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									                                         Chapter 20: International Trade


                                    Chapter 20: International Trade

Multiple Choice Questions


U.S. TRADE PATTERNS


    1. Goods and services purchased from foreign sources by the United States:
       A) Are imports.                                     C) Threaten domestic import-competing industries.
       B) Increase the trade deficit, ceteris paribus.    D) All of the above.

        Answer: D Type: Analytical Page: 413


    2. Which of the following statements about U.S. trade is true?
       A) Since the 1970s, foreign countries have bought more U.S. goods and services than the U.S. has bought
          from foreign countries.
       B) The U.S. has a trade deficit with each of the countries with which it trades.
       C) The U.S. typically has a substantial trade surplus in services.
       D) All of the above.

        Answer: C Type: Basic Understanding Page: 413


    3. When comparing the ratio of trade to GDP, the United States, relative to other countries, typically has:
       A) Lower ratios for both imports and exports.
       B) A higher ratio for imports but a lower ratio for exports.
       C) A lower ratio for imports but a higher ratio for exports.
       D) Higher ratios for both imports and exports.

        Answer: A Type: Basic Understanding Page: 414


    4. When the United States has a trade deficit:
       A) Exports exceed imports.
       B) The U.S. economy produces more than it consumes.
       C) The trade balance is negative.
       D) All of the above.

        Answer: C Type: Definition Page: 415


    5. When the overall trade balance is zero:
       A) Merchandise exports equal merchandise imports.
       B) The service trade balance must be zero.
       C) Exports equal imports.
       D) All of the above.

        Answer: C Type: Definition Page: 415




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                                        Chapter 20: International Trade


   6. Over a given period of time if exports are greater than imports, the result is:
      A) A trade war. B) A trade deficit. C) An embargo. D) A trade surplus.

       Answer: D Type: Definition Page: 415


   7. Over a given period of time if imports are greater than exports, the result is:
      A) A trade war. B) A trade deficit. C) An embargo. D) A trade surplus.

       Answer: B Type: Definition Page: 415


THE MOTIVATION TO TRADE


   8. Greater opportunity to trade increases production by:
      A) Protecting countries from competition.
      B) Improving efficiency through specialization.
      C) Shifting the production-possibilities curve outward.
      D) All of the above.

       Answer: B Type: Complex Understanding Page: 416


   9. Which of the following is an argument for free trade?
      A) Lower consumption possibilities.
      B) The need to protect goods and services essential to national security.
      C) Greater efficiency through specialization.
      D) Aiding infant industries.

       Answer: C Type: Complex Understanding Page: 416


  10. If a country is completely self-reliant in producing goods for its own consumption needs, then:
      A) It consumes more than it can with trade.
      B) Its consumption possibilities equal its production possibilities.
      C) It promotes specialization.
      D) It achieves a higher standard of living by exporting.

       Answer: B Type: Basic Understanding Page: 416


  11. In the absence of trade, a country's consumption possibilities are:
      A) Limited to its domestic production possibilities. C) Less than its trade balance.
      B) More than its terms of trade.                      D) Greater than with trade.

       Answer: A Type: Basic Understanding Page: 416




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                                        Chapter 20: International Trade


12. It is not likely that a country will specialize completely in one good even if it has a lower opportunity cost
    because:
    A) Comparative advantage is not a workable concept in the world economy.
    B) Opportunity costs increase as more of a good is produced.
    C) The country would want to save some of the good for its own citizens.
    D) The country would end up inside its production-possibilities curve.

     Answer: B Type: Complex Understanding Page: 416


13. A country has an incentive to specialize completely in a good for which it has a lower opportunity cost if:
    A) There is a significant demand in the country for that good.
    B) The country also has an absolute advantage in the production of that good.
    C) The production-possibilities curve is a straight line.
    D) All of the above.

     Answer: C Type: Complex Understanding Page: 416


14. Two countries will have zero incentive to trade if their production-possibilities curves are parallel straight
    lines because:
    A) The opportunity costs for both countries are the same.
    B) One country has an absolute advantage in the production of both goods thus providing that country with
         no incentive for trade.
    C) One country has a comparative advantage in the production of both goods thus providing that country
         with no incentive for trade.
    D) An intersection of the two lines is not possible and therefore a trade equilibrium is not possible.

     Answer: A Type: Complex Understanding Page: 416


15. Suppose the country of Montgomery has specialized in the production of a good but has not yet entered into
    trade. At this point in time, Montgomery has:
    A) Moved to a level of production outside its production-possibilities curve.
    B) Shifted its production-possibilities curve outward.
    C) Moved along its existing production-possibilities curve.
    D) Moved to a level of consumption outside its production-possibilities curve.

     Answer: C Type: Complex Understanding Page: 416


16. Consumption possibilities, during a given time period, refer to the:
    A) Maximum amount of imported goods and services that a country can consume.
    B) Amount by which a country can expand its production possibilities by engaging in international trade.
    C) Alternative combinations of goods and services that a country can consume.
    D) Maximum amount that a country can produce if it imports and does not export.

     Answer: C Type: Definition Page: 416




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                                      Chapter 20: International Trade


17. The benefits from international trade include:
    A) Increased world output of goods and services.
    B) Greater efficiency in the use of the world's limited resources.
    C) Higher national standards of living throughout the world.
    D) All of the above.

     Answer: D Type: Basic Understanding Page: 417


18. World output of goods and services increases with specialization because:
    A) The world's resources are being used more efficiently.
    B) Each country's production-possibilities curve is shifted outward.
    C) Each country's workers are able to produce more than they could before specialization.
    D) All of the above.

     Answer: A Type: Complex Understanding Page: 417


19. When two countries face straight-line production-possibilities curves with different slopes, then:
    A) Neither can have a comparative advantage in producing one good or the other.
    B) Neither can have an absolute advantage in producing one good or the other.
    C) The opportunity costs of the goods in terms of each other will differ between the two countries.
    D) Specialization will not permit greater consumption even though trade occurs.

     Answer: C Type: Complex Understanding Page: 417


20. When a country has a lower opportunity cost in producing a good than any other country does:
    A) It has an absolute advantage in producing the good.
    B) It has favorable terms of trade in producing the good.
    C) Specialization in producing the good will increase worldwide consumption possibilities.
    D) All of the above.

     Answer: C Type: Definition Page: 419


21. When two countries face identical, straight-line production-possibilities curves with identical amounts of
    resources:
    A) The opportunity costs of either good in terms of the other may differ between the two countries.
    B) Specialization will not permit greater consumption through trade.
    C) Either can have a comparative advantage in producing one good or the other.
    D) Either can have an absolute advantage in producing one good or the other.

     Answer: B Type: Complex Understanding Page: 419




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                                         Chapter 20: International Trade


PURSUIT OF COMPARATIVE ADVANTAGE


  22. Comparative advantage in production is achieved by:
      A) Subsidizing, specializing, and lowering the price of an exported good.
      B) Being able to produce a good with fewer inputs than in other countries.
      C) Having terms of trade that are better than the terms of trade faced in other countries.
      D) Having a lower opportunity cost of producing a good relative to that of other countries.

       Answer: D Type: Definition Page: 420


  23. Comparative advantage refers to:
      A) The ability of a country to produce a specific good with fewer resources than other countries.
      B) A country's monopoly power in the world market for a specific good.
      C) The ability of a country to sell a certain good for a higher price than other countries in the same market.
      D) The ability of a country to produce a specific good at a lower opportunity cost than other countries.

       Answer: D Type: Basic Understanding Page: 420


  24. The expansion of world output as a result of trade is mainly due to the effects of:
      A) Higher trade barriers.
      B) Improved terms of trade.
      C) Specialization according to comparative advantage.
      D) Specialization according to absolute advantage.

       Answer: C Type: Basic Understanding Page: 420


  25. A country with a comparative advantage in producing computer chips:
      A) Has a lower opportunity cost of producing computer chips than any other country.
      B) Can produce computer chips with fewer resources than any other country.
      C) Can achieve better terms of trade in selling computer chips than any other country.
      D) Has greater capacity to produce computer chips given its resources than any other country.

       Answer: A Type: Definition Page: 420


  26. To say that a country has a comparative advantage in the production of beef is to say that:
      A) It can produce beef with fewer resources than any other country can.
      B) Its opportunity cost of producing beef is greater than any other country's.
      C) Its opportunity cost of producing beef is lower than any other country's.
      D) The relative price of beef is higher in that country than in any other.

       Answer: C Type: Basic Understanding Page: 420




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                                       Chapter 20: International Trade


27. Suppose the production of 12 tons of copper in the United States requires the same amount of resources as the
    production of 1 ton of aluminum. In Mexico, 12 tons of copper requires the same amount of resources as 2
    tons of aluminum. Implicitly:
    A) The United States has the comparative advantage in producing copper.
    B) Mexico has an absolute advantage in producing aluminum.
    C) The United States has an absolute advantage in producing copper.
    D) All of the above.

     Answer: A Type: Basic Understanding Page: 420


28. Suppose 2 cars take the same resources as producing 2 trucks in the United States. But in Japan 2 cars take the
    same resources as 1 truck. In the production of cars we can conclude:
    A) Japan has the absolute advantage.
    B) The United States has the absolute advantage.
    C) The United States has the comparative advantage.
    D) Japan has the comparative advantage.

     Answer: D Type: Basic Understanding Page: 420


29. In China suppose 1 hour of labor produces either 3 pianos or 2 HDTVs, but in Italy 1 hour produces either 2
    pianos or 1 HDTV. Implicitly, Italy has:
    A) Both an absolute and a comparative advantage in pianos.
    B) An absolute but not necessarily a comparative advantage in pianos.
    C) A comparative but not necessarily an absolute advantage in pianos.
    D) Neither a comparative nor an absolute advantage in pianos.

     Answer: C Type: Basic Understanding Page: 420


30. In China suppose 1 hour of labor produces either 2 pianos or 3 HDTVs, but in Italy 1 hour produces either 2
    pianos or 1 HDTV. What is the opportunity cost of producing one piano in China?
    A) 1/3 HDTV. B) 1/2 HDTV. C) 3/2 HDTV. D) 2/3 HDTV.

     Answer: C Type: Basic Understanding Page: 420


31. Suppose France and the United States do not trade and the competitive price of an ordinary bottle of wine is
    40 francs in France and $2 in the United States. The price of wheat per bushel is 40 francs in France and $6
    in the United States. If prices reflect only the differences in costs of the resources to produce wine and wheat
    in the two countries, this information is sufficient to enable us to state that:
    A) The United States has a comparative advantage in the production of wine.
    B) France has a comparative advantage in the production of wine.
    C) Neither country has a comparative advantage in the production of either good.
    D) The United States has an absolute advantage in the production of both goods.

     Answer: A Type: Complex Understanding Page: 420




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                                         Chapter 20: International Trade


  32. When one country can produce a given amount of a good using fewer inputs than any other country:
      A) It has an absolute advantage in producing the good.
      B) It has a comparative advantage in producing the good.
      C) Specialization will definitely increase worldwide consumption possibilities.
      D) All of the above.

       Answer: A Type: Definition Page: 420


  33. Absolute advantage refers to:
      A) Total market domination by one country of the production and sales of a certain good.
      B) The ability of a country to produce a specific good at a lower opportunity cost than its trading partners.
      C) The ability of a country to produce a specific good with fewer resources than other countries.
      D) The ability of a country to guarantee itself very favorable terms of trade at the expense of its trading
         partners.

       Answer: C Type: Definition Page: 420


  34. Suppose the world's political leaders decided that world trade should be based on worker productivity rather
      than comparative advantage. Compared to a comparative advantage basis for trade:
      A) Total world production would be higher.
      B) International trade would decrease, especially between more developed countries and less developed
          countries.
      C) Production possibilities would expand for all countries.
      D) International trade would increase.

       Answer: B Type: Complex Understanding Page: 421


  35. Assume the United States and Canada have the same amount of resources. In a given time period, the U.S.
      can produce 1 ton of steel or 100 tons of wheat. Canada can produce 2 tons of steel or 200 tons of wheat. This
      means that:
      A) The United States has the comparative advantage in steel.
      B) Canada has the comparative advantage in steel.
      C) The United States has an absolute advantage in steel.
      D) Canada has an absolute advantage in both steel and wheat.

       Answer: D Type: Basic Understanding Page: 421


TERMS OF TRADE


  36. Terms of trade refers to:
      A) The opportunity costs incurred in trade.
      B) The rate at which goods are exchanged.
      C) The degree to which one country has an absolute advantage.
      D) Which country pays the transportation costs when trade occurs.

       Answer: B Type: Definition Page: 421




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                                       Chapter 20: International Trade


37. To ensure mutually beneficial trade, the terms of trade between two countries should always:
    A) Allow each country to develop its area of absolute advantage.
    B) Be between their respective opportunity costs in production.
    C) Be set to favor the larger country because its output will be greater.
    D) Be set to favor the country with the least comparative advantage in a good to ensure the greatest gains
        from specialization.

     Answer: B Type: Basic Understanding Page: 421


38. If the terms of trade between any two countries lie somewhere between their respective opportunity costs,
    then the effects of trade will include:
    A) Consumption outside the production-possibilities curve for both countries.
    B) Less specialization by both countries.
    C) Less interdependence between the economies of the two countries.
    D) All of the above.

     Answer: A Type: Complex Understanding Page: 421


39. When the terms of trade are between the opportunity costs for two countries, then the effects of trade will
    include:
    A) Consumption outside of the production-possibilities curve for each country.
    B) Specialization by both countries.
    C) Greater interdependence between the economies of the two countries.
    D) All of the above.

     Answer: D Type: Basic Understanding Page: 421


40. A country will not trade unless:
    A) It has an absolute advantage.
    B) The terms of trade are superior to domestic opportunities.
    C) Its balance of trade is in a surplus position.
    D) All of the above.

     Answer: B Type: Basic Understanding Page: 421


41. In China suppose 1 hour of labor produces either 3 pianos or 2 HDTVs, but in Italy 1 hour produces either 2
    pianos or 1 HDTV. Terms of trade between the two countries will lie between:
    A) 1/2 and 2/3 HDTV per piano.                        C) 1/3 and 1/2 HDTV per piano.
    B) 1/3 and 2/3 HDTV per piano.                        D) 1/2 and 1 HDTV per piano.

     Answer: A Type: Basic Understanding Page: 421


42. Assume that country A can produce a unit of good X with 1 labor hour and a unit of good Y with 3 labor
    hours. Country B can produce a unit of good X with 2 labor hours and a unit of good Y with 6 labor hours.
    Labor is the only resource used. What would be the terms of trade for 1 unit of good X?
    A) Between 2 and 3 units of Y.                       C) Between 1/3 and 1/4 unit of Y.
    B) Between 3 and 6 units of Y.                       D) Between 2 and 6 units of Y.

     Answer: C Type: Complex Understanding Page: 421




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                                         Chapter 20: International Trade



  43. Assume that Pakistan has to give up 30 machines to produce 5 tanks and 1 tank to produce 6 machines. Israel
      must give up 4 tanks to produce 2 machines and 1 machine to produce 2 tanks. If Pakistan and Israel begin
      trade in these two goods, the cost of 1 tank will be:
      A) 30 machines.                                       C) Between 1 machine and 30 machines.
      B) 6 machines.                                        D) Between 6 machines and 0.50 of a machine.

       Answer: D Type: Complex Understanding Page: 421


  44. With regard to international trade, the market mechanism:
      A) Provides a profit incentive to producers who specialize in the production of goods and services for which
         they have a comparative advantage.
      B) Provides a profit incentive to producers who trade the goods and services for which they have a
         comparative advantage.
      C) Determines the terms of trade.
      D) All of the above.

       Answer: D Type: Basic Understanding Page: 423


PROTECTIONIST PRESSURES


  45. Suppose that Brazil has a comparative advantage in coffee and Mexico has a comparative advantage in
      tomatoes. Which of the following groups would be worse off if these countries specialize and trade?
      A) Mexican coffee producers.
      B) Brazilian coffee producers.
      C) Mexican tomato producers.
      D) All groups are better off when specialization and trade take place.

       Answer: A Type: Complex Understanding Page: 424


  46. Which group is most likely to be adversely affected by the importation of foreign steel?
      A) Consumers of domestic automobiles which use steel as an input.
      B) Domestic steel workers.
      C) Domestic automobile workers.
      D) All of the above.

       Answer: B Type: Basic Understanding Page: 424


  47. Which of the following groups has an interest in restricting free trade?
      A) Workers producing goods for export.
      B) Communities depending on export goods for jobs.
      C) Producers in import-competing industries.
      D) All of the above.

       Answer: C Type: Complex Understanding Page: 424




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                                        Chapter 20: International Trade


48. As trade restrictions are eliminated, increased imports:
    A) Lower competition in product markets.
    B) Leave the composition of the GDP unchanged.
    C) Shift the allocation of resources away from import-competing industries.
    D) Redistribute income out of import-using industries.

     Answer: C Type: Complex Understanding Page: 424


49. The elimination of import restrictions will:
    A) Alter the mix of output from export industries toward domestic industries.
    B) Redistribute income from import-competing industries to export industries.
    C) Alter the mix of output from export industries to import-competing industries.
    D) Redistribute income from domestic to foreign producers.

     Answer: B Type: Complex Understanding Page: 424


50. If we add together all the gains from specialization and trade and then subtract all the losses, the net result
    would be:
    A) Zero; the gains and losses would cancel out.
    B) Positive; a net gain for the world and each country.
    C) Negative; a net loss for the world and each country.
    D) Impossible to tell; the net result could be zero, positive, or negative.

     Answer: B Type: Basic Understanding Page: 424


51. From a consumer's viewpoint, which of the following policies would be least desirable?
    A) Tariffs on imported goods. B) Quotas on imported goods. C) No trade. D) Free trade.

     Answer: C Type: Complex Understanding Page: 424


52. International trade:
    A) Lowers prices to consumers.
    B) Alters the mix of domestic production.
    C) Redistributes income from import-competing industries to export industries.
    D) All of the above.

     Answer: D Type: Basic Understanding Page: 424


53. If trade is mutually beneficial, then increasing trade:
    A) Increases the welfare of producers that compete with importers.
    B) Makes countries less interdependent.
    C) Leads to increased output in export industries.
    D) All of the above.

     Answer: C Type: Basic Understanding Page: 424




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                                       Chapter 20: International Trade


54. Increased trade restrictions:
    A) Increase a trade deficit in the short run.             C) Alter a nation's production possibilities.
    B) Reduce total consumption possibilities.                D) All of the above.

     Answer: B Type: Basic Understanding Page: 424


55. There will always be winners and losers when countries engage in free trade. When all the losers' costs are
    subtracted from all the winners' benefits, the total will be:
    A) Zero.
    B) Positive.
    C) Negative.
    D) Impossible to tell. The magnitude of the benefits and costs will depend on the size of the comparative
        advantage.

     Answer: B Type: Complex Understanding Page: 424


56. Which of the following U.S. groups has an interest in encouraging free trade?
    A) Farm workers in wheat-growing areas of the Midwest.
    B) The united Auto Workers.
    C) Textile workers.
    D) Steel workers.

     Answer: A Type: Complex Understanding Page: 424


57. Arguments against free trade include:
    A) Concerns about national security.                      C) Concerns about dumping.
    B) Protection of infant industries.                       D) All of the above.

     Answer: D Type: Basic Understanding Page: 425


58. Dumping is said to occur when:
    A) Foreign producers sell their goods in the United States at prices lower than their marginal cost of
       production.
    B) Foreign producers sell their goods in the United States at prices lower than the U.S. average cost of
       production.
    C) Foreign producers sell their goods in the United States at prices lower than those prevailing in their own
       countries.
    D) The foreign countries have trade surpluses and the United States has a trade deficit.

     Answer: C Type: Definition Page: 425


59. Protectionism achieves which of the following goals?
    A) Greater consumption possibilities through greater specialization.
    B) Protection of infant industries.
    C) Protection of comparative advantage.
    D) Protection of absolute advantage.

     Answer: B Type: Basic Understanding Page: 425




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                                        Chapter 20: International Trade


  60. The infant-industry argument can be justified because:
      A) A new industry may never develop in a protected, noncompetitive environment.
      B) The government may not be able politically to end protectionism even when protectionism is no longer
          justified.
      C) Government may choose to protect industries which place heavy import burdens on the economy.
      D) A new industry may be difficult to start in the face of existing foreign competition.

       Answer: D Type: Basic Understanding Page: 425


  61. Improvement of the terms of trade from the point-of-view of the United States can be accomplished by:
      A) Restricting imports of foreign goods.             C) Placing tariffs on imports of foreign goods.
      B) "Buy American" campaigns.                         D) All of the above.

       Answer: D Type: Complex Understanding Page: 426


BARRIERS TO TRADE


  62. Which of the following is a barrier to trade?
      A) Embargoes. B) Quotas. C) Tariffs. D) All of the above.

       Answer: D Type: Complex Understanding Page: 426


  63. An embargo is:
      A) A prohibition on exports or imports.
      B) A tax imposed on imported goods.
      C) A limit to the quantity of a good that may be imported in a given time period.
      D) An orderly marketing agreement.

       Answer: A Type: Definition Page: 426


  64. When a country imposes tariffs, it is likely to cause:
      A) Increased quantities of imports.                    C) Lower prices for domestic production.
      B) Higher prices for the import-competing goods. D) Less expensive exports.

       Answer: B Type: Definition Page: 427


  65. Tariffs tend to reduce the volume of imports by:
      A) Setting maximum allowable import limits.
      B) Placing severe quality restrictions on imported goods.
      C) Making them more expensive to domestic consumers.
      D) Reducing prices of domestically produced goods.

       Answer: C Type: Basic Understanding Page: 427




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                                       Chapter 20: International Trade


66. Tariffs on imported goods result in:
    A) Higher prices for the imported goods.
    B) Higher prices for the import-competing goods.
    C) Gains by workers of import-competing industries.
    D) All of the above.

     Answer: D Type: Basic Understanding Page: 427


67. When tariffs are imposed, the losers include:
    A) Domestic consumers and the domestic government.
    B) Foreign consumers and domestic producers of import-competing goods.
    C) Domestic consumers and domestic producers of import-competing goods.
    D) Domestic consumers and foreign producers.

     Answer: D Type: Complex Understanding Page: 427


68. If the United States raises tariffs on foreign goods it may achieve:
    A) Higher U.S. exports.                                  C) Greater profitability of import-competing firms.
    B) Higher efficiency in domestic production.             D) Higher production possibilities.

     Answer: C Type: Basic Understanding Page: 427


69. U.S. tariffs on foreign goods result in:
    A) A higher U.S. trade deficit.
    B) Greater productivity of American firms.
    C) Greater employment for import-competing industries.
    D) Higher consumption possibilities.

     Answer: C Type: Basic Understanding Page: 427


70. What should happen to the equilibrium price and quantity in a market as a result of a tariff on imports?
    A) Equilibrium price and quantity should both go up.
    B) Equilibrium price should go up, and equilibrium quantity should go down.
    C) Equilibrium price should go down, and equilibrium quantity should go up.
    D) Equilibrium price and quantity should both go down.

     Answer: B Type: Complex Understanding Page: 427


71. A beggar-thy-neighbor policy is:
    A) The imposition of import barriers for the purpose of curbing inflation.
    B) The imposition of trade barriers to increase domestic employment.
    C) The imposition of trade barriers for the purpose of expanding exports.
    D) An attempt by a poor country to get more foreign aid and assistance.

     Answer: B Type: Definition Page: 427




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                                        Chapter 20: International Trade


 72. A quota is:
     A) A limit on the quantity of a good that may be imported.
     B) A tax imposed on imported goods.
     C) A prohibition against trading a good.
     D) An elimination of trade to nurture an infant industry.

      Answer: A Type: Definition Page: 428


 73. Quotas are a greater threat to competition than tariffs because:
     A) Quotas allow imports but only at a higher price.
     B) Tariffs are voluntary and quotas are not.
     C) Quotas preclude additional imports at any price.
     D) Tariffs do not reduce the quantity sold and quotas do.

      Answer: C Type: Definition Page: 428


 74. What should happen to the equilibrium price and quantity in a market as a result of a quota on imports?
     A) Equilibrium price and quantity should both go up.
     B) Equilibrium price should go up, and equilibrium quantity should go down.
     C) Equilibrium price should go down, and equilibrium quantity should go up.
     D) Equilibrium price and quantity should both go down.

      Answer: B Type: Basic Understanding Page: 428


 75. When quotas are eliminated, losers include:
     A) There are no losers when free international trade is established.
     B) Domestic producers.
     C) Foreign producers.
     D) Domestic consumers.

      Answer: B Type: Complex Understanding Page: 428


 76. A voluntary restraint agreement is:
     A) A prohibition on exports or imports.
     B) A tax imposed on imported goods.
     C) A trade bloc which permits free trade among member countries.
     D) An agreement to reduce the volume of trade in a specific good.

      Answer: D Type: Definition Page: 428


THE ECONOMY TOMORROW


 77. The General Agreement on Tariffs and Trade (GATT):
     A) Encourages trade restrictions.
     B) Committed GATT members to a reduction of protectionism.
     C) Established the European Common Market.
     D) Has now eliminated all nontariff barriers to trade.

      Answer: B Type: Basic Understanding Page: 432



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                                     Chapter 20: International Trade




78. A principal objective of GATT is to:
    A) Protect import-competing producers.
    B) Equalize income tax structures in various countries.
    C) Assist in retraining workers displaced by imports.
    D) Reduce barriers to trade.

     Answer: D Type: Basic Understanding Page: 432


79. The General Agreement of Tariffs and Trade (GATT):
    A) Encouraged trade restrictions.
    B) Committed GATT members to a reduction in protectionism.
    C) Was not effective in eliminating trade barriers.
    D) Eliminated all non-tariff barriers to trade.

     Answer: B Type: Basic Understanding Page: 432


80. The principal objective of GATT is to:
    A) Protect each country's domestic producers from foreign competition.
    B) Assist in retraining workers displaced by imports.
    C) Reduce barriers to trade.
    D) Encourage currency devaluation.

     Answer: C Type: Basic Understanding Page: 432


81. The purpose of the World Trade Organization (WTO) is to:
    A) Enforce the rules of free trade.
    B) Protect the workers from foreign competition.
    C) Protect producers from foreign competition.
    D) Ensure there are no losers as a result of free trade.

     Answer: A Type: Basic Understanding Page: 432


82. If exports are being excluded unfairly from a market, the World Trade Organization (WTO) may authorize:
    A) Quotas.                                             C) Other non-tariff barriers.
    B) Retaliatory tariffs.                                D) Retaliatory comparative advantages.

     Answer: B Type: Basic Understanding Page: 432


83. The primary purpose of NAFTA is to:
    A) Encourage the development of the Mexican and Canadian economies at the expense of U.S. workers and
        consumers.
    B) Protect U.S. and Canadian workers from unfair competition from Mexico.
    C) Increase employment and income in Mexico, Canada and the U.S. by encouraging free trade.
    D) Ensure that there are no losers as the result of trade agreements between Mexico, Canada and the U.S.

     Answer: C Type: Basic Understanding Page: 433




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                                         Chapter 20: International Trade



   84. Overall, since its signing by Canada, Mexico, and the U.S. in 1992, NAFTA has:
       A) Caused massive unemployment and recessions.
       B) Accelerated economic growth and reduced inflationary pressures in all three countries.
       C) Increased economic growth and employment in Mexico at the expense of the U.S.
       D) Had no significant impact on any of the three countries.

        Answer: B Type: Basic Understanding Page: 433


   85. The European Union (EU) has:
       A) Enhanced intercountry mobility of workers and capital.
       B) Eliminated trade barriers between all the members countries.
       C) Eliminated the national currencies of many of the member nations.
       D) All of the above.

        Answer: D Type: Basic Understanding Page: 433


Use the following to answer questions 86-92:

Assume Russia and the United States have the same amount of resources with which to produce soybeans and
computers and they produce no other goods.

Table 20.1: Full-employment output of goods

  Country        Bushels of Soybeans     Computers
Russia                   100               300
United States            150               600



   86. Based on the information in Table 20.1, the opportunity cost of producing 1 bushel of soybeans in the United
       States is:
       A) 1/4 of an computer. B) 1/3 of an computer. C) 3 computers. D) 4 Computers.

        Answer: D Type: Analytical Page: 418


   87. Based on the information in Table 20.1, the opportunity cost of producing 1 bushel of soybeans in China is:
       A) 1/3 of an computer. B) 1/4 of an computer. C) 3 computers. D) 4 computers.

        Answer: C Type: Analytical Page: 418


   88. Based on the information in Table 20.1, the opportunity cost of producing 1 computer in China is:
       A) 1/3 of a bushel of soybeans.                       C) 3 bushels of soybeans.
       B) 1/4 of a bushel of soybeans.                      D) 4 bushels of soybeans.

        Answer: A Type: Analytical Page: 418




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                                                                           Chapter 20: International Trade


                                   89. From the information in Table 20.1, it is clear that:
                                       A) China has a comparative advantage in computers.
                                       B) China has both an absolute and comparative advantage in computers.
                                       C) The United States has a comparative advantage in both goods.
                                       D) The United States has an absolute advantage in both goods.

                                        Answer: D Type: Analytical Page: 418


                                   90. Based on the opportunity costs in Table 20.1:
                                       A) The United States should specialize in the production of computers.
                                       B) China should specialize in the production of soybeans.
                                       C) The United States has an absolute advantage in both goods.
                                       D) All of the above.

                                        Answer: D Type: Analytical Page: 418


                                   91. Based on the information in Table 20.1, the output of computers and soybeans would be greatest if:
                                       A) China specialized in producing soybeans, and the United States specialized in producing computers.
                                       B) Both countries prohibited trade.
                                       C) China specialized in producing computers, while the United States specialized in producing soybeans.
                                       D) The United States produced both goods and exported them to China.

                                        Answer: A Type: Analytical Page: 418


                                   92. Based on the information in Table 20.1, for trade to be mutually beneficial for both countries, the terms of
                                       trade will be such that 1 bushel of soybeans will exchange for:
                                       A) More than 3 computers but less than 4.              C) Less than 3 computers.
                                       B) More than 1/3 of a computer but less than 1/4. D) Zero computers.

                                        Answer: A Type: Analytical Page: 421


Use the following to answer questions 93-102:

Figure 20.1


                                     4,000                                                                                 4,000
                                                                                        Output of Motorcycles (per year)
Output of Motorcycles (per year)




                                     3,000                                                                                 3,000                     United States
                                                          Japan

                                     2,000         A                                                                       2,000


                                                                                                                                                           B
                                     1,000                                                                                 1,000


                                         0                                4000                                                 0                        3000    4000
                                                1000     2000     3000                                                               1000     2000
                                              Output of CD Players (per day)                                                       Output of CD Players (per day)




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                                       Chapter 20: International Trade



93. If the countries are at points A and B in Figure 20.1 and do not trade, what is the total number of motorcycles
    produced per day?
    A) 1,000. B) 2,000. C) 3,000. D) 4,000.

     Answer: C Type: Analytical Page: 418


94. If the countries are at points A and B in Figure 20.1 and do not trade, what is the total number of CD players
    produced per day?
    A) 1,000. B) 2,000. C) 3,000. D) 4,000.

     Answer: D Type: Analytical Page: 418


95. In Figure 20.1 what is the opportunity cost of CD players in Japan?
    A) 1/2 of a motorcycle per CD player.                 C) 2 motorcycles per CD player.
    B) 1 motorcycle per CD player.                        D) 1/3 of a motorcycle per CD player.

     Answer: C Type: Analytical Page: 418


96. In Figure 20.1 what is the opportunity cost of motorcycles in Japan?
    A) 1/2 of a CD player per motorcycle.                 C) 2 CD players per motorcycle.
    B) 1 CD player per motorcycle.                        D) 3 CD players per motorcycle.

     Answer: A Type: Analytical Page: 418


97. Which of the following best describes the comparative advantage of the two countries illustrated in Figure
    20.1?
    A) Japan has a comparative advantage in both goods.
    B) Japan has the comparative advantage in CD players; the United States in motorcycles.
    C) Japan has the comparative advantage in motorcycles; the United States in CD players.
    D) The United States has a comparative advantage in both goods.

     Answer: C Type: Analytical Page: 418


98. Which of the following best describes the absolute advantage of the two countries illustrated in Figure 20.1?
    A) Japan has an absolute advantage in motorcycles and CD players.
    B) The United States has an absolute advantage in CD players.
    C) Japan has an absolute advantage in motorcycles, the United States in CD players.
    D) The United States has an absolute advantage in motorcycles, Japan in CD players.

     Answer: B Type: Analytical Page: 418


99. Which of the following terms of trade would enable the two countries illustrated in Figure 20.1 to trade with
    each other to increase consumption possibilities?
    A) 1/3 of a CD player per motorcycle.                C) 3 CD players per motorcycle.
    B) 4 CD players per motorcycle.                      D) 1 CD player per motorcycle.

     Answer: D Type: Analytical Page: 421



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                                                                          Chapter 20: International Trade




                                 100. Suppose both countries illustrated in Figure 20.1 specialized completely in the good they could produce with
                                      the lowest opportunity cost. What would be the total production of CD players?
                                      A) 2,000. B) 3,000. C) 4,000. D) 3,500.

                                       Answer: C Type: Analytical Page: 418


                                 101. Suppose both countries illustrated in Figure 20.1 specialized completely in the good they could produce with
                                      the lowest opportunity cost. What would be the total production of motorcycles?
                                      A) 2,000. B) 3,000. C) 4,000. D) 3,500.

                                       Answer: C Type: Analytical Page: 418


                                 102. As a result of complete specialization and trade, the two countries illustrated in Figure 20.1 would, compared
                                      to their initial positions at points A and B:
                                      A) Increase the output of both CD players and motorcycles.
                                      B) Increase the output of CD players only.
                                      C) Increase the output of motorcycles only.
                                      D) Increase the output of neither CD players nor motorcycles.

                                       Answer: C Type: Analytical Page: 418


Use the following to answer questions 103-107:

Figure 20.2

                                           United States                                                            Mexico
                                       Production Possibilities                                              Production Possibilities

                                  60
                                                                            Output of Baseballs (per year)
Output of Baseballs (per year)




                                                   20
                                  Output of Golf Shoes (pairs per year)                                        Output of Golf Shoes (pairs per year)
                                                 (A)                                                                           (B)




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                                          Chapter 20: International Trade


103. The production-possibilities curves illustrated in Figure 20.2 reveal that:
     A) The United States has no comparative advantage.
     B) The United States has an absolute advantage in both goods.
     C) Mexico has no comparative advantage.
     D) Mexico has a comparative advantage in baseballs.

      Answer: B Type: Analytical Page: 418


104. Using Figure 20.2, the opportunity cost of producing 1 pair of golf shoes in the United States is:
     A) Less than the opportunity cost in Mexico. B) 2 baseballs. C) 1/3 of a baseball. D) 3 baseballs.

      Answer: D Type: Analytical Page: 418


105. Using Figure 20.2, the opportunity cost of producing 1 pair of golf shoes in Mexico is:
     A) Greater than the opportunity cost in the United States.
     B) 3 baseballs.
     C) 2 baseballs.
     D) 1/2 of a baseball.

      Answer: C Type: Analytical Page: 418


106. Based on the comparative cost ratios implied in Figure 20.2, it is clear that:
     A) The United States has a comparative advantage in baseballs and Mexico has a comparative advantage in
         golf shoes.
     B) Mexico should import all of its golf shoes from the United States.
     C) The United States should import all of its baseballs from Mexico.
     D) The United States should specialize in producing golf shoes, and Mexico should specialize in producing
         baseballs.

      Answer: A Type: Analytical Page: 420


107. In order for trade to be mutually beneficial for both countries illustrated in Figure 20.2, the terms of trade will
     call for 1 pair of golf shoes to exchange for:
     A) Between 20 and 60 baseballs.                          C) More than 3 but less than 20 baseballs.
     B) Less than 2 baseballs.                                D) More than 2 but less than 3 baseballs.

      Answer: D Type: Analytical Page: 421




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                                                           Chapter 20: International Trade


Use the following to answer questions 108-111:

Figure 20.3
          OMATOES




                    12
   PUTOF T




                              U.S.
OUT




                    8




                         Mexico




                                          7 9
                                  OUTPUT OF MACHINERY



                    108. Refer to Figure 20.3 for the production-possibilities curves for the United States and Mexico. These two
                         curves indicate that:
                         A) There is no benefit to the United States as a result of trading tomatoes or machinery with Mexico.
                         B) Mexico does not have an absolute advantage in the production of either good.
                         C) The United States has a comparative advantage in the production of machinery.
                         D) Mexico has a comparative advantage in the production of tomatoes.

                          Answer: B Type: Complex Understanding Page: 418


                    109. Refer to Figure 20.3 for the production-possibilities curves for the United States and Mexico. These two
                         curves indicate that:
                         A) The United States has a comparative advantage in the production of tomatoes.
                         B) Mexico has a comparative advantage in the production of machinery.
                         C) The United States has an absolute advantage in the production of both goods.
                         D) All of the above.

                          Answer: D Type: Analytical Page: 420


                    110. Refer to Figure 20.3 for the production-possibilities curves for the United States and Mexico. These two
                         curves indicate that:
                         A) The United States has a comparative advantage in the production of tomatoes.
                         B) Mexico has an absolute advantage in the production of machinery.
                         C) Mexico cannot gain from trading with the United States.
                         D) All of the above.

                          Answer: A Type: Analytical Page: 420




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                                                        Chapter 20: International Trade


                 111. Refer to Figure 20.3 for the production-possibilities curves for the United States and Mexico. These two
                      curves indicate that:
                      A) The United States should specialize in the production of both goods because it has an absolute advantage
                          in the production of both.
                      B) The United States should specialize in the production of machinery.
                      C) Mexico should specialize in the production of tomatoes.
                      D) Mexico should specialize in the production of machinery.

                       Answer: D Type: Analytical Page: 420


Use the following to answer question 112:

Figure 20.4



                                    D
QUANT YOF WINE




                         C
     IT




                                   A



                                         B


                         QUANTITY OF WHEAT


                 112. Refer to Figure 20.4 for the production-possibilities curve for Chile. Chile's production and consumption of
                      wine and wheat without trade is represented by point A. Suppose that Chile has a comparative advantage in
                      the production of wine compared to the U.S. and specialization and trade takes place between the two
                      countries. The most likely new combination of wine and wheat available to Chile would be:
                      A) A. B) B. C) C. D) D.

                       Answer: D Type: Complex Understanding Page: 420




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                                                Chapter 20: International Trade


Use the following to answer questions 113-114:

Figure 20.5


                                                  S1




         P1
Price




         P3                                                S3

         P2                                                S2

                                                   D

                              Quantity


        113. Refer to Figure 20.5. If S1 represents the U.S. domestic supply of a good and S2 represents supply in the
             United States under conditions of free trade, what does S3 most likely represent?
             A) U.S. supply under tariff-restricted trade.
             B) U.S. supply under quota-restricted trade.
             C) The result of a foreign country dumping this good on the U.S. market.
             D) Production possibilities under conditions of free trade.

              Answer: A Type: Complex Understanding Page: 427


        114. Refer to Figure 20.5. If S1 represents the U.S. domestic supply of a good and S2 represents supply in the
             United States under conditions of free trade. If the United States imposes a tariff on this good, what will
             happen to the quantity imported?
             A) Imports will increase because producers will pass the cost of the tariff on to consumers.
             B) Imports will decline as price increases and domestic production decreases.
             C) Imports will decline as price increases and domestic production increases.
             D) Imports will increase as price increases and domestic production increases.

              Answer: C Type: Complex Understanding Page: 427




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                                                 Chapter 20: International Trade


Use the following to answer question 115:

Figure 20.6


                                                 S1
                                                          S2
PRICE




        P1



        P2


                                                      D

                                 QUANTITY



        115. Refer to Figure 20.6. If S1 represents the U.S. domestic supply of a good, what does S2 most likely to
             represent?
             A) U.S. supply under tariff-restricted trade.
             B) U.S. supply under quota-restricted trade.
             C) The result of a foreign country dumping this good on the U.S. market.
             D) Production possibilities under conditions of free trade.

              Answer: B Type: Complex Understanding Page: 429


 The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.


        116. One In the News article reports "California wine makers are hawking a bill that could slap higher tariffs on
             imported wine...the Wine Equity Act...is already sponsored by 345 Congressmen and 60 Senators." What
             should happen to the equilibrium price and quantity in the wine market if the tariff is applied to imported
             wine?
             A) Equilibrium price and quantity should both go up.
             B) Equilibrium price should go up, and equilibrium quantity should go down.
             C) Equilibrium price should go down, and equilibrium quantity should go up.
             D) Equilibrium price and quantity should both go down.

              Answer: B Type: Complex Understanding Page: 423


        117. An In the News article quotes the Wine Institute "Sales of imported table wines . . . have soared at an alarming
             rate. . . . Unless this trend is halted immediately, the domestic wine industry will face economic ruin. . . .
             Foreign wine imports must be limited." Their justification for protectionism is most likely based on:
             A) National security.                                     C) Voluntary restraint agreements.
             B) Microeconomic losses.                                  D) Macroeconomic losses.

              Answer: B Type: Complex Understanding Page: 423


        118. One In the News article reports "California wine makers are hawking a bill that could slap higher tariffs on


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                                            Chapter 20: International Trade


         imported wine . . . The Wine Equity Act . . . is already sponsored by 345 Congressmen and 60 Senators."
         Which of the following groups would be against such a bill?
         A) Wine importers.                                     C) American grape growers.
         B) California wine makers.                             D) United Farm Workers of America.

         Answer: A Type: Complex Understanding Page: 423


Use the following to answer questions 119-122:

One World View article describes protection of the sugar industry: "The 12,000 domestic beet-sugar growers have
convinced Congress to protect their industry to ensure a secure supply of sugar in a war. The U.S. Department of
Agriculture guarantees the beet-sugar owners a minimum of 18 cents per pound for their output. To keep prices at that
level, the U.S. Congress limits sugar imports to 1.6 million tons a year. As a result, domestic sugar prices are typically
twice as high as world sugar prices…. This price difference cost American consumers nearly $2 billion in 2001
alone."


  119. Which of the following forms of protectionism is described in the quotation above?
       A) Embargoes. B) Quotas. C) Subsidies. D) Tariffs.

         Answer: B Type: Complex Understanding Page: 431


  120. Which of the following is used in the quotation above as a justification for protection of the sugar industry?
       A) Microeconomic pressures. B) Equity. C) National security. D) Market power.

         Answer: C Type: Complex Understanding Page: 431


  121. Who benefits from the form of protectionism described in the quotation above?
       A) Foreign sugar plantation owners.                 C) Domestic producers of candy.
       B) Foreign consumers of sugar.                      D) Foreign sugar producers.

         Answer: B Type: Complex Understanding Page: 431


  122. Who would benefit from the elimination of the protectionism described in the quotation above?
       A) U.S. firms which use sugar as an input.
       B) Members of Congress receiving campaign contributions from the beet-sugar growers.
       C) Firms supplying inputs to U.S. sugar producers.
       D) U.S. producers of sugar substitutes.

         Answer: A Type: Complex Understanding Page: 431


  123. One World View article reports "The House voted . . . to bar Mexican trucks from operating in the United
       States." This is an example of which kind of protection?
       A) Tariff. B) Quota. C) Voluntary export agreement. D) Non-tariff barrier.

         Answer: D Type: Complex Understanding Page: 431




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                                          Chapter 20: International Trade


 124. One World View article reports "The House voted . . . to bar Mexican trucks from operating in the United
      States." Who will benefit from this rule?
      A) U.S. consumers. B) U.S. truckers. C) Mexican truckers. D) All of the above.

       Answer: B Type: Complex Understanding Page: 431


U.S. TRADE PATTERNS


 T     F 125. The ratio of exports to GDP in the United States is small relative to that of other countries.

       Answer: True Type: Basic Understanding Page: 414


 T     F 126. The United States has a higher reliance on foreign trade, as measured by the ratio of exports to GDP,
              than most other nations.

       Answer: False Type: Basic Understanding Page: 414


 T     F 127. A trade deficit means that exports exceed imports over some relevant time period.

       Answer: False Type: Basic Understanding Page: 415


 T     F 128. If the United States has a trade deficit with the rest of the world, then the rest of the world must have
              an offsetting trade surplus.

       Answer: True Type: Basic Understanding Page: 415


MOTIVATION TO TRADE


 T     F 129. Specialization increases total world output.

       Answer: True Type: Basic Understanding Page: 416


 T     F 130. The main reason that countries specialize and trade with each other is that by doing so they can get
              things they cannot produce themselves.

       Answer: False Type: Basic Understanding Page: 416


 T     F 131. If every country specializes in what it produces best, more will be produced than if each country
              tries to produce everything for its own needs.

       Answer: True Type: Basic Understanding Page: 416




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                                      Chapter 20: International Trade


 T   F 132. A country can consume outside its production-possibilities curve by trading.

     Answer: True Type: Basic Understanding Page: 417


 T   F 133. Even with trade a country must continue to consume inside or on its production-possibilities curve.

     Answer: False Type: Basic Understanding Page: 419


 T   F 134. Since trade increases a country's consumption possibilities, each country will be made better off by
            free trade.

     Answer: True Type: Basic Understanding Page: 419


 T   F 135. Free trade results in reduced prices and increased consumption.

     Answer: True Type: Basic Understanding Page: 419


 T   F 136. International trade allows a country's consumption possibilities to exceed its production
            possibilities.

     Answer: True Type: Basic Understanding Page: 419


PURSUIT OF COMPARATIVE ADVANTAGE


 T   F 137. Comparative advantage refers to the ability to produce output with fewer resources than any other
            country.

     Answer: False Type: Definition Page: 420


 T   F 138. Comparative advantage refers to the opportunity costs of producing particular goods.

     Answer: True Type: Definition Page: 420


 T   F 139. World output will be maximized when each country pursues its comparative advantage.

     Answer: True Type: Basic Understanding Page: 420


 T   F 140. A country's ability to produce a specific good with fewer resources than other countries determines
            whether or not it has an absolute advantage in producing the good.

     Answer: True Type: Basic Understanding Page: 420




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                                       Chapter 20: International Trade


TERMS OF TRADE


 T   F 141. The terms of trade between any two countries for two goods cannot be between their respective
            opportunity costs if there are to be any gains in trade.

     Answer: False Type: Basic Understanding Page: 421


 T   F 142. If the terms of trade are not between the opportunity costs for two countries, then the two countries
            will have no reason to trade.

     Answer: True Type: Basic Understanding Page: 421


 T   F 143. Since trade increases a country's consumption possibilities, everyone will be made better off by free
            trade.

     Answer: False Type: Basic Understanding Page: 422


PROTECTIONIST PRESSURES


 T   F 144. Reducing protectionism allows greater gains from free trade.

     Answer: True Type: Basic Understanding Page: 423


 T   F 145. When a country engages in trade, workers in import-competing industries are harmed.

     Answer: True Type: Basic Understanding Page: 424


 T   F 146. Trade redistributes income from export industries to import-competing industries.

     Answer: False Type: Basic Understanding Page: 424


 T   F 147. Trade restrictions designed to benefit the import-competing industries will benefit the entire
            country.

     Answer: False Type: Basic Understanding Page: 424


 T   F 148. Preservation of national security is one argument in favor of trade restrictions.

     Answer: True Type: Basic Understanding Page: 424


 T   F 149. Dumping involves selling goods in export markets at a price equal to the domestic price.

     Answer: False Type: Basic Understanding Page: 425




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                                       Chapter 20: International Trade



BARRIERS TO TRADE


 T   F 150. An embargo is a prohibition against trading particular goods.

     Answer: True Type: Definition Page: 426


 T   F 151. Tariffs are trade restrictions that limit the amount of a good that can enter a country.

     Answer: False Type: Basic Understanding Page: 427


 T   F 152. Quotas are a much greater threat to competition than are tariffs, because quotas preclude additional
            imports at any price.

     Answer: True Type: Basic Understanding Page: 427


 T   F 153. Voluntary restraint agreements are, in reality, voluntary tariffs.

     Answer: False Type: Basic Understanding Page: 430




                                                   Page 29

								
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