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Define the term carbon tax
An indirect tax on greenhouse gas emissions or the carbon content of fossil fuels in order to reduce pollution from particular industries by internalizing the negative externalities of production.
Define the term common pool resources
Rivalrous but non-excludable goods or services, that is, they are not owned by a private individual or firm, for example, public beaches, country parks or commercial fishing.
Define the term comparative advantage.
Comparative advantage is where one country has a lower opportunity cost of producing a good than another country.
Define the term tariff.
Tariffs are taxes imposed on imported goods as they enter the domestic economy. The individual or organisation importing the goods must pay the tariff.
Define the term administrative trade barrier.
Administrative trade barriers are where the government imposes excessive rules, regulations and bureaucracy on imported goods.
Which of the following is least likely to be a benefit of free trade?
A. Structural unemployment
B. Allocative efficiency
C. Economies of scale
D. Competition
A
Free international trade can cause structural unemployment when domestic firms face increased competition.
Which of the following is the most likely to be beneficial for a domestic firm when its market is opened up to foreign competition?
A. Increased competition
B. Learning new production methods
C. Rise in labour costs
D. Diseconomies of scale
B
Increased foreign competition means domestic firms can learn from their foreign competitor's methods.
Which of the following is unlikely to be a benefit of imposing a tariff on a good?
A. Raises revenue for the government
B. Protects a declining industry
C. Increases domestic producer surplus
D. Reduces domestic consumer surplus
D
Trade barriers normally increase domestic prices which reduces the domestic consumer surplus.
Which of the following statements about a quota on shoes is untrue?
A. There is a gain in the producer surplus for domestic shoe producers
B. There is a welfare loss of people who no longer buy shoes at a higher price because of the quota
C. The government earns revenue from the quota
D. There is a welfare loss of inefficient domestic shoe producers in the market because of the quota
C
Quotas do not earn revenue for the government.
Which of the following is the least likely consequence of Country A imposing an import quota on rice to reduce the quantity of rice imported?
A. The domestic producer surplus will increase
B. The domestic consumer surplus will increase
C. The price of rice will rise in Country A
D. The quantity of rice imported will be the amount of the quota
B
Because the price of rice rises in Country A the domestic consumer surplus will decrease.
What type of trade agreement is one signed between the UK and Japan?
A. Multilateral
B. Common market
C. Bilateral
D. Regional
C
A trade agreement between two countries is called a bilateral agreement.
Which of the following is the difference between an FTA and a common market?
A. An FTA allows countries to set their own tariffs against non-member countries
B. An FTA removes all trade barriers between member countries
C. An FTA involves a series of bilateral agreements
D. An FTA allows free movement of capital
A
An FTA removes all trade barriers between members and members can set their own tariffs against non -,member countries.
Which of the following is not a function of the WTO?
A. Lending funds to ELDCs to support trade
B. Forum for trade negotiations between countries
C. Administering trade agreements
D. Arbiter in trade disputes between nations
A
The WTO is not involved in financing trade. This would be the IMF, not the WTO.
When a country enters a customs union low-cost imports from a country outside the union are replaced by high-cost imports from a country within the union. This is an example of which of the following?
A. Trade creation
B. Comparative advantage
C. Absolute advantage
D. Trade diversion
D
Trade diversion is when low-cost imports from outside the union are replaced by high-cost imports from within the union.
What is the main characteristic of a free trade area?
A. A common external tariff
B. Tariffs on goods between member countries
C. A common currency among member countries
D. No tariffs or quotas on goods traded between member countries
D
A free trade area means removing trade barriers between member countries, and each member country sets its own trade barriers against non-members.
Explain the two welfare loss triangles associated with the imposition of a tariff on bicycles in the Bahamas.
The yellow triangle is a welfare loss associated with the cost of bicycles for inefficient domestic producers who could not compete in the market when there were no tariffs. These costs occur because of the tariff and are, therefore, a welfare loss.
The green triangle is a welfare loss because it represents the loss of consumer surplus of bicycle buyers who no longer buy them because the tariff increases the price of the bicycles above the level the buyers are prepared to pay.
Explain why a tariff might be considered to be a regressive tax.
A regressive tax means households on lower incomes pay a higher proportion of their income in tax than those on higher incomes. The tariffs on bicycles in the Bahamas are regressive because the $15 tariff on a bike would be a higher proportion of someone's income who is earning $10,000 per year than it would be on someone earning $100,000 per year.
Explain two reasons why the Japanese government might choose administrative trade barriers instead of tariffs or quotas.
The Japanese government might choose administrative barriers because:
They are not as official as tariffs and quotas are may not attract retaliation from other countries.
They can be targeted at specific trade issues such as health and safety and product standards.
Explain the difference between a free trade area and a customs union.
A free trade area (FTA) is a multilateral trade agreement between countries where there is free trade without any trade barriers between member countries of the FTA, and each member sets its own tariff against non-members of the FTA. A customs union (CU) is a multilateral trade agreement where there is free trade between members of the CU, but a common external tariff is set against non-members of the CU.
Using a demand and supply diagram, explain the impact of policies aimed at ‘increasing productivity and investment in the poultry industry’.
Responses should include a correctly labelled demand and supply diagram with a shift of the supply curve to the right AND an explanation that direct support will lead to falling production costs, resulting in a rise in supply / output and lower prices for consumers.
Using a diagram, explain how trade creation benefits a country when it joins the EU.
Trade creation occurs when a country joins a trading bloc, and there are no trade barriers between member countries. This increases the volume of trade between member countries, and these countries receive the benefits of increased free trade. These benefits are shown in the diagram where a tariff is removed.
Using a diagram, explain how trade diversion affects a country when it joins the EU.
Trade diversion occurs when a country joins a customs union. It happens when the goods a country imported before it joined the customs union are replaced by less efficiently produced goods which are now imported from countries inside the customs union. It occurs because the common external tariff is higher than the tariff set by the country before it joined the customs union. The diagram shows the effect on the price of butter when Poland joined the EU customs union.
Explain two reasons why the government might wish to protect the domestic poultry industry.
· to protect jobs
· to ensure higher revenues for domestic chicken producers
· to reduce the potential impact on growth as the industry makes up 40 % of the agriculture sector
· to compensate for the subsidies given to foreign producers · to improve the balance of payments
· to earn government tariff revenue
· to protect safety standards
· to counteract dumping.
Using an appropriate diagram, explain the likely effect that the suggested increase in the tariff would have on the domestic production of poultry.
Responses should include a correctly labelled tariff diagram to show an increase in the tariff through an upward shift of the world supply + tariff curve and an increase in domestic production AND an explanation that there would be an increase in domestic production as the price of chicken rises.
Using an AD/AS diagram, suggest what will happen to employment if imports continue to damage the domestic poultry industry.
Responses should include a correctly labelled AD/AS diagram with a shift of the AD curve to the left AND an explanation that increasing imports will reduce AD (net exports) which will reduce real national output, thus reducing employment in the economy.