Multiple Choice

1.     __________ constitute the regulations governing a nation’s international trade.

A)    Tariff policies

B)     Commercial policies

C)    Non-tariff barriers

D)    Globalization policies Answer: B

2.      A(n) __________ is a tax or duty levied on the traded commodity as it enters a nation.

A)    ad valorem tariff

B)     compound tariff

C)     optimum tariff

D)    import tariff Answer: D

3.      A tax of 5% per unit of imported wine would be an example of a(n):

A)    compound tariff

B)     specific tariff

C)     export tariff

D)    ad valorem tariff Answer: D

4.      A tariff expressed as a fixed percentage of the value of a traded commodity is a(n):

A)    export tariff

B)     ad valorem tariff

C)     compound tariff

D)    import tariff Answer: B

5.      The _______________ is expressed as a fixed sum per physical unit of the traded commodity.

A)    ad valorem tariff

B)     export tariff

C)     specific tariff

D)    compound tariff Answer: C

6.      A tariff that is a combination of an ad valorem and a specific tariff is a(n):

A)    import tariff

B)     export tariff

C)     compound tariff

D)    optimum tariff Answer: C

7.      A defining characteristic of a “small nation” relative to a “large nation” with respect to identifying the welfare effects of a tariff is that the:

A)    small nation has less land mass than a large nation

B)     small nation cannot influence world price of imported goods as much as a large nation can

C)     small nation has a smaller trade deficit than the large nation

D)    small nation has a smaller population compared to a large nation Answer: B

8.      With free trade, the small nation will import all its commodities at what price level?

A)    the world market price

B)     the domestic price plus the compound tariff

C)     the small nation’s autarky price

D)    the large nation’s autarky price Answer: A

Reference: Use Figure 1 to answer questions 10- 12.

$

15

10

8              12          16             20

9.      In Figure 1, if the free trade price was $10 and a $5 tariff was imposed on the imports, then how much is the consumption effect of the tariff (how much will the consumers loose as a result of the tariff)?

A)     10

B)     20

C)     50

D)    90 Ans: D

10.    In Figure 1, if the free trade price was $10 and a $5 tariff was imposed on the imports, then how much is the gain in producer surplus?

A)    20

B)     40

C)     50

D)     80 Ans: C

11.    In Figure 1, if the free trade price was $10 and a $5 tariff was imposed on the imports, then how much is the deadweight loss to the society?

A)     10

B)     20

C)     50

D)    90 Ans: B

12.    Suppose, to produce $200,000 worth of finished cloth in the US, textile producers import    $150,000 of raw materials.  The raw materials are imported duty free.  However, the US has        imposed a 5% nominal tariff on imports of finished cloth.  What is the effective rate of protection enjoyed by the domestic cloth producers in the US?

A)    20%

B)     10%

C)     5%

D)    6%   Answer: A

13.    The decline in import volumes as a result of the imposition of a tariff is attributed to the :

A)    production effect of a tariff

B)     trade effect of a tariff

C)     revenue effect of a tariff

D)    consumption effect of a tariff Answer: B

14.    The revenue collected by the government as a result of an imposed tariff is attributed to the:

A)    production effect of a tariff

B)     trade effect of a tariff

C)     revenue effect of a tariff

D)    consumption effect of a tariff Answer: C

15.    When a 10 percent tariff is imposed on commodity X, there is a(n) ____________  in consumer surplus and a(n) _________ in producer surplus.

A)    decrease, increase

B)     increase, decrease

C)     decrease, decrease

D)    increase, increase Answer: A

16.    The difference between what consumers would be willing to pay for each unit of commodity and what they actually pay for that unit is called ____________.

A)    producer surplus

B)     consumer surplus

C)     reservation price

D)    import tariff Answer: B

17.   ______________ represents payment that is made  above the amount required for the producers to be willing to supply a specific amount of a commodity to the market.

A)    Producer surplus

B)     Consumer surplus

C)     Revenue effect

D)    Import tariff Answer: A

18.   ________________ refers to the real loss in a small nation’s welfare due to inefficiencies in production and distortions in consumption resulting from the imposition of a tariff.

A)    Deadweight loss

B)     Protection loss

C)     Consumer loss

D)    Economic loss Answer: A

19.    In a large nation, who bears the burden of the import tariff?

A)    domestic import-competing producers

B)     foreign producers of the imported good

C)     domestic consumers only

D)    domestic consumers and foreign producers of the imported good Answer: D

20.    The more _____________ the demand or supply curves of the imported commodity in the nation imposing the tariff, the more likely it is that a large nation will experience a net welfare  gain from the tariff.

A)    inelastic

B)     elastic

C)     linear

D)    nonlinear Answer: B

21.    The ______________ is the tariff that maximizes the positive difference between gains associated with improvement in terms of trade and the losses resulting from reduction in the volume of trade.

A)    optimum tariff

B)     prohibitive tariff

C)     nominal tariff

D)    absolute tariff Answer: A

22.    A(n) ______________ is a tariff calculated on the price of a final commodity.

A)     optimum tariff

B)     prohibitive tariff

C)     nominal tariff

D)    terms of trade effect on a tariff Answer: C

True/False

23.    A specific tariff of $10 would provide the same level of protection for a $100 good as for a $200 good.

Answer: False

24.    A small nation is not large enough to affect the world price of the commodity it is importing

Answer: True

25.    Consumer surplus is the difference between what consumers are willing to pay for a commodity and the price they actually pay for the commodity.

Answer: True

26.    Graphically, consumer surplus is measured by the area between the supply curve and the market price.

Answer: False

27.    The rate of effective protection is equal to the nominal tariff imposed on the imported product only if the domestic producer utilizes imported components in the production of the good.

Answer: False

28.    The effective rate of protection of a tariff is important to producers because it indicates how much the domestic import-competing producer of the good can increase the value added portion  of their final product.

Answer: True

Essay

29.    “Using international trade theory, we can unambiguously state that the imposition of a tariff imposes net losses to the imposing nation.”  Is this statement true or false?  Explain.

Answer: For a small nation, the tariff redistributes income from domestic consumers (who pay a  higher price for the commodity) to domestic producers of the commodity (who receive the higher price).  Also, the tariff redistributes the nation’s abundant factor (producing exportable) to the      nation’s scare factor (producing importable).  This process leads to inefficiencies, which is           referred to as deadweight loss.  Therefore, we can unambiguously state that a small nation loses   welfare as the result of a tariff.

For a large nation, a tariff imposed by a large nation will have two parts.  First, the tariff will fall on domestic consumers in the form of a higher price on the imported commodity.  Secondly, the foreign producers will receive a lower price for the commodity, the reason being because the      large nation is significant and leads to a reduction in the price that the foreign producers can       charge for the commodity.  The large nation may benefit from the tariff.  If the large nation has a demand or supply curve that is elastic, they may have welfare gains from the tariff.  Therefore,   we cannot unambiguously state that the imposition of a tariff will harm a large nation.