic subsidies, import tariffs and quotas:

a.

Permit less efficient home production

b.

Distort choices for domestic consumers

c.

Result in higher tax rates for domestic residents

d.

Redistribute revenue from domestic producers to consumers

ANS:BPTS:1

6.Suppose the government grants a subsidy to its export firms that permits them to charge lower prices on goods sold abroad. The export revenue of these firms would rise if the foreign demand is:

a.

Elastic in response to the price reduction

b.

Inelastic in response to the price reduction

c.

Unit elastic in response to the price reduction

d.

None of the above

ANS:APTS:1

7.Because export subsidies tend to result in domestic exporters charging lower prices on their goods sold overseas, the home country's:

a.

Export revenues will decrease

b.

Export revenues will rise

c.

Terms of trade will worsen

d.

Terms of trade will improve

ANS:CPTS:1

8.Which trade restriction stipulates the percentage of a product's total value that must be produced domestically in order for that product to be sold domestically?

a.

Import quota

b.

Orderly marketing agreement

c.

Local content requirement

d.

Government procurement policy

ANS:CPTS:1

9.The imposition of a domestic content requirement by the United States would cause consumer surplus for Americans to:

a.

Rise

b.

Fall

c.

Remain unchanged

d.

None of the above

ANS:BPTS:1

10.Domestic content legislation applied to autos would tend to:

a.

Support wage levels of American autoworkers

b.

Lower auto prices for American autoworkers

c.

Encourage American automakers to locate production overseas

d.

Increase profits of American auto companies

ANS:APTS:1

11.Compared to an import quota, an equivalent tariff may provide a less certain amount of protection for home producers since:

a.

A tariff has no deadweight loss in terms of production and consumption

b.

Foreign firms may absorb the tariff by offering exports at lower prices

c.

Tariffs are effective only if home demand is perfectly elastic

d.

Quotas do not result in increases in the price of the imported good

ANS:BPTS:1

12.Empirical studies show that because voluntary export quotas are typically administered by exporting countries, foreign exporters tend to:

a.

Raise their export prices, thus capturing much of the quota's revenue effect

b.

Lower their export prices, thus losing much of the quota's revenue effect

c.

Raise their export prices, thus selling more goods overseas

d.

Lower their export prices, thus selling fewer goods overseas

ANS:APTS:1

13.Concerning the restrictive impact of an import quota, assume there occurs an increase in the domestic demand for the import product. As long as the quota falls short of what would be imported under free market conditions, the economy's adjustment to the increase in demand would take the form of:

a.

A decrease in domestic production of the import good

b.

An increase in the amount of the good being imported

c.

An increase in the domestic price of the import good

d.

A decrease in domestic consumption of the import good

ANS:CPTS:1

14.Assume the U.S. has a competitive advantage in producing calculators, while the rest of the world has a competitive advantage in steel. Suppose the U.S. and the rest of the world enter into an agreement to lower import quotas below existing levels on calculators and steel. Which of the following would least likely occur for the U.S.? Rising levels of:

a.

Consumer surplus for American buyers of steel

b.

Producer surplus for American steelmakers

c.

Production in the American calculator industry

d.

Producer surplus for American calculator producers

ANS:BPTS:1

15.A firm that faces problems of falling sales and excess productive capacity might resort to international dumping if it:

a.

Can charge higher prices in markets that are elastic to price changes

b.

Earns revenues on foreign sales that at least cover variable costs

c.

Can sell at that price where domestic and foreign demand elasticities equate

d.

Is able to force foreign prices below marginal production costs

ANS:BPTS:1

16.A producer successfully practicing international dumping would charge:

a.

A relatively higher price in the more inelastic market

b.

A relatively higher price in the more elastic market

c.

The same price in all markets, regardless of their elasticities

d.

Different prices in all markets, regardless of their elasticities

ANS:APTS:1

17.The practice of Canadian firms dumping their products in Sweden poses a problem for economic policymakers since dumping tends to:

a.

Favor Swedish consumers over Canadian consumers

b.

Favor Swedish producers over Canadian producers

c.

Become widespread as firms operate at full productive capacity

d.

Result in firms charging prices above the total costs of production

ANS:APTS:1

18.The United Auto Workers union attempted to win the approval of legislation that would moderate the practice of foreign sourcing on the part of American auto manufacturers. Which of the following best represents this legislation?

a.

Voluntary export quotas

b.

Trigger price mechanism

c.

Tariff quotas

d.

Local content laws

ANS:DPTS:1

19.A main factor behind the president's decision to extend relief to steel firms in the form of trigger prices was that:

a.

Dumping complaints can be time consuming and expensive to implement

b.

The Tokyo Round outlawed the granting of subsidies to steel firms

c.

Trigger prices involve zero deadweight welfare loss for the economy

d.

Orderly marketing agreements were too costly to administer

ANS:APTS:1

20.If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then:

a.

The quota results in efficiency reductions but the tariff does not

b.

The tariff results in efficiency reductions but the quota does not

c.

They have different impacts on how much is produced and consumed

d.

They have different impacts on how income is distributed

ANS:DPTS:1

21.If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then:

a.

The quota results in efficiency reductions but the tariff does not

b.

The tariff results in efficiency reductions but the quota does not

c.

They have identical impacts on how much is produced and consumed

d.

They have identical impacts on how income is distributed

ANS:CPTS:1

22.From the perspective of the American public as a whole, export subsidies levied by overseas governments on goods sold to the United States:

a.

Help more than they hurt

b.

Hurt more than they help

c.

Are equivalent to an import quota

d.

Are equivalent to an export quota

ANS:APTS:1

23.Export subsidies levied by foreign governments on products in which the United States has a comparative disadvantage:

a.

Lower the welfare of all Americans

b.

Lead to increases in U.S. consumer surplus

c.

Encourage U.S. production of competing goods

d.

Encourage U.S. workers to demand higher wages

ANS:BPTS:1

24.If import licenses are auctioned off to domestic importers in a competitive market, their scarcity value (revenue effect) accrues to:

a.

Foreign corporations

b.

Foreign workers

c.

Domestic corporations

d.

The domestic government

ANS:DPTS:1

25.A specification of a maximum amount of a foreign produced good that will be allowed to enter the country over a given time period is referred to as:

a.

A domestic subsidy

b.

An export subsidy

c.

An import quota

d.

An export quota

ANS:CPTS:1

26.Import quotas tend to lead to all of the following except:

a.

Domestic producers of the imported good being harmed

b.

Domestic consumers of the imported good being harmed

c.

Prices increasing in the importing country

d.

Prices falling in the exporting country

ANS:APTS:1

27.To maintain that South Koreans are dumping their VCRs in the United States is to maintain that:

a.

Koreans are selling VCRs in the United States below their production cost

b.

Koreans are selling VCRs in the United States above their production cost

c.

The cost of manufacturing VCRs in Korea is lower in Korea than in the United States since wages are lower in Korea

d.

The cost of manufacturing VCRs in Korea is higher in Korea than in the United States since wages are higher in Korea

ANS:APTS:1

28.If the home country's government grants a subsidy on a domestically produced good, domestic producers tend to:

a.

Capture the entire subsidy in the form of higher profits

b.

Increase their level of production

c.

Reduce wages paid to domestic workers

d.

Consider the subsidy as an increase in production cost

ANS:BPTS:1

29.For years the U.S. government levied quotas on inexpensive oil imported from the Middle East. The quotas led to cost increases for U.S. consumers totaling $3 billion for oil products. An apparent justification for this policy was that:

a.

U.S. oil companies and workers deserved higher incomes

b.

U.S. oil was of superior quality and merited higher prices

c.

One should not be too dependent on foreign suppliers of crucial resources

d.

The U.S. government needed the quota revenue to balance its budget

ANS:CPTS:1

30.In certain industries, Japanese employers do not lay off workers. Therefore, they sometimes have excess supplies of goods that they cannot sell on the home market without lowering prices. To hold down losses, they sell goods in overseas markets at prices well beneath those in Japan. This practice is best referred to as:

a.

Orderly marketing

b.

Trigger pricing

c.

Domestic content pricing

d.

Dumping

ANS:DPTS:1

Figure 5.1 illustrates the steel market for Mexico, assumed to be a "small" country that is unable to affect the world price. Suppose the world price of steel is given and constant at $200 per ton. Now suppose the Mexican steel industry is able to obtain trade protection.

Figure 5.1. Alternative Nontariff Trade Barriers Levied by a "Small" Country

(With quota or subsidy)

(No quota or subsidy)

31.Consider Figure 5.1. With free trade, the quantity of steel imported by Mexico equals:

a.

2 tons

b.

4 tons

c.

6 tons

d.

8 tons

ANS:CPTS:1

32.Consider Figure 5.1. With free trade, Mexico's consumer surplus and producer surplus respectively equal:

a.

$2000 and $1200

b.

$3200 and $200

c.

$3600 and $800

d.

$4000 and $600

ANS:BPTS:1

33.Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel.

If Mexican steel importers behave as monopoly buyers and foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico equals:

a.

$200

b.

$400

c.

$600

d.

$800

ANS:BPTS:1

34.Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel.

If foreign exporters behave as monopoly sellers, and Mexican importers behave as competitive buyers, the overall welfare loss of the quota to Mexico equals:

a.

$200

b.

$400

c.

$600

d.

$800

ANS:DPTS:1

35.Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel.

If the Mexican government auctions import licenses to the highest foreign bidder, the overall welfare loss of the quota to Mexico equals:

a.

$200

b.

$400

c.

$600

d.

$800

ANS:BPTS:1

36.Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy).

The quantity of imports equals:

a.

1 ton

b.

2 tons

c.

3 tons

d.

4 tons

ANS:DPTS:1

37.Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy).

The total cost of the subsidy to the Mexican government equals:

a.

$200

b.

$400

c.

$600

d.

$800

ANS:DPTS:1

38.Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy).

As a result of the subsidy Mexican steel producers gain ____ of producer surplus.

a.

$200

b.

$400

c.

$600

d.

$800

ANS:CPTS:1

39.Consider Figure 5.1. Suppose instead that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy).

As a result of the subsidy, the welfare loss to Mexico due to inefficient domestic production equals:

a.

$200

b.

$400

c.

$600

d.

$800

ANS:APTS:1

40.Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy).

The overall deadweight welfare loss to Mexico equals:

a.

$200

b.

$400

c.

$600

d.

$800

ANS:APTS:1

41.Consider Figure 5.1. Suppose the rest of the world voluntarily agrees to reduce steel shipments to Mexico vis-a-vis an export quota equal to 2 tons.

Assuming Mexican importers behave as competitive buyers while foreign exporters behave as monopoly sellers, the overall welfare loss of the quota to Mexico is:

a.

$200

b.

$400

c.

$600

d.

$800

ANS:DPTS:1

42.Consider Figure 5.1. Suppose the rest of the world voluntarily agrees to reduce steel shipments to Mexico vis-a-vis an export quota equal to 2 tons.

Assuming Mexican importers behave as monopoly buyers while foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico is:

a.

$200

b.

$400

c.

$600

d.

$800

ANS:BPTS:1

Figure 5.2 illustrates the revenue and cost conditions of ABC Inc. which sells calculators in Canada and France.

Figure 5.2. International Dumping

43.Consider Figure 5.2. In the absence of international dumping, ABC Inc. maximizes profits by selling ____ calculators at a price of $____; the firm realizes profits totaling $____.

a.

27, $5, $54

b.

27, $5, $36

c.

24, $4, $46

d.

24, $4, $28

ANS:APTS:1

44.Referring to Figure 5.2, consider if ABC Inc. sells 27 calculators at a price of $5 each, realizing profits totaling $54. Of this quantity, ABC Inc. sells ____ calculators in Canada and realizes revenues totaling $____; the firm sells ____ calculators in France and realizes revenues totaling $____.

a.

15, $35, 9, $45

b.

15, $45, 9, $35

c.

21, $105, 6, $30

d.

21, $30, 6, $105

ANS:CPTS:1

45.Consider Figure 5.2. With international dumping, ABC Inc. sells ____ calculators to Canadian buyers at a price of $____ and ____ calculators to French buyers at a price of $____.

a.

15, $4, 12, $7

b.

15, $7, 12, $4

c.

9, $5, 15, $6

d.

9, $6, 15, $5

ANS:BPTS:1

46.Consider Figure 5.2. Compared with the total revenue and total profit that ABC Inc. realizes in the absence of dumping, with dumping the firm attains a:

a.

Fall in revenue of $18; fall in profits of $15

b.

Fall in revenue of $18, fall in profits of $18

c.

Rise in revenue of $18, rise in profits of $15

d.

Rise in revenue of $18, rise in profits of $18

ANS:DPTS:1

Figure 5.3 illustrates the apple market for Sweden, assumed to be a "small" country that is unable to affect the world price. SSweden is the domestic supply and DSweden is the domestic demand. SSweden+Quota is Sweden's supply schedule with an import quota.

Figure 5.3. Sweden's Apple Market

47.Consider Figure 5.3. In the absence of trade, Sweden's equilibrium price and quantity of apples would be:

a.

$0.60 and 22 pounds

b.

$0.60 and 14 pounds

c.

$1.00 and 18 pounds

d.

$1.40 and 14 pounds

ANS:DPTS:1

48.Consider Figure 5.3. Suppose the rest of the world can supply apples to Sweden at a price of $0.60 per pound. With free trade, Sweden produces ____ pounds of apples and imports ____ pounds of apples.

a.

10, 8

b.

10, 18

c.

6, 22

d.

6, 16

ANS:DPTS:1

49.Consider Figure 5.3. At the free-trade price of $0.60 per pound, Sweden's consumer surplus totals $____ and producer surplus totals $____.

a.

$10.80, $2.40

b.

$14.60, $3.90

c.

$24.20, $1.80

d.

$32.40, $2.30

ANS:CPTS:1

50.Consider Figure 5.3. If SSweden+Quota represents the supply schedule after a quota is levied, Sweden's imports will equal:

a.

6 apples

b.

8 apples

c.

10 apples

d.

12 apples

ANS:BPTS:1

51.Consider Figure 5.3. After the quota is levied, the price of apples in Sweden will equal:

a.

$0.60 per pound

b.

$1.00 per pound

c.

$1.40 per pound

d.

$1.80 per pound

ANS:BPTS:1

52.Consider Figure 5.3. As a result of the quota, Sweden's consumer surplus:

a.

Increases by $6

b.

Increases by $8

c.

Decreases by $6

d.

Decreases by $8

ANS:DPTS:1

53.Consider Figure 5.3. The quota leads to a deadweight welfare loss for Sweden of an amount equaling:

a.

$0.80

b.

$1.60

c.

$2.40

d.

$3.20

ANS:BPTS:1

54.Consider Figure 5.3. The quota's revenue effect equals:

a.

$1.60

b.

$2.40

c.

$3.20

d.

$4.00

ANS:CPTS:1

55.Consider Figure 5.3. Assume that Swedish import companies behave as competitive buyers while foreign export companies behave as a monopoly seller. Compared to free trade, Sweden's import quota results in domestic welfare:

a.

Gains totaling $3.20

b.

Gains totaling $4.80

c.

Losses totaling $3.20

d.

Losses totaling $4.80

ANS:DPTS:1

56.Consider Figure 5.3. Assume that Swedish import companies behave as a monopoly buyer while foreign export companies behave as competitive sellers. Compared to free trade, Sweden's import quota results in domestic welfare:

a.

Gains totaling $1.60

b.

Gains totaling $3.20

c.

Losses totaling $1.60

d.

Losses totaling $3.20

ANS:CPTS:1

57.Consider Figure 5.3. If the Swedish government auctions import licenses to the highest bidder in a competitive market, it could realize revenues of up to:

a.

$3.20

b.

$4.00

c.

$4.80

d.

$5.60

ANS:APTS:1

Figure 5.4 illustrates the calculator market for Venezuela, assumed to be a "small" country that is unable to affect the world price. SVenezuela is the domestic supply schedule and DVenezuela is the domestic demand schedule.

Figure 5.4. Venezuelan Calculator Market

58.Consider Figure 5.4. Suppose the rest of the world supplies calculators to Venezuela at a price of $4 each. With free trade, Venezuelan imports total:

a.

8 calculators

b.

16 calculators

c.

20 calculators

d.

24 calculators

ANS:CPTS:1

59.Consider Figure 5.4. Assume the Venezuelan government grants its manufacturers a production subsidy of $4 per calculator. After the subsidy is granted, Venezuelan imports total:

a.

8 calculators

b.

12 calculators

c.

16 calculators

d.

20 calculators

ANS:CPTS:1

60.Consider Figure 5.4. The cost of the production subsidy to the Venezuelan government totals:

a.

$32

b.

$40

c.

$48

d.

$54

ANS:APTS:1

61.Consider Figure 5.4. The increase in Venezuelan producer surplus under the production subsidy totals:

a.

$16

b.

$20

c.

$24

d.

$32

ANS:CPTS:1

62.Consider Figure 5.4. The production subsidy results in an overall welfare loss for Venezuela totaling:

a.

$8

b.

$12

c.

$16

d.

$20

ANS:APTS:1

63.A voluntary export agreement

a.

Typically applies only to the world's most important exporting nation(s)

b.

Typically applies only to the world's least important exporting nation (s)

c.

Is always more restrictive on trade than a tariff or import quota

d.

All of the above

ANS:APTS:1

64.When voluntary export limits are imposed on the world's chief exporter

a.

The exports of the non-restrained suppliers may be stimulated

b.

A trade diversion effect may occur

c.

Both a and b

d.

None of the above

ANS:CPTS:1

65.Subsidies to domestic firms may lead to

a.

An increase in prices

b.

Higher volume of exports

c.

Higher volume of imports

d.

Increase in welfare of the trading partner

ANS:BPTS:1

66.Concerning international dumping, many economists argue that "fair value" should be based on

a.

Average variable cost

b.

Average fixed cost

c.

Marginal cost

d.

Total cost

ANS:APTS:1

TRUE/FALSE

1.In the post-World War II era, Nontariff trade barriers have decreased in importance relative to tariff barriers.

ANS:FPTS:1

2.An import quota is a physical restriction on the quantity of goods that may be imported during a specified time period.

ANS:TPTS:1

3.Today most industrial countries protect their industries via global import quotas rather than selective import quotas.

ANS:FPTS:1

4.A global import quota permits a specified number of goods to be imported each year, but does not specify where the product is shipped from and who is permitted to import.

ANS:TPTS:1

5.Import tariffs and import quotas yield identical protection effects, consumption effects, redistribution effects, and revenue effects.

ANS:FPTS:1

6.Import quotas can yield revenue for the domestic government if it auctions import licenses to the highest bidder in a competitive market.

ANS:TPTS:1

7.To the extent that domestic importing companies organize as a monopoly buyer, and foreign exporting companies behave as competitive sellers, the importing companies capture the revenue effect of a quota.

ANS:TPTS:1

8.An import quota tends to reduce the overall welfare of the importing nation by an amount equal to the protective effect, consumption effect, and the portion of the revenue effect that is captured by the domestic government.

ANS:FPTS:1

9.The sugar import quotas of the U.S. government have tended to increase the market price of sugar, thus reducing the costs to the government of maintaining sugar price supports for domestic growers.

ANS:TPTS:1

10.During periods of growing demand, a tariff more effectively restricts the volume of imports than an equivalent import quota.

ANS:FPTS:1

11.With a quota placed on imported sugar, increased domestic demand leads to increased sugar imports but not to higher sugar prices.

ANS:FPTS:1

12.With a tariff on auto imports, increased domestic demand leads to a fall in the number of autos imported and a rise in the number of autos produced domestically.

ANS:FPTS:1

13.An orderly marketing agreement is a market-sharing pact negotiated by trading nations, and its effect is to moderate the intensity of international competition.

ANS:TPTS:1

14.An elimination of nontariff barriers on apples tends to increase apple imports, reduce profits of import-competing apple producers, and generate job losses for domestic apple workers.

ANS:TPTS:1

15.The distribution of an import quota's revenue effect depends on the relative concentration of bargaining power between foreign exporters and domestic importers.

ANS:TPTS:1

16.Voluntary export restraint agreements typically apply to all of the world's exporting nations rather than only the most important exporting nations.

ANS:FPTS:1

17.For an export quota applied to manufactured goods, foreign exporters tend to capture only a negligible share of the quota's revenue effect.

ANS:FPTS:1

18.When increases in nonrestraint supply offset part of the cutback in shipments that occur under an export quota, the overall inefficiency loss for the importing country is less than that which would have occurred in the absence of nonrestrained exports.

ANS:TPTS:1

19.Export quotas, placed on Japanese auto shipments to the United States in the 1980s, led to rising prices of both Japanese autos and U.S.-produced autos purchased by the U.S. consumer.

ANS:TPTS:1

20.Under the Multifiber Arrangement, the United States can export only limited quantities of textiles and apparel to Taiwan, Hong Kong, South Korea, and China.

ANS:FPTS:1

21.During the 1980s, U.S. steel-using companies (Caterpillar) actively supported the U.S. government's negotiation of voluntary export agreements with foreign steel-exporting countries.

ANS:FPTS:1

22.By limiting the amount of foreign sourcing, local content laws are viewed as a means of jobs preservation for domestic workers.

ANS:TPTS:1

23.Local content laws stipulate the maximum percentage of a product's total value that must be produced domestically for that product to be sold domestically.

ANS:FPTS:1

24.Local content laws are consistent with the principle of import substitution, in which domestic production replaces the importation of goods from abroad.

ANS:TPTS:1

25.To the extent that a local content requirement forces firms to locate production in a high-cost nation, product price rises and consumer surplus falls.

ANS:TPTS:1

26.A subsidy granted to import-competing producers results in a welfare loss to the economy by an amount equal to the protective effect plus the consumption effect.

ANS:FPTS:1

27.A subsidy granted to import-competing producers is intended to lead to increased domestic production and decreased imports for the home country.

ANS:TPTS:1

28.A subsidy granted to an import-competing producer shifts its supply schedule outward to the right.

ANS:TPTS:1

29.A subsidy granted to an import-competing producer imposes a deadweight loss on the domestic economy equal to the redistribution effect plus consumption effect.

ANS:FPTS:1

30.A subsidy granted to import-competing producers reduces overall domestic welfare by the same amount as would a tariff or quota that restricts imports by the same amount.

ANS:FPTS:1

31.To the extent that subsidies granted to exporting firms reduce the foreign price of their goods, the subsidizing country's terms of trade worsen.

ANS:TPTS:1

32.If the U.S. demand for Korean steel is price elastic, an export subsidy granted to Korean steel firms will increase Korea's export revenue.

ANS:TPTS:1

33.International dumping occurs when foreign buyers are charged higher prices than domestic buyers for an identical product, after allowing for transportation costs and tariff duties.

ANS:FPTS:1

34.Sporadic (distress) dumping would occur if domestic orange producers dispose of an excess quantity of oranges, resulting from an abnormally large harvest, by selling them at lower prices abroad than at home.

ANS:TPTS:1

35.Predatory dumping would occur if Toyota Inc. of Japan sells autos to U.S. consumers at lower prices than to Japanese consumers in order to put Chrysler Inc. out of business.

ANS:TPTS:1

36.A firm would increase profits from dumping if it charges a lower price at home, where demand is inelastic, and a higher price abroad where demand is elastic.

ANS:FPTS:1

37.The purpose of international dumping is to decrease a firm's costs and increase its profits, compared to what would be realized in the absence of dumping.

ANS:FPTS:1

38.A firm granting lifetime employment to its workers has the incentive to engage in international dumping during periods of business recession and excess production capacity.

ANS:TPTS:1

39.A firm suffering idle plant capacity would minimize losses by selling its product abroad at a lower price than at home, provided that the foreign price more than covers average variable cost.

ANS:TPTS:1

40.Under U.S. antidumping law, an antidumping duty can be levied when the U.S. Commerce Department determines that a foreign product is being sold in the United States at less than fair value and the U.S. International Trade Commission determines that the dumped product is causing economic harm to domestic producers.

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41.The margin of dumping equals the amount by which the foreign price is greater than the domestic price, or the amount by which the foreign price exceeds the cost of production.

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42.For most nations, the ratio of imports to total purchases in the public sector is much higher than in the private sector.

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43.According to the U.S. Buy American Act, federal government agencies cannot purchase materials and products from U.S. suppliers if their prices are higher than those of foreign competitors.

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44.For the United States, the Buy American Act has tended to increase consumer surplus for U.S. buyers of protected merchandise.

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45.An effective Buy American law would tend to increase U.S. producer surplus at the expense of U.S. consumer surplus.

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46.An effective Buy American law results in deadweight welfare losses for the United States in the form of the protective effect and consumption effect.

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47.Although the Tokyo Round of international trade negotiations reduced the Buy-American restrictions of the U.S. government, many state governments have maintained restrictive Buy-American policies.

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48.According to the cost-based definition of dumping, dumping begins to occur when a firm sells a product at a price that is less than average variable cost.

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49.If the Japanese demand for computers is elastic and the Canadian demand for computers is inelastic, a profit-maximizing firm would charge a higher price to Canadian buyers than to Japanese buyers.

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50.If the Australian government imposes a domestic content requirement of 75 percent on autos, at least 25 percent of an auto's value must be produced in a foreign country if that auto is to be sold in Australia.

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51.During the 1980s, the U.S. government imposed sugar import quotas in an attempt to reduce its costs of maintaining price supports for U.S. sugar growers.

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Figure 5.5 illustrates the television market for Mexico, assumed to be a small country that is unable to affect the world price. SMexico is the domestic supply schedule and DMexico is the domestic demand schedule. Suppose that Japan can supply televisions to Mexico at a price of $100 per set.

Figure 5.5. Mexico's Television Market

52.Consider Figure 5.5. With free trade, Mexicans produce 4 TVs, consume 24 TVs, and import 20 TVs.

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53.Consider Figure 5.5. With free trade, Mexican producer surplus equals $2450 and Mexican consumer surplus equals $200.

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54.Consider Figure 5.5. Suppose that the governments of Mexico and Japan negotiate a voluntary export agreement in which Japanese TV exports to Mexico are limited to 8 units. Under the quota, the price of TVs in Mexico equals $250 while Mexicans produce 10 TVs and purchase 18 TVs.

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55.Consider Figure 5.5. Compared to free trade, the Japanese export quota leads to an increase in Mexican consumer surplus of $3150.

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56.Consider Figure 5.5. Compared to free trade, the Japanese export quota leads to an increase in Mexican producer surplus of $1050.

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57.Consider Figure 5.5. The deadweight welfare loss to Mexico, as a result of the Japanese export quota, totals $1200.

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58.Consider Figure 5.5. The Japanese export quota's revenue effect totals $1200.

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59.Consider Figure 5.5. The government of Mexico collects 50 percent of the export quota's revenue effect, or $600, in the form of tax revenue.

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60.Consider Figure 5.5. Assuming that the revenue effect of the export quota accrues to Japanese firms, the overall welfare loss to Mexico equals $2100 as a result of the quota.

ANS:TPTS:1

SHORT ANSWER

1.Is a tariff-rate quota a two-tier tariff? Why?

ANS:

Yes. It allows a specified number of goods to be imported at one tariff rate, whereas any imports above this level face a higher tariff rate.

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2.What is an OMA?

ANS:

An OMA involves limitations on export sales administered by one or more exporting nations.

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ESSAY

1.Describe some of the differences between tariffs and quotas?

ANS:

Tariffs and quotas differ in their revenue effects and restrictive impacts on the volume of trade. While quotas are easier to administer and manage, they do not provide the government with revenue.

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2.What are the intent and impact of domestic content requirements?

ANS:

Domestic content requirements try to limit the practice of job outsourcing and also encourage the development of domestic industry. They stipulate the minimum percentage of a product's value that must be produced in the home country for that product to be sold there. Domestic content protection tends to impose welfare losses on the domestic economy in the form of higher production costs and higher-priced goods.

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