A government rules that no more than 1 million tons of sugar may enter the country each year. Which trade policy tool is this?
An import quota
✓
A tariff
An export subsidy
A free trade agreement
Correct Answer
An import quota
An import quota is a numerical limit on how much of a good may be brought into a country. A tariff is a tax on imports, not a cap on their quantity. An export subsidy is a payment to domestic firms that sell abroad, not a limit on imports. A free trade agreement lowers barriers among members rather than limiting imports.
Category: Tools of Protection
Question 2
According to the demand and supply model, what happens in the domestic market when a country blocks imports of a good it had been importing?
The price falls and domestic production rises
The price rises and domestic production rises
✓
The price rises and domestic production falls
The price falls and domestic production falls
Correct Answer
The price rises and domestic production rises
With imports blocked, buyers must rely on domestic suppliers, so the price climbs toward the no-trade level and domestic firms move up their supply curve and produce more. The price falls and domestic production rises gets the price direction wrong. The price rises and domestic production falls ignores that a higher price draws out more domestic output. The price falls and domestic production falls describes what opening to imports does, not blocking them.
Category: Winners and Losers
Question 3
When the United States restricts imports of sugar, which group does the demand and supply model predict will be made worse off?
U.S. sugar growers
Owners of U.S. sugar mills
U.S. sugar buyers
✓
Workers on U.S. sugar farms
Correct Answer
U.S. sugar buyers
Restricting imports raises the U.S. price of sugar, so U.S. sugar buyers pay more and buy less, losing consumer surplus. U.S. sugar growers gain because they sell more at a higher price. Owners of U.S. sugar mills are part of domestic production, which expands. Workers on U.S. sugar farms benefit from the larger domestic output.
Category: Winners and Losers
Question 4
Protectionism is often described as an indirect subsidy to domestic producers. Who pays for this subsidy?
Taxpayers, through higher taxes
Foreign governments, through fees
Domestic firms, through lower profits
Consumers, through higher prices
✓
Correct Answer
Consumers, through higher prices
Protection raises the price of the protected good, so consumers transfer money to domestic producers every time they buy it. Taxpayers, through higher taxes describes a direct government subsidy, not protection. Foreign governments, through fees do not fund the policy. Domestic firms, through lower profits is backward, because protected firms earn more.
Category: Winners and Losers
Question 5
At the world price of $2 per pound, domestic suppliers offer 40 million pounds of a good and domestic buyers want 100 million pounds. How much does the country import?
60 million pounds
✓
40 million pounds
100 million pounds
140 million pounds
Correct Answer
60 million pounds
Imports fill the gap between what buyers want and what domestic firms supply: 100 million minus 40 million is 60 million pounds. 40 million pounds is domestic production, not imports. 100 million pounds is total consumption. 140 million pounds adds the two quantities instead of subtracting them.
Category: Winners and Losers
Question 6
When a country moves from free trade to blocking imports of a good, how does the gain to domestic producers compare with the loss to domestic consumers?
The gain is larger than the loss
The gain is smaller than the loss
✓
The gain exactly equals the loss
Both groups gain from the change
Correct Answer
The gain is smaller than the loss
Blocking imports raises producer surplus, but consumer surplus falls by more, so total surplus in the country shrinks. The gain is larger than the loss would mean protection raises total surplus, which the model rejects. The gain exactly equals the loss ignores the deadweight loss from producing and consuming the wrong amounts. Both groups gain from the change is wrong, because consumers pay higher prices.
Category: Winners and Losers
Question 7
According to the economic analysis of trade, how does protecting one industry from imports affect jobs in the economy as a whole?
Jobs rise in every industry in the economy
Jobs rise only in industries that export
Jobs saved there are offset by jobs lost elsewhere
✓
Jobs in the protected industry are unaffected
Correct Answer
Jobs saved there are offset by jobs lost elsewhere
Protection keeps jobs in the shielded industry, but higher prices leave consumers less to spend elsewhere and raise costs for firms that use the product, so jobs are lost in other industries. Jobs rise in every industry in the economy ignores those losses. Jobs rise only in industries that export is backward, since exporters often lose when trade shrinks. Jobs in the protected industry are unaffected is wrong, because those are the jobs the policy saves.
Category: Jobs and Wages
Question 8
Protecting an industry raises consumer costs by $300 million a year and saves 1,000 jobs that each pay $40,000 a year. What is the cost to consumers per job saved?
$40,000
$260,000
$3,000,000
$300,000
✓
Correct Answer
$300,000
Divide the consumer cost by the jobs saved: $300,000,000 / 1,000 = $300,000 per job, far more than each job pays. $40,000 is the salary of one job, not the cost of saving it. $260,000 subtracts the salary from the cost per job, which is a different figure. $3,000,000 misplaces the decimal by a factor of ten.
Category: Jobs and Wages
Question 9
As a country expands its trade, which workers are most likely to see their wages fall?
Workers in industries that compete with imports
✓
Workers in export industries with growing sales
Workers in services that cannot be imported
Workers in firms that use cheaper imported inputs
Correct Answer
Workers in industries that compete with imports
Import competition lowers demand for labor in the industries that compete with foreign goods, which pushes their wages down. Workers in export industries with growing sales tend to see labor demand and wages rise. Workers in services that cannot be imported, such as lawn care, are not directly exposed to foreign competition. Workers in firms that use cheaper imported inputs gain because their employers' costs fall.
Category: Jobs and Wages
Question 10
A government shields a young domestic industry from imports for a limited time so it can grow strong enough to compete. Which argument supports this policy?
The national interest argument
The infant industry argument
✓
The anti-dumping argument
The environmental protection argument
Correct Answer
The infant industry argument
The infant industry argument holds that new industries need temporary protection to build skills and economies of scale before facing world competition. The national interest argument concerns relying on foreign suppliers for vital goods. The anti-dumping argument targets imports sold below their cost of production. The environmental protection argument concerns pollution and weak standards abroad.
Category: Arguments for Restrictions
Question 11
What is a common practical problem with protecting infant industries?
Protected industries always grow too quickly
Consumers pay lower prices during protection
Protected industries often never become competitive
✓
The protection ends before firms can adjust
Correct Answer
Protected industries often never become competitive
Many protected industries remain weak, and because removing protection is politically hard, the temporary shelter often becomes permanent. Protected industries always grow too quickly is not the concern. Consumers pay lower prices during protection is backward, since protection raises prices. The protection ends before firms can adjust reverses the usual problem, which is that protection lasts too long.
Category: Arguments for Restrictions
Question 12
Which is an innocent explanation for why a foreign firm might sell goods abroad below their cost of production?
The firm plans to drive out rivals and then raise prices
The importing government taxes the good heavily
The firm's workers earn more than local workers
A drop in demand pushed market prices below cost
✓
Correct Answer
A drop in demand pushed market prices below cost
When demand falls or supply surges, market prices can drop below cost for a time, and firms may sell at a loss rather than not at all, much like a going-out-of-business sale. The firm plans to drive out rivals and then raise prices is predatory pricing, the sinister explanation. The importing government taxes the good heavily would raise its price, not explain selling below cost. The firm's workers earn more than local workers would raise costs and does not explain below-cost sales.
Category: Arguments for Restrictions
Question 13
What is the fear that firms will move to countries with the weakest environmental rules, pushing all countries to weaken their own rules, called?
A race to the bottom
✓
Disruptive market change
Predatory pricing
A nontariff barrier
Correct Answer
A race to the bottom
A race to the bottom is the worry that competition for jobs will drive countries to keep lowering their environmental and other standards. Disruptive market change describes new products or technologies that upset existing firms. Predatory pricing is selling below cost to drive out rivals. A nontariff barrier is a rule or procedure that makes importing harder.
Category: Arguments for Restrictions
Question 14
Under World Trade Organization rules, a country's product safety standards must meet which condition?
They apply only to goods from low-income countries
They apply equally to imported and domestic goods
✓
They are approved by the exporting country first
They are stricter for imports than for home goods
Correct Answer
They apply equally to imported and domestic goods
A country may set its own health and safety standards, but they must have a scientific basis and must treat imported and domestic goods the same way. They apply only to goods from low-income countries would discriminate among trading partners. They are approved by the exporting country first is not required. They are stricter for imports than for home goods is exactly the discrimination the rules forbid.
Category: Trade Agreements
Question 15
Which pair of activities describes the work of the World Trade Organization?
Setting exchange rates and lending to governments
Coordinating monetary policy and issuing a common currency
Negotiating lower trade barriers and settling trade disputes
✓
Setting minimum wages and regulating working conditions
Correct Answer
Negotiating lower trade barriers and settling trade disputes
The WTO hosts negotiations to reduce tariffs and other barriers and hears complaints when a country believes a partner has broken trade rules. Setting exchange rates and lending to governments is closer to the work of the International Monetary Fund. Coordinating monetary policy and issuing a common currency is done by central banks or an economic union. Setting minimum wages and regulating working conditions is left to each nation.
Category: Trade Agreements
Question 16
Why can a small group of domestic firms often win import protection even when it costs buyers more than it helps sellers?
Buyers usually prefer protection to lower prices
Protection lowers the prices that buyers pay
Firms outnumber buyers in most countries
Each firm gains a lot while each buyer loses a little
✓
Correct Answer
Each firm gains a lot while each buyer loses a little
The benefits of protection are concentrated on a few producers, so each has a strong reason to lobby for it, while the cost is spread thinly across millions of consumers who have little reason to organize against it. Buyers usually prefer protection to lower prices is backward, since protection raises what they pay. Protection lowers the prices that buyers pay is wrong, because limiting imports pushes the domestic price up. Firms outnumber buyers in most countries is false, since consumers vastly outnumber producers.
Category: Trade Agreements
Question 17
One reason countries sign trade agreements is that the agreements help political leaders resist pressure from which group?
Domestic industries seeking protection
✓
Foreign consumers seeking lower prices
Central banks setting interest rates
Workers in export industries
Correct Answer
Domestic industries seeking protection
Leaders facing calls for protection can point to a trade treaty and say their hands are tied, which shields them from special-interest pressure. Foreign consumers seeking lower prices do not lobby a country's lawmakers for tariffs. Central banks setting interest rates are not the source of protectionist pressure. Workers in export industries usually benefit from open trade and seldom push for import barriers.
Category: Trade Agreements
Question 18
Economists compare blocking imports to protect jobs with which other policy, to argue that both would be unwise?
Lowering taxes on domestic firms
Banning a new labor-saving technology
✓
Funding job retraining programs
Paying for scientific research
Correct Answer
Banning a new labor-saving technology
A new technology that lets one firm produce more with fewer workers hurts rivals in the same way cheaper imports do, and society gains by accepting such change rather than banning it. Lowering taxes on domestic firms is not part of the comparison. Funding job retraining programs is a policy economists favor for displaced workers. Paying for scientific research helps firms innovate and is not an unwise policy.
Category: Trade Policy Tradeoffs
Question 19
Which policy does the economic analysis of trade favor for workers who lose their jobs to import competition?
Permanent tariffs on competing imports
Quotas that allow zero imports
Retraining and temporary assistance
✓
Bans on firms moving production abroad
Correct Answer
Retraining and temporary assistance
Temporary support and help in learning new skills ease the cost of adjustment while still letting the economy capture the gains from trade. Permanent tariffs on competing imports are protectionism and impose large costs on consumers. Quotas that allow zero imports block trade entirely. Bans on firms moving production abroad also restrict the gains from trade rather than addressing workers' problems directly.
Category: Trade Policy Tradeoffs
Question 20
Compared with free trade, where does a small import quota leave the domestic price of the good?
Below the free trade price
Above the no-trade price
Exactly at the free trade price
Between the free trade price and the no-trade price
✓
Correct Answer
Between the free trade price and the no-trade price
A small quota cuts imports only partly, so the price rises above the free trade level but not all the way to the price with no trade at all. Below the free trade price is wrong because limiting supply cannot lower the price. Above the no-trade price is wrong because some imports still arrive. Exactly at the free trade price would mean the quota has no effect.
Category: Tools of Protection