Trade and Trade Policies

1. A logical starting point from which the study of international trade

begins is

a. the recognition that not all markets are competitive.

b. the recognition that government intervention in markets
sometimes enhances the economic welfare of the society.
c. the principle of absolute advantage.
d. the principle of comparative advantage.

2. For any country, if the world price of zinc is higher than the
domestic price of zinc without trade, that country should

a. export zinc, since that country has a comparative advantage in

zinc.
b. import zinc, since that country has a comparative advantage in
zinc.
c. neither export nor import zinc, since that country cannot gain
from trade.
d. neither export nor import zinc, since that country already
produces zinc at a low cost compared to other countries.

3. When the nation of Worldova allows trade and becomes an exporter

of silk,

a. residents of Worldova who produce silk become worse off;

residents of Worldova who buy silk become better off; and the
economic well-being of Worldova rises.
b. residents of Worldova who produce silk become worse off;
residents of Worldova who buy silk become better off; and the
economic well-being of Worldova falls.
c. residents of Worldova who produce silk become better off;
residents of Worldova who buy silk become worse off; and the
economic well-being of Worldova rises.
d. residents of Worldova who produce silk become better off;
residents of Worldova who buy silk become worse off; and the
economic well-being of Worldova falls.

1
4. Trade raises the economic well-being of a nation in the sense that

a. the gains of the winners exceed the losses of the losers.

b. everyone in an economy gains from trade.
c. since countries can choose what products to trade, they will pick
those products that are most beneficial to society.
d. the nation joins the international community when it begins to
engage in trade.

5. Suppose Haiti has an absolute advantage over other countries in

producing oranges, but other countries have a comparative
advantage over Haiti in producing oranges. If trade in oranges is
allowed, Haiti

a. will import oranges.

b. will export oranges.
c. will either export oranges or export oranges, but it is not clear
from the given information.
d. would have nothing to gain either from exporting or importing
oranges.

2
Figure 1. Supply and Demand for wool in Scotland
Price
75
70
65
Domestic supply
60 A
55 World
price
50 B G
D
45 H
40 F

35 C
Domestic demand
30
25
20
15
10
5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Quantity

6. Refer to Figure 1. From the figure it is apparent that

a. Scotland will experience a shortage of wool if trade is not

allowed.
b. Scotland will experience a surplus of wool if trade is not allowed.
c. Scotland has a comparative advantage in producing wool,
relative to the rest of the world.
d. foreign countries have a comparative advantage in producing
wool, relative to Scotland.

7. Refer to Figure 1. From the figure it is apparent that

a. Scotland will export wool if trade is allowed.

b. Scotland will import wool if trade is allowed.
c. Scotland has nothing to gain either by importing or exporting
wool.
d. the world price will fall if Scotland begins to allow its citizens to
trade with other countries.

8. Refer to Figure 1. With trade, Scotland will

a. export 11 units of wool.

b. export 5 units of wool.
c. import 15 units of wool.
d. import 6 units of wool.

3
9. Refer to Figure 1. In the absence of trade, the equilibrium price
of wool in Scotland is

a. $15.
b. $45.
c. $55.
d. $70.

10. Refer to Figure 1. In the absence of trade, total surplus in

Scotland is represented by the area

a. A + B + C.
b. A + B + C + D + F.
c. A + B + C + D + F + G.
d. A + B + C + D + F + G + H.

11. Refer to Figure 1. When trade in wool is allowed, consumer

surplus in Scotland

a. increases by the area B + D.

b. increases by the area C + F.
c. decreases by the area B + D.
d. decreases by the area D + G.

12. Refer to Figure 1. When trade in wool is allowed, producer

surplus in Scotland

a. increases by the area B + D.

b. increases by the area B + D + G.
c. decreases by the area C + F.
d. decreases by the area G.

13. Refer to Figure 1. When trade is allowed,

a. Scotland producers of wool become better off and Scotland

consumers of wool become worse off.
b. Scotland consumers of wool become better off and Scotland
producers of wool become worse off.
c. both Scotland producers and consumers of wool become better
off.
d. both Scotland producers and consumers of wool become worse
off.

4
 14. Refer to Figure 1. Relative to the no-trade situation, trade
with the rest of the world results in

a. Scotland consumers paying a higher price for wool.

b. a decrease in producer surplus in Scotland.
c. a decrease in total surplus in Scotland.
d. All of the above are correct.

15. Refer to Figure 1. In the absence of trade, total surplus in

the Scotland wool market amounts to

a. 187.5
b. 275.0
c. 378.5
d. 412.5

16. Refer to Figure 1. With trade, total surplus in the Scotland

wool market amounts to

a. 312.5.
b. 367.0.
c. 467.5.
d. 495.0.

17. The principal benefit of tariff protection goes to:

a. Domestic consumers of the good produced

b. Domestic producers of the good produced
c. Foreign producers of the good produced
d. Foreign consumers of the good produced

18. The deadweight loss of a tariff:

a. Is a social loss since it promotes inefficient production

b. Is a social loss since it reduces the revenue for the government
c. Is not a social loss because society as a whole doesn't pay for the
loss
d. Is not a social loss since only business firms suffer revenue losses

19. The most vocal political pressure for tariffs is generally made
by:

a. Consumers lobbying for export tariffs

b. Consumers lobbying for import tariffs
c. Producers lobbying for export tariffs

5
d. Producers lobbying for import tariffs

20. You have been asked to quantify the effects of a country’s

tariff on sugar. Somebody has estimated how many pounds of sugar
would be produced, consumed, and imported by the country if
there were no sugar duty. You are given the information shown in
the table:

Situation with Estimated

Import Tariff Situation without
Tariff
World Price $0.10 per pound $0.10 per pound
Tariff $0.02 per pound 0
Domestic Price $0.12 per pound $0.10 per pound
Domestic 20 22
Consumption
(Billions of pounds
per year)
Domestic 8 6
Production
(Billions of pounds
per year)
Imports 12 16
(Billions of pounds
per year)

Calculate the following:

a) The domestic consumer’s gain from removing the tariff.

b) The domestic producer’s loss from removing the tariff.
c) The government tariff revenue loss.
d) The net effect on national well-being.

6
 21. Compared to an import quota, an equivalent tariff may
provide a less certain amount of protection for home producers
since:

a. A tariff has no deadweight loss in terms of production and

consumption
b. Foreign firms may absorb the tariff by offering exports at lower
prices
c. Tariffs are effective only if home demand is perfectly elastic
d. Quotas do not result in increases in the price of the imported
good

22. If a tariff and an import quota lead to equivalent increases in

the domestic price of steel, then:

a. The quota results in efficiency reductions but the tariff does not
b. The tariff results in efficiency reductions but the quota does not
c. They have different impacts on how much is produced and
consumed
d. They have different impacts on how income is distributed

23. If import licenses are auctioned off to domestic importers in a

competitive market, the revenue collected goes to:

a. Foreign corporations
b. Foreign workers
c. Domestic corporations
d. The domestic government

24. A small country imports sugar. With free trade at the world
price of $0.10 per pound, the country’s national market is:

Domestic Production 120 million pounds per year

Domestic consumption 420 million pounds per year
Imports 300 million pounds per year

The country’s government decides to impose a quota that limits sugar

imports to 240 million pounds per year. With the import quota in effect,
the domestic price rises to $0.12 per pound, and domestic production
increases to 160 million pounds per year. The government auctions the
right to import the 240 million pounds per year.

7
a) Calculate how much domestic producers gain or lose from the
quota.
b) Calculate how much domestic consumers gain or lose from the
quota.
c) Calculate how much the government receives in payment when it
auctions the quota rights to import.
d) Calculate the net national gain or loss from the quota. Explain the
economic reason(s) for this net gain or loss.

25. Denmark is an importer of computer chips and adds a $5 per

chip tariff to the world price of $12 per chip. Suppose Denmark
removes the tariff. Which of the following outcomes is not possible?

a. More Danish-produced chips are sold in Denmark.

b. More foreign-produced chips are sold in Denmark.
c. Danish consumers of chips become better off.
d. Total surplus in the Danish chip market increases.

26. Domestic producers of a good become worse off, and

domestic consumers of a good become better off, when a country
begins allowing international trade in that good and

a. the country becomes an importer of the good as a result.

b. the world price exceeds the domestic price of the good that
prevailed before international trade was allowed.
c. the country in question has a comparative advantage, relative to
other countries, in producing the good.
d. total surplus does not change as a result.

27. A tariff

a. lowers the domestic price of the exported good below the world
price.
b. keeps the domestic price of the exported good the same as the
world price.
c. raises the domestic price of the imported good above the world
price.
d. lowers the domestic price of the imported good below the world
price.

8
 28. Chile is an importer of computer chips, taking the world price
of $12 per chip as given. Suppose Chile imposes a $7 tariff on
chips. Which of the following outcomes is possible?

a. The price of chips in Chile increases to $19; the quantity of

Chilean-produced chips decreases; and the quantity of chips
imported by Chile decreases.
b. The price of chips in Chile increases to $16; the quantity of
Chilean-produced chips increases; and the quantity of chips
imported by Chile decreases.
c. The price of chips in Chile increases to $19; the quantity of
Chilean-produced chips increases; and the quantity of chips
imported by Chile decreases.
d. The price of chips in Chile increases to $16; the quantity of
Chilean-produced chips increases; and the quantity of chips
imported by Chile does not change.

29. Import quotas and tariffs produce some common results.

Which of the following is not one of those common results?

a. Total surplus in the domestic country falls.

b. Producer surplus in the domestic country increases.
c. The domestic country experiences a deadweight loss.
d. Revenue is raised for the domestic government.

30. Pepperville is a small economy that currently operates as an

autarky (self-sufficient closed economy). In the market for green
peppers, domestic demand and domestic supply can be represented
as P = 5000 – 0.5Q and P = 1.5Q, respectively, where P is the price
per tonne of green peppers and Q is the quantity of green peppers
measured in tonnes.

a) Identify the equilibrium price and quantity of green peppers in

Pepperville. What is the value of consumer surplus and producer surplus?
b) The current world price of green peppers is $3000 per tonne, and
domestic producers of green peppers are lobbying the government of
Pepperville to remain an autarky. Explain why domestic producers of
green peppers are not in favour of open trade in the green pepper
market.
c) Domestic consumers of green peppers in Pepperville successfully
lobby the Pepperville government to open trade in the green pepper
market. How many tonnnes of green peppers will be imported into or
exported out of Pepperville, given the world price of $3000 per tonne
when this market opens to trade?
Domestic producers wage a successful campaign to enact a tariff in the
market for green peppers. The tariff effectively raises the price of green
peppers to $3450 per tonne. Answer questions d) through g) based on

9
this tariff. Assume the world price for green peppers is unchanged and
equal to $3000 per tonne.
d) How many tonnes of green peppers will be imported into Pepperville
once this tariff is enacted?
e) What is the value of consumer surplus and producer surplus once this
tariff is implemented?
f) What is the tariff revenue the government earns with this tariff?
g) What is the deadweight loss associated with this tariff?
h) Pepperville is considering replacing the tariff on green peppers with a
quota. If consumer surplus and producer surplus are to remain the same
under the quota as they are with the tariff? what must the amount of the
quota equal?
i) From the domestic consumers’ perspective, which trade policy –closed
economy, open economy, or open economy with a tariff or quota – would
they prefer? Explain your answer.
j) From the domestic producers’ perspective, which trade policy –closed
economy, open economy, or open economy with a tariff or quota –would
they prefer? Explain your answer.
k) Given your answers in parts i) and j), why do government frequently
adopt tariffs or quotas in particular markets?

10
 ANSWERS

1) D
2) A
3) C
4) A
5) A
6) C
7) A
8) A
9) B
10) B
11) C
12) B
13) A
14) A
15) D
16) C
17) B
18) A
19) D
20)
(a) Consumers gain $420 million per year. (b) Producers lose $140
million per year. (c) The government loses $240 million per year.
(d) The country as a whole gains $40 million a year.
21) B
22) D
23) D
24)
a) The change in producer surplus is a gain of $0.02 per pound
for the 120 million pounds that are produced with free trade
plus the producer surplus on the increased production of 40
million pounds. The latter is ½ x $0.02 per pound x 40 million
pounds (assuming a straight-line domestic supply curve). The
gain in producer surplus totals $2.8 million.

11
 b) The change in consumer surplus is a loss of $0.02| per pound
for the 400 million pounds that the consumers continue to
purchase after the quota is imposed plus the loss of consumer
surplus on the 20 million pounds that consumers no longer
purchase because of the quota. The latter is ½ x $0.02 x 20
million (assuming a straight-line domestic demand curve).
The loss in consumer surplus totals $8.2 million.
c) The right to import is a right to buy sugar at the world price
of $0.10, import it, and sell it domestically at the price of
$0.12. If the bidding for the rights is competitive, then the
buyers of the rights bid $0.02 per pound. The government
collects $4.8 million (=$0.02 per pound x 240 million
pounds).
d) The net loss to the country is $0.6 million. By limiting
imports, the quota causes two kinds of economic inefficiency.
First, the increased domestic production is high-cost by world
standards. The country uses some of its resources
inefficiently producing this extra sugar rather than producing
other products. Second, the consumers squeezed out of the
market by the higher price lose the consumer surplus that
they would have received if they were allowed to import
freely.
25) A
26) A
27) C
28) C
29) D
30)
a) The equilibrium price of green peppers is $3750 per tonne,
and the equilibrium quantity of green peppers is 2500 tonnes.
CS is $1 562 500 and PS is $4 687 500.
b) b. Domestic producers are currently selling 2500 tonnes of
green peppers at a price of $3750 per tonne. If the market
opens to trade, each tonne of peppers will sell for a lower
price: domestic producers will sell fewer tonnes of peppers as
the price falls (2000 tonnes instead of 2500 tonnes), and they
will receive a lower price per tonne than they do when the
green pepper market is closed ($3000 vs. $3750).
c) When the green pepper market is open to trade, the domestic
demand for green peppers at $3000 per tonne is equal to
4000 tonnes of green peppers. At a price of $3000 per tonne,
the domestic quantity supplied is equal to 2000 tonnes of
green peppers. There is an excess demand for peppers when

12
 pepperville opens to trade, and this excess demand will result
in Pepperville importing green peppers to make up the
difference between the amount domestically supplied and the
amount domestically demanded. Pepperville will import 2000
tonnes of green peppers. The value of consumer surplus with
trade is equal to $4 000 000 and the value of producer
surplus with trade is equal to $ 3 000 000.
d) At a price of $3450, the quantity of green peppers demanded
domestically is equal to 3100 tonnes while the quantity
supplied domestically is equal to 2300 tonnes. Pepperville
will import 800 tonnes of green peppers.
e) The value of consumer surplus is equal to $ 2 402 500. The
value of producer surplus is $3 967 500.
f) The government earns the difference between the tariff price
per tonne of green peppers and the world price of green
peppers on every tonne of green peppers imported into
Pepperville. The tariff revenue is equal to $360 000.
g) The deadweight loss is $270 000.
h) The quota has to equal the number of units Pepperville
imports when the tariff raises the price of green peppers to
$3450 per tonne. That is, the quota must be 800 tonnes of
green peppers.
i) Consumer surplus is greatest when trade policy is one of an
open economy.
j) Producer surplus is greatest when the trade policy is one of a
closed economy.
k) Governments can successfully provide a benefit to both
consumers and producers by choosing this option. If you
review the consumer and producer surplus under each of
these options, you will see that the middle option gives
consumers a greater consumer surplus than they would get
with a closed economy. It is a compromise position for the
government to take between these two constituencies.

13