Chapter 16 International Trade and Globalization Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. David Ricardo demonstrated that (a) weak nations need trade protection from powerful nations. (b) weak and powerful nations need trade protection. (c) weak and powerful nations benefit from trade. (d) nations can produce more efficiently by being self-sufficient. 2. A day s labor in Estonia can produce 8 bushels of wheat or 16 pages of computer programming. A day s work in Romania produces 6 bushels of wheat or 2 pages of computer programming. Estonia s opportunity cost of producing 1 page of computer programming is (a) 16 bushels of wheat. (b) 8 bushels of wheat. (c) 2 bushels of wheat. (d) 1/2 of a bushel of wheat. (e) 1/3 of a bushel of wheat. 3. A day s labor in Estonia can produce 8 bushels of wheat or 16 pages of computer programming. A day s work in Romania produces 6 bushels of wheat or 2 pages of computer programming. Romania s opportunity cost of producing 1 page of computer programming is (a) 2 bushels of wheat. (b) 3 bushels of wheat. (c) 6 bushels of wheat. (d) 1/2 of a bushel of wheat. (e) 1/3 of a bushel of wheat.
204 Gregory Essentials of Economics, Sixth Edition 4. A day s labor in Estonia can produce 8 bushels of wheat or 16 pages of computer programming. A day s work in Romania produces 6 bushels of wheat or 2 pages of computer programming. In twocountry trade, which of the following terms of trade are impossible (a) 3 bushels to 1 page. (b) 2 bushels to 1 page. (c) 1 bushel to 1 page. (d) 1.5 bushels to 1 page. (e) 4 bushels to 1 page. 5. If tariff barriers are lowered, (a) the government will gain tariff revenue. (b) the average person will gain from increased trade. (c) all workers will gain from increased trade. (d) all businesses will gain from increased trade. 6. If a country levies a $1 tariff on imported shoes, (a) the workers in the domestic shoe industry lose. (b) the domestic shoe industry gains. (c) the workers in the foreign shoe industry gain. (d) the foreign shoe industry gains. 7. U.S. taxpayers pay about $1 billion per year in subsidies to U.S. sugar producers. All of the following are true except (a) 1 percent of sugar producers receive half of the subsidies. (b) 20 cents per pound is the government maintained minimum price. (c) import licenses are worth almost $75,000 to sell 500,000 pounds of sugar. (d) consumers pay some $2 billion in higher costs for sugar. (e) All of the above are correct. 8. From the Civil War until 1940, import duties in the United States were rarely below (a) 60%. (b) 80%. (c) 50%. (d) 30%.
Chapter 16 International Trade and Globalization 205 9. International trade between countries reflects (a) the law of absolute advantage. (b) the fact that goods and services are more easily moved from country to country than are the resources used to produce those goods. (c) the fact that the resources used to produce goods are more easily moved from country to country than are the goods and services they produce. (d) the fact that goods, services, and resources move with equal ease between countries. (e) the law of diminishing returns. 10. A day s labor in England can produce 8 units of clothing or 2 units of wine. A day s labor in Spain can produce 6 units of clothing or 3 units of wine. England s opportunity cost of producing 1 unit of wine is (a) 2 units of clothing. (b) 8 units of clothing. (c) 1/4 unit of clothing. (d) 4 units of clothing. (e) 1/2 unit of clothing. 11. A day s labor in England can produce 8 units of clothing or 2 units of wine. A day s labor in Spain can produce 6 units of clothing or 3 units of wine. Spain s opportunity cost of producing 1 unit of wine is (a) 3 units of clothing. (b) 6 units of clothing. (c) 1/4 unit of clothing. (d) 4 units of clothing. (e) 1/3 unit of clothing. 12. At the end of World War I, Austria and Hungary became two separate countries. Hungary had a comparative disadvantage in the production of paper but increased the size of its paper industry. Other things equal, this policy should have (a) increased competition in the paper industry. (b) substantially increased the cost of paper in Hungary. (c) promoted improvements in forestry and paper production suitable for Hungary. (d) allowed Hungary to capture a large portion of the European paper market. 13. Analysis of data on economic growth shows (a) the amount of trade and economic growth are unrelated to each other. (b) that, on average, countries where protectionism is greatest have the lowest growth rates. (c) economic growth and relative factor endowments are highly correlated to each other. (d) that countries in trading blocs have higher rates of growth than those countries that have few trading partners. (e) countries where protectionism is greatest have the highest growth rates.
206 Gregory Essentials of Economics, Sixth Edition 14. U.S. comparative advantages tend to be in new products and processes because (a) such goods give the United States more prestige in the world. (b) the United States has the best advertising in the world. (c) the United States has an abundant supply of engineers and scientists. (d) people turn to the United States for leadership. (e) the United States has an abundant supply of land. 15. A fundamental fact of international trade is that (a) exports should exceed imports. (b) resources are more mobile internationally than are goods. (c) goods are more mobile internationally than are resources. (d) different monetary units hinder trade between countries. (e) trade imbalances can persist for a long time. 16. The law of comparative advantage implies that (a) the most inefficient countries cannot export profitably. (b) every country can gain from exporting and importing. (c) the most efficient countries cannot import profitably. (d) protectionism is profitable. 17. The law of comparative advantage implies that a country will (a) tend to import those goods in which the country has a comparative advantage. (b) find that restrictions on imports are in its best interest. (c) find it difficult to conclude free trade agreements with other nations. (d) export goods produced by domestic industries with low wages relative to its trading partners. (e) tend to export those goods in which the country has a comparative advantage. 18. The main purpose of the European Community, when it was initially formalized, was to (a) allow member states to continue to heavily subsidize their agricultural sectors. (b) create a region of free trade among member states. (c) maintain the existing system of import and export tariffs in Europe. (d) increase economic protection from oil price shocks. (e) create a single currency for all of Europe.
Chapter 16 International Trade and Globalization 207 19. The Free-Trade Agreement between Canada, Mexico and the United States reduced tariffs on goods traded between all three countries. Hence, the agreement will (a) economically benefit all three countries. (b) only be beneficial if all three countries experience economies of scale in producing some goods. (c) create substantial economic gains for the United States but not Canada and Mexico. (d) have little effect on trade patterns between the three countries. (e) create substantial economic gains for Mexico but not the U.S. and Canada. 20. England is comparatively poor in terms of land but well-off with respect to labor and capital. Other factors equal, England (a) is likely to find it has a comparative advantage in the production of food. (b) will implement trade protection policies for capital-intensive manufactured goods. (c) is likely to import food and other agricultural products. (d) would be best served by finding trade partners with similar factor endowments. 21. A day s work in Korea produces 2 units of food or 4 units of clothing. A day s work in Japan produces 10 units of food or 5 units of clothing. Before trade takes place, the opportunity cost of (a) clothing is 0.5 unit of food in Korea. (b) food is 2 units of clothing in Korea. (c) clothing is 2 units of food in Japan. (d) food is 0.5 unit of clothing in Japan. 22. A day s work in Korea produces 2 units of food or 4 units of clothing. A day s work in Japan produces 10 units of food or 5 units of clothing. In two-country trade, which of the following terms of trade are impossible? (a) 3 units of clothing for 1 unit of food (b) 2 units of clothing for 1 unit of food (c) 1 unit of clothing for 1 unit of food (d) 1.5 units of clothing for 1 unit of food (e) 1.75 units of clothing for 1 unit of food 23. If the international terms of trade are strictly between each country s opportunity cost, (a) trade will be impossible. (b) only one country gains from trade. (c) both countries gain from trade. (d) one country will gain and the other will lose from trade. (e) The terms of trade are never between each country s opportunity cost.
208 Gregory Essentials of Economics, Sixth Edition 24. Trade among individuals and trade among countries are both governed by the principle of comparative advantage. This is true primarily because (a) barter among individuals and countries is a relatively cumbersome way to trade goods and services. (b) individuals and countries can improve their economic welfare by specialization. (c) individuals and countries tend to have roughly similar traits and factor endowments. (d) the principle of comparative advantage explains differences in each individual s or country s factor endowments. 25. Reports that high-wage countries like the United States cannot possibly compete with low-wage countries like Taiwan or Korea are nonsense because (a) the United States is both larger and richer. (b) people like to buy from high-wage countries. (c) the terms of trade favor countries that practice the least amount of trade restriction. (d) relative wages are a reflection of international differences in labor productivity. 26. Which of the following correctly completes this statement? Gains from trade are (a) achieved when a country can consume beyond its production-possibilities frontier. (b) unrelated to the terms of trade. (c) the same as decreasing costs of production. (d) increased by import restrictions for low-productivity industries. 27. The United States has a comparative advantage in products that intensively use (a) fertile farm land. (b) research and development. (c) highly skilled technical workers. (d) All of the above. 28. According to some trade experts, nontariff trade barriers, such as import quotas and voluntary export quotas, (a) are alike in their economic effects. (b) are now less important than tariffs in the United States. (c) are now more important than tariffs in the United States. (d) are employed primarily in protecting the textile industry. (e) are larger revenue generators for the government.
Chapter 16 International Trade and Globalization 209 29. The United States has a productivity advantage over foreign countries in many of its industries. In those industries in which the United States has a comparative advantage, high U.S. wages (a) must be offset by tariffs on competing foreign products. (b) must be neutralized with an agreement to implement voluntary export quotas by foreign governments. (c) are more than offset by the U.S. productivity advantage. (d) eventually will erode that advantage. (e) require lower tariffs by foreign countries on U.S. exports. 30. Which of the following is a nonprotectionist argument for a tariff? (a) The tariff-for-diversification argument. (b) The national-defense argument. (c) The foreign-will-pay argument. (d) The tariff-for-revenue argument. 31. If import licenses are auctioned off in a competitive market, their scarcity value (a) will usually be near zero. (b) accrues to foreign residents. (c) accrues to the domestic importers. (d) accrues to the domestic government. (e) accrues to domestic consumers. 32. If the United States imposes a tariff of $1 per imported shirt, the higher tariff will (a) raise the cost of living to consumers. (b) benefit domestic shirt producers. (c) eventually lower exports of all goods. (d) lower imports of all goods. 33. The reason tariffs and quotas are imposed is that (a) they create net benefits in the long run. (b) they reduce import dependence. (c) their costs are diffused and their benefits are concentrated. (d) their costs are concentrated and their benefits are diffused. (e) they improve the economic efficiency of international trade.
210 Gregory Essentials of Economics, Sixth Edition 34. The eventual effect of higher import tariffs on total domestic employment is (a) to lower the amount of domestic employment. (b) to raise the amount of domestic employment. (c) zero, because tariffs are unimportant in the modern world. (d) to raise employment in the import-competing industries at the expense of employment in other (export) industries. 35. When foreign products are dumped in the United States, (a) American consumers of the dumped goods are better off. (b) the American consumer is hurt in the short run and in the long run. (c) the United States becomes the dumping ground for the lowest-quality goods from all over the world. (d) no laws are being violated. (e) U.S. citizens pay more than citizens of the foreign country. 36. Tariffs do not keep money in the country because (a) foreigners want our goods and services, not our money. (b) tariffs reduce imports. (c) tariff revenue is wasted by government. (d) tariffs have no impact since people avoid them illegally. 37. A tariff or quota imposed on, say, foreign cars imported into the United States (a) benefits domestic car companies more than the loss of consumer surplus due to the higher price of cars. (b) benefits both domestic car companies and consumers because with greater output firms can sell U.S.-made cars at a cheaper price. (c) will not affect car imports because people need small foreign cars. (d) benefits domestic car companies less than the loss of consumer surplus due to the higher price of cars. (e) benefits foreign car companies who produce energy efficient cars. 38. Protection is economically inefficient because (a) in the long run it hurts the protected industries themselves. (b) total employment must fall. (c) the benefits go to the government, not consumers. (d) nobody benefits. (e) it means the importing country cannot export as many goods.
Chapter 16 International Trade and Globalization 211 39. One effect of higher import tariffs is to (a) hurt everybody. (b) raise imports. (c) lower exports in the long run. (d) increase unemployment in domestic, import-competing industries. (e) lower domestic employment in import-competing industries. 40. The political economy of tariffs and quotas is that (a) politics and economics do not mix. (b) the individual consumer costs are small, and the protected business firm benefits greatly. (c) politicians are sensitive to the wishes of the consumer rather than the producer. (d) individual consumer costs are large, and protected individuals hardly benefit. (e) politicians typically are experts in international trade law. 41. Foreign export subsidies on goods in which the United States has a comparative disadvantage (a) make Americans better off. (b) stimulate U.S. production of competing products. (c) are unfair to all Americans. (d) are not covered by U.S. statutes or laws. 42. A tariff imposed on imports of cars into the United States does NOT (a) raise profits of the U.S. automobile industry. (b) increase sales of imported cars in the United States. (c) raise the prices of cars in the United States. (d) cut car imports. (e) increase profits immediately for foreign car producers. 43. A tariff on imported textiles has the same effect as (a) a national sales tax on textiles. (b) a tax on domestic consumers of textiles and a production subsidy to domestic producers of textiles. (c) a production subsidy to domestic producers of textiles. (d) a tax on domestic producers of textiles.
212 Gregory Essentials of Economics, Sixth Edition 44. A prohibitive import tariff on a product (a) eliminates all tariff revenue. (b) imposes net costs on society. (c) eliminates all imports of the product. (d) increases domestic production of the product. 45. The most widely used protectionist argument is (a) that foreign competition is unfair. (b) that infant industries must be protected. (c) that money must be kept in the country. (d) that domestic jobs must be saved. (e) the terms-of-trade argument. 46. Which of the following correctly completes this statement? The fact that information is costly (a) makes tariffs an expensive way to raise revenue. (b) makes quotas efficient and tariffs inefficient. (c) is irrelevant to the benefits of protection. (d) makes it improbable that governments can pick out infant industries that will turn out to be winners in the long run. (e) makes it plausible that governments can successfully determine those industries that are essential to national defense. 47. An import tariff has the same effect (a) as an import quota plus production tax. (b) as an import quota plus production subsidy. (c) as a consumption tax plus a production subsidy. (d) as a consumption subsidy plus a production tax. (e) as an export quota plus a production subsidy. 48. Which of the following correctly completes this statement? Dumping by a foreign country (a) promotes domestic infant industries. (b) saves domestic jobs. (c) keeps money in the country. (d) means that we pay less here for imports than what it costs to produce these imports. (e) pays for our exports.