Tutorial
Chapter 10
International Trade
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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.
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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.
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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.
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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.
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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.
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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.
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7. American companies often petition
Congress to impose tariffs against
foreign competitors.
True
This is an example of rent seeking.
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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.
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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.
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10. 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.
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11. 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.
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12. 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.
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13. 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.
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14. 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.
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15. 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.
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16. 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.
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17. 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.
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18. 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.
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19. 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.
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20. 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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END
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