Chapter 18—International Trade

MULTIPLE CHOICE

1. International trade increases world economic efficiency for the same reasons that domestic trade
increases national economic efficiency.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: The Gains from Trade

2. International trade equalizes the opportunity cost of producing any good around the world.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: The Gains from Trade

3. Which of the following best expresses the benefit from international trade?
a. With trade, each country can concentrate on producing those goods and services that it
produces most efficiently.
b. With trade, a country can increase its political involvement on a global scale.
c. Increased U.S. trade would improve high-tech exports but not agricultural exports.
d. Increased trade would increase U.S. exports and decrease U.S. imports.
e. Increased trade implies that exports of goods and services will always equal imports of
goods and services.
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade

4. Exports amount to about 11 percent of U.S. GDP.

a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

5. The United States exports more raw materials than finished products.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

6. For which of the following nations does international trade account for the largest percentage of GDP?
a. Japan
b. The Netherlands
c. Germany
d. Great Britain
e. the United States
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports
 7. Most U.S. imports are
a. manufactured goods
b. agricultural services
c. petroleum and related products
d. minerals such as bauxite and nickel
e. military goods
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

8. The two main categories of U.S. exports are

a. transportation goods and fuel
b. steel and fuel
c. capital goods and industrial supplies and materials
d. fuels and agricultural goods
e. agricultural and transportation goods
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

9. Which country is the United States' largest trading partner?

a. Canada
b. Japan
c. Great Britain
d. Mexico
e. South Korea
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

10. The two major trading partners of the United States are
a. Germany and Mexico
b. Mexico and Canada
c. Japan and Canada
d. Canada and Brazil
e. Brazil and Japan
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

11. Exports account for what percent of GDP in the United States?
a. 2 percent
b. 5 percent
c. 11 percent
d. 15 percent
e. 20 percent
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

12. U.S. exports

a. represent approximately 50 percent of GDP
b. represent approximately 35 percent of GDP
c. represent approximately 11 percent of GDP
 d. consist primarily of agricultural commodities
e. consist primarily of metals and other raw materials
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

13. The United States is a major exporter of

a. diamonds
b. bauxite
c. coffee
d. corn
e. gold
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: A Profile of Exports and Imports

14. Japan is generally considered an economy closed to foreign trade.

a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Production Possibilities without Trade

15. The term autarky refers to

a. equilibrium after trade begins between two countries
b. the gains received from trade
c. self-sufficiency
d. political isolationism
e. the recognition that mutually beneficial trade is not possible between two countries
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Production Possibilities without Trade

16. In determining comparative advantage, cost is measured in terms of

a. foreign currency
b. domestic currency
c. gold only
d. units of weight and measure
e. opportunities forgone
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Production Possibilities without Trade

17. Suppose that workers in Transylvania can produce only two goods -- yo-yos or sweatsocks. The
Transylvanian currency is the daler. In what unit is the opportunity cost of yo-yos measured?
a. dalers
b. dalers per yo-yo
c. dalers per sweatsock
d. yo-yos
e. sweatsocks
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Production Possibilities without Trade
18. For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany
can produce one watch for every 100 pounds of cheese it produces. Which of the following is true with
regard to opportunity costs in the two countries?
a. The opportunity cost of producing watches is higher in Denmark.
b. The opportunity cost of producing cheese is higher in Denmark.
c. The opportunity cost of producing cheese is identical in both countries.
d. It is impossible to compare opportunity costs because the two countries use different
currencies.
e. In both countries combined, the opportunity cost of one watch is 150 pounds of cheese.
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Production Possibilities without Trade

19. For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany
can produce one watch for every 100 pounds of cheese it produces. Which of the following is true with
regard to opportunity costs in the two countries?
a. The opportunity cost of producing watches is lower in Denmark.
b. The opportunity cost of producing cheese is lower in Denmark.
c. The opportunity cost of producing watches is identical in both countries.
d. It is impossible to compare opportunity costs because the two countries use different
currencies.
e. In Germany the opportunity cost of producing one pound of cheese is one watch.
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Production Possibilities without Trade

20. For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany
can produce one watch for every 100 pounds of cheese it produces. Which of the following is true
concerning comparative advantage between the two countries?
a. Denmark has the comparative advantage in watches and cheese.
b. Germany has the comparative advantage in watches and cheese.
c. Germany has the comparative advantage in watches.
d. Denmark has the comparative advantage in watches.
e. Denmark has the comparative advantage in cheese.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Production Possibilities without Trade

21. For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany
can produce one watch for every 100 pounds of cheese it produces. Which of the following is true
concerning production possibilities curves in both countries?
a. The slopes of the countries' production possibilities frontiers cannot be determined unless
the number of workers in each country is known.
b. The countries' production possibilities frontiers have the usual bowed-out shape.
c. On a graph with cheese on the vertical axis, the slope of Germany's production
possibilities frontier is everywhere equal to 1/100.
d. On a graph with cheese on the vertical axis, the slope of Germany's production
possibilities frontier is steeper than Denmark's.
e. On a graph with cheese on the vertical axis, the slope of Germany's production
possibilities frontier is everywhere equal to negative 1/100.
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Production Possibilities without Trade
22. In New Zealand one worker can produce 40 walking sticks or 10 boomerangs each hour. What is the
opportunity cost of producing one walking stick?
a. 40 boomerangs
b. 10 boomerangs
c. 4 boomerangs
d. 1/4 of a boomerang
e. 1/2 worker
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Production Possibilities without Trade

23. In autarky,
a. each country's consumption possibilities are the same as its production possibilities
b. equilibrium is attained with the maximum gains from specialization and trade
c. equilibrium is attained with the maximum amount of international trade
d. a nation has such a high standard of living that there are technically no poor people
e. a nation is governed by an individual with absolute authority
ANS: A PTS: 1 DIF: Hard NAT: Analytic
LOC: International trade and finance TOP: Production Possibilities without Trade

24. If the United States has an absolute advantage in producing computer components, it should export
them worldwide.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

25. U.S. consumers would be better off if they bought only U.S.-produced goods.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

26. If a country has an absolute advantage in the production of every good, it cannot benefit from trade
with other countries.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

27. Whenever the opportunity costs of goods are significantly different in different countries, there are
gains from specialization and trade.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage
28. It is possible for one country to have a comparative advantage in the production of all products.
a. True
b. False
ANS: B PTS: 1 DIF: Hard NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

29. International trade is most likely to occur whenever

a. one of the trading nations is self-sufficient
b. all of the trading nations are self-sufficient
c. one of the trading nations gains from trade
d. each of the trading nations gains from trade
e. labor is cheaper abroad
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

30. The basis of the benefits of specialization is

a. comparative advantage
b. absolute advantage
c. size of country
d. identical production costs between two countries
e. self-sufficiency
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

31. Mutually beneficial trade will occur between two countries for all of the following reasons except one.
Which is the exception?
a. The opportunity costs of producing two goods differs between the two trading partners.
b. One country is more productive than the other.
c. One country is more efficient than the other.
d. One country has an absolute advantage over the other.
e. Each country has a comparative advantage in producing some good.
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

32. Which of the following is not a basis for trade between two nations?
a. different skill levels of the labor forces
b. one nation's absolute advantage
c. a difference in tastes between countries
d. economies of scale
e. different capital stocks
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

33. Absolute advantage

a. is the same as comparative advantage
 b. implies autarky
c. means that countries of the same size have the same opportunity cost of producing both
goods
d. means that a country can produce more of two goods than another country can
e. means that a country can produce less of two goods than another country can
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

34. Which of the following factors is the most significant in determining the pattern of international trade?
a. absolute advantage
b. diplomatic expertise
c. comparative advantage
d. overpowering military strength
e. a country's size relative to another country’s
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

35. The basis for international trade is

a. established trade patterns
b. the size of gold holdings of two countries
c. shipping and transportation costs
d. absolute advantage
e. comparative advantage
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

36. The opportunity cost of producing one car in Germany is 2,000 bushels of wheat, and the opportunity
cost of producing one car in Canada is 1,200 bushels of wheat. The two countries can realize mutual
gains from trade if they agree on terms of trade that are
a. greater than 2,000 bushels of wheat per car
b. less than 1,200 bushels of wheat per car
c. greater than 1,200 bushels of wheat per car and less than 2,000 bushels of wheat per car,
and Germany produces wheat
d. greater than 1,200 bushels of wheat per car and less than 2,000 bushels of wheat per car,
and Germany produces cars
e. greater than 1,200 bushels of wheat per car and less than 2,000 bushels of wheat per car,
and each country produces both goods
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

37. Which of the following is not true of the terms of trade?

a. They are determined by supply and demand factors.
b. They lie somewhere between the opportunity costs of the trading partners.
c. GATT begins negotiations on the terms of trade.
d. They depend on negotiations between trade partners.
e. They often favor one partner more than the other.
 ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

38. The rate at which two countries trade one good for another
a. is known as the foreign exchange rate
b. is known as the terms of trade
c. is known as the export line
d. equals the slope of the import line
e. equals the common slope of the countries' production possibilities frontiers
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

39. Which of the following is true?

a. International trade makes it possible for a country's consumption possibilities to exceed its
production possibilities.
b. International trade requires that a country's production possibilities exceed its consumption
possibilities.
c. A country's production possibilities always equal its consumption possibilities.
d. A country's consumption possibilities can never equal its production possibilities because
of leakages in the system.
e. As long as there is full employment of resources, a country's production possibilities will
exceed its consumption possibilities even with trade.
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

40. International trade does all the following except

a. allow a country to specialize in producing certain goods and services
b. reduce world output
c. allow a country to move to a higher consumption possibilities frontier
d. allow a country's consumption possibilities frontier to lie outside its production
possibilities frontier
e. increase world output
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

41. World output will be maximized if each country

a. attempts to be self-sufficient
b. specializes in producing those goods in which it has a comparative advantage
c. specializes in producing those goods in which it has an absolute advantage
d. reduces its consumption possibilities
e. specializes in producing those goods for which it has the lowest demand
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

42. A country should export only those goods for which, relative to its trading partners, it has the
a. absolute advantage
 b. highest opportunity cost
c. lowest production possibilities
d. strongest demand
e. lowest opportunity cost
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

43. Comparative advantage is determined by

a. the amount of resources needed to produce a good
b. the money cost of producing any good
c. the opportunity cost of producing any good
d. absolute advantage and production possibilities combined
e. the level of demand for a good
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

44. A nation's consumption possibilities frontier is

a. always the same as its production possibilities frontier
b. never the same as its production possibilities frontier
c. the same as its production possibilities frontier only if there is advantageous trade
d. the same as its production possibilities frontier only if there is no international trade
e. usually lower than its production possibilities frontier
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

45. The source of gains from trade is

a. tariffs
b. self-sufficiency
c. autarky equilibrium
d. absolute advantage
e. comparative advantage
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

46. To maximize worldwide gains from trade, the country that should produce a good is the country that
a. has the lowest opportunity cost of producing it
b. can produce that good using the fewest resources
c. will produce that good using the most expensive resources
d. has the most desire for that good
e. has produced that good in the past
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

NARRBEGIN: Exhibit 32-8

Exhibit 19-1
 Costa Rica United States
tons of rice per day t-shirts per day tons of rice per day t-shirts per day
20 0 100 0
18 80 90 100
16 160 80 200
14 240 70 300
12 320 60 400
10 400 50 500
8 480 40 600
6 560 30 700
4 640 20 800
2 720 10 900
0 800 0 1000

NARREND

47. In Exhibit 19-1, the United States has an absolute advantage in the production of both rice and t-shirts.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance
TOP: Consumption Possibilities Based on Comparative Advantage

48. In Exhibit 19-1, the opportunity cost of a ton of rice in the United States is
a. 0
b. 1/3 of a t-shirt
c. 1/2 of a t-shirt
d. 1 t-shirt
e. 2 t-shirts
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade

49. In Exhibit 19-1, the opportunity cost of 1 t-shirt in the United States is
a. 0
b. 1/2 ton of rice
c. 3/4 ton of rice
d. 1 ton of rice
e. 2 tons of rice
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade

50. In Exhibit 19-1, the opportunity cost of 1 t-shirt in Costa Rica is

a. 0
b. 1/40 ton of rice
c. 3/4 ton of rice
d. 1 ton of rice
e. 2 tons of rice
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade
51. In Exhibit 19-1, the opportunity cost of 1 ton of rice in Costa Rica is
a. 0
b. 10 t-shirts
c. 20 t-shirts
d. 30 t-shirts
e. 40 t-shirts
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade

52. In Exhibit 19-1, Costa Rica has a comparative advantage in the production of rice.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade

53. In Exhibit 19-1, the United States has a comparative advantage in the production of rice.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade

54. In Exhibit 19-1, the United States should produce rice and trade their rice for Costa Rica’s t-shirts.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade

55. In Exhibit 19-1, trade between the United States and Costa Rica will benefit Costa Rica but not the
United States.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: The Gains from Trade

56. Differences in resource endowments are differences in

a. tariffs charged by each country
b. consumption patterns across nations
c. production patterns across nations
d. the quantity, but not the quality, of resources available in different nations
e. the quality and quantity of resources available in different nations
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization

57. Differences in tastes among nations

a. make gains from trade possible even in the absence of differences in resource endowments
b. make gains from trade possible only when there are differences in resource endowments
c. negate any potential gains from trade
d. are caused by differences in resource endowments
e. occur only among countries whose people are of different religions
 ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization

58. If production is subject to economies of scale,

a. countries can gain from trade if each nation specializes
b. one country will develop an absolute advantage in the production of all goods
c. higher output levels result in higher average production costs
d. one country will develop a comparative advantage in the production of all goods
e. countries cannot gain from trade
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization

59. One reason for international specialization in production is

a. a high tariff imposed by a national government
b. a low tariff imposed by a national government
c. diminishing returns to a variable factor of production
d. the different resource endowments throughout the world
e. high fixed costs of production
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization

60. One reason for international specialization in production is

a. differing national tastes
b. diseconomies of scale in production
c. a high world price for a good
d. resources are plentiful in all nations
e. people have limited wants for domestically produced goods and services
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization

61. Which of the following is not a reason for international specialization?

a. some countries have educated, trained workers, while other countries have unskilled
workers
b. tastes and preferences tend to be different in different countries
c. economies of scale can allow larger, specialized producers to operate at lower average cost
d. mineral resources are often concentrated in particular countries
e. the world price of a good is determined by the world supply and demand for it
ANS: E PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: International trade and finance TOP: Reasons for International Specialization

62. Domestic producers of goods that compete with imports benefit from protectionism in the short run.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Tariffs

63. A tariff is a tax on either imports or exports.

a. True
b. False
 ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Tariffs

64. If a tariff increases, everybody loses except the government imposing the tariff.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

65. Ad valorem tariffs on imports are based on a percentage of an import's value; specific tariffs are based
on a lump sum per physical unit imported.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Tariffs

NARRBEGIN: Exhibit 32-1

Exhibit 19-2

NARREND

66. In Exhibit 19-2, if the world price of corn is $2 and there are no trade restrictions, the United States
will
a. produce 3,000, consume 7,000, and import 4,000 bushels of corn
b. produce 3,000, consume 7,000, and export 4,000 bushels of corn
c. have an excess supply of corn
d. be a net exporter of corn
e. not produce any corn
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

67. In Exhibit 19-2, if the world price of corn is $6 and there are no trade restrictions, the United States
will
a. produce 7,000, consume 3,000, and import 4,000 bushels of corn
b. produce 7,000, consume 3,000, and export 4,000 bushels of corn
c. have an excess demand for corn
 d. be a net importer of corn
e. not produce any corn
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

68. In Exhibit 19-2, if the world price of corn is $2 and there are no trade restrictions, the United States
will
a. produce 3,000, consume 7,000, and export 2,000 bushels of corn
b. have an excess supply of corn
c. be a net exporter of corn
d. not produce any corn
e. consume all of the corn that it produces
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

69. In Exhibit 19-2, if the world price of corn is $6 and there are no trade restrictions, the United States
will
a. produce 7,000, consume 3,000, and import 4,000 bushels of corn
b. have an excess demand for corn
c. be a net importer of corn
d. not produce any corn
e. consume only a portion of what is produced
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

NARRBEGIN: Exhibit 32-2

Exhibit 19-3

Domestic Supply and Demand

for Tulips in the Netherlands
Demand Supply
Q P Q P
12,000  $0  6,000 $0 
10,000  1 7,000 1
8,000 2 8,000 2
6,000 3 9,000 3
4,000 4 10,000  4

NARREND

70. In Exhibit 19-3, if the world price of tulips is $4 and there are no trade restrictions, The Netherlands
will
a. produce 10,000, consume 4,000, and import 6,000 tulips
b. produce 10,000, consume 4,000, and export 6,000 tulips
c. produce 4,000, consume 10,000, and import 6,000 tulips
d. produce no tulips
e. import all of the tulips that it consumes
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs
71. In Exhibit 19-3, if the world price of tulips is $1 and there are no trade restrictions, The Netherlands
will
a. produce 7,000, consume 10,000, and export 3,000 tulips
b. produce 10,000 and consume 10,000 tulips
c. produce no tulips
d. import all of the tulips that it consumes
e. consume all of the tulips that it produces
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

72. In Exhibit 19-3, if the world price of tulips is $4 and there are no trade restrictions, The Netherlands
will
a. produce 10,000, consume 4,000, and import 6,000 tulips
b. produce 10,000 and consume 10,000 tulips
c. produce no tulips
d. import all of the tulips that it consumes
e. consume only some of the tulips it produces
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

73. If there are no trade restrictions, a country will import a particular good if
a. domestic quantity supplied equals domestic quantity demanded at the world price
b. there is excess domestic quantity demanded at the world price
c. world quantity supplied is less than world quantity demanded
d. world quantity supplied is greater than world quantity demanded
e. domestic quantity supplied is greater than domestic quantity demanded at the world price
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Tariffs

74. A country will import a good only if

a. there is excess domestic quantity supplied at the world price
b. domestic quantity supplied is greater than world quantity supplied
c. domestic quantity demanded is less than world quantity demanded
d. domestic quantity demanded is zero at the world price
e. excess quantity demanded is positive at the world price
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Tariffs

75. As a result of international trade,

a. the gain to producers in the importing country exceeds the loss to consumers in the
importing country
b. the loss to producers in the importing country is less than the gain to consumers in the
importing country caused by a decrease in price
c. the loss to producers in the importing country exceeds the gain to consumers in the
importing country caused by an increase in price
d. the loss to producers in the importing country is equal to the gain to consumers in the
importing country because price increases and equilibrium quantity decreases
e. the loss to producers in the importing country is equal to the gain to consumers in the
importing country because price decreases and equilibrium quantity increases
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
 LOC: International trade and finance TOP: Tariffs

NARRBEGIN: Exhibit 32-3

Exhibit 19-4

NARREND

76. At a world price of $1.00 in Exhibit 19-4,

a. 20 units will be exported
b. 20 units will be imported
c. 50 units will be exported
d. 50 units will be imported
e. 10 units will be exported
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

77. In Exhibit 19-4, with a tariff of $0.50 per unit and a world price of $1.00,
a. 25 units will be exported
b. 25 units will be imported
c. 50 units will be exported
d. 50 units will be imported
e. 10 units will be exported
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

78. If the country illustrated in Exhibit 19-4 is initially trading without restrictions at a world price of
$1.00, the loss of consumer surplus as a result of a tariff of $0.50 per unit is represented by area
a. a
b. b + d
c. c + i + e + f
d. c
e. d
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs
79. If the country illustrated in Exhibit 19-4 is initially trading without restrictions at a world price of
$1.00, the gain in producer surplus as a result of a tariff of $0.50 per unit is represented by area
a. c + h
b. h
c. c
d. c + g
e. g
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

80. If the country illustrated in Exhibit 19-4 is initially trading without restrictions at a world price of
$1.00, the government revenue from a tariff of $0.50 per unit is represented by area
a. c
b. e + g
c. i + e + f
d. d + e
e. e
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

81. If the country illustrated in Exhibit 19-4 is initially trading without restrictions at a world price of
$1.00, net welfare loss as a result of a tariff of $0.50 per unit is represented by area
a. c + i + e + f
b. i + f
c. i
d. f
e. b + d
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

82. A tariff is
a. a tax on financial transactions
b. a tax on either imports or exports
c. the result of a treaty
d. a penalty imposed on importers of capital
e. an agreement between countries to limit trade
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Tariffs

83. A lump-sum tax per unit on imports is known as

a. a specific tariff
b. an effective tariff
c. a specific quota
d. an effective quota
e. an ad valorem quota
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Tariffs

84. A tax on imports equal to a percentage of the cost of those imports is known as
a. a specific tariff
 b. an ad valorem tariff
c. a tax on luxury goods only
d. an effective quota
e. an ad valorem quota
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Tariffs

85. As a result of a tariff on imports, consumers in the importing country

a. purchase more domestically produced goods and fewer foreign goods, resulting in the
consumption of fewer total goods than without the tariff
b. purchase more domestically produced goods and fewer foreign goods, resulting in the
consumption of more total goods than without the tariff
c. purchase more domestically produced goods and more foreign goods, resulting in the
consumption of fewer total goods than without the tariff
d. purchase fewer domestically produced goods and fewer foreign goods, resulting in the
consumption of more total goods than without the tariff
e. cease importing any goods at all
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

86. As a result of a tariff on an imported good,

a. domestic producers are better off because they sell more goods at the same price
b. domestic producers are better off because they sell more goods at a higher price
c. domestic producers are better off because they sell the same quantity of goods at a higher
price
d. domestic consumers are better off because there are more domestically produced goods
available
e. domestic consumers are neither better off nor worse off because imports do not change
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

87. The world price of a good is

a. the price paid by consumers in all nations
b. the price at which it is traded internationally
c. the price paid in U.S. dollars
d. the price paid in foreign currency
e. the terms of trade for each nation
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Tariffs

88. The difference between a specific tariff and an ad valorem tariff is that a specific tariff
a. is a set amount of money per unit of a product, while an ad valorem tariff is a set
percentage of product price
b. is a set percentage of product price, while an ad valorem tariff is a set amount of money
per unit of a product
c. names a particular good to which the tariff applies, while an ad valorem tariff applies to
large classes of products
d. applies only to imports, while an ad valorem tariff applies only to exports
e. sets a strict quota limit on the amount one individual can purchase, while an ad valorem
tariff sets no such limit
 ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

NARRBEGIN: Exhibit 32-4

Exhibit 19-5

NARREND

89. Exhibit 19-5 shows domestic supply and demand for baseballs in the United States. The world price of
a baseball is $3. With free trade, how many baseballs will be purchased in the United States?
a. 4,000
b. 6,000
c. 8,000
d. 10,000
e. 12,000
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

90. In Exhibit 19-5, the world price of a baseball is $3. With free trade, how many baseballs will the
United States import?
a. 4,000
b. 6,000
c. 8,000
d. 10,000
e. 12,000
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

91. In Exhibit 19-5, if the world price of a baseball is $3 and a tariff of $1 per baseball is imposed in the
United States, how many baseballs will be purchased in the United States?
a. 4,000
b. 6,000
c. 8,000
d. 10,000
e. 12,000
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs
92. In Exhibit 19-5, if the world price of a baseball is $3 and a tariff of $1 per baseball is imposed in the
United States, how many baseballs will the United States import?
a. 4,000
b. 6,000
c. 8,000
d. 10,000
e. 12,000
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

93. In Exhibit 19-5, if the world price of a baseball is $3 and a tariff of $1 per baseball is imposed in the
United States, how much tariff revenue will the United States government collect?
a. $4,000
b. $16,000
c. $20,000
d. $24,000
e. $48,000
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

94. In Exhibit 19-5, if the world price of a baseball is $3 and a tariff of $1 per baseball is imposed in the
United States, which area represents the amount of tariff revenue the United States government
collects?
a. a
b. b
c. c
d. f
e. e
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

95. In Exhibit 19-5, if the world price of a baseball is $3 and a tariff of $1 per baseball is imposed in the
United States, which area represents the United States' net loss as a result of the tariff?
a. a + b + c + e
b. b + c + e
c. b + c
d. c + e
e. b + f
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Tariffs

96. An effective import quota is one that increases the amount of tariff revenues received.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Import Quotas

97. Which of the following is true concerning the impact of tariffs and quotas?
a. Tariffs raise the price of a good but quotas do not.
 b. Tariffs reduce consumer and producer surplus whereas quotas reduce domestic consumer
surplus and increase domestic producer surplus.
c. Both tariffs and quotas increase the quantity demanded.
d. The revenue resulting from a tariff goes to the government whereas the revenue resulting
from a quota goes to whoever is awarded the right to sell the product.
e. The potential welfare loss is greater with tariffs than quotas.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Import Quotas

98. An import quota is a

a. tax on imports
b. legal limit on the amount of a specific good that can be imported into a particular country
c. tax on import quantities above the legal limit
d. way to increase tariff revenues
e. legal incentive for members of GATT to increase their exports of a particular good
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Import Quotas

99. An effective import quota

a. lowers the price of imports
b. lowers the price of domestic goods competing with imports
c. increases the variety of goods available to the consumer
d. increases tax revenues
e. lowers the quantity demanded of the imported good
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Import Quotas

100. An effective import quota is one that

a. reduces imports to zero
b. increases exports
c. reduces the price of an imported good below the world price
d. limits imports to less than what would be imported under free trade
e. reduces demand for a good to zero
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Import Quotas

NARRBEGIN: Exhibit 32-5

Exhibit 19-6
 NARREND

101. Suppose that the world price in Exhibit 19-6 is $2.00 per unit. What is the smallest import quota that
would not affect the level of imports in this country?
a. $3.00
b. $2.00
c. 50 units per month
d. 100 units per month
e. 150 units per month
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Import Quotas

NARRBEGIN: Exhibit 32-6

Exhibit 19-7

NARREND

102. If the country in Exhibit 19-7 is initially trading without restrictions at a world price of $2.00 and an
import quota of 50 units per month is enacted,
a. imports will not change
b. imports will increase from 25 to 50 units per month
c. domestic production will increase from 100 to 175 units per month
d. domestic production will increase from 100 to 125 units per month
e. domestic production will increase from 100 to 150 units per month
 ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Import Quotas

NARRBEGIN: Exhibit 32-7

Exhibit 19-8

NARREND

103. If the country in Exhibit 19-8 is initially trading without restrictions at a world price of $2.00 and an
import quota of 50 units per month is enacted, the decrease in consumer surplus can be represented by
area
a. a
b. c + d
c. c + d + e
d. b + c + d + e
e. a + b + c + d + e
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Import Quotas

104. If the country in Exhibit 19-8 is initially trading without restrictions at a world price of $2.00 and an
import quota of 50 units per month is enacted, the welfare loss resulting from higher domestic
production costs is represented by area
a. a
b. b
c. c + d
d. b + d
e. e
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Import Quotas

105. If the country in Exhibit 19-8 is initially trading without restrictions at a world price of $2.00 and an
import quota of 50 units per month is enacted, the gain to those awarded the right to import the 50
units and sell it at the new domestic price is represented by area
a. a
b. b
c. c
d. d
 e. c + d
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Import Quotas

106. Under a tariff, the domestic government gains revenue, but under an import quota it does not, unless it
sells the quota rights.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Quotas in Practice

107. Which of the following is not correct concerning quotas?

a. The enactment of quotas rewards domestic producers with higher prices.
b. The enactment of quotas creates opportunities for lobbyists to seek the perpetuation of
quotas.
c. Quotas on steel, textiles and apparel, and sugar have been in effect for several decades.
d. Lobbying efforts by domestic producers and foreign exporters are vigorously fought by
domestic consumers.
e. The auctioning of quotas would reduce their attractiveness to foreign exporters.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Quotas in Practice

108. The difference between the effect of an import quota when quota rights are given away and the effect
of a tariff is that
a. only the tariff results in a higher domestic price
b. only the quota decreases the amount of goods imported
c. the decrease in producer surplus is smaller with the quota
d. under a quota, part of the decrease in consumer surplus is redistributed to foreign
producers; under a tariff, it is redistributed to the domestic government
e. under a tariff, part of the decrease in consumer surplus is redistributed to foreign
producers; under a quota, it is redistributed to the domestic government
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Quotas in Practice

109. Which pair of groups benefits from an import quota when quota rights are given away without charge?
a. domestic and foreign producers
b. domestic producers and foreign consumers
c. domestic government and foreign consumers
d. domestic government and producers
e. foreign consumers and producers
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Quotas in Practice

110. The difference between an import quota and a tariff that results in the same domestic price is
a. none; they are the same
b. the quantity demanded is higher under the tariff
c. the world price is higher under the quota
d. the tariff revenue goes to the domestic government; quota benefits may go to foreigners
e. none because both quotas and tariffs are illegal
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
 LOC: International trade and finance TOP: Quotas in Practice

111. 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 requirement that exports to a certain country must exceed a specified value before
that country's product may be imported
d. percentage tax on an imported product
e. lump-sum tax on an imported product
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Quotas in Practice

112. To be effective, an import quota must

a. reduce the price and increase the quantity of imports
b. set the price of the imported good higher than the domestic equilibrium price
c. restrict imports to less than would be imported under free trade
d. restrict imports to less than exports in trade with that particular country
e. be directed at the product of a specific country
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Quotas in Practice

113. The primary difference between an import tariff and an import quota is that
a. tariffs cause prices to rise, but quotas do not
b. quotas cause prices to rise, but tariffs do not
c. tariffs result in a net welfare loss, but quotas do not
d. quotas result in a net welfare loss, but tariffs do not
e. tariff revenues go to government, but quotas benefit those with the right to sell foreign
goods domestically
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Quotas in Practice

114. Which of the following is not a type of trade restriction?

a. low-interest loans to foreign buyers
b. export subsidies to domestic producers
c. restrictive health and safety standards
d. domestic content requirements
e. economies of scale
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Other Trade Restrictions

115. Which of the following is not a type of trade restriction?

a. low-interest loans to foreign buyers
b. export subsidies for domestic firms
c. domestic content requirements
d. restrictive health and safety standards
e. economies of scale
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Other Trade Restrictions
116. Dumping refers to selling a commodity abroad at a price that is below its cost of production or below
the price charged in the domestic market.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Freer Trade by Multinational Agreement

117. International trade between countries typically produces a winner and a loser. Generally, it is the
economically more advanced country that gains at the expense of the less developed nation.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Freer Trade by Multinational Agreement

118. The international treaty established to negotiate lower trade restrictions is known as the
a. World Bank Act
b. General Agreement on Tariffs and Trade (GATT)
c. International Association for Free Trade (IAFT)
d. Countries United for Free Trade (CUFT)
e. International Development Fund
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Freer Trade by Multinational Agreement

119. The establishment of GATT resulted in

a. lower tariff rates
b. increased tariff rates
c. decreases in total world trade
d. increased protectionism
e. a rise in the price of imports
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Freer Trade by Multinational Agreement

120. The General Agreement on Tariffs and Trade (GATT) was established in
a. 1870 to protect U.S. industries and decrease world trade
b. 1921 to manage legal and accounting requirements for U.S. tariffs and quotas
c. 1947 to reduce trade restrictions among 23 countries
d. 1973 to increase trade restrictions, after OPEC significantly raised oil prices
e. 1990 to create a common market
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Freer Trade by Multinational Agreement

121. The GATT's most-favored nation clause means that tariff reductions granted by a member of GATT to
imports from one country
a. apply only to that country
b. are only extended to certain favored members of GATT
c. are extended to all other members of GATT
d. must be matched by equivalent quota reductions
e. are extended to all other countries of the world
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Freer Trade by Multinational Agreement
122. 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)
d. meets in different countries every few years to analyze each country's trade policies and
restrictions
e. was an international treaty that expired in 1990
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: The World Trade Organization

123. Regional trading bloc agreements

a. are not considered trade restrictions
b. are required by World Trade Organization rules
c. exist primarily in Russia, Africa, and South America
d. require all nations in a specified region to trade only with other countries in the same
geographic area
e. make special trade deals between countries in that region and discriminate against
countries outside the region
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: The World Trade Organization

124. The World Trade Organization (WTO)

a. members are required to eliminate tariffs and customs duties
b. supervises trade in merchandise and in services
c. supervises merchandise trade only
d. members are required to eliminate ad valorem tariffs but not specific tariffs
e. includes all nations with populations greater than 10 million, with the exception of North
Korea and Cuba
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: The World Trade Organization

125. The largest regional trading bloc is the

a. North American Free Trade Agreement
b. European Community
c. Latin American Free Trade Agreement
d. Asian Free Trade Agreement
e. East Asian Cooperation Council
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Common Markets

126. A major U.S. motive for negotiating a free-trade agreement with Mexico was to
a. increase immigration into the United States
b. encourage Mexico's recent drive to achieve a more market-oriented economy
c. keep Mexico from going Communist
d. achieve, ultimately, political union with Mexico
e. help foster the study of the Spanish language in the United States as a means to trading
with all Spanish-speaking countries
 ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Common Markets

127. A major U.S. motive for negotiating a free-trade agreement with Mexico was to
a. help foster the study of the Spanish language as a means to trading with all Spanish-
speaking countries
b. increase immigration into the United States
c. gain increased access to Mexican consumers
d. keep Mexico from going Communist
e. achieve, ultimately, political union with Mexico
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Common Markets

128. A major U.S. motive for negotiating a free-trade agreement with Mexico was
a. to gain increased access to Mexico's huge oil reserves
b. to achieve ultimately political union with Mexico
c. as a stepping-stone to the formation of a free-trade bloc in the whole Western Hemisphere
d. to appease Canada
e. to appease GATT
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Common Markets

129. Which of the following is not an argument in favor of restricting trade?

a. to preserve national security
b. to prevent dumping
c. to increase consumer surplus
d. to protect infant industries
e. to protect declining industries
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Arguments for Trade Restrictions

130. Which of the following is not a criticism of the national defense argument for trade restrictions?
a. National defense only makes sense in the absence of international trade.
b. Stockpiling basic military hardware could eliminate the need to protect the domestic
industry.
c. Nearly all industries can make some claim to strategic importance, so such trade
restrictions can get out of hand.
d. National defense considerations can outweigh concerns about efficiency.
e. Government subsidies to domestic producers may be more efficient than trade restrictions.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: National Defense Argument

131. According to some economists, the protection granted to infant industries should be
a. terminated after one year.
b. for new firms that eventually would develop significant economies of scale in their
production processes
c. restricted to firms that face little competition
d. based on current absolute advantage
e. permanent
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
 LOC: International trade and finance TOP: Infant Industry Argument

132. Dumping is the practice of

a. selling a lower quality product abroad
b. selling a commodity abroad at a price lower than the domestic price
c. selling a commodity abroad at a price higher than the domestic price
d. flooding a foreign market with large quantities of a good
e. most less-developed countries but not industrialized countries
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Antidumping Argument

133. In the United States, dumping is

a. encouraged because it lowers prices for consumers
b. prohibited by the Trade Agreement Act of 1979
c. discouraged by domestic consumers who benefit from the lower price
d. encouraged because it encourages competition
e. encouraged because it promotes expenditure on R&D
ANS: B PTS: 1 DIF: Hard NAT: Analytic
LOC: International trade and finance TOP: Antidumping Argument

134. If a manufacturer sells goods abroad for less than they sell for at home, which of the following is true?
a. An embargo has been established.
b. A quota has been established.
c. The manufacturer is engaged in dumping.
d. There has been an improvement in the terms of trade.
e. Tariffs have been reduced.
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Antidumping Argument

135. Which of the following is not correct regarding dumping?

a. In the country where products are dumped, consumer surplus grows as a result of the
dumping.
b. Dumping involves the selling of a product by foreign producers at a price lower than that
in their own countries.
c. Critics of dumping recommend applying a tariff as the correct antidumping measure.
d. A major difficulty with dumping by firms in other countries is that it drives up prices to
the domestic consumer.
e. Predatory dumping is often aimed at driving domestic producers out of business.
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Antidumping Argument

136. Predatory dumping is the practice of

a. rejecting imports
b. persistently selling a good in another country for a price lower than the world price
c. persistently selling a good in another country for a price lower than the domestic price
d. temporarily selling a good in another country for a price lower than the world price to
drive out competing producers
e. temporarily selling a good in another country for a price lower than the domestic price to
drive out competing producers
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
 LOC: International trade and finance TOP: Antidumping Argument

137. Which of the following is not correct concerning predatory dumping?

a. It may be a way to discourage the development of domestic production of a good.
b. It may drive out established firms.
c. There are a great number of documented cases of predatory dumping.
d. In actuality, the blocking of entry on a worldwide scale would be extremely difficult to
accomplish.
e. In pursuing their monopoly position after dumping, dumpers may actually encourage the
entry of other firms.
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Antidumping Argument

138. If wage rates are lower in Mexico than in Germany, labor costs per unit of output can still be higher in
Mexico.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Jobs and Income Argument

139. U.S. auto workers sometimes experience structural unemployment because of the popularity of foreign
cars. Which argument is a labor union most likely to present to Congress when it lobbies for trade
restrictions?
a. national defense argument
b. infant industry argument
c. antidumping argument
d. loss of domestic jobs argument
e. declining industry argument
ANS: D PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: International trade and finance TOP: Jobs and Income Argument

140. Which of the following is not true regarding the argument for protection as a way of maintaining jobs
and wage levels?
a. Wages may be only a small fraction of total production costs.
b. High wages do not necessarily imply high labor costs when productivity is taken into
account.
c. U.S. workers are among the most productive in the world partly because they are well
educated and trained compared to other countries.
d. U.S. workers are highly productive partly because they are provided with abundant
supplies of machines and physical capital.
e. It is not possible that the U.S. wages, even when supported by high U.S. output per
worker, can render U.S. products competitive with low-wage countries.
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Jobs and Income Argument

141. Low wages may be traceable to all of the following except one. Which is the exception?
a. low productivity
b. too much saving
c. unstable business climate
d. poor education and training
e. lack of adequate physical capital supplied to labor
 ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Jobs and Income Argument

142. Which of the following does not explain why U.S. wage rates are higher than wage rates in developing
countries?
a. better education and training of workers in the United States
b. greater availability of capital in the United States
c. use of the latest technology in the United States
d. higher productivity in the United States
e. unstable business conditions in the United States
ANS: E PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: International trade and finance TOP: Jobs and Income Argument

143. When a country establishes trade restrictions, domestic producers of goods that compete with imported
goods
a. always lose in the short run
b. always gain in the long run
c. may lose in the long run if protection stifles innovation and leaves the industry vulnerable
d. may gain in the short run because wages will fall in that industry
e. usually lobby against such restrictions
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: International trade and finance TOP: Jobs and Income Argument

144. Firms in a high-wage nation such as the U.S. can compete effectively with imports from low-wage
nations if
a. skill levels are identical in the nations
b. the U.S. reduces tariffs on imports
c. low-wage nations impose tariffs on U.S. made goods
d. labor productivity is higher in the low-wage nation
e. labor productivity is higher in the U.S.
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Jobs and Income Argument

145. A nation's producers can compete effectively with imports from other nations if it has
a. high wages
b. low wages
c. low labor cost per unit of output
d. less specialization
e. low labor productivity
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Jobs and Income Argument

146. The American Tire Company has been experiencing a steady loss of market over the past 40 years due
to imports of lower-priced tires. Which argument would American Tire most likely present to Congress
when it lobbies for trade restrictions?
a. infant industry argument
b. declining industry argument
c. national defense argument
d. antidumping argument
e. loss of domestic jobs
 ANS: B PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: International trade and finance TOP: Declining Industries Argument

147. Which of the following is not true of declining industries?

a. Job loss is not a problem in a declining industry because the workers can easily find jobs
in expanding industries.
b. Jobs may be lost by declining industries but new jobs are created in expanding industries.
c. Over 60 million new jobs have been created in the United States since 1960.
d. One way to solve the problems posed by declining industries is for the government to fund
programs to retrain workers for jobs that are in greater demand.
e. One way to solve the problems posed by declining industries is for the government to offer
wage subsidies or special tax breaks that decline over time.
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Declining Industries Argument

148. If an established domestic industry is in jeopardy of being displaced by lower-priced imports, there
could be a rationale for
a. permanent import restrictions to prevent the decline of the domestic industry
b. temporary import restrictions to allow the orderly adjustment of the domestic industry
c. permanent import restrictions based on the infant industry argument
d. temporary import restrictions based on the infant industry argument
e. temporary import restrictions that will be replaced by permanent tax breaks for the
domestic industry
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Declining Industries Argument

149. Which of the following is not a problem with trade restrictions?

a. the high cost of rent-seeking activities such as lobbying
b. the high cost of enforcement
c. the unintended effects on related industries
d. the inability to save U.S. jobs in the short run in industries that compete with imports
e. the possibility of retaliation
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance TOP: Problems with Protection

150. The losers when the United States institutes trade restrictions include
a. U.S. consumers of imported goods, U.S. producers who use imported intermediate goods,
and, if other countries retaliate, U.S. exporters
b. U.S. producers of goods that compete with imported goods only
c. U.S. consumers of imported goods and U.S. producers of goods that compete with
imported goods
d. all U.S. producers of all goods and U.S. exporters
e. only U.S. exporters
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Problems with Protection

151. Which of the following is not an argument often made for the imposition of trade restrictions?
a. trade restrictions are necessary for national defense purposes
b. trade restrictions are necessary to improve economic efficiency
c. trade restrictions are necessary to protect fledgling industries
d. trade restrictions are necessary to protect against dumping
 e. trade restrictions are necessary to protect jobs
ANS: B PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: International trade and finance TOP: Arguments for Trade Restrictions

152. Dumping refers to selling a product abroad for less than the cost of production.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Antidumping Argument

153. Industries that seek trade protection from government can be said to be engaging in rent seeking
behavior.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Problems With Trade Protection

154. Which of the following does the United States import?

a. cotton
b. wheat
c. oil seeds
d. zinc
e. barley
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization

155. Which of the following does the United States export?

a. oats
b. coffee
c. oil
d. lead
e. copper
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization

156. If U.S. consumption falls short of U.S. production, the U.S. imports the difference.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization

157. When it comes to basic commodities, the United States is a net exporter of oil and metals and a net
importer of farm crops.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Reasons for International Specialization
158. Tina Makumbi imports sesame oil from Ethiopia and sells to a market that has a downward sloping
demand curve.The demand curve indicates that some consumers are willing to pay $1.50 or more per
pound for the first few pounds, but every consumer gets to buy at the market clearing price of $0.50
per pound. The difference between the most that consumers would pay and the actual amount they do
pay is called
a. exporter surplus
b. trade balance
c. producer surplus
d. consumer equilibrium
e. consumer surplus
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance
TOP: Consumer Surplus and Producer Surplus from Market Exchange

159. Robert Tadmur exports processed turkey and has an upward sloping supply curve. The supply curve
indicates that Robert faces a marginal cost of $0.25 or less per pound for supplying the first few
pounds. But every producer in this market sells turkey at the market clearing price of $0.50 per pound.
The difference between the actual amount that Robert receives and what he would accept to supply the
market clearing quantity is called
a. consumer surplus
b. importer surplus
c. producer surplus
d. trade deficit
e. average variable cost
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: International trade and finance
TOP: Consumer Surplus and Producer Surplus from Market Exchange

160. Revenue from a(n) __________ goes to the U.S. government while revenue from a(n) __________
goes to whomever secures the right to sell foreign goods in the U.S. market.
a. export subsidy, quota
b. tariff, quota
c. domestic content requirement, low-interest loan
d. tariff, export subsidy
e. quota, tariff
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: International trade and finance TOP: Tariffs and Quota Compared

161. Quotas and tariffs discourage foreign governments from retaliating with quotas and tariffs of their
own.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Tariffs and Quota Compared

162. The General Agreement on Tariffs and Trade forms the legal and institutional foundation for the
current multilateral trading system.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Reflective Thinking
 LOC: International trade and finance TOP: The World Trade Organization

163. One way to reduce pressure for Mexicans to cross the U.S. border illegally is to create job
opportunities in Mexico.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: International trade and finance TOP: Common Markets