1 Tutorial Chapter 10 International Trade

2 1. International trade leads to greater economies of scale. True The market enlarges with international trade, so up to a certain point productivity increases as we experience a greater division of labor.

3 2. Opportunity cost is that which is given up in the best alternative endeavor when making a decision between two alternatives. True Each time you make a decision you incur an opportunity cost, each time there is something you have to give up. That which you give up in the best alternative choice is your opportunity cost of making the decision you did.

4 3. Comparative advantage occurs when a country can produce goods and services at lower costs than other nations. False Comparative advantage occurs when a country can produce something with lower opportunity costs than other nations. Lower costs would be an example of absolute advantage. To be successful countries make decisions based on comparative advantage, not absolute advantage.

5 4. A quota is a tax levied against a specific good being imported into a country. False A quota limits the quantity of a good that can be imported into a country. A tariff is a tax placed on an import.

6 5. The low foreign wages in the textile industry is one reason why Americans pay such low prices of clothing. True The low wages in foreign countries, like Bangladesh, is the main reason American pay low prices for new clothes.

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

8 7. American companies often petition Congress to impose tariffs against foreign competitors. True This is an example of rent seeking.

9 8. Given a certain demand curve, if the supply is pushed to the right, as would be the case if the supply was restricted, the price will be higher False A movement to the right of a supply curve will push prices down, not up.

10 9. The gains from trade are due primarily to the fact that a. the wealth of large, industrialized nations can be spread throughout the world. b. total world output increases when each country specializes. c. countries can boost their economies by increasing exports. B. By each county specializing each country becomes more efficient for several reasons; one reason is that non productive activity is eliminated. Total world output increases because of the resultant greater efficiency.

The source of gains from trade a. are tariffs. b. is self-sufficiency. c. is autarky equilibrium. d. is comparative advantage. D. Comparative advantage is the ability of a country to produce something at a lower opportunity cost than other producers face. Even if Americans could make hand made wicker baskets better than any other country, we should not manufacture them because our opportunity costs would be so high, for example, time spent with the baskets would be time not spent on high technology products.

Mutually beneficial trade cannot occur a. when each country has its own comparative advantage. b. if one country has absolute advantages in the production of every good. c. when the opportunity costs of producing each good are equal for both trading partners. d. if total world production equals total world consumption. C. Countries trade because they have different opportunity costs in producing goods and services.

To maximize worldwide gains from trade, the country which should produce a good is the country that a. has the lowest opportunity cost of producing that good. b. can produce that good using the fewest resources. c. will produce that good using the most expensive resources. A. Since specialization makes possible an increase in productivity, the question becomes, what should a country specialize in? The answer is - in has the lowest opportunity cost.

Comparative advantage a. exists only when one producer can make the product using fewer resources than any other producer. b. leads to the most efficient allocation of resources and the greatest combined output. c. eliminates specialization, so that each country produces all of its own needs independently. B. When a country produces a good that it has low opportunity cost, it is taking advantage of its comparative advantage. By producing goods with low opportunity costs it is giving up less in terms of foregone production than producing alternative goods.

When the world price of an internationally traded product is greater than a country’s domestic equilibrium price, a. the domestic price will prevail, and the world price is irrelevant. b. the country’s import line is horizontal. c. the country’s exports of the product will increase. C. Goods are most often bought based on relative price differences between alternatives. If a country’s price of a good is less expensive that the alternative goods offered in the world market, demand will increase along with exports of that good.

Trade restrictions in the real world a. are extremely rare, due to the economic benefits of specialization and trade. b. hurt domestic producers and benefit foreign consumers. c. hurt domestic producers and benefit domestic consumers. d. hurt domestic consumers and benefit domestic producers. D. Domestic consumers are hurt because they are forced to pay higher prices than they would pay otherwise. Domestic producers benefit because of less foreign competition.

A tariff is a. a tax on imports only. b. a tax on exports only. c. a tax on either imports or exports. d. a luxury tax. C. When a country places a tax on an import or export, the tax is called a tariff. A tariff would be placed on an import to discourage the importation of a particular good; a tariff would be placed on an export to discourage the exportation of a product.

An import quota is a a. legal limit on the quantity of a good that can be imported per year. b. legal requirement that a specified percentage of a final good’s value must be produced domestically. c. legal requirements that exports to a specific country must exceed a specific value before the country’s product may be imported. A. A second way to discourage the importation of a product is to limit the number of units that can be imported. With fewer units, the price will be higher than would be the case otherwise. This is called an import quota.

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. tariff revenues go to government, but quotas benefit those with the right to sell foreign goods domestically. C. As a tax, tariffs bring in revenue for the government. A quota, on the other hand, benefits the sellers because they can now sell the imported product for more money.

The World Trade Organization (WTO) a. became, in 1995, the institutionalized and more comprehensive successor to the General Agreement on Tariffs and Trade (GATT). b. was established in 1947 to reduce trade restrictions among 23 member countries. c. was established in 1980 to oppose and counteract the policies of the General Agreement on Tariffs and Trade (GATT). A. With a new round of agreements among participating nations, a name change was made.

Trade restrictions are often a result of rent seeking. Rent seeking involves a. influencing public policy to redistribute income in one’s favor. b. reducing costs and increase profit through greater efficiency. c. raising price and increase profit by restricting output. d. increasing market demand through advertising. A. When a company, or an industry, sends lobbyists to Washington DC to influence politicians to vote for programs that will benefit them, this practice is an example of rent seeking.

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