Question

The specification of a maximum amount of a commodity or product which may be imported into a country in any period of time is a : a. tariff. b. quota. c. nontariff barrier. d. voluntary export restriction. 2 Restrictions on imports usually lead to a. very little reaction from the trade partners affected by the restriction. b. a general increase in the amount of goods that we may export to other countries. c. a retaliation from the affected trade partners and a lessening of our country's exports. d. a fall in domestic consumer prices on those import-competing goods. 3 Quotas and tariffs both serve the purpose of a. increasing the amount of foreign trade. b. restricting the amount of foreign trade. c. causing domestic producers to lose revenues, d. lowering the prices of imported goods. 4 A tariff is a. a subsidy on domestically produced goods. b. the difference between the world market price and the domestic price when a group of firms in an industry are successful at collusion. c. a tax on imported goods. d. a government restriction on the quantity of a specific god that can be imported into the country and sold. 5 The infant-industry argument for tariffs implies that a. it is unfair to levy tariffs on items intended for use by infants. b. tariffs should be levied in the short-run on foreign products that compete with new domestic industries c. if a newly established domestic industry can survive in the short-run with tariff protection from foreign competition, it would be able to effectively compete in international markets in the long-run without trade protection because of economies of scale. d. if a newly established domestic industry can survive in the short-run, a tariff should be imposed to protect the domestic industry from foreign competition in the long-run. e. permanent tariffs should be levied on foreign products that compete with those produced by newly established domestic industries. 6 A tariff imposed on imported shoes will cause the domestic price of shoes to and the domestic production of shoes to . a. increase, increase. b. increase, decrease, c. decrease, decrease. d. decrease, increase. 7 A tax on an imported product or commodity is a : a. tariff b. export subsidy. c. quota d. import subsidy. 8 If there is no comparative advantage between two countries: a. one country must be more productive at producing all goods than the other. b. the benefits resulting from trade are increased. c. there are no gains from specialization and trade. d. each country should specialize in the production of a particular commodity. 9 A policy of increased exports from the US economy will cause the domestic prices of products to and the domestic production of products to . a. increase, increase. b. increase, decrease. c. decrease, decrease. d. decrease, increase. 10 The North American Free Trade Agreement reduces trade barriers a. among the states of the United States. b. among the provinces of Canada. c. between the United States and Cuba. d. among the United States, Canada, and Mexico.

Answer 1

1. b. quota

2. c. a retaliation from the affected trade partners and a lessening of our country's exports

3. b. restricting the amount of foreign trade

4. c. a tax on imported goods

5. c. if a newly established domestic industry can survive in the short-run with tariff protection from foreign competition, it would be able to effectively compete in international markets in the long-run without trade protection because of economies of scale

6. a. increase, increase

7. a. tariff

8. c. there are no gains from specialization and trade

9. a. increase, increase

10. d. among the United States, Canada, and Mexico.

Explanation:

1. A quota is an economic restriction that imposes the limit (in monetary terms) of goods a country may import or export. They can be placed on a particular type of goods. They represent the tool of the government used to increase or decrease international trade.

Not to be confused with voluntary export restriction (VER) which is strictly an export restraint made by the exporting country.

Also, a broader group of trade restrictions where a quota belongs to is the nontariff barrier group. However, that is not the correct answer as it is a broad group of barriers that includes barriers different from quotas.

2. Usually, our attitude towards export/import influences our trade partners in a similar manner. It is economically rational for them to limit the import of our goods if we are doing the same. B) and d) are completely false, as the opposite of both statements is true.

3. Having in mind quotas and tariffs are trade barriers, it is evident that their purpose is to limit the amount of foreign trade. If we wanted to increase foreign trade, we would give incentives to export/import, not impose barriers.

By limiting the amount of imported products, their prices can only go up, not down.

4. Being an essential trade barrier, the purpose of tariffs is to limit foreign trade by putting tax on imported goods. This way, import is directly restricted with a monetary barrier, which is the amount of tax the exporting country has to pay in order to get its goods imported in a foreign country.

5. Having in mind the large amount of fixed costs when the industry is arising, it is important to receive government aid in the beginning steps. The best tools for that are tariffs, limiting the import of similar goods, thus encouraging the market penetration of the domestic goods.

After some time, given that the industry is operating in an efficient manner, it should reach the economies of scale phase. Then, it becomes internationally competitive, as the initially substantial expenses become spread out to a large number of goods.

6. If a particular good has an added tariff, the tariff amount inflates the current price, making the good more expensive.

As the shoe price of domestically produced shoes becomes more competitive afterwards, domestic producers will increase their production due to customer demand aimed towards domestic shoes.

7. Tariffs are a typical trade barrier imposed by the government during the control of imported goods. By putting a tax on imported goods, they are directly influencing the level of importing of that particular good.

On the contrary, subsidies encourage import/export activities by making the import/export prices more competitive.

8. Comparative advantage referring to two countries in international trade is the potency of one of the countries to produce goods with a smaller opportunity cost than the other country.

An opportunity cost is the cost of choice, or in other words, the lost benefit of one option when we choose the other one. So, if there is no comparative advantage, neither of the two countries will have the incentive needed for foreign trade.

9. If the export of domestic products is encouraged, the demand of the same products is increased. When the demand increases, the price follows the same pattern.

As for the production, a higher market price is always motivating producers to create a bigger supply.

10. The NAFTA agreement is of concern for the states that signed the agreement: United States, Canada, and Mexico. The goal of the agreement was to create a trade bloc, essential to regulate the trade between the named countries.

It was signed in 1994. The vicinity of the named countries and the large extent of their already existing trade processes were the incentive for creating such an agreement.