Chapter 8: The Instruments of Trade Policy Multiple Choice Questions 1. Specific tariffs are A.

import taxes stated in specific legal statutes. B. import taxes calculated as a fixed charge for each unit of imported goods. C. import taxes calculated as a fraction of the value of the imported goods. D. the same as import quotas. E. None of the above. Ans er! B ". Ad valorem tariffs are A. import taxes stated in ads in industr# publications. B. import taxes calculated as a fixed charge for each unit of imported goods. A. import taxes calculated as a fraction of the value of the imported goods. B. the same as import quotas C. None of the above. Ans er! C $. %he excess suppl# curve of a product e &'( import from foreign countries &)( increases as A. excess demand of countr# ' increases. B. excess demand of countr# ) increases. C. excess suppl# of countr# ' increases. D. excess suppl# of countr# ) increases. E. None of the above. Ans er! D *. +f a good is imported into &large( countr# ' from countr# ), then the imposition of a tariff in countr# ' A. raises the price of the good in both countries &-the -.a of /ne 0rice-(. B. raises the price in countr# ' and cannot affect its price in countr# ). C. lo ers the price of the good in both countries. D. lo ers the price of the good in ' and could raise it in ). E. raises the price of the good in ' and lo ers it in ). Ans er! E

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3. +f a good is imported into &small( countr# ' from countr# ), then the imposition of a tariff +n countr# ' A. raises the price of the good in both countries &-the -.a of /ne 0rice-(. B. raises the price in countr# ' and cannot affect its price in countr# ). C. lo ers the price of the good in both countries. D. lo ers the price of the good in ' and could raise it in ). E. raises the price of the good in ' and lo ers it in ). Ans er! B 2. +f a good is imported into &large( countr# ' from countr# ), then the imposition of a tariff in countr# ' in the presence of the 4et5ler 0aradox, A. raises the price of the good in both countries &-the -.a of /ne 0rice-(. B. raises the price in countr# ' and cannot affect its price in countr# ). C. lo ers the price of the good in both countries. D. lo ers the price of the good in ' and could raise it in ). E. raises the price of the good in ' and lo ers it in ). Ans er! C 6. %he effective rate of protection measures A. the -true- ad valorum value of a tariff. B. the quota equivalent value of a tariff. C. the efficienc# ith hich the tariff is collected at the customhouse. D. the protection given b# the tariff to domestic value added. E. None of the above. Ans er! D 7. +f the tariff on computers is not changed, but domestic computer producers shift from domesticall# produced semiconductor to imported components, then the effective rate of protection in the computer industr# ill A. increase. B. decrease C. remain the same. D. depend on hether computers are 0Cs or -Supercomputers-. E. None of the above. Ans er! A

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+f the tariff on computers is not changed, but the government then adds hitherto nonexistent tariffs on imported semi8conductor components, then the effective rate of protection in the computer industr# ill A. increase. B. decrease C. remain the same. D. depend on hether computers are 0Cs or -Supercomputers-. E. None of the above. Ans er! B

19. +f a small countr# imposes a tariff, then A. the producers must suffer a loss. B. the consumers must suffer a loss. C. the government revenue must suffer a loss. D. the demand curve must shift to the left. E. None of the above. Ans er! B 11. +f a small countr# imposes a tariff, then A. the producers must suffer a loss. B. the consumers must suffer a loss. C. the government revenue must suffer a loss. D. the demand curve must shift to the left. E. None of the above. Ans er! E 1". %he imposition of tariffs on imports results in dead eight &triangle( losses. %hese are A. production and consumption distortion effects. B. redistribution effects. C. revenue effects D. efficienc# effects. E. None of the above. Ans er! E

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1$. Suppose the :nited States eliminates its tariff on ball bearings. Ball bearing prices in the :nited States ould be expected to A. increase, and the foreign demand for :.S. exports ould increase. B. decrease, and the foreign demand for :.S. exports ould increase. C. increase, and the foreign demand for :.S. exports ould decrease. D. decrease, and the foreign demand for :.S. exports ould decrease. E. None of the above. Ans er! C 1*. A specific tariff provides home producers more protection hen A. the home mar;et bu#s cheaper products rather than expensive products. B. it is applied to a commodit# ith man# grade variations. C. the home demand for a good is elastic ith respect to price changes. D. it is levied on manufactured goods rather than primar# products. E. None of the above. Ans er! A 13. A lo er tariff on imported steel ould most li;el# benefit A. foreign producers at the expense of domestic consumers. B. domestic manufacturers of steel. C. domestic consumers of steel. D. or;ers in the steel industr#. E. None of the above. Ans er! C 12. <hen a government allo s ra materials and other intermediate products to enter a countr# dut# free, this generall# results in a&an( A. effective tariff rate less than the nominal tariff rate. B. nominal tariff rate less than the effective tariff rate. C. rise in both nominal and effective tariff rates. D. fall in both nominal and effective tariff rates. E. None of the above. Ans er! B

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16. /f the man# arguments in favor of tariffs, the one that has en=o#ed significant economic =ustification has been the A. cheap foreign labor argument. B. infant industr# argument. C. even pla#ing field argument. D. balance of pa#ments argument E. domestic living standard argument. Ans er! B 17. %he main redistribution effect of a tariff is the transfer of income from A. domestic producers to domestic bu#ers. B. domestic bu#ers to domestic producers. C. domestic producers to domestic government. D. domestic government to domestic consumers. E. None of the above. Ans er! B 11. %he principle benefit of tariff protection goes to A. domestic consumers of the good produced. B. foreign consumers of the good produced. C. domestic producers of the good produced. D. foreign producers of the good produced. E. None of the above. Ans er! C "9. As globali5ation tends to increase the proportion of imported inputs relative to domesticall# supplied components, A. the nominal tariff automaticall# increases. B. the rate of &effective( protection automaticall# increases. C. the nominal tariff automaticall# decreases. D. the rate of &effective( protection automaticall# decreases. E. None of the above. Ans er! D

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"1. <hich of the follo ing policies permits a specified quantit# of goods to be imported at one tariff rate and a higher tariff rate to imports above this quantit#> A. +mport tariff B. ?oluntar# exports restraint C. %ariff quota D. Ad valorum tariff E. None of the above. Ans er! C "". Should the home countr# be -large- relative to its trade partners, its imposition of a tariff on imports ould lead to an increase in domestic elfare if the terms of the trade rectangle exceed the sum of the A. revenue effect plus redistribution effect. B. protective effect plus revenue effect. C. consumption effect plus redistribution effect. D. protective distortion effect plus consumption distortion effect. E. None of the above. Ans er! D "$. A problem encountered hen implementing an -infant industr#- tariff is that A. domestic consumers ill purchase the foreign good regardless of the tariff. B. the industr# ma# never -mature-. C. most industries require tariff protection hen the# are mature. D. the tariff ma# hurt the industr#@s domestic sales. E. None of the above. Ans er! B "*. <hich of the follo ing is a fixed percentage of the value of an imported product> A. Specific tariff B. Ad valorem tariff C. Nominal tariff D. Effective protection tariff E. None of the above. Ans er! B

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"3. A tax of "9 cents per unit of imported garlic is an example of a&n( A. specific tariff. B. ad valorem tariff. C. nominal tariff. D. effective protection tariff. E. None of the above. Ans er! A "2. A tax of "9 percent per unit of imported garlic is an example of a&n( A. specific tariff. B. ad valorem tariff. C. nominal tariff. D. effective protection tariff. E. None of the above. ). Ans er! B "6. <hich t#pe of tariff is forbidden in the :nited States on Constitutional grounds> A. +mport tariff B. Export tariff C. Specific tariff D. 0rohibitive tariff E. None of the above. Ans er! B "7. %he dead A. B. C. D. E. eight loss of a tariff is a social loss because it promotes inefficient use of national resources. is a social loss because it reduces the revenue of the government. is not a social loss because it merel# redistributes revenue from one sector to another. is not a social loss bacuase it is paid for b# rich corporations. None of the above.

Ans er! A "1. %ariffs are not defended on the ground that the# A. improve the terms of trade of foreign nations. B. protect =obs and reduce unemplo#ment. C. promote gro th and development of #oung industries. D. prevent over8dependence of a countr# on onl# a fe industries. E. None of the above. Ans er! A

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$9. %he most vocal political pressure for tariffs is generall# made b# A. consumers lobb#ing for export tariffs. B. consumers lobb#ing for import tariffs. C. consumers lobb#ing for lo er import tariffs. D. producers lobb#ing for export tariffs. E. producers lobb#ing for import tariffs. Ans er! E $1. A polic# of tariff reduction in the computer industr# is A. in the interest of the :nited States as a hole and in the interest of computer producing regions of the countr#. B. in the interest of :nited States as a hole but not in the interest of computer producing regions of the countr#. C. not in the interest of the :nited States as a hole but in the interests of computer producing regions of the countr#. D. not in the interest of the :nited States as a hole and not in the interests of computer consumers. E. None of the above. Ans er! B $". %he fact that industriali5ed countries lev# ver# lo or no tariff on ra materials and semi processed goods A. helps developing countries export manufactured products. B. has no effect on developing countr# exports. C. hurts developing countr# efforts to export manufactured goods. D. hurts developing countr# efforts to export ra materials. E. None of the above. Ans er! C $$. %he Metzler Paradox A. explains h# the :nited States uses both specific and ad valorum tariffs. B. explains h# the :nited States uses man# none8tariff barriers to imports. C. refers to the fact that the :nited States exported labor8intensive goods. D. is not considered to be of practical application in the real orld. E. None of the above. Ans er! D

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$*. %he Metzler Paradox A. could theoreticall# happen hen a small countr# levies a tariff. B. refers to a situation hen an /ptimal %ariff hurts a countr#@s economic elfare. C. refers to a situation hen the imposition of a tariff lo ers domestic prices. D. refers to a situation hen the imposition of a tariff helps foreign exporters. E. None of the above. Ans er! C $3. An Optimal Tariff A. could theoreticall# happen hen a small countr# levies a tariff. B. refers to a situation hen a tariff hurts a countr#@s economic elfare. C. refers to a situation hen the imposition of a tariff lo ers domestic prices. D. refers to a situation hen the imposition of a tariff helps foreign exporters. E. None of the above. Ans er! E $2. An Optimal Tariff is considered unli;el# to be observed in the real orld because of A. %he Metzler Paradox. B. it is practicall# impossible to define optimalit# in trade polic# terms. C. the li;elihood of foreign repercussions. D. real countries are considered to be -small- in the orld trade context. E. None of the above. Ans er! C

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Essay Questions 1. Economic theor# in general, and trade theor# in particular are replete ith equivalencies. )or example, it is argued that for an# specific tariff one can find an equivalent ad valorum tariffA and that for an# quota one can calculate a tariff equivalent. Discuss conditions or situations under hich a specific and an ad valorum tariff are not equivalent. Discuss conditions or situations hen a tariff and a quota are not equivalent. Ans er! E.g., during a period of price inflation, an ad valorum tariff ould become increasingl# more effective. %he government does not receive an# of the quota revenues, unless the import licenses are sold or auctioned. ". %he Metzler Paradox is a special case of the optimum tariff concept. Discuss this assertion. <ould the optimum tariff tend to be a high one or a lo one in the case here this paradox exists> <hat conditions ould be needed in the international mar;ets for a countr#@s exports for this paradox to exist> <h# do #ou suppose empirical support for the existence of this paradox has not been forthcoming to date> Ans er! %he Metzler Paradox describes an unli;el# situation in hich the imposition of a tariff not onl# improves a countr#@s elfare, but also improves that of its domestic consumers. +f this paradox ere present then the magnitude of the optimum tariff ould tend to be large, since the elfare decreasing decrease in imports is not present in this case &the imports actuall# increase, as orld prices drasticall# drop(. %he Metzler Paradox could occur onl# if the foreign offer curves are inelastic. +t is not li;el# to be observed because trade elasticities tend to be relativel# large. Also, ere it to exist, its activation b# a large countr# ould tend to evo;e foreign retaliation. $. Some argue that tariffs al a#s hurt the imposing countr#@s economic elfare, and are t#picall# designed to shift resources from one sector to another, protected or preferred one, ithin an econom#. )ind and discuss a counterexample to this argument. Ans er! %he optimum tariff is theoreticall# a first8best trade polic#.

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*. %he effective rate of protection is a eighted average of nominal tariffs and tariffs on imported inputs. +t has been noted that in most industriali5ed countries, the nominal tariffs on ra materials or intermediate components or products are lo er than on final8stage products meant for final mar;ets. <h# ould countries design their tariff structures in this manner> <ho tends to be helped, and ho is harmed b# this cascading tariff structure? Answer: %he cascading tariff structure is probabl# the result of s#stematic lobb#ing on the part of manufacturing interests and lobbies to lo er costs of production &in terms of imported inputs(. %he end result is in fact to create effective rates of protection for do nstream, or final manufacturing processes that are often much higher than nominal tariffs on these products. An important group, hich is hurt b# this are exporters of ra materials and components in developing countries. 3. %he t o dead eight triangles are the Consumption distortion and Production distortion losses. +t is eas# to understand h# the Consumption distortion constitutes a loss for societ#. After all it raises the prices of goods to consumers, and even causes some consumers to drop out of the mar;et altogether. +t seems paradoxical that the Production distortion is considered an equivalent burden on societ#. After all, in this case, profits increase, and additional production & ith its associated emplo#ment( comes on line. %his ould seem to be an offset rather than an addition to the burden or loss borne b# societ#. Explain h# the Production distortion is indeed a loss to societ#, and hat is rong ith the logic that leads to the apparent paradox. Ans er! %he Production distortion is a loss to societ# because it constitutes a loss to consumer surplus, hich is not recouped b# an# other group in societ#. %he actual triangle here represents an inefficient shift of societ#Bs resources to produce a good, hich it could not sell profitabl# at orld prices. Sine & ith full emplo#ment assumed( these resources ere formerl# used to produce export goods, hich could compete profitabl#, the net result is a loss in real income to the countr#.

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Quantitative/Graphing Pro lems

1.

+n the )igure above, in the absence of %rade ho man# <idgets does this countr# produce and consume>

Ans er! 29 ". +n the absence of trade hat is the countr#@s consumer plus producer surplus>

Ans er! C179, C179 $. <ith free trade and no tariffs, hat is the quantit# of <idgets imported>

Ans er! 199 *. <ith a specific tariff of C$ per unit, hat is the quantit# of <idget imports>

Ans er! 79 3. %he loss of Consumer Surplus due to the tariff equals

Ans er! C"$9 2. %he lo est specific tariff hich ould be considered prohibitive is

Ans er! C3

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