IB Economics International Trade 3.4: Trade Protection

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IB Economics: www.ibdeconomics.com 3.4 TRADE PROTECTION: STUDENT LEARNING ACTIVITY Answer the questions that follow. 1.

1 IB Economics: TRADE PROTECTION: STUDENT LEARNING ACTIVITY Answer the questions that follow. 1. DEFINITIONS Define the following terms: Budget deficit Budget surplus Ceteris paribus Consumer surplus Consumer welfare Cost-push inflation Costs of production Determinants of supply Excess demand Export subsidy External cost Income tax Merit good Merit goods Opportunity cost Perfectly elastic supply Private costs Producer surplus Protectionist subsidy Public goods Purchasing power Quantity demanded Quantity supplied Quasi-public goods Quota Tariff [10 marks] 2. SHORT-ANSWER QUESTIONS 1. Explain, using a diagram, why a tariff decreases the consumer surplus. [6 marks] 2. Explain, using a diagram, how a quota will affect the allocation of the world s resources. [6 marks] 3. Explain, using a diagram, how a subsidy will affect the quantity of imports into a domestic market. [6 marks] 4. Outline three effects of a tariff on each of the following stakeholder groups. [8 marks]

2 i. Domestic consumers ii. Domestic firms in the subsidised industry iii. Foreign firms competing in the domestic market iv. The government 5. Use the diagram below to answer the following questions regarding tariffs: [7 marks] i. Calculate the value of the consumer surplus prior to the tariff ii. Calculate the value of the change in the consumer surplus after the tariff is implemented iii. Calculate the value of foreign firms revenues prior to the tariff iv. Calculate the change in value of domestic firms revenues v. Calculate the value of the deadweight loss associated with the tariff vi. Calculate the value of the tariff revenue collected by the government vii. Calculate the producer surplus of domestic firms after the tariff is imposed 6. Explain how health and safety standards can act as a non-tariff barrier to international trade. 7. State five administrative barriers to trade. [2 marks]

8. Use the diagram below to answer the following questions regarding quotas: [8 marks] i. Calculate the value of the consumer surplus after the quota ii.

3 8. Use the diagram below to answer the following questions regarding quotas: [8 marks] i. Calculate the value of the consumer surplus after the quota ii. Calculate the value of the change in the consumer surplus after the quota is implemented iii. Calculate the value of domestic consumer spending prior to the tariff iv. Calculate the value of the change in domestic spending after the quota is implemented v. Calculate the change in value of domestic firms revenues vi. Calculate the change in value of foreign firms revenues vii. Calculate the value of the deadweight loss associated with the quota viii. Calculate the producer surplus of domestic firms before the quota is imposed

9. Use the diagram below to answer the following questions regarding a protectionist subsidy: [9 marks] i. Calculate the value of the consumer surplus after the subsidy ii.

4 9. Use the diagram below to answer the following questions regarding a protectionist subsidy: [9 marks] i. Calculate the value of the consumer surplus after the subsidy ii. Calculate the value of the change in the consumer surplus after the subsidy is implemented iii. Calculate the value of domestic consumer spending iv. Calculate the value of the change in domestic spending after the quota is implemented v. Calculate the change in value of domestic firms revenues vi. Calculate the change in value of foreign firms revenues vii. Calculate the value of the deadweight loss associated with the subsidy viii. Calculate the cost of the subsidy to the government and taxpayers ix. Calculate the producer surplus of domestic firms before the subsidy is granted 10. Evaluate the effects of tariffs, taking into account various stakeholders, the domestic economy, the economies of exporters and the global economy. [8 marks] 11. Distinguish between the effects of a tariff and a quota, and explain why foreign firms may prefer quotas to tariffs under certain circumstances. [6 marks]

5 3. MULTICHOICE QUESTIONS Choose the best answer to each question. [50 marks] 1. Protection is a government action designed to: a. Prevent consumers exploiting MNCs b. Assist domestic industries with some artificial support c. Increase welfare payments to import industries d. Prevent foreign firms competing in domestic markets 2. Increased protection for domestic industry mainly aims to: a. Increase prices to domestic consumers b. Promote domestic employment and output c. Reciprocate barriers imposed in other foreign markets d. Boost domestic exports for world markets 3. Which is not a valid argument in opposition of tariff barriers? a. Decreases the price to domestic consumers b. Domestic consumers have less choice c. Results in retaliatory trade protection from other countries d. Inhibits global economic growth and incomes 4. In the long-term, the effects of tariffs will be to: a. Increase profits of domestic producers b. Eliminate foreign competition from domestic markets c. Reduce prices to domestic consumers d. Breed inefficiency in domestic industries 5. The effect of higher tariffs on imported goods effectively subsidises: a. Domestic consumers b. Domestic producers c. Overseas producers d. Overseas consumers 6. A policy of tariff reduction as part of a microeconomic reform process aims to: a. Increase the level of competition domestically b. Enforce the benefits of specialisation and trade domestically c. Reduce prices to consumers d. All three aims stated here 7. Price per unit = $50 pre-tariff and $60 post-tariff. Cost of imported raw materials = $30: a. 25% is the nominal rate of protection b. 20% is the nominal rate of protection

c. 40% is the nominal rate of protection d. 30% is the nominal rate of protection 8. Price per unit = $50 pre-tariff and $60 post-tariff. Cost of imported raw materials = $30: a.

6 c. 40% is the nominal rate of protection d. 30% is the nominal rate of protection 8. Price per unit = $50 pre-tariff and $60 post-tariff. Cost of imported raw materials = $30: a. 50% is the effective rate of protection b. 25% is the effective rate of protection c. 40% is the effective rate of protection d. 20% is the effective rate of protection 9. The best definition of a subsidy is a(n): a. A payment to firms to decrease their costs of production b. An increase in the price of domestically produced goods c. Used to benefit sunset industries d. Paid on merit goods 10. The deadweight loss associated with an increase in tariff protection measures is: a. The less of welfare from reduced consumption b. Higher post-tariff prices paid by consumers c. The cost of employers from increased domestic production d. The tariff revenue accruing to government 11. The effect of widespread tariff protection is to: a. Increase specialisation and world trade b. Increase levels of efficiency c. Lower levels of world production d. Increase real wages Figure 1

7 12. In figure 1, domestic production after the tariff increases from: a. Pw to Pw+t b. Sworld to Sworld + tariff c. Q3 to Q4 d. Q1 to Q3 13. In figure 1, consumption before the tariff is: a. Q1 b. Q2 c. Q3 d. Qe 14. In figure 1, consumption after the tariff is: a. Q1 b. Q2 c. Q4 d. Qe 15. The best definition of a quota is a(n): a. Qualitative limit on imports b. Quantitative limit on imports c. Tax on imports d. Additional revenues gained by government by taxing imports 16. In figure 1, consumption after the tariff increase/decrease from: a. Qe to Q4 b. Qe to Q3 c. Qe to Q2 d. Q2 to Q4 17. In figure 1, the deadweight loss associated with the tariff is represented by areas: a. c + f b. c c. f d. d + e 18. In figure 1, the government revenue associated with the tariff is represented by areas: a. b + c b. c + d + e + f c. d + e + i + j d. d + e

8 19. In figure 1, the increase in the revenues of domestic firms is represented by the area(s): a. b + c + h b. a + b + c + h c. a + b + c d. h 20. In figure 1, the revenues of foreign firms after the tariff is represented by the area(s): a. i + j + k b. d + e + i + j c. i + j d. h 21. After a tariff is imposed, consumer surplus and domestic firms producer surplus : a. Increases, increases b. Increases, decreases c. Decreases, increases d. Is unchanged, increases 22. Methods for trade protection may include (i) subsidies, (ii) tariffs, (iii) import licenses: a. (i) only b. (i) and (ii) only c. (ii) and (iii) only d. (i), (ii) and (iii) 23. Tariffs: a. Increase tax revenues for government b. Increase domestic competition c. Decrease prices in the domestic market d. Promote free trade 24. Which of the following does not involve protectionism? a. Intervention by government in international trade b. Implementing non-tariff barriers c. Programmes of structural adjustment d. Protecting domestic firms and industries 25. Which group loses when a tariff is imposed? a. Domestic firms b. Foreign consumers c. Foreign firms d. Government

9 26. Which is not a valid argument in opposition of tariff barriers? a. Decreases the price to domestic consumers b. Domestic consumers have less choice c. Results in retaliatory trade protection from other countries d. Inhibits global economic growth and incomes 27. Which group is most negatively affected when a subsidy is imposed? a. Domestic firms b. Foreign consumers c. Foreign firms d. Government 28. Which of the following is a long-run cost of protectionism? a. The price of imports falls b. Inflation increases as the price of imports rise c. Increased domestic prices d. A balance of payments deficit 29. Subsides for selected domestic firms and industries increases the resources used by these firms and: a. Increases the cost of inputs for non-subsidised firms b. Decreases employment in subsidised firms c. Increases costs of inputs for subsidised firms d. The government ensures the more efficient use of resources 30. Which of the following is not an effect of tariffs on domestic consumers? a. Tariff tax paid by consumers b. Increased price c. Increased consumer welfare d. Quantity demanded falls 31. Which of the following is not an effect of tariffs on domestic producers in the industry? a. Increased price b. Profitability increases c. More efficient use of resources d. Quantity supplied increases 32. Which of the following is not an effect of tariffs on foreign producers in the industry? a. Profitability decreases b. Profitability increases c. Pre-tariff price received d. Quantity supplied decreases

33. Which of the following is not an effect of tariffs on the government? a. Gains tariff revenues b. Increased tax revenues from the extra employment c. Protects domestic firms in industry d.

10 33. Which of the following is not an effect of tariffs on the government? a. Gains tariff revenues b. Increased tax revenues from the extra employment c. Protects domestic firms in industry d. Decreased social welfare as purchasing power decreases 34. In figure 2, domestic production after the quota increases from: a. Pw to Pquota b. Sworld to Sdomestic + quota c. Q1 to Q3 d. Q1 to Q1 + Q3 + (Q4 - Q3) 35. In figure 2, consumption before the quota is: a. Q1 b. Q2 c. Q3 d. Qe 36. In figure 1, consumption after the quota is: a. Q1 b. Q2 c. Q4 d. Qe

11 37. In figure 2, consumption after the quota increases/decreases from: a. Qe to Q4 b. Qe to Q3 c. Qe to Q2 d. Q2 to Q4 38. In figure 2, the deadweight loss associated with the quota is represented by areas: a. j + k b. i + j c. j d. k 39. In figure 2, the government revenue associated with the tariff is represented by areas: a. i + j b. c + d c. c + d + i + j d. A tariff produces no government revenue 40. In figure 2, the increase in the revenues of domestic firms is represented by the area(s): a. b + c + h b. f + c + d + i + j c. f d. i + j 41. In figure 1, the revenues of foreign firms after the tariff is represented by the area(s): a. b + g b. d + e + i + j c. b + g + h d. c + d+ i + j

12 42. In figure 3, domestic production after the subsidy increases from: a. Pw to Pquota b. Sworld to Sdomestic + subsidy c. Q1 to Q3 d. Q1 to Q3 + (Q2 - Q3) 43. In figure 3, consumption before the subsidy is: a. Q1 b. Q2 c. Q3 d. Qe 44. In figure 3, consumption after the subsidy is: a. Q1 b. Q2 c. Q4 d. Qe 45. In figure 3, consumption after the subsidy increases/decreases from: a. Qe to Q1 b. Qe to Q2 c. Qe to Q3 d. A subsidy does not increase consumption

13 46. In figure 3, the deadweight loss associated with the subsidy is represented by areas: a. e + f b. f + g c. g d. f 47. In figure 3, the cost to the government associated with the subsidy is represented by areas: a. e b. f + g + b c. f + g d. e + f + g 48. In figure 3, the increase in the revenues of domestic firms is represented by the area(s): a. e + f + g b. b + e + f + g c. b + f + g d. e 49. In figure 3, the revenues of foreign firms after the tariff is represented by the area(s): a. c b. d c. c + d d. f + g 50. An export subsidy will increase supply to a point where the domestic market equilibrium is: a. Above world price b. Below world price c. Unchanged for domestic producers d. Unchanged for foreign producers 4. TRUE OR FALSE QUESTIONS Indicate whether the following statements are true or false. 1. The most common barrier to free trade are tariffs. 2. Tariffs effectively reduce imports, support domestic industries and increase consumer welfare.

14 3. Free trade is generally more beneficial than protectionism. 4. Protectionism will usually lead to long-term economic gains from profitable domestic industries. 5. Subsidies increase the price to consumers, reduce quantity demanded and increase the consumer surplus. 6. Protectionist subsidies will increase consumer welfare and increase the consumer surplus. 7. Careful application of a targeted subsidy or tariff will be neutral in terms of welfare. 8. Protectionism will lead to the long-term misallocation of resources and inefficiencies. 9. Protectionism, in the long-term, will lead to rising costs of production in unsupported industries. 10. A tariff will increase the producer surplus, reduce the consumer surplus and lead to a loss of welfare. Source:

IB Economics The Level of Overall Economic Activity 2.1: Economic Activity

IB Economics The Level of Overall Economic Activity 2.1: Economic Activity IB Economics: www.ibdeconomics.com 2.1 ECONOMIC ACTIVITY: STUDENT LEARNING ACTIVITY Answer the questions that follow. 1. DEFINITIONS Define the following terms: Income Factors of production Land entrepreneurship).