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International Economics, 8e (Krugman) Chapter 8 The Instruments of Trade Policy 8.1 Basic Tariff Analysis
1) pecific tariffs are S A) mport taxes stated in specific legal statutes. i B) mport taxes calculated as a fixed charge for each unit of imported goods. i C) mport taxes calculated as a fraction of the value of the imported goods. i D) he same as import quotas. t E) one of the above. N Answer: B
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2) d valorem tariffs are A A) mport taxes stated in ads in industry publications. i B) mport taxes calculated as a fixed charge for each unit of imported goods. i C) mport taxes calculated as a fraction of the value of the imported goods. i D) he same as import quotas. t E) one of the above. N Answer: C
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3) he excess supply curve of a product we (H) import from foreign countries (F) increases as T A) xcess demand of country H increases. e B) xcess demand of country F increases. e C) xcess supply of country H increases. e D) xcess supply of country F increases. e E) one of the above. N Answer: D
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4) uppose the United States eliminates its tariff on ball bearings used in producing exports. Ball bearing prices S in the United States would be expected to A) ncrease, and the foreign demand for U.S. exports would increase. i B) ecrease, and the foreign demand for U.S. exports would increase. d C) ncrease, and the foreign demand for U.S. exports would decrease. i D) ecrease, and the foreign demand for U.S. exports would decrease. d E) one of the above. N Answer: C
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5) specific tariff provides home producers more protection when A A) he home market buys cheaper products rather than expensive products. t B) t is applied to a commodity with many grade variations. i C) he home demand for a good is elastic with respect to price changes. t D) t is levied on manufactured goods rather than primary products. i E) one of the above. N Answer: A
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6) lower tariff on imported steel would most likely benefit A A) oreign producers at the expense of domestic consumers. f B) omestic manufacturers of steel. d C) omestic consumers of steel. d D) orkers in the steel industry. w E) one of the above. N Answer: C
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7) problem encountered when implementing an ʺinfant industryʺ tariff is that A A) omestic consumers will purchase the foreign good regardless of the tariff. d B) he industry may never ʺmature.ʺ t C) ost industries require tariff protection when they are mature. m D) he tariff may hurt the industryʹs domestic sales. t E) one of the above. N Answer: B
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8) hich of the following is a fixed percentage of the value of an imported product? W A) pecific tariff s B) d valorem tariff a C) ominal tariff n D) ffective protection tariff e E) one of the above. N Answer: B
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9) tax of 20 cents per unit of imported garlic is an example of a(n) A A) pecific tariff. s B) d valorem tariff. a C) ominal tariff. n D) ffective protection tariff. e E) one of the above. N Answer: A
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10) tax of 20 percent per unit of imported garlic is an example of a(n) A A) pecific tariff. s B) d valorem tariff. a C) ominal tariff. n D) ffective protection tariff. e E) one of the above. N Answer: B
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11) hich type of tariff is forbidden in the United States on Constitutional grounds? W A) mport tariff i B) xport tariff e C) pecific tariff s D) rohibitive tariff p E) one of the above. N Answer: B
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12) ariffs are not defended on the ground that they T A) mprove the terms of trade of foreign nations. i B) rotect jobs and reduce unemployment. p C) romote growth and development of young industries. p D) revent over-dependence of a country on only a few industries. p E) one of the above. N Answer: A
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13) he most vocal political pressure for tariffs is generally made by T A) onsumers lobbying for export tariffs. c B) onsumers lobbying for import tariffs. c C) onsumers lobbying for lower import tariffs. c D) roducers lobbying for export tariffs. p E) roducers lobbying for import tariffs. p Answer: E
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14) he Metzler Paradox T A) xplains why the United States uses both specific and ad valorum tariffs. e B) xplains why the United States uses many none-tariff barriers to imports. e C) efers to the fact that the United States exported labor-intensive goods. r D) s not considered to be of practical application in the real world. i E) one of the above. N Answer: D
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15) he Metzler Paradox T A) ould theoretically happen when a small country levies a tariff. c B) efers to a situation when an Optimal Tariff hurts a countryʹs economic welfare. r C) efers to a situation when the imposition of a tariff lowers domestic prices. r D) efers to a situation when the imposition of a tariff helps foreign exporters. r E) one of the above. N Answer: C
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16) ariff rates on products imported into the U.S. T A) ave dropped substantially over the past 50 years. h B) ere prohibited by the constitution w C) eached an all time high in 2002. r D) ave risen steadily since 1920. h E) one of the above. N Answer: A
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17) hat is a true statement concerning the imposition in the U.S. of a tariff on steel? W A) t lowers the price of cheese domestically. I B) t raises the price of cheese internationally. I C) t raises revenue for the government. I D) t will always result in retaliation from abroad. I E) one of the above. N Answer: C
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18) he tariff levied in a ʺlarge countryʺ (Home), lowers the world price of the imported good. This causes T A) oreign consumers to demand less of the good on which was levied a tariff. f B) omestic demand for imports to decrease. d C) omestic demand for imports to increase. d D) oreign suppliers to produce less of the good on which was levied a tariff. f E) one of the above. N Answer: D
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19) n the country levying the tariff, the tariff will I A) ncrease both consumer and producer surplus. i B) ecrease both the consumer and producer surplus. d C) ecrease consumer surplus and increase producer surplus. d D) ncrease consumer surplus and decrease producer surplus. i E) one of the above. N Answer: C
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20) t is argued that a tariff may help promote employment in a single industry, but is not likely to help I employment in general. Discuss. Answer: A general tariff on all imports is equivalent to a depreciation in the value of the countryʹs currency. It would raise the prices of all imports, and have a considerable income effect. This income effect will have a negative effect on total consumption of the import-competing sector (as well as the exportables and non-tradables). In addition, under conditions of a flexible exchange rate regime (assuming the Marshal-Lerner Conditions hold) it will lower the supply of the countryʹs currency in the foreign exchange market, and hence cause an appreciation of the currency. This will harm the countryʹs exports, and negatively affect this sectorʹs employment.
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21) efer to above figure. In the absence of trade, how many Widgets does this country produce and consume? R Answer: 60
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22) efer to above figure. In the absence of trade, what is the countryʹs consumer plus producer surplus? R Answer: $180, $180
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23) efer to above figure. With free trade and no tariffs, what is the quantity of Widgets imported? R Answer: 100
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24) efer to above figure. With a specific tariff of $3 per unit, what is the quantity of Widget imports? R Answer: 80
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25) efer to above figure. The loss of Consumer Surplus due to the tariff equals ________. R Answer: $230
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26) efer to above figure. The lowest specific tariff which would be considered prohibitive is ________. R Answer: $5
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8.2 Costs and Benefits of a Tariff
1) f a good is imported into (large) country H from country F, then the imposition of a tariff in country H I A) aises the price of the good in both countries (the ʺLaw of One Priceʺ). r B) aises the price in country H and cannot affect its price in country F. r C) owers the price of the good in both countries. l D) owers the price of the good in H and could raise it in F. l E) aises the price of the good in H and lowers it in F. r Answer: E
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2) f a good is imported into (small) country H from country F, then the imposition of a tariff In country H I A) aises the price of the good in both countries (the ʺLaw of One Priceʺ). r B) aises the price in country H and does not affect its price in country F. r C) owers the price of the good in both countries. l D) owers the price of the good in H and could raise it in F. l E) aises the price of the good in H and lowers it in F. r Answer: B
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3) f a good is imported into (large) country H from country F, then the imposition of a tariff in country H in the I presence of the Metzler Paradox, A) aises the price of the good in both countries (the ʺLaw of One Priceʺ). r B) aises the price in country H and cannot affect its price in country F. r C) owers the price of the good in both countries. l D) owers the price of the good in H and could raise it in F. l E) aises the price of the good in H and lowers it in F. r Answer: C
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4) he effective rate of protection measures T A) he ʺtrueʺ ad valorum value of a tariff. t B) he quota equivalent value of a tariff. t C) he efficiency with which the tariff is collected at the customhouse. t D) he protection given by the tariff to domestic value added. t E) one of the above. N Answer: D
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5) f the tariff on computers is not changed, but domestic computer producers shift from domestically produced I semiconductors to imported components, then the effective rate of protection in the computer industry will A) ncrease. i B) ecrease d C) emain the same. r D) epend on whether computers are PCs or ʺSupercomputers.ʺ d N E) one of the above. Answer: A
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6) f the tariff on computers is not changed, but the government then adds hitherto nonexistent tariffs on I imported semi-conductor components, then the effective rate of protection in the computer industry will A) ncrease. i B) ecrease d C) emain the same. r D) epend on whether computers are PCs or ʺSupercomputers.ʺ d E) one of the above. N Answer: B
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7) f a small country imposes a tariff, then I A) he producers must suffer a loss. t B) he consumers must suffer a loss. t C) he government revenue must suffer a loss. t D) he demand curve must shift to the left. t E) one of the above. N Answer: B
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8) he imposition of tariffs on imports results in deadweight (triangle) losses. These are T A) roduction and consumption distortion effects. p B) edistribution effects. r C) evenue effects r D) fficiency effects. e E) one of the above. N Answer: E
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9) hen a government allows raw materials and other intermediate products to enter a country duty free, this W generally results in a(an) A) ffective tariff rate less than the nominal tariff rate. e B) ominal tariff rate less than the effective tariff rate. n C) ise in both nominal and effective tariff rates. r D) all in both nominal and effective tariff rates. f E) one of the above. N Answer: B
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10) f the many arguments in favor of tariffs, the one that has enjoyed significant economic justification has O been the A) heap foreign labor argument. c B) nfant industry argument. i C) ven playing field argument. e D) alance of payments argument b E) omestic living standard argument. d Answer: B
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11) he main redistribution effect of a tariff is the transfer of income from T A) omestic producers to domestic buyers. d B) omestic buyers to domestic producers. d C) omestic producers to domestic government. d D) omestic government to domestic consumers. d E) one of the above. N Answer: B
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12) he principle benefit of tariff protection goes to T A) omestic consumers of the good produced. d B) oreign consumers of the good produced. f C) omestic producers of the good produced. d D) oreign producers of the good produced. f E) one of the above. N Answer: C
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13) s globalization tends to increase the proportion of imported inputs relative to domestically supplied A components, A) he nominal tariff automatically increases. t B) he rate of (effective) protection automatically decreases. t C) he nominal tariff automatically decreases. t D) he rate of (effective) protection automatically increases. t E) one of the above. N Answer: D
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14) hould the home country be ʺlargeʺ relative to its trade partners, its imposition of a tariff on imports would S lead to an increase in domestic welfare if the terms of the trade rectangle exceed the sum of the A) evenue effect plus redistribution effect. r B) rotective effect plus revenue effect. p C) onsumption effect plus redistribution effect. c D) roduction distortion effect plus consumption distortion effect. p E) one of the above. N Answer: D
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15) he deadweight loss of a tariff T A) s a social loss because it promotes inefficient use of national resources. i B) s a social loss because it reduces the revenue of the government. i C) s not a social loss because it merely redistributes revenue from one sector to another. i i D) s not a social loss because it is paid for by rich corporations. E) one of the above. N Answer: A
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16) policy of tariff reduction in the computer industry is A A) n the interest of the United States as a whole and in the interest of computer producing regions of the i country. B) n the interest of United States as a whole but not in the interest of computer producing regions of the i country. C) ot in the interest of the United States as a whole but in the interests of computer producing regions of n the country. D) ot in the interest of the United States as a whole and not in the interests of computer consumers. n E) one of the above. N Answer: B
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17) he fact that industrialized countries levy very low or no tariff on raw materials and semi processed goods T A) elps developing countries export manufactured products. h B) as no effect on developing country exports. h C) urts developing country efforts to export manufactured goods. h D) urts developing country efforts to export raw materials. h E) one of the above. N Answer: C
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18) n an inflationary environment, then over time I A) specific tariff will tend to raise more revenue than an ad valorum tariff. A B) n ad valorum tariff will tend to raise more revenue than a specific tariff A C) n optimum tariff will tend to raise more revenue than an escalating tariff A D) tariff quota will tend to raise more revenue than a specific tariff. A E) one of the above. N Answer: B
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19) he imposition of tariffs will help a nation attain which of the following goals? T A) ecreased domestic consumer prices d B) ncreased domestic employment i C) ncreased amount and variety of goods available for consumers i D) ncreased competition between domestic and foreign producers i E) one of the above. N Answer: E
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20) he change in the economic welfare of a country associated with an increase in a tariff equals T A) fficiency loss - terms of trade gain. e B) fficiency gain - terms of trade loss. e C) fficiency loss + tax revenue gain. e D) efficiency loss + tax revenue gain + terms of trade gain. E) one of the above. N Answer: A
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21) he Metzler Paradox is a special case of the optimum tariff concept. Discuss this assertion. Would the optimum T tariff tend to be a high one or a low one in the case where this paradox exists? What conditions would be needed in the international markets for a countryʹs exports for this paradox to exist? Why do you suppose empirical support for the existence of this paradox has not been forthcoming to date? Answer: The Metzler Paradox describes an unlikely situation in which the imposition of a tariff not only improves a countryʹs welfare, but also improves that of its domestic consumers. If this paradox were present then the magnitude of the optimum tariff would tend to be large, since the welfare decreasing decrease in imports is not present in this case (the imports actually increase, as world prices drastically drop). The Metzler Paradox could occur only if the foreign offer curves are inelastic. It is not likely to be observed because trade elasticities tend to be relatively large. Also, were it to exist, its activation by a large country would tend to evoke foreign retaliation.
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22) ome argue that tariffs always hurt the imposing countryʹs economic welfare, and are typically designed to S shift resources from one sector to another, protected or preferred one, within an economy. Find and discuss a counterexample to this argument. Answer: The optimum tariff is theoretically a first-best trade policy.
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23) he effective rate of protection is a weighted average of nominal tariffs and tariffs on imported inputs. It has T been noted that in most industrialized countries, the nominal tariffs on raw materials or intermediate components or products are lower than on final-stage products meant for final markets. Why would countries design their tariff structures in this manner? Who tends to be helped, and who is harmed by this cascading tariff structure? Answer: The cascading tariff structure is probably the result of systematic lobbying on the part of manufacturing interests and lobbies to lower costs of production (in terms of imported inputs). The end result is in fact to create effective rates of protection for downstream, or final manufacturing processes that are often much higher than nominal tariffs on these products. An important group, which is hurt by this are exporters of raw materials and components in developing countries.
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24) he two deadweight triangles are the Consumption distortion and Production distortion losses. It is easy to T understand why the Consumption distortion constitutes a loss for society. After all it raises the prices of goods to consumers, and even causes some consumers to drop out of the market altogether. It seems paradoxical that the Production distortion is considered an equivalent burden on society. After all, in this case, profits increase, and additional production (with its associated employment) comes on line. This would seem to be an offset rather than an addition to the burden or loss borne by society. Explain why the Production distortion is indeed a loss to society, and what is wrong with the logic that leads to the apparent paradox. Answer: The Production Distortion represents an inefficient shift of societyʹs resources to produce a good, which it could not sell profitably at world prices. Since (with full employment assumed) these resources were formerly used to produce export goods, which could compete profitably, the net result is a loss in real income to the country.
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8.3 Other Instruments of Trade Policy
1) n important difference between tariffs and quotas is that tariffs A A) aise the price of the good. r B) enerate tax revenue for the government. g C) timulate international trade. s D) elp domestic producers. h E) one of the above. N Answer: B
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2) hroughout the post-World War II era, the importance of tariffs as a trade barrier has T A) ncreased. i B) ecreased. d C) emained the same. r D) luctuated wildly. f E) emonstrated a classic random walk with a mean-reversion tendency. d Answer: B
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3) n the exporting country, an export subsidy will I A) elp consumers and raise the overall economic welfare of the exporting country. h B) urt consumers but raise the overall economic welfare of the exporting country. h C) urt consumers and lower the overall economic welfare of the exporting country. h D) elp consumers but lower economic welfare of the exporting country. h E) one of the above N Answer: C
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4) conomic theory in general, and trade theory in particular are replete with equivalencies. For example, it is E argued that for any specific tariff one can find an equivalent ad valorum tariff; and that for any quota one can calculate a tariff equivalent. Discuss conditions or situations under which a specific and an ad valorum tariff are not equivalent. Discuss conditions or situations when a tariff and a quota are not equivalent. Answer: E.g., during a period of price inflation, an ad valorum tariff would become increasingly more effective. The government does not receive any of the quota revenues, unless the import licenses are sold or auctioned.
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8.4 The Effects of Trade Policy: A Summary
1) here are no questions for this section. T Answer: TRUE
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8.5 Appendix 1 to Chapter 8: Tariff Analysis in General Equilibrium
1) here are no questions for this section. T Answer: TRUE
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8.6 Appendix 2 to Chapter 8: Tariffs and Import Quotas in the Presence of Monopoly
1) here are no questions for this section. T Answer: TRUE Question Status: ew N

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...Thesis Economics Thesis The goal of an economics thesis is to solve a problem regarding the exchange of goods and services in an innovative way. To this end, the student may explore macroeconomics, the study of large economics systems, or microeconomics, the study of person-to-person exchanges of goods and services, in a completely unique manner or in a manner that simply expands on or addresses previous ideas. Students who are struggling to develop ideas for their economics theses may benefit from asking themselves what problems they have a passion for solving. For example, perhaps the student feels greatly irritated about gas prices and could develop an idea on how to cut costs. Perhaps the student has a fascination with the failure of communism and would like to develop a thesis on where the economic system went wrong and why. If the student cannot identify a topic that would produce a viable economics thesis, he or she should talk with the major professor and see if together they can brainstorm a usable idea. Economics theses may have concerns that most disciplines do not have, particularly in formatting. Because pictures can carry a great deal of information in a much more succinct way than text and because economics theses often handle highly complex issues, writers of economics theses may find it useful to include a number of charts, graphs, and tables both in appendices and in the body of the thesis itself. Depending on the complexity of those graphics, the student...

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Economics

...classified and analyzed. The first studies on the economic impact of port activity emerged in the United States in the second half of the 1960s. The ports of New York and New Jersey were the first to be taken into consideration. In the 1970s, the first methodological discussions took place, based on the development of the input–output model and its application to the measurement of the impact of ports. The main stances opposing this kind of study were advocated by Robert C. Waters, while those in favour had Semoon Chang as their main champion, and most of Waters’ criticisms were dealt with. 1. PORT ECONOMIC IMPACTS Ports contribute much to their economies, and port economic impact analysis is the major tool for documenting those contributions. The primary objective of port impact studies is to inform the public of the importance of port services, and additional benefits that may exist vary with particular studies. And also, the decision of local governmental agencies to construct port facilities is often preceded by a port economic impact study. The majority of existing port impact studies begin with definitions of port impacts, as an improper notion of port impact might well lead to an entirely wrong estimation of the total economic impact of a port. One of the major challenges in port impact studies is to identify the port-related industries and find out the degree of port dependency of these industries. Generally, economic impacts of port on the local economy can be divided...

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Economics

...stirred up a massive cause for debate, and for the correct reason. The decision the English citizen is going to comprehend is crucial for the welfare for the English economy, and is known to be the ‘’most important decision you’ll make in a generation’’ As quoted by George Osbourne, Chancellor of the Exchequer, in an article about foreign relations with Brussels. It is a very important decision to the English taxpayer, but is equally important for the British economy, but I think, is arguably most important for the small or large, private or public, English Business. The English economy is growing by 1.5% per annum, this is not enough. Compared to foreign relations such as China, with a G.D.P growth rate or economic growth rate of nearly 9% a year, China has a faster economic growth rate by 6x. Now what do these numerical figures mean in contrast to leaving the EU? Well, whether or not to leave the EU has a massive effect on our economy, influenced by trade. But how does this correlate to affecting British businesses? Well a faster, well protected economy will allow businesses to run faster, trade faster, produce faster, and become efficient, which...

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Economic

...Economic Decisions Individuals and societies alike face many decisions. Individuals tend to make economic decisions when faced with trade-offs, and because of that, individuals are required to compare costs and benefits of their alternative actions referred to as the opportunity cost. Rational individuals tend to think of marginal change during the process of decision-making, and therefore, may respond differently to incentives whilst making economic decisions. This paper discusses the four principles of economics, a decision associated with marginal change, the incentive(s) that could lead to making different decision, and finally, how the principles of economics affect decision-making, interaction and the workings of the economy as whole. The Principles of Economics A trade-off is often referred to as the “technique of reducing or forgoing one or more desirable outcomes in exchange for increasing or obtaining other desirable outcomes to maximize the total return or effectiveness under given circumstances.” (BusinessDictionary.com, 2009) In brief, individuals choose something over something else, or give up something in order to get something else. Whatever “it” is that individuals sacrifice in order to get something, is generally “its” cost, and cost is often linked and associated with money, an opportunity cost however, could be the cost of anything i.e. time or health sacrificed in order to get something. Marginal changes are incremental adjustments individuals make...

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Economics

...single monopoly and share production and profit. However, if this price-fixing game is repeated indefinitely, it would come to a moment that one firm cheats on their collusive agreement. If the cheater cuts its price and the complier remains the agreed price. As shown in the figure, for the complier, ATC now exceeds price and for the cheater, the price exceeds ATC. The industry output is larger than the monopoly output and the industry price is lower than the monopoly price. The total economic profit made by the industry is also smaller than the monopoly’s economic profit. Therefore the complier incurs an economic loss while the cheater gains economic profit. If since both firms have an incentive to cheat as long as price exceeds marginal cost. In this price-fixing game, it will occur a situation that both firms cheat. If both firms produce more cigarettes than the number agreed, the industry output will be increased, the price of cigarettes will fall and both firms makes zero economic profit, as shown in the figure. -In monopolistic competition a company in the short run, makes its output and price decision just like a monopoly company does. The following figure illustrates the monopolistic competition in the short run. As you can see, when the marginal revenue equals its marginal cost (MR = MC), the firm charges the highest price (P) that buyers are willing to pay for this quantity, which is highly higher than the average total cost (ATC). Therefore the firm makes...

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Economics

...both Macro and Micro Economic principles and is aligned with the California State Standards for Social Science in Economics. It is designed to provide a basic understanding of the core concepts, ideas, and theories relevant to the study of Economics as a social science in today’s world. Although many of the topics we cover will be new to many students, it is my goal to relate them to both the life of a teenager about to embark on his or her own economic odyssey and the larger issues filling up space on the pages of our newspapers and the screens of our computers. Whether you like it (or even know it) or not, we are all subject to the economic system we live in and its ever-changing conditions. We are all economic actors! Course Topics: 1. What is Economics? What are the basic ideas, questions, and vocabulary underlying the study of economics as a social science? 2. Economic Systems How do society’s decide what to make, how to make it, and who gets what is made? 3. Supply and Demand How are prices, the language consumers and producers use to communicate, determined in a free market system? 4. Labor Unions What do they do, what are their pros and cons, what is their history, and their current status? 5. Financial Markets What are the fundamentals of our financial system and how can you begin to learn to take advantage of it for your own benefit? 6. Macroeconomics How are large-scale economic indicators, such as...

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Economics

...Title: Economics Name: Professor’s name: Course title: Date: Economics Suggest how an economist would approach the problem of alcohol abuse. Provide two (2) possible solutions to this problem. Include the four (4) elements of the economic way of thinking in your analysis. It is a genuine case of negative externalities both in production and consumption. Alcohol production also causes pollution of the environment especially due to the large CO2 emissions produced by factories and some of the byproducts. Two possible solutions to these problems proposed by economists are: • Coase theorem. Negotiating for compensation with no any government intervention on condition that the cost of negotiation is not high and the property rights are secured. • Pigouvian regulations or taxes: Drunk driving is incorporated. An economist would raise cost through reduced availability and added taxes Analyze how prescription drugs affect the demand and supply of other products and services in this country. According to Garrod and Willis (2007), in economics, the law of supply and demand is regard as one of the fundamental principles running an economy. It is illustrated as the situation where as supply raises the price will likely drop or vice versa. As demand raises the price will likely increase or vice versa. Essentially this is a standard that nearly all people intuitively understand concerning the relationship of services and goods against the demand for...

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