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Study Questions (Ch 04)

1. Study Questions #1. Ch 4.

Which of the following defines a compound tariff?
Points:
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Explanation:
A specific tariff is expressed as a fixed amount of money per unit of the imported product. An ad valorem tariff is a fixed percentage of the value of the imported product as it enters the country. A compound tariff combines a specific tariff and an ad valorem tariff.
Which of the following tariffs provide protection to domestic producers during a business recession? Check all that apply.
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Explanation:
Since a specific tariff is a fixed monetary duty per unit of imported product, the degree of protection afforded by a specific tariff varies inversely with changes in import prices. Thus, during a recession, when cheaper products are purchased, a specific tariff provides better protection than an ad valorem or a compound tariff. More generally, specific tariffs cushion domestic producers progressively against foreign competitors who cut their prices. See section: “Types of Tariffs.”

2. Study Questions #2. Ch 4.

Which of the following are the methods customs appraisers use to determine the values of commodity imports? Check all that apply.
Points:
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Explanation:
Two common valuation concepts used by customs appraisers are the free-on-board (FOB) technique and the cost-insurance-freight (CIF) technique. Under an FOB valuation, an ad valorem tariff is applied to a product’s value as it leaves the exporting country. Under a CIF valuation, an ad valorem tariff is levied as a percentage of the imported commodity’s total value as it arrives at its final destination. Thus, the latter includes transportation costs. See section: “Types of Tariffs.”

3. Study Questions #3. Ch 4.

Suppose KiddoComp, which makes thin computers, adds value by assembling thin computer components that are produced abroad. Suppose the imported components can enter the United States on a duty-free basis (zero tariff). Suppose also that 20% of a thin computer’s final value can be attributed to domestic assembly activities (value added). The domestic price of a thin computer is $500. The remaining 80% reflects the value of the imported components. Let the cost of the thin computer’s components be the same for both KiddoComp and its foreign competitor, which can produce and sell a thin computer for$500.
Evaluate the following statement.
True or False: When material inputs or intermediate products enter a country at a low duty while the final imported product is protected by a high duty, the nominal tariff rate on the final product understates the effective rate of protection.
Points:
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Explanation:
If the tariff on inputs is small relative to the tariff on finished goods, then the nominal tariff rate will understates the effective rate of protection. For example, suppose the tariff on imported parts is 0%, the tariff on the finished product is 10%, and 80% of the product’s value is imported inputs. The effective rate of protection would be e=nab1a=0.10.2=50%e=n−ab1−a=0.10.2=50%. Thus, the nominal tariff rate of 10% understates the effective rate of protection of 50%.
However, now suppose the tariff on imported parts is 20%, while the tariff on the finished product is 10%, and 80% of the product’s value is imported units. Now, the effective rate of protection is e=0.10.8×0.210.8=0.060.2=30%e=0.1−0.8×0.21−0.8=−0.060.2=−30%. In this case, the nominal tariff rate of 10% overstates the effective rate of protection of –30%.
In summary, the effective rate of protection will be larger than the nominal tariff rate whenever the nominal tariff on finished goods is larger than the tariff on inputs. The effective rate of protection will be smaller than the nominal tariff rate whenever the nominal tariff on finished goods is smaller than the tariff on inputs. See section: “Effective Rate of Protection.”
Let ee be the effective rate of protection, nn be the nominal tariff rate on the final product, aa be the ratio of the value of the imported input to the value of the finished product, and bb be the nominal tariff rate on the imported input.
Which of the following is the correct formula for the effective rate of protection?
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Explanation:
In general, the effective tariff rate is given by the following formula: e=nab1ae=n−ab1−a. See section: “Effective Rate of Protection.”

4. Study Questions #4. Ch 4.

Complete the following paragraph to explain why less developed nations sometimes argue that the industrialized nations’ tariff structures discourage them from undergoing industrialization.
Industrialized nations’ low tariffs on primary commoditiesencourage   developing nations to expand operations in these sectors. The high protective rates levied on manufactured goodscreate entry barriers for   developing nations wishing to compete in this area.
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Explanation:
Developing countries have argued that industrial countries allow raw materials to be imported at low nominal tariff rates while maintaining high nominal tariff rates on finished products. Tariff reductions on raw materials magnify the discrepancy between the nominal and effective tariffs of the industrialized nations, worsening the potential competitive position of the less developed nations in the manufacturing and processing sectors. See section: “Effective Rate of Protection.”

5. Study Questions #5. Ch 4.

Use the following table to define consumer surplus and producer surplus.
Definition
Consumer Surplus
Producer Surplus
The difference between the amount that buyers would be willing and able to pay for a good and the actual amount the buyer pays
The difference between the minimum amount that producers would be willing sell their products for and the actual amount they receive
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A decrease in the market price results in an increase in consumer   surplus and a decrease inproducer   surplus.
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Explanation:
Consumer surplus refers to the difference between the amount actually paid by the buyer and the maximum that the buyer would have been willing to pay for the product. Producer surplus refers to the difference between the amount actually received by the producer and the minimum that the producer would have been willing to sell the product for. By influencing market prices, trade restrictions influence consumer and producer surplus. A decrease in the market price results in an increase in consumer surplus and a decrease in producer surplus. By the same token, an increase in the market price results in a decrease in consumer surplus and an increase in producer surplus. See section: “Tariff Welfare Effects: Consumer Surplus and Producer Surplus.”

6. Study Questions #6. Ch 4.

True or False: An import tariff on computers must push the price of imported computers above the price of its domestic counterparts for domestic producers to prosper.
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Explanation:
Import tariffs increase the domestic market price of an item, and the higher price discourages domestic consumption and encourages producers to expand output. A tariff thus detracts from a nation’s welfare via its consumption effect (the loss of welfare caused by increased prices and lower consumption) and protective effect (the loss of welfare resulting from wasted resources when less efficient domestic production is substituted for more efficient foreign production). An import tariff does should be just high enough to reduce the price differential between the imported products and the domestically made products. See section: “Tariff Effects: An Overview.”

7. Study Questions #7. Ch 4.

Generally, what factors influence the size of the revenue, protective, consumption, and redistributive effects of a tariff? Check all that apply.
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Explanation:
In general, the size of the welfare responses to tariffs is determined by the impact of the tariffs on domestic prices and the response of domestic producers and consumers to these price changes. See section: “Tariff Welfare Effects: Large-Nation Model.”

8. Study Questions #8. Ch 4.

Complete the following paragraph to explain the effect of imposing tariffs on imported goods on a nation’s welfare.
Suppose a large economy imposes a specific tariff of $2,000 on imported autos. If the terms-of-trade effect exceeds the deadweight losses resulting from the tariff, its national welfareincreases . Points: 1 / 1 Close Explanation Explanation: A large economy that imposes a tariff on imports will realize an improvement in its terms of trade. If the favorable terms-of-trade effect—the tariff revenue extracted from foreign producers in the form of a lower supply price—more than offsets the deadweight losses resulting from the tariff, national welfare will improve. See section: “Tariff Welfare Effects: Large-Nation Model.” 9. Study Questions #9. Ch 4. Which of the following are arguments for trade restrictions that might be considered valid in today’s world? Check all that apply. Points: 1 / 1 Close Explanation Explanation: Economists generally contend that most arguments for trade restrictions cannot withstand empirical analysis. The infant-industry and national security arguments may have some validity, but they must be highly qualified. See section: “Arguments for Trade Restrictions.” 10. Study Questions #10. Ch 4. Evaluate the following statement. True or False: If a small nation imposes a tariff on an imported good, the volume of international trade will decline, and world welfare will suffer. Points: 1 / 1 Close Explanation Explanation: Since a small nation is a price taker and faces a horizontal world supply schedule, neither the price nor quantity of world output would be affected by the tariff. Thus, the world’s welfare will not be affected. Additionally, while a tariff may raise a country’s producer surplus, a change in a country’s producer surplus has no particular bearing on whether global welfare is increased or decreased by a tariff. By contrast, if a tariff triggers retaliatory tariffs by other countries, the volume of international trade will decline, and world welfare will suffer. By increasing the price of trade goods, tariffs lower the volume of trade. For the world as a whole, there is no favorable terms-of-trade effect to offset the trade volume effect. See section: “Arguments for Trade Restrictions.” 11. Study Questions #11. Ch 4. Evaluate the following statement. True or False: The imposition of a tariff on a large nation improves its terms of trade, while trade volume declines. Points: 1 / 1 Close Explanation Explanation: The terms of trade improve, while the trade volume declines. Since a large nation faces an upward-sloping (rather than a horizontal) product supply curve, when it imposes a tariff, the reduction in quantity demanded puts downward pressure on the supply price, improving the importing country’s terms of trade. However, a tariff causes the volume of imports to decrease, which reduces the nation’s welfare by reducing its consumption of low-cost imports. In sum, there is a gain because of improved terms of trade and a loss due to a reduced import volume. See section: “The Optimal Tariff and Retaliation.” 12. Study Questions #12. Ch 4. Suppose that the production of$1 million worth of steel in Canada requires $100,000 worth of imported taconite. Canada’s nominal tariff rates for importing these goods are 20% for steel and 10% for taconite. Given this information, the effective rate of protection for Canada’s steel industry is21% . Points: 1 / 1 Close Explanation Explanation: The effective rate of protection can be determined using the following formula: e=nab1ae=n−ab1−a, where ee is the effective rate of protection; nn is the nominal tariff rate on the final product; aa is the ratio of the value of the imported input to the value of the finished product; and bb is the nominal tariff rate on the imported input. The ratio of imported inputs to finished product is$100,000$1,000,000=0.1$100,000$1,000,000=0.1. Plugging the above values into the formula yields the effective rate of protection for Canada’s steel industry:  ee = = 0.2−(0.1)×(0.1)1−0.10.2−0.1×0.11−0.1 = = 0.2−0.010.90.2−0.010.9 = = 0.21 or 21%0.21 or 21% See section: “Effective Rate of Protection.” 13. Study Questions #13. Ch 4. Which of the following accurately describe the effects of an import tariff imposed on oil? Check all that apply. Points: 1 / 1 Close Explanation Explanation: The benefits and costs of protecting domestic producers from foreign competition are based on the direct effects of an import tariff. On the one hand, import-competing producers and workers can benefit from tariffs through increases in output, profits, jobs, and compensation. On the other hand, a tariff imposes costs on domestic consumers in the form of higher prices for protected products and reductions in the consumer surplus. A tariff placed on imported oil increases the costs of energy-consuming manufacturers. This increase leads to a higher price charged by the manufacturers and a loss of international competitiveness. See sections: “The Optimum Tariff and Retaliation” and “How a Tariff Burdens Exporters.” 14. Study Questions #14. Ch 4. What is meant by the term foreign trade zone? Points: 1 / 1 How do foreign trade zones help importers mitigate the effects of domestic import duties? Points: 1 / 1 Close Explanation Explanation: A bonded warehouse is a storage facility for imported goods; it allows imported goods to be put into storage without the payment of duties. Goods may be later sold overseas duty free or withdrawn for domestic sale upon payment of import duties. A foreign trade zone (FTZ), on the other hand, is a site where foreign merchandise can be imported with no import duty; merchandise in the zone can be stored or used in the manufacturing of final products. Unlike with bonded warehouses, once merchandise has moved into an FTZ, the merchandise can be repackaged, repaired or damaged goods destroyed, component parts assembled into finished products, and either the parts or finished products exported. The manufacturing of goods is also allowed in FTZs. Importers who use FTZs can conduct a broader range of business activities than can occur in bonded warehouses that permit only the storage of imported goods and limited repackaging and processing activities. Bonded warehouses and FTZs are similar in that customs duties are due only when goods are transferred from the these facilities for U.S. consumption. See section: “Postponing Import Tariffs.” 15. Study Questions #15. Ch 4. Assume the nation of Australia is “small” and thus unable to influence the world price. The following table shows the demand and supply schedules for television sets in Australia. Price of TVs Quantity Demanded Quantity Supplied (Dollars) (Units) (Units) 500 0 50 400 10 40 300 20 30 200 30 20 100 40 10 0 50 0 Using the data in the table, use the blue points (circle symbol) to plot the demand curve, and use the orange points (square symbol) to plot the supply curve on the following graph. Then use the black cross to indicate the equilibrium price and quantity. (Hint: Be sure to use all the given points to plot the supply and demand curves.) Points: 0.83 / 1 The equilibrium price is$250

, and the equilibrium quantity is

25

TV sets.

Points:
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Explanation:
The equilibrium price and quantity can be found at the intersection of the demand and supply curves: The equilibrium price is $250, and the equilibrium quantity is 25 TV sets. On the previous graph, use the green triangle symbol to shade the area of consumer surplus. Then use the purple diamond symbol to shade the area of producer surplus. The consumer surplus is$3,125

, and the producer surplus is

$3,125 . Points: 1 / 1 Close Explanation Explanation: Consumer surplus is the difference between the maximum amount buyers are willing to pay for a given quantity of a good and the amount actually paid. Graphically, consumer surplus is represented by the area under the demand curve and above the good’s market price. Producer surplus is the revenue producers receive over and above the minimum necessary for production. Graphically, producer surplus is represented by the area above the supply curve and below the good’s market price. From the graph, you can see that consumer surplus is$3,125 and producer surplus is $3,125. See section: “Tariff Welfare Effects: Consumer Surplus and Producer Surplus.” Under free-trade conditions, suppose Australia imports TV sets at a price of$100 each.
Under these conditions,

10

TV sets will be produced,

40

consumed, and

30

imported. As a result, consumer surplus changes to

$8,000 , whereas producer surplus becomes$500

.

Points:
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Explanation:
Under free-trade conditions, the quantity supplied is 10 TV sets, quantity demanded is 40 TV sets, and 4010=3040−10=30 TV sets will be imported.
As a result, consumer surplus changes to $8,000 (the tan triangle), and producer surplus becomes$500 (the blue triangle).
To protect its producers from foreign competition, suppose the Australian government levies a specific tariff of $100 on imported TV sets. On the previous graph, use the tan points (dash symbol) to plot the world supply with the tariff. With the tariff, the quantity of TV sets supplied by Australian producers is 20 TV sets, whereas the quantity of TV sets demanded by Australian consumers is 30 TV sets. Thus, the volume of trade is 10 TV sets. Points: 1 / 1 True or False: For a small nation, a tariff placed on an imported product is shifted to the domestic consumer via a higher product price. Consumer surplus falls as a result of the price increase. The small nation’s welfare decreases by an amount equal to the protective effect and consumption effect. Points: 0 / 1 Close Explanation Explanation: With the tariff, the new price is$100+$100=$200$100+$100=$200. At this price, the quantity supplied is 20 TV sets, and the quantity demanded is 30 TV sets. Thus, 10 TV sets will be imported. (Refer to the graph in the previous explanation.) In general, for a small nation, a tariff placed on an imported product is shifted to the domestic consumer via a higher product price. Consumer surplus falls as a result of the price increase. The small nation’s welfare decreases by an amount equal to the protective effect and consumption effect. Therefore, the result is deadweight losses due to a tariff. 16. Study Questions #16. Ch 3. Assume that the United States, as a steel-importing nation, is large enough so that changes in the quantity of its imports influence the world price of steel. The following table shows the U.S. supply and demand schedules for steel, along with the overall amount of steel supplied to U.S. consumers by domestic and foreign producers. Price Quantity Supplied Quantity Demanded (Dollars per ton) (Domestic) (Domestic plus Imports) 100 0 0 15 200 0 4 14 300 1 8 13 400 2 12 12 500 3 16 11 600 4 20 10 700 5 24 9 Using the data in the table, use the blue points (circle symbol) to plot the demand curve and use the orange points (square symbol) to plot the supply curve (domestic plus imports) on the following graph. Then use the black cross to indicate the equilibrium price and quantity. Points: 0.6 / 1 With free trade, the equilibrium price of steel is$400

per ton. At this price,

12

tons are purchased by U.S. buyers,

2

tons are supplied by U.S. producers, and

10

tons are imported.

Points:
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Explanation:
With free trade, the equilibrium price of steel is $400 per ton, and the equilibrium quantity is 12 tons of steel. You can see in the data table that at this price, 2 tons are supplied by U.S. producers, and 10 tons are imported. Suppose that to protect its producers from foreign competition, the U.S. government levies a specific tariff of$250 per ton on steel imports. Which of the following best describes the effect of the tariff?
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On the previous graph, use the purple point (diamond symbol) to plot the new world supply curve after the tariff is imposed. Then use the grey point (star symbol) to indicate the equilibrium point given the tariff of $250. The new equilibrium is 10 tons of steel traded at$600

per ton. At this price, U.S. producers supply

4

tons, and

6

tons are imported.

Points:
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Close Explanation
Explanation:
When the U.S. government levies a specific tariff of $250 per ton on steel imports, the free trade supply curve shifts to the left (or up) by an amount equal to the tariff. Therefore, the new equilibrium is 10 tons of steel traded at$600 per ton. You can see in the data table that at this price, U.S. producers supply 4 tons, and 104=610−4=6 tons are imported. See sections: “Tariff Welfare Effects: Large-Nation Model” and “The Political Economy of Protectionism.”