Chapter 9Application: International TradeTRUE/FALSE1. Trade decisions are based on the principle of absolute advantage.ANS: F DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Absolute advantage MSC: Interpretive2. The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive fromparticipating in a market.ANS: T DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Total surplus MSC: Interpretive3. According to the principle of comparative advantage, all countries can benefit from trading with one anotherbecause trade allows each country to specialize in doing what it does best.ANS: T DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Comparative advantage MSC: Interpretive4. The world price of cotton is the highest price of cotton observed anywhere in the world.ANS: F DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization, and tradeTOP: Prices MSC: Definitional5. If the world price of a good is greater than the domestic price in a country that can engage in internationaltrade, then that country becomes an importer of that good.ANS: F DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: International trade | Prices MSC: Interpretive6. Without free trade, the domestic price of a good must be equal to the world price of a good.ANS: F DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Prices MSC: Interpretive7. The nation of Aviana soon will abandon its no-trade policy and adopt a free-trade policy. If the world priceof goose meat is $3 per pound and the domestic price of goose meat without trade is $2 per pound, then Aviana should export goose meat.ANS: T DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Prices | Comparative advantage | Exports MSC: Interpretive8. If Argentina exports oranges to the rest of the world, Argentina's producers of oranges are worse off, andArgentina's consumers of oranges are better off, as a result of trade.ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade | Economic welfare MSC: Applicative9. If a country’s domesti c price of a good is lower than the world price, then that country has a comparativeadvantage in producing that good.ANS: T DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Comparative advantage | Prices MSC: Interpretive594Chapter 9 /Application: International Trade 595 10. When a country allows international trade and becomes an importer of a good, domestic producers of the goodare better off, and domestic consumers of the good are worse off.ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization, and tradeTOP: Gains from trade MSC: Interpretive11. If the United Kingdom imports tea cups from other countries, then U.K. producers of tea cups are better off,and U.K. consumers of tea cups are worse off, as a result of trade.ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade | Economic welfare MSC: Applicative12. If Belgium exports chocolate to the rest of the world, then Belgian chocolate producers benefit from higherproducer surplus, Belgian chocolate consumers are worse off because of lower consumer surplus, and total surplus in Belgium increases because of the exports of chocolate.ANS: T DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade | Economic welfare MSC: Applicative13. In principle, trade can make a nation better off, because the gains to the winners exceed the losses to thelosers.ANS: T DIF: 1 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade | Economic welfare MSC: Interpretive14. Suppose the Ivory Coast, a small country, imports wheat at the world price of $4 per bushel. If the Ivory Coastimposes a tariff of $1 per bushel on imported wheat, then, other things equal, the price of wheat in Ivory Coast will increase, but by less than $1.ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Prices MSC: Interpretive15. The small-economy assumption is necessary to analyze the gains and losses from international trade.ANS: F DIF: 1 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: International trade | Assumptions MSC: Interpretive16. The greater the elasticities of supply and demand, the smaller are the gains from trade.ANS: F DIF: 3 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Gains from trade | Price elasticities of demand and supplyMSC: Applicative17. If a tariff is placed on watches, the price of both domestic and imported watches will rise by the amount of thetariff.ANS: T DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Prices MSC: Interpretive18. When a government imposes a tariff on a product, the domestic price will equal the world price.ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Prices MSC: Interpretive19. A tariff increases the quantity of imports and moves the market farther from its equilibrium without trade. ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Imports MSC: Applicative596 Chapter 9 /Application: International Trade20. 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.ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization, and tradeTOP: Imports | Prices MSC: Interpretive21. When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worseoff.ANS: T DIF: 1 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization, and tradeTOP: Tariffs MSC: Interpretive22. When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse offand sellers of shoes in that country become better off.ANS: T DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization, and tradeTOP: Tariffs MSC: Interpretive23. Deadweight loss measures the decrease in total surplus that results from a tariff or quota.ANS: T DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Deadweight losses MSC: Interpretive24. If a small country imposes a tariff on an imported good, domestic sellers will gain producer surplus, thegovernment will gain tariff revenue, and domestic consumers will gain consumer surplus.ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Economic welfare MSC: Applicative25. Domestic consumers gain and domestic producers lose when the government imposes a tariff on imports. ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs MSC: Interpretive26. The imposition of a tariff on imported wine will increase the domestic price of wine, decrease the quantity ofwine imported, and increase the quantity of wine produced domestically.ANS: T DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Prices | Imports | Tariffs MSC: Interpretive27. 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, thedeadweight loss of the tariff is $300 million.ANS: F DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Deadweight losses MSC: Applicative28. Suppose Ecuador imposes a tariff on imported bananas. If the increase in producer surplus is $50 million, thereduction 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.ANS: T DIF: 3 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Deadweight losses MSC: Applicative29. Tariffs cause deadweight loss because they move the price of an imported product closer to the equilibriumwithout trade, thus reducing the gains from trade.ANS: T DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Deadweight losses MSC: InterpretiveChapter 9 /Application: International Trade 597 30. Import quotas and tariffs both cause the quantity of imports to fall.ANS: T DIF: 1 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Import quotas MSC: Interpretive31. Import quotas and tariffs make domestic sellers better off and domestic buyers worse off.ANS: T DIF: 2 REF: 9-2NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs | Import quotas | Economic welfare MSC: Interpretive32. Economists agree that trade ought to be restricted if free trade means that domestic jobs might be lost becauseof foreign competition.ANS: F DIF: 2 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade policy | Employment MSC: Interpretive33. Free trade causes job losses in industries in which a country does not have a comparative advantage, but it alsocauses job gains in industries in which the country has a comparative advantage.ANS: T DIF: 2 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Comparative advantage | Employment MSC: Interpretive34. Most economists support the infant-industry argument because it is so easy to implement in practice.ANS: F DIF: 1 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade policy MSC: Interpretive35. If Honduras were to subsidize the production of wool blankets and sell them in Sweden at artificially lowprices, the Swedish economy would be worse off.ANS: F DIF: 2 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade policy | Economic welfare MSC: Interpretive36. Policymakers often consider trade restrictions in order to protect domestic producers from foreign competitors. ANS: T DIF: 1 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade policy MSC: Interpretive37. GATT is an example of a successful unilateral approach to achieving free trade.ANS: F DIF: 2 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: GATT MSC: Interpretive38. NAFTA is an example of a multilateral approach to achieving free trade.ANS: T DIF: 2 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: NAFTA MSC: Interpretive39. The rules established under the General Agreement on Tariffs and Trade (GATT) are enforced by aninternational body called the World Trade Organization (WTO).ANS: T DIF: 1 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization, and tradeTOP: GATT | WTO MSC: Definitional40. A multilateral approach to free trade has greater potential to increase the gains from trade than a unilateralapproach, because the multilateral approach can reduce trade restrictions abroad as well as at home.ANS: T DIF: 2 REF: 9-3NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade policy MSC: Interpretive598 Chapter 9 /Application: International Trade41. The results of a 2007 Los Angeles Times poll suggest that a significant majority of Americans believe that freeinternational trade helps the American economy.ANS: F DIF: 2 REF: 9-4NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade policy MSC: Interpretive42. The results of a 2007 Los Angeles Times poll suggest that the percentage of Americans who believe trade isharmful to the economy exceeds the percentage of Americans who believe trade is beneficial to the economy. ANS: T DIF: 2 REF: 9-4NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade policy MSC: Interpretive43. Most economists view the United States as an ongoing experiment that raises serious doubts about the virtuesof free trade.ANS: F DIF: 1 REF: 9-4NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Trade policy MSC: InterpretiveChapter 9 /Application: International Trade 599 SHORT ANSWER1. Use the graph to answer the following questions about CDs.a.What is the equilibrium price of CDs before trade?b.What is the equilibrium quantity of CDs before trade?c.What is the price of CDs after trade is allowed?d.What is the quantity of CDs exported after trade is allowed?e.What is the amount of consumer surplus before trade?f.What is the amount of consumer surplus after trade?g.What is the amount of producer surplus before trade?h.What is the amount of producer surplus after trade?i.What is the amount of total surplus before trade?j.What is the amount of total surplus after trade?k.What is the change in total surplus because of trade?ANS:a.$12b.50c.$15d.30e.$250f.$122.50g.$250h.$422.50i.$500j.$545k.$45DIF: 2 REF: 9-2 NAT: AnalyticLOC: Gains from trade, specialization and trade TOP: Exports | Economic welfare MSC: Applicative600 Chapter 9 /Application: International Trade2. Using the graph below, answer the following questions about hammers.a.What is the equilibrium price of hammers before trade?b.What is the equilibrium quantity of hammers before trade?c.What is the price of hammers after trade is allowed?d.What is the quantity of hammers imported after trade is allowed?e.What is the amount of consumer surplus before trade?f.What is the amount of consumer surplus after trade?g.What is the amount of producer surplus before trade?h.What is the amount of producer surplus after trade?i.What is the amount of total surplus before trade?j.What is the amount of total surplus after trade?k.What is the change in total surplus because of trade?ANS:a.$14b.90c.$10d.85e.$360f.$810g.$405h.$125i.$765j.$935k.$170DIF: 2 REF: 9-2 NAT: AnalyticLOC: Gains from trade, specialization and trade TOP: Imports | Economic welfare MSC: ApplicativeChapter 9 /Application: International Trade 601 3. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questionsgiven this information.a.What is the domestic price and quantity demanded of hammers after the tariff is imposed?b.What is the quantity of hammers imported before the tariff?c.What is the quantity of hammers imported after the tariff?d.What would be the amount of consumer surplus before the tariff?e.What would be the amount of consumer surplus after the tariff?f.What would be the amount of producer surplus before the tariff?g.What would be the amount of producer surplus after the tariff?h.What would be the amount of government revenue because of the tariff?i.What would be the total amount of deadweight loss due to the tariff?ANS:a.$6, 84b.66c.44d.$384e.$294f.$45g.$80h.$44i.$11DIF: 2 REF: 9-2 NAT: AnalyticLOC: Gains from trade, specialization and trade TOP: Tariffs | Economic welfare MSC: Applicative4. How does an import quota differ from an equivalent tariff?ANS:Both the import quota and the tariff raise the domestic price of the good, reduce the welfare of domestic consumers, increase the welfare of domestic producers, and cause deadweight losses. The only difference for the economy is that the tariff raises revenue for the government, while the import quota creates surplus for license holders.DIF: 2 REF: 9-2 NAT: AnalyticLOC: Gains from trade, specialization and trade TOP: Tariffs | Import quotasMSC: Interpretive602 Chapter 9 /Application: International Trade5. Characterize the two different approaches a nation can take to achieve free trade. Does one approach have anadvantage over the other?ANS:A unilateral approach is when a country removes its trade restrictions on its own. A multilateral approach is when a country removes its trade restrictions while other countries do the same. A multilateral approach has two advantages. The first is that it has the potential to result in freer trade because it can reduce trade restrictions abroad as well as at home. If international negotiations fail, however, the result could be more restricted trade than under a unilateral approach. Also, the multilateral approach may have a political advantage and can sometimes win political support when a unilateral reduction cannot.DIF: 2 REF: 9-3 NAT: AnalyticLOC: Gains from trade, specialization and trade TOP: Trade policyMSC: Interpretive6. What are the arguments in favor of trade restrictions, and what are the counterarguments? According to mosteconomists, do any of these arguments really justify trade restrictions? Explain.ANS:Arguments mentioned in the text include the jobs argument, the national security argument, the infant industry argument, the unfair competition argument, and the protection-as-a-bargaining-chip argument. These arguments and counter-arguments are outlined in section 9-3 of the text. Most economists would dismiss the jobs argument, the infant industry argument, and the unfair competition argument on strictly economic grounds. The bargaining-chip argument carries high risks of economic harm if the threat doesn't work. The national-security argument balances economic loss from trade restriction against the benefit of long-term national survival, and is probably the argument that economists would most likely buy if it were clear that the industry being protected was clearly crucial to national security.DIF: 2 REF: 9-3 NAT: AnalyticLOC: Gains from trade, specialization and trade TOP: Trade policyMSC: InterpretiveSec00 - Application: International TradeMULTIPLE CHOICE1. An important factor in the decline of the U.S. textile industry over the past 100 or so years isa.foreign competitors that can produce quality textile goods at low cost.b.lower prices of goods that are substitutes for clothing.c. a decrease in Americans’ demand for clothing, due to increased incomes and the fact that clothingis an inferior good.d.the fact that the minimum wage in the U.S. has failed to keep pace with the cost of living.ANS: A DIF: 1 REF: 9-0NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: International trade MSC: Interpretive2. With which of the Ten Principles of Economics is the study of international trade most closely connected?a.People face tradeoffs.b.Trade can make everyone better off.ernments can sometimes improve market outcomes.d.Prices rise when the government prints too much money.ANS: B DIF: 1 REF: 9-0NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: International trade MSC: Interpretive3. Which of the following tools and concepts is useful in the analysis of international trade?a.total surplusb.domestic supplyc.equilibrium priced.All of the above are correct.ANS: D DIF: 1 REF: 9-0NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: International trade MSC: InterpretiveChapter 9 /Application: International Trade 6034. A logical starting point from which the study of international trade begins isa.the recognition that not all markets are competitive.b.the recognition that government intervention in markets sometimes enhances the economic welfareof the society.c.the principle of absolute advantage.d.the principle of comparative advantage.ANS: D DIF: 1 REF: 9-0NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: International trade | Comparative advantage MSC: InterpretiveSec01 - Application: International Trade - The Determinants of TradeMULTIPLE CHOICE1. What is the fundamental basis for trade among nations?a.shortages or surpluses in nations that do not tradeb.misguided economic policiesc.absolute advantageparative advantageANS: D DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: International trade | Comparative advantage MSC: Interpretive2. Patterns of trade among nations are primarily determined bya.cultural considerations.b.political considerations.parative advantage.d.differences in the income elasticity of demand among nations.ANS: C DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: International trade | Comparative advantage MSC: Interpretive3. The nation of Pineland forbids international trade. In Pineland, you can buy 1 pound of fish for 2 pounds ofbeef. In other countries, you can buy 1 pound of fish for 1.5 pounds of beef. These facts indicate thata.Pineland has a comparative advantage, relative to other countries, in producing fish.b.other countries have a comparative advantage, relative to Pineland, in producing beef.c.the price of beef in Pineland exceeds the world price of beef.d.if Pineland were to allow trade, it would import fish.ANS: D DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Comparative advantage | World price MSC: Applicative4. The nation of Waterland forbids international trade. In Waterland, you can obtain a computer by trading 2bicycles. In other countries, you can obtain a computer by trading 3 bicycles. These facts indicate thata.if Waterland were to allow trade, it would export computers.b.Waterland has an absolute advantage, relative to other countries, in producing computers.c.Waterland has a comparative advantage, relative to other countries, in producing bicycles.d.All of the above are correct.ANS: A DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Comparative advantage MSC: Applicative5. The principle of comparative advantage asserts thata.not all countries can benefit from trade with other countries.b.the world price of a good will prevail in all countries, regardless of whether those countries allowinternational trade in that good.c.countries can become better off by exporting goods, but they cannot become better off by importinggoods.d.countries can become better off by specializing in what they do best.ANS: D DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Comparative advantage MSC: Interpretive6. A tax on an imported good is called aa.quota.b.tariff.c.supply tax.d.trade tax.ANS: B DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs MSC: Definitional7. A tariff is aa.limit on how much of a good can be exported.b.limit on how much of a good can be imported.c.tax on an exported good.d.tax on an imported good.ANS: D DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Tariffs MSC: Definitional8. The price of a good that prevails in a world market is called thea.absolute price.b.relative price.parative price.d.world price.ANS: D DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Price | International trade MSC: Definitional9. The price of sugar that prevails in international markets is called thea.export price of sugar.b.import price of sugar.parative-advantage price of sugar.d.world price of sugar.ANS: D DIF: 1 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Price | International trade MSC: Definitional10. If a country allows trade and, for a certain good, the domestic price without trade is higher than the worldprice,a.the country will be an exporter of the good.b.the country will be an importer of the good.c.the country will be neither an exporter nor an importer of the good.d.Additional information is needed about demand to determine whether the country will be anexporter of the good, an importer of the good, or neither.ANS: B DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Prices | Imports MSC: Interpretive11. If a country allows trade and, for a certain good, the domestic price without trade is lower than the world price,a.the country will be an exporter of the good.b.the country will be an importer of the good.c.the country will be neither an exporter nor an importer of the good.d.Additional information is needed about demand to determine whether the country will be anexporter of the good, an importer of the good, or neither.ANS: A DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Prices | Exports MSC: Interpretive12. For any country, if the world price of zinc is higher than the domestic price of zinc without trade, that countryshoulda.export zinc, since that country has a comparative advantage in zinc.b.import zinc, since that country has a comparative advantage in zinc.c.neither export nor import zinc, since that country cannot gain from trade.d.neither export nor import zinc, since that country already produces zinc at a low cost compared toother countries.ANS: A DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Exports | Comparative advantage MSC: Applicative13. If the world price of textiles is higher than Vietnam’s domestic price of textiles without trade, then Vietnama.should import textiles.b.has a comparative advantage in textiles.c.should produce just enough textiles to meet its domestic demand.d.should refrain altogether from producing textiles.ANS: B DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Prices | Comparative advantage MSC: Interpretive14. Assume, for Singapore, that the domestic price of soybeans without international trade is higher than the worldprice of soybeans. This suggests that, in the production of soybeans,a.Singapore has a comparative advantage over other countries and Singapore will import soybeans.b.Singapore has a comparative advantage over other countries and Singapore will export soybeans.c.other countries have a comparative advantage over Singapore and Singapore will import soybeans.d.other countries have a comparative advantage over Singapore and Singapore will export soybeans. ANS: C DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Prices | Comparative advantage MSC: Applicative15. Assume, for the U.S., that the domestic price of beef without international trade is lower than the world priceof beef. This suggests that, in the production of beef,a.the U.S. has a comparative advantage over other countries and the U.S. will export beef.b.the U.S. has a comparative advantage over other countries and the U.S. will import beef.c.other countries have a comparative advantage over the U.S. and the U.S. will export beef.d.other countries have a comparative advantage over the U.S. and the U.S. will import beef.ANS: A DIF: 2 REF: 9-1NAT: Analytic LOC: Gains from trade, specialization and tradeTOP: Prices | Comparative advantage MSC: Applicative。