Trade Policy in Developing Countries

11.2 Results of Favoring Manufacturing: Problems of Import-Substituting Industrialization

1. General equilibrium considerations lead to the realization that import-substituting policies have the effect of A)
encouraging exports.
B) creating competitive manufacturing sectors.
C) generating large tariff revenues for the government.
D) encouraging an efficient use of a country's resources.
E) discouraging exports.
Answer

2. A reason why it is difficult for developing countries to maintain a cartel is that

A) the elasticity of demand for a cartel's output decreases over time.
B) tariffs allow producers in the cartel to produce items that make no profit.
C) producers in the cartel have the motivation to lower prices but not to raise prices. D)
economic profits discourage other producers from entering the industry.
E) producers in the cartel have an economic incentive to cheat.
Answer

3. Import substitution policies make use of

A) tariffs that discourage goods from entering a country.
B) quotas applied to goods that are shipped abroad.
C) production subsidies granted to industries with comparative advantage.
D) production facilities provided by industrialized countries.
E) tax breaks granted to industries with comparative advantage.
Answer:

4. Brazil's export record in 1999 illustrated the principle that

A) protectionist policies tend to discourage exports.
B) a large country will tend to have few exports.
C) a small country will tend to have a high export ratio.
D) export-promoting policies do not tend to work.
E) import substitution policies helped the Brazilian economy.
Answer:

5. The disappointment with import-substitution policies is in part because

A) of the rapid and continuous growth record of South American countries.
 B) many countries pursuing this strategy experienced stagnation in their growth.
C) this policy is inconsistent with sophisticated economic growth models.
D) of the financial investment lost by the U.S.
E) this policy tended to create world-class industrial competitors.
Answer:

6. It is argued that import substitution is a misguided trade policy if the intent is to promote long-term
economic growth. Explain the reasons underlying this argument.
Answer: Import substitution promotes that economic activity in which the country is relatively inefficient. This
lowers the real income at any given time and decreases the resources which can be used for investment
purposes, hence lower growth rates. An additional answer is that import substitution by creating a
protected domestic market fails to provide incentives to produce high, or world-class quality-which means
this country, cannot market in foreign countries. With such a (perceived) limited market, endogenous
economic growth will not be forthcoming. Finally, it may be that exposure to world competition has its
own dynamic effect promoting economic growth.

11.3 Trade Liberalization

1. The high correlation between rapid growth in exports and rapid economic growth observed in several East Asia
countries in recent decades
A) proves that trade policy is the most important policy area for promotion of economic development. B)
proves that exports help growth, whereas imports impede growth.
C) proves that a free-trade orientation of trade policy results in rapid economic growth. D)
does not prove that trade liberalization always leads to rapid economic growth.
E) proves that export promoting trade policy leads to relatively rapid economic growth.
Answer:

2. The relatively rapid economic growth experienced by Chile in the late 1980s
A) supported the conventional Latin American reliance on import substitution.
B) demonstrated the importance of market failure as a reason for import substitution. C)
relied on high tariffs and import substitution.
D) rejected the conventional Latin American reliance on import substitution.
E) relied on the Harris-Todaro model to explain this growth.
Answer:

3. To help developing countries expand their industrial base, some industrial countries have reduced tariffs on
designated manufactured imports from developing countries below the levels applied to imports from industrial
countries. This policy is called
A) export-led growth.
B) reciprocal trade agreement.
C) generalized system of preferences.
D) Most Favored Nation.
E) outsourcing.
 Answer:

4. To help developing nations strengthen their international competitiveness, many industrial nations have
granted tariff reductions to developing nations under the
A) export led growth program.
B) international commodity agreements program.
C) multilateral contract program.
D) generalized system of preferences program.
E) import substitution policy.
Answer:

5. Export-led growth tends to

A) lower the overall volume of imports.
B) exploit domestic comparative advantages.
C) help firms benefit from diseconomies of large-scale production.
D) lead to unemployment among domestic workers.
E) discourage competition in the global economy.
Answer:

6. An efficient economy would set the marginal product in the traditional sector
A) lower in the relatively capital intensive sector.
B) lower than that in the modern non-traditional sector.
C) equal to that in the modern sophisticated sector.
D) higher in the relatively capital intensive sector.
E) higher than that in the modern sophisticated sector.
Answer:

7. The experience of sub-Saharan Africa, as compared to that of "Other Asia" (not including the HPAEs)
supports the argument that
A) the poorer is the country the easier it is for it to "catch up" economically.
B) free trade always best stimulates a developing country's economy.
C) neither trade liberalization nor import substitution is a foolproof strategy for economic development. D)
high rates of protection tend to harm economic growth.
E) low rates of protection tend to promote economic growth.
Answer:

8. The experience of Chile's foreign sector in the last two decades of the 20th century supports the proposition that
economic growth is supported by
A) intra-industry trading.
B) industrialization policies.
 C) trade liberalization policies.
D) import substitution.
E) trade embargoes.
Answer:

9. China's recent experience supports the proposition that

A) "economic miracles" are solely to be expected in small countries.
B) a lessening of income disparities is a prerequisite for economic growth.
C) growth in a large country cannot be affected by its foreign sector.
D) central planning and socialism can promote sustained economic growth.
E) policy changed can dramatically prompt export oriented growth Answer:

11.4 Trade and Growth: Takeoff in Asia

1. Historically those few developing countries which have succeeded in significantly raising their per-capita
income levels
A) tended to provide heavy protection to domestic industrial sectors.
B) favored industrial to agricultural or service sectors.
C) did so to the detriment of their nearest neighbors.
D) did accomplish this with import-substituting industrialization.
E) did not accomplish this with import-substituting industrialization.
Answer:

2. Statistical evidence suggests that

A) import substitution is to this day the preferred growth strategy promoted by the World Bank. B)
import substitution proved to be the most effective aid for developing countries before 1970. C)
import substitution tends to lead to relatively low effective rates of protection.
D) free trade policies promote economic growth more effectively than do import substitution policies. E)
import substituting policies tend to promote effective exploitation of scale economies.
Answer:

3. The growth successes of the high performance Asian economies

A) rejects the belief that economic development requires import substitution policies.
B) rejects the belief that export-oriented industrialization is likely to promote economic development. C)
enforces United States' hesitation to trade with developing countries.
D) suggests that free trade policies are required for successful economic development.
E) supports the belief that economic development requires import substitution policies.
Answer:

4. Which industrialization policy used by developing countries places emphasis on the comparative advantage
principle as a guide to resource allocation?
 A) international commodity agreements
B) intra-industry trade practice
C) Infant Industry promotion
D) import substitution
E) export promotion
Answer:

5. Taiwan and South Korea are examples of developing nations that have recently pursued these
industrialization policies
A) export promotion.
B) commercial dumping.
C) import substitution.
D) trade embargoes.
E) multilateral contract.
Answer:

6. All the following nations except ________ have recently utilized export-led growth policies. A)
Taiwan
B) South Korea
C) Argentina
D) Singapore
E) Hong Kong
Answer:

7. The development of countries like South Korea has been supported by all of the following EXCEPT A)
high domestic interest rates.
B) reduced government regulation.
C) high levels of labor productivity.
D) large endowments of human capital.
E) high domestic saving rates.
Answer:

8. In 2003, the per-capita income in China was roughly ________ of that in the U.S. A)
one hundredth
B) the same as
C) one half
D) one eighth
E) one twentieth
Answer:

9. The "East Asian Miracle" is

 A) the fact that so many Influenza varieties originate from this region.
B) the advent of completely free labor mobility between east Asian countries. C)
the ability to maintain large positive trade balances with the U.S.
D) the fact that poor dualistic economies managed to escape the vicious circle of poverty. E)
the ability of so many people to live in such small areas.
Answer:

10. The HPAE (High Performance Asian Economies) countries

A) have all maintained openness to international trade.
B) have all consistently maintained non-biased efficient free capital markets.
C) have all consistently supported free trade policies.
D) have all consistently maintained import-substitution policies.
E) have all outperformed the U.S.
Answer:

11. The remarkable success of the HPAEs proves that

A) trade policy is the key to successful economic growth.
B) trade policy is irrelevant to successful economic growth.
C) trade policy can lead to a higher standard of living for developing countries. D)
dual economies must suffer economic stagnation.
E) high educational standards is the key to successful economic growth.
Answer:

12. The HPAE "economic miracle" illustrates a clear case in which A)

exports and growth were positively related.
B) exports were promoted by successful economic growth.
C) import substitution enhanced economic development.
D) trade policy dominated other considerations in promoting economic growth. E)
economic growth was determined by successful export promotion. Answer:

13. The "East Asian Miracle" of the "Four Tigers" in the 1960s was replicated by A)
developing countries around the world.
B) Industrialized countries.
C) Sub Sahara African countries.
D) other East Asian countries.
E) Eastern European countries.
Answer: