International Trade

1.

Countries usually impose restrictions on free foreign trade to...

A.

Protect foreign producers
B.

Protect foreign consumers
C.

Protect domestic producers
D.

Protect domestic consumers

Correct Answer
C. Protect domestic producers

Explanation
Countries usually impose restrictions on free foreign trade to protect domestic producers. This is because unrestricted foreign trade can lead to an influx of cheaper imported goods, which can pose a threat to domestic industries. By imposing restrictions such as tariffs or quotas, countries can create a barrier to entry for foreign competitors and provide a level of protection for their domestic producers. This allows domestic industries to remain competitive and maintain their market share, ensuring the stability and growth of the domestic economy.

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2.

If a country allows trade and the domestic price of a good is higher than the world price,

A.

The country will become an exporter of the good
B.

The country will become an importer of the coogd
C.

The country will neither import nor export
D.

Additional information about demand is needed to determine whether the country will export or import the good

Correct Answer
B. The country will become an importer of the coogd

Explanation
If a country allows trade and the domestic price of a good is higher than the world price, the country will become an importer of the good. This is because the domestic price being higher indicates that the country's producers are unable to compete with the lower-priced imports from other countries. Therefore, the country will need to import the good in order to meet domestic demand at a more affordable price.

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3.

When a country allows for trade and becomes an exporter of the good, which of the following would NOT be true?

A.

The price paid by the domestic consumer of the good increases
B.

The price received by the domestic producers of the good increases
C.

The losses of domestic consumers exceed the gains of domestic producers
D.

The gains of domestic producers exceed the losses of domestic consumers

Correct Answer
C. The losses of domestic consumers exceed the gains of domestic producers

Explanation
When a country allows for trade and becomes an exporter of the good, the price paid by the domestic consumer of the good increases. This is because as the country becomes an exporter, the domestic supply decreases, leading to an increase in price for domestic consumers. At the same time, the price received by the domestic producers of the good increases. This is because they can now sell their goods at higher prices in the international market. However, the gains of domestic producers exceed the losses of domestic consumers. This is because the increase in price received by domestic producers is greater than the increase in price paid by domestic consumers, resulting in a net gain for the domestic producers.

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4.

If Brazil has a comparative advantage in producing rubber, and trade in rubber is allowed,

A.

Brazil will become an importer of rubber
B.

Brazil will become an exporter of rubber
C.

Brazil could become either an exporter or importer
D.

It is impossible to determine whether Brazil will become an importer or an exporter of rubber without additional information about rubber prices

Correct Answer
B. Brazil will become an exporter of rubber

Explanation
If Brazil has a comparative advantage in producing rubber, it means that Brazil can produce rubber at a lower opportunity cost compared to other countries. This implies that Brazil can produce rubber more efficiently and at a lower cost than other countries. As a result, Brazil will be able to sell its rubber at a competitive price in the international market, making it an exporter of rubber.

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5.

The US is importing down pillows. The world price of these pillows is $25. the US imposes a $10 tariff on pillows. The US is a price taker in the pillow market. As a result of the tariff...

A.

The US price of pillows will be $25 and the quantity of pillows purchased will decrease
B.

The US price of pillows will be $35 and the quantity of pillows purchased will decrease
C.

The US price of pillows will be $25 and the quantity of pillows purchased will increase
D.

The US price of pillows will be $35 and the quantity of pillows purchased will increase

Correct Answer
B. The US price of pillows will be $35 and the quantity of pillows purchased will decrease

Explanation
When the US imposes a $10 tariff on pillows, it increases the cost of importing pillows. As a result, the US price of pillows will be $35 (the world price of $25 plus the $10 tariff). The higher price will lead to a decrease in the quantity of pillows purchased, as consumers are less likely to buy pillows at a higher price. Therefore, the correct answer is "the US price of pillows will be $35 and the quantity of pillows purchased will decrease."

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6.

Which of the following theories suggests that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively?

A.

Absolute Advantage Theory
B.

Comparative Advantage Theory
C.

Heckscher-Ohlin Theory
D.

New Trade Theory

Correct Answer
C. Heckscher-Ohlin Theory

Explanation
The Heckscher-Ohlin Theory suggests that a country will export goods that use its abundant factors of production intensively and import goods that use its scarce factors intensively. This theory is based on the idea that the differences in factor endowments (such as labor, capital, and land) between countries determine their comparative advantage. For instance, a country with an abundance of capital will export capital-intensive goods, while a country with an abundance of labor will export labor-intensive goods.

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7.

A tariff and import quota will both

A.

Increase the quantity of imports and raise domestic price
B.

Increase the quantity of imports and lower the domestic price
C.

Reduce the quantity of imports and raise the domestic price
D.

Reduce the quantity of imports and lower the domestic price

Correct Answer
C. Reduce the quantity of imports and raise the domestic price

Explanation
A tariff is a tax imposed on imported goods, while an import quota is a restriction on the quantity of goods that can be imported. Both measures aim to protect domestic industries by reducing the quantity of imports. By increasing the cost of imported goods, a tariff discourages their purchase, leading to a decrease in imports. Similarly, an import quota limits the quantity of imports, thereby reducing their overall volume. As a result, both measures lead to a reduction in the quantity of imports. Additionally, by limiting competition from foreign goods, both a tariff and import quota can raise domestic prices as domestic producers have more control over the market.

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8.

Which of the following is an argument for restricting trade?

A.

Trade restrictions make Americans better off
B.

Trade restrictions increase economic efficiency
C.

Trade restrictions are necessary for economic growth
D.

Trade restrictions are necessary for economic growth

Correct Answer
D. Trade restrictions are necessary for economic growth

Explanation
The given answer suggests that trade restrictions are necessary for economic growth. This argument implies that by restricting trade, a country can protect its domestic industries and promote their growth. This can be achieved by reducing competition from foreign industries and allowing domestic industries to flourish. However, it is important to note that this argument is controversial, as many economists argue that free trade promotes economic growth by increasing market access, fostering competition, and encouraging specialization.

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9.

The infant industry argument...

A.

Is based on the belief that protecting industries when they are young will pay off later
B.

Is based on the belief that protecting industries producing goods and services for infants is necessary if country is have healthy children
C.

Has the support of most economists
D.

Has proven to be correct in nearly all cases

Correct Answer
A. Is based on the belief that protecting industries when they are young will pay off later

Explanation
The infant industry argument is based on the belief that protecting industries when they are young will pay off later. This means that by providing support and protection to new and emerging industries, such as through tariffs or subsidies, they can develop and become competitive in the global market. The argument suggests that this initial protection will enable these industries to grow, innovate, and eventually become self-sustaining and internationally competitive. The belief is that the long-term benefits, such as job creation, economic growth, and increased exports, outweigh the short-term costs of protection.

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