Instructor:
John Whitehead
e-mail: whiteheadjc@appstate.edu
Exam #2 Study Guide
The exam will/may consist of 50 multiple choice and true/false questions. Each question is worth 2 points.
Key Terms
Chapter 5: inter-industry trade, intra-industry trade (model),
intra-industry trade share, monopolistic competition, product differentiation,
gains from trade, internal economies of scale, oligopoly, external economies of scale,
gains from trade (model)
Chapter 7: tariff, specific tariff, ad valorem, , deadweight loss, effects of a small country tariff on: producers (production effect), consumers (consumption effect), and government (model), large country terms of trade effect (model)
Chapter 8: quota, voluntary export restraint, effects of a quota on: producers (production effect), consumers (consumption effect), and government (model), World Trade Organization, how big are the costs of protectionism?
Chapter 9: spillover effects (i.e., positive externalities), infant industry, countervailing duties, trade war (i.e., tariff escalation), rent seeking, loss of product variety (intra-industry trade), loss of innovation, enforcement costs, positive externalities, infant-industry, dying industry, unfair trade practices, strategy trade policy, national pride, national defense, income redistribution, environmental and safety regulation
Chapter 10: export subsidies (small country model), deadweight loss (consumption effect, production effect), dumping, countervailing duties
Chapter 11: free-trade area, customs union, common market, economic union, most favored nation principle
Handout: "Trade Gap Widens on Record Imports"
Handout: "Boeing ...
Practice Questions
Chapter 5 (#7)
7. Use the intra-industry trade model to answer this question: (a) Opening trade allows consumers to enjoy lower prices and greater product variety; (b) The long run profit of producers is the same as before trade was opened: zero. However, fewer firms in the world market will exist after trade, some of the home country firms may go out of business.
Chapter 7 (#3, #4)
3. Use a diagram like Figure 7.3 to answer this question: The production effect of a tariff is the loss of consumer surplus for the units that domestic producers will produce with protection when the tariff increases the domestic price. The tariff “artificially” raises the domestic price and causes some consumers to pay more for the product than otherwise. It is the triangular area b.
4. Use a diagram like Figure 7.3 to answer this question: The consumption effect of a tariff is the loss of consumer surplus for the units that consumers would consume with free trade but do not consume when the tariff increases the domestic price. The tariff “artificially” raises the domestic price and causes some consumers to buy less of the product. It is the triangular area d.
Chapter 8 (#2)
2. Voluntary export restraint (VER) agreements are nontariff barriers to imports. Despite their name, the importing-country government coerces the exporting-country government into allocating a limited quota of exports among its exporting firms. Import-country governments often force exporters into accepting VERs because the government wants to limit imports without explicit import barriers like tariffs or import quotas that would violate international agreements. In choosing VERs, the importing-country government does not create a bigger national gain than with quotas.
Chapter 10 (Chapter 7, #3, #4 and substitute the word "subsidy" for "tariff")
3. Use a diagram like Figure 10.3 to answer this question: The production effect of a subsidy is the loss of consumer surplus for the units that domestic producers will produce with protection when the subsidy increases the domestic price. The subsidy “artificially” raises the domestic price and causes some consumers to pay more for the product than otherwise. It is the triangular area h.
4. Use a diagram like Figure 10.3 to answer this question: The consumption effect of a subsidy is the loss of consumer surplus for the units that consumers would consume with free trade but do not consume when the subsidy increases the domestic price. The subsidy “artificially” raises the domestic price and causes some consumers to buy less of the product. It is the triangular area f.
