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TutorialChapter 10

International Trade

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1. International trade leads to greater economies of scale.

TrueThe market enlarges with international trade, so

up to a certain point productivity increases as we experience a greater division of labor.

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2. Opportunity cost is that which is given up in the best alternative endeavor when making a decision between two alternatives.

TrueEach time you make a decision you incur an

opportunity cost, each time there is something you have to give up. That which you give up in the best alternative choice is your opportunity cost of making the decision you did.

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3. Comparative advantage occurs when a country can produce goods and services at lower costs than other nations.

FalseComparative advantage occurs when a country can

produce something with lower opportunity costs than other nations. Lower costs would be an example of absolute advantage. To be successful countries make decisions based on comparative advantage, not absolute advantage.

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4. A quota is a tax levied against a specific good being imported into a country.

FalseA quota limits the quantity of a good that

can be imported into a country. A tariff is a tax placed on an import.

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5. The low foreign wages in the textile industry is one reason why Americans pay such low prices of clothing.

TrueThe low wages in foreign countries, like

Bangladesh, is the main reason American pay low prices for new clothes.

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6. Because the United States is so big and richly endowed with so many natural resources we can always win a tariff war against other countries.

FalseOn one wins a tariff war.

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7. American companies often petition Congress to impose tariffs against foreign competitors.

TrueThis is an example of rent seeking.

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8. Given a certain demand curve, if the supply is pushed to the right, as would be the case if the supply was restricted, the price will be higher

FalseA movement to the right of a supply curve

will push prices down, not up.

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9. The gains from trade are due primarily to the fact that

a. the wealth of large, industrialized nations can be spread throughout the world.b. total world output increases when each

country specializes.c. countries can boost their economies by

increasing exports.

B. By each county specializing each country becomes more efficient for several reasons; one reason is that non productive activity is eliminated. Total world output increases because of the resultant greater efficiency.

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10. The source of gains from tradea. are tariffs.b. is self-sufficiency.c. is autarky equilibrium.d. is comparative advantage.

D. Comparative advantage is the ability of a country to produce something at a lower opportunity cost than other producers face. Even if Americans could make hand made wicker baskets better than any other country, we should not manufacture them because our opportunity costs would be so high, for example, time spent with the baskets would be time not spent on high technology products.

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11. Mutually beneficial trade cannot occura. when each country has its own comparative

advantage.b. if one country has absolute advantages in the

production of every good.c. when the opportunity costs of producing each

good are equal for both trading partners.d. if total world production equals total world

consumption.

C. Countries trade because they have different opportunity costs in producing goods and services.

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12. To maximize worldwide gains from trade, the country which should produce a good is the country thata. has the lowest opportunity cost of

producing that good.b. can produce that good using the fewest

resources.c. will produce that good using the most

expensive resources.

A. Since specialization makes possible an increase in productivity, the question becomes, what should a country specialize in? The answer is - in has the lowest opportunity cost.

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13. Comparative advantagea. exists only when one producer can make the

product using fewer resources than any other producer.

b. leads to the most efficient allocation of resources and the greatest combined output.

c. eliminates specialization, so that each country produces all of its own needs independently.

B. When a country produces a good that it has low opportunity cost, it is taking advantage of its comparative advantage. By producing goods with low opportunity costs it is giving up less in terms of foregone production than producing alternative goods.

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14. When the world price of an internationally traded product is greater than a country’s domestic equilibrium price,a. the domestic price will prevail, and the world

price is irrelevant.b. the country’s import line is horizontal.c. the country’s exports of the product will increase.

C. Goods are most often bought based on relative price differences between alternatives. If a country’s price of a good is less expensive that the alternative goods offered in the world market, demand will increase along with exports of that good.

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15. Trade restrictions in the real worlda. are extremely rare, due to the economic

benefits of specialization and trade.b. hurt domestic producers and benefit

foreign consumers.c. hurt domestic producers and benefit

domestic consumers.d. hurt domestic consumers and benefit

domestic producers.

D. Domestic consumers are hurt because they are forced to pay higher prices than they would pay otherwise. Domestic producers benefit because of less foreign competition.

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16. A tariff isa. a tax on imports only.b. a tax on exports only.c. a tax on either imports or exports.d. a luxury tax.

C. When a country places a tax on an import or export, the tax is called a tariff. A tariff would be placed on an import to discourage the importation of a particular good; a tariff would be placed on an export to discourage the exportation of a product.

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17. An import quota is a a. legal limit on the quantity of a good that can be

imported per year.b. legal requirement that a specified percentage of a

final good’s value must be produced domestically.c. legal requirements that exports to a specific

country must exceed a specific value before the country’s product may be imported.

A. A second way to discourage the importation of a product is to limit the number of units that can be imported. With fewer units, the price will be higher than would be the case otherwise. This is called an import quota.

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18. The primary difference between an import tariff and an import quota is thata. tariffs cause prices to rise, but quotas do not.b. quotas cause prices to rise, but tariffs do not.c. tariff revenues go to government, but quotas

benefit those with the right to sell foreign goods domestically.

C. As a tax, tariffs bring in revenue for the government. A quota, on the other hand, benefits the sellers because they can now sell the imported product for more money.

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19. The World Trade Organization (WTO)a. became, in 1995, the institutionalized and more

comprehensive successor to the General Agreement on Tariffs and Trade (GATT).

b. was established in 1947 to reduce trade restrictions among 23 member countries.

c. was established in 1980 to oppose and counteract the policies of the General Agreement on Tariffs and Trade (GATT).

A. With a new round of agreements among participating nations, a name change was made.

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20. Trade restrictions are often a result of rent seeking. Rent seeking involves a. influencing public policy to redistribute income

in one’s favor. b. reducing costs and increase profit through

greater efficiency.c. raising price and increase profit by restricting

output.d. increasing market demand through advertising.

A. When a company, or an industry, sends lobbyists to Washington DC to influence politicians to vote for programs that will benefit them, this practice is an example of rent seeking.

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