Ch34 Globalization and Protectionism Multiple Choice Questions 1
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Multiple Choice Questions 1. A tariff differs from a quota in that a tariff is: A. levied on imports, whereas a quota is imposed on exports. B. levied on exports, whereas a quota is imposed on imports. C. a tax levied on exports, whereas a quota is a limit on the number of units of a good that can be exported. D. a tax imposed on imports, whereas a quota is an absolute limit to the number of units of a good that can be imported. Answer: D Reference: Explanation: 2. Tariffs are taxes imposed on _________________. A. imported products B. exported products C. hazardous goods D. surplus goods Answer: A Reference: Explanation: 3. An import quota or tariff on French wine that raises the prices for wine will probably: A. hurt domestic wine drinkers but help domestic wineries, which will gain from the higher prices. B. hurt both domestic wine drinkers and domestic wineries, but this will be more than offset by a reduction in driving fatalities. C. hurt both domestic wine drinkers and domestic wine producers because of a reduction in competition. D. hurt domestic wineries, which will lose business as a result of the higher prices. Answer: A Reference: Explanation: 4. Which of the following would be expected if the tariff on foreign-produced automobiles were increased? A. The domestic price of automobiles would fall. B. The supply of foreign automobiles to the domestic market would be reduced, causing auto prices to rise. C. The number of unemployed workers in the domestic automobile industry would rise. D. The demand for foreign-produced automobiles would increase, causing the price of automobiles to increase in other nations. Answer: B Reference: Explanation: 5. _____________ are numerical limitations on the quantity of products that can be imported. A. Tariffs B. Import quotas C. Taxes D. Nontariff barriers Answer: B Reference: Explanation: 6. "Tariffs and other trade restrictions increase the domestic scarcity of products from abroad. Such policies benefit domestic producers of the restricted products at the expense of domestic consumers." This statement: A. contains one error; the trade restraints do not increase the scarcity of foreign-produced goods. B. contains one error; domestic producers gain at the expense of foreign producers rather than domestic consumers. C. contains two errors; trade restraints do not increase the domestic scarcity of product and neither do they harm domestic consumers. D. is essentially correct. Answer: D Reference: Explanation: 7. Which of the following is the best example of a quota? A. a tax placed on all small cars sold in the domestic market B. a limit imposed on the number of men's suits that can be imported from a foreign country C. a subsidy from the American government to domestic manufacturers of men's suits so they can compete more effectively with foreign producers of men's suits D. a $100-per-car fee imposed on all small cars imported Answer: B Reference: Explanation: 8. A new American import quota on imported steel would be likely to: A. increase the production of steel-using American firms. B. increase American production of steel. C. generate tax revenue to the government. D. reduce the cost of production to steel-using American firms. Answer: B Reference: Explanation: 9. The infant industry argument for protectionism suggests that an industry must be protected in the early stages of its development so that: A. firms will be protected from subsidized foreign competition. B. domestic producers can attain the economies of scale to allow them to compete in world markets. C. there will be adequate supplies of crucial resources in case they are needed for national defence. D. it will not be subjected to a takeover from a foreign competitor. Answer: B Reference: Explanation: 10. ____________ means selling goods below their cost of production. A. Protectionism B. Dumping C. Import quotas D. Non-tariff barriers Answer: B Reference: Explanation: 11. The membership of the WTO includes about __________ nations. A. 15 B. 150
C. 700 D. 1500
Explanation: 12. An import quota does which of the following? A. decreases the price of the imported goods to consumers B. increases the price of the domestic goods to consumers C. redistributes income away from domestic producers of those products toward domestic producers of exports D. both a) and c) Answer: B Reference: Explanation: Category: Analyze 13. Import tariffs generally ________ the output of domestic producers of the affected products and also _________ the output of domestic exporters. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase Answer: C Reference: Explanation: 14. If Japan does not have a comparative advantage in producing rice, the consequences of adopting a Japanese policy reducing or eliminating imports of rice into the country would include: A. Japan will be able to consume a combination of rice and other goods beyond their domestic production possibilities curve. B. the real incomes of Japanese rice producers would rise, but the real incomes of Japanese rice consumers would fall. C. the real incomes of Japanese rice consumers would rise, but the real incomes of Japanese rice producers would fall. D. the price of rice in Japan will fall. Answer: B Reference: Explanation: Category: Analyze 15. __________________ are ways that a nation can draw up regulations, inspections, and paperwork to make it more costly or difficult to import products. A. Tariffs B. Nontariff barriers C. Quotas D. Import ceilings Answer: B Reference: Explanation: 16. A rule that every imported product must be opened by hand and inspected with a magnifying glass, by one of just three government inspectors available at any given time might be referred to as __________________. A. a non-tariff barrier B. a quota C. a government bureaucracy D. an import quota Answer: A Reference: Explanation: 17. There are nontariff barriers in the form of _______________ regulations, in which certain textiles are made in the United States, shipped to other countries, combined in making apparel with textiles made in those other countries—and then re-exported back to the United States at a lower tariff rate. A. import quota B. export quota C. "rules of origin" D. dumping Answer: C Reference: Explanation: 18. Despite interlocking import quotas, tariffs, and nontariff barriers, the share of apparel sold in the United States that is imported rose from about _________ in 1999 to about ________ today. A. 10%; 25% B. 25%; 50% C. 50%; 75% D. 75%; 90% Answer: C Reference: Explanation: 19. After the USA introduces a tariff in the market for gigastraps, the price of gigastraps in the USA will: A. decrease. B. increase. C. remain the same. D. change in an indeterminate manner. Answer: B Reference: Explanation: 20. A tariff differs from a quota in that a tariff is: A. a tax imposed on imports, whereas a quota is an absolute limit to the number of units of a good that can be imported. B. a tax levied on exports, whereas a quota is a limit on the number of units of a good that can be exported. C. levied on exports, whereas a quota is imposed on imports. D. levied on imports, whereas a quota is imposed on exports. Answer: A Reference: Explanation: 21. Suppose the government of Taiwan subsidized its watch-making industry, enabling Taiwanese producers to undersell foreign watch producers. The law of comparative advantage indicates that watch-importing nations would best take advantage of the Taiwanese subsidization policy by: A. setting a tariff high enough to just offset the subsidy granted to the Taiwanese watch-making industry. B. setting a declining quota on the import of Taiwanese watches such that the nation's domestic watch-making industry would continue to grow at the same rate as the rest of the economy. C. setting a tariff such that the prices of Taiwanese and domestic watches to the consumer are equal. D. accepting the subsidy of the Taiwanese government, making the appropriate adjustment for the resources temporarily displaced from the domestic watch-making industry. Answer: D Reference: Explanation: 22. Tariffs result in a decrease in consumer surplus because: A. the price and the quantity consumed of the protected good increases. B. the price and the quantity consumed of the protected good decreases. C. the price of the protected good increases and quantity consumed decreases. D. the price of the protected good decreases and quantity consumed increases. Answer: C Reference: Explanation: 23. Which of the following is the best example of a tariff? A. a tax placed on all small cars sold in the domestic market B. a limit imposed on the number of small cars that can be imported from a foreign country C. a subsidy from the American government to domestic manufacturers of small cars so they can compete more effectively with foreign producers of small cars D. a $1000-per-car fee imposed on all small cars imported Answer: D Reference: Explanation: 24. Economists would say tariffs: A. protect domestic producers of exported goods. B. limit voluntary exchanges. C. protect foreign producers of goods. D. protect domestic consumers of goods. Answer: B Reference: Explanation: Category: Analyze 25. Politicians often argue for tariff increases in order to reduce the nation's dependence on imports. If tariffs are increased, the long-run effect is most likely to be: A. an increase in American imports, and a decrease in American exports. B. an decrease in American imports, and an increase in American exports. C. an increase in both American imports and exports. D. a decrease in both American imports and exports. Answer: D Reference: Explanation: 26. Introducing a tariff on vitamin Z would: A. reduce exports of vitamin Z. B. increase American consumption of domestically produced vitamin Z. C. increase total American consumption of vitamin Z. D. decrease domestic production of vitamin Z. Answer: B Reference: Explanation: 27. Raising an existing tariff on grapes from Argentina will: A. increase domestic production of grapes. B. increase total American consumption of grapes. C. increase American consumption of domestically produced grapes. D. increase American imports of grapes from Argentina. Answer: C Reference: Explanation: 28. Which of the following is not a short-run impact of imposing quotas on the American industries they seek to protect? A. government tax revenues increase B. domestic production and sales by the protected industries increase C. consumers' real incomes decrease D. prices of the goods produced by protected industries increase Answer: A Reference: Explanation: Category: Analyze 29. ________________________ is theoretically possible, even sensible: give an industry a short-term indirect subsidy through protection, and then reap the long-term economic benefits of having a vibrant healthy industry. A. Protectionism B. The infant industry argument C. Dumping D. Import quotas Answer: B Reference: Explanation: 30. Low-wage U.S. workers suffer from protectionism in all the industries that they don’t work in, because: A. protectionism provides a barrier to entry to the job markets that the low-wage earners want entry to. B. protectionism forces them to pay higher prices for basic necessities like clothing and food. C. protectionism will encourage foreign workers to apply for American jobs. D. protectionism will prevent them from applying for those jobs in other industries. Answer: B Reference: Explanation: 31. The United States national minimum wage is _____________. A. $6.25/hour B. $7.25/hour C. $8.25/hour D. $9.25/hour Answer: B Reference: Explanation: 32. Why would foreign firms export a product at less than its cost of production—which presumably means making a loss? A. Many nations participate in poor planning and as a result produce a surplus of product which they sell at a loss. B. This may be part of a long-term strategy in which foreign firms would sell at below the cost of production in the short-term for a time, and when they have driven out the domestic U.S. competition, they would then raise prices. C. Many nations simply wish to keep their workers employed, no matter what the cost. D. Many nations simply produce and sell inferior goods at prices that reflect this fact. Answer: B Reference: Explanation: 33. The race to the bottom scenario of global environmental degradation is explained roughly like this: A. Companies seek to reduce their costs of operations on plant and equipment design and this results in higher levels of pollution. B. Companies seek the lowest market prices on products in order to gain market share, resulting in inferior goods and increased waste and pollution. C. Profit-seeking multinational companies shift their production from countries with strong environmental standards to countries with weak standards, thus reducing their costs and increasing their profits. D. Companies seek to influence environmental legislation standards are set to the lowest possible standards in the USA in order to maximize profits. Answer: C Reference: Explanation: 34. It is sometimes argued that nation should not depend too heavily on other countries for supplies of certain key products. This argument is commonly known as the _______________. A. National Interest Argument B. Import Limitation Argument C. Anti-Dumping Argument D. Buy-American Argument Answer: A Reference: Explanation: 35. The acronym GATT stands for: A. General Association for Trade and Tariffs. B. General Agreement on Tariffs and Trade. C. General Accounting for Tariff and Trade. D. General Association on Technology and Trade. Answer: B Reference: Explanation: 36. International trade is fundamentally a ________________________. A. win-lose situation B. lose-lose situation C. win-win situation D. war which is won by the strongest Answer: C Reference: Explanation: 37. During the second half of the twentieth century, trade barriers have in general: A. declined quite substantially both in the U.S. economy and in the global economy. B. declined quite substantially in the U.S. economy but not in the global economy. C. increased quite substantially in the U.S. economy and in the global economy. D. increased quite sbstantially in the U.S. economy but not in the global economy. Answer: A Reference: Explanation: 38. As international trade increases, it contributes to a shift in jobs away from industries where that economy does not have a(n) __________ advantage and toward industries where it has a(n) ___________ advantage. A. absolute; absolute B. comparative; comparative C. comparative; competitive D. comparative; absolute Answer: B Reference: Explanation: 39. If the government legislates policies that block imports of solar panels and gives domestic manufacturers a $5 billion dollar tax subsidy, the benefits to the U.S. solar panel manufacturing and distribution industry will be very visible. The bearers of the cost of the tax subsidy: A. are easy to identify. B. also fit this pattern of identifiable winners. C. will have their interests counterbalanced over time. D. are more anonymous. Answer: D Reference: Explanation: Essay Questions 1. Why would foreign firms export a product at less than its cost of production—which presumably means making a loss? This question has two possible answers, discuss both of them. Reference: Explanation: The innocent explanation is that market prices are set by demand and supply, not by the cost of production. Perhaps demand for a product shifts back to the left or supply shifts out to the right, which drives the market price to low levels—even below the cost of production. When a local store has a going-out-of-business sale, for example, it may sell goods at below the cost of production. If international companies find that there is excess supply of steel or computer chips or machine tools that is driving the market price down below their cost of production—well, this may be the market in action. The sinister explanation is that dumping is part of a long-term strategy in which foreign firms would sell at below the cost of production in the short-term for a time, and when they have driven out the domestic U.S. competition, they would then raise prices. This scenario is sometimes called “predatory pricing.” 2. What are the effects of a tariff, and who benefits and who loses when tariffs are imposed? What are the effects of a quota, and who benefits and who loses when quotas are imposed? Reference: Explanation: A tariff raises the domestic price of the good the tariff is placed on. The higher price benefits domestic producers and the tariff revenue benefits the government, both at the expense of domestic consumers. A quota raises the domestic price of the good with the quota imposed on it. The higher price benefits domestic producers and the foreign producers who are allowed to sell the good at a higher price, both at the expense of the domestic consumer 3. What is the race to the bottom scenario? Reference: Explanation: The race to the bottom scenario of global environmental degradation runs like this. Profit-seeking multinational companies shift their production from countries with strong environmental standards to countries with weak standards, thus reducing their costs and increasing their profits. Faced with such behavior, countries reduce their environmental standards to attract multinational firms, which after all provide jobs and economic clout. As a result, global production becomes concentrated in countries where it can pollute the most and environmental laws everywhere race to the bottom. 4. In the national interest argument. It is sometimes argued that nation should not depend too heavily on other countries for supplies of certain key products. This argument has been made for commodities that are important to the U.S. economy as a whole, like oil. Discuss some arguments economists may raise against this. Reference: Explanation: If the United States needs to be protected from a possible cut off of foreign oil, then a more reasonable strategy would be to import 100% of the United States’ petroleum supply now, and save the U.S. domestic oil resources for when or if the foreign supply is cut off. It might also be useful to import extra oil and put it into a stockpile for use in an emergency, as the U.S. government did by starting a Strategic Petroleum Reserve in 1977. Moreover, it may be necessary to discourage people from using oil, and to start a high-powered program to seek out alternatives to oil. A straightforward way to do this would be to raise taxes on oil. (Such a tax increase on oil could be offset with cuts in other taxes, so that the total tax burden need not rise.) But it makes no sense to argue that because oil is highly important to the U.S. economy, then the United States should shut out oil imports and use up its domestic supplies of oil more quickly. 5. “Block Imports—Save Jobs for Some Americans, Lose a Roughly Equal Number of Jobs for Other Americans, and Also Pay High Prices.” Discuss this statement within the context of protectionism. Reference: Explanation: Why does it cost so much to save jobs through protectionism? The basic reason is that not all of the extra money paid by consumers because of protectionism goes to save the jobs of workers. For example, if tariffs are imposed on steel imports so that buyers of steel pay a higher price, U.S. steel companies earn greater profits, buy more equipment, pay bigger bonuses to managers, give pay raises to existing employee—and also avoid firing some additional workers. Only part of the higher price of protected steel goes toward saving jobs. Also, when an industry is protected, the economy as a whole loses the benefits of playing to its comparative advantage. Thus, part of the higher price that consumers pay for protected goods is wasted by this lost economic efficiency. 6. Define protectionism as a policy and describe what a country stands to lose when it enacts such a policy. Reference: Explanation: Protectionism is a policy where the domestic consumers of a product (consumers may include either households or other firms) are required to pay higher prices to benefit domestic producers of that product. In addition, when a country enacts protectionism, it loses the economic gains it would have been able to achieve through a combination of comparative advantage, learning, and economies of scale 7. In theory, imports might injure workers in several different ways: fewer jobs, lower wages, or poor working conditions. Provide a counterpoint for each and describe. Reference: Explanation: Protectionism certainly saves jobs in the specific industry being protected, but for two reasons, it costs jobs in other unprotected industries. First, if consumers are paying higher prices to the protected industry, they inevitably have less money to spend on goods from other industries, and so jobs are lost in those other industries. Second, if the protected product is sold to other firms, like sugar or steel, so that other firms must now pay a higher price for a key input, then those firms will have a hard time competing against foreign producers who don’t need to pay the higher price. The hidden opportunity cost of using protectionism to save jobs in one industry sacrifices the jobs that are not created in other industries. First, it seems unlikely that intra-industry trade, where the U.S. trades similar goods like machinery, computers and cars with other high-wage economies like Canada, Japan, Germany, and the United Kingdom, has a heavier impact on the wages of low-skill, low-wage Americans. After all, most U.S. workers in these industries have above-average skills and wages—and many of them are doing quite well in the world of globalization. Remember, intra-industry trade makes up about half of all U.S. trade. Second, many low-skilled U.S. workers hold service jobs that cannot be replaced by imports from low-wage countries. For example, lawn care services or moving and hauling services or hotel maids cannot be imported from countries of long distances like China or Bangladesh. Competition from imported products is not the primary determinant of their wages. Finally, while the focus of the discussion here is on wages, it’s worth pointing out that low-wage U.S. workers suffer from protectionism in all the industries that they don’t work in, because protectionism forces them to pay higher prices for basic necessities like clothing and food. The real problem for many in low-income countries isn’t that globalization has made their lives worse, but rather that they have so few good life alternatives. 8. What is the World Trade Organization and what is its mandate? Reference: Explanation: World Trade Organization. The GATT process (transformed into the WTO) was to negotiate an agreement to reduce barriers to trade, sign that agreement, pause for breath, and then start negotiating the next agreement. 9. “The Unsafe consumer Products Argument” is one argument for shutting out certain imported products to domestic markets is that they are unsafe for consumers. What is the World Trade Organization's position regarding this argument? Reference: Explanation: The WTO explains its current agreement on this subject in this way: “It allows countries to set their own standards. But it also says regulations must be based on science. . . . And they should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail.” Thus, under WTO rules, it is perfectly legitimate for the United States to pass laws requiring that all, say, food products or cars sold in the United States meet certain safety standards approved by the U.S. government, whether or not other countries choose to pass similar standards. However, such standards must have some scientific basis, and it would be unfair to impose, say, one set of health and safety standards for domestically produced goods but a different set of standards for imports, or one set of standards for imports from Europe and a different set of standards for imports from Latin America. 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