International Trade
Examination 3

These questions are from the test bank. Some questions have multiple parts.

Short Answer Essay

1. What is a negative externality?

(a) Give an example of a negative externality.

(b) Please show an externality for a market.

(c) How can government correct an externality?

2. What is a positive externality?

(a) Give an example of a positive externality.

(b) How can government fix a positive externality?

3. How does trade protection involve positive externalities? In your answer, make sure you list at least three benefits of trade protection.

4. What is the Infant Industry Argument?

(a) Which founding father of the United States advocated this argument?

(b) Which German citizen advocated this argument, and what did he add?

(c) What is import substitution?

(d) Does import substitution work? Please explain.

5. Why is import substitution such a failure?

(a) Which countries have used import substitution?

(b) Some countries like the Asian tigers focus on exports. Why is export-oriented growth important to a country?

6. What is the Dying Industry Argument?

(a) What are some regional effects?

(b) What is the Trade Adjustment Assistance?

7. Why are tariffs and export taxes important for governments with limited sources of tax revenues?

8. Why is trade protection important for National Defense and National Security? Please explain.

9. What is tariff escalation?

(a) Which countries impose tariff escalation? Why do they do it?

(b) How does politics play a role in trade protection?

10. Identify three conditions for a firm to use effectively price discrimination?

(a) How does price discrimination lead to dumping?

(b) Evaluate the economics of an exporting firm using price discrimination to dump its product on the market. Make sure you draw two markets: the domestic and international markets. Use a constant marginal cost (MC) function

11. (20 points) Please show international trade between the United States and China using demand and supply functions for the soybean market. The U.S. exports soybeans, while China imports them. Make sure you include an international market, and both countries are large and can influence the world price.

(a) Show the consumers' plus producers' surpluses and total welfare for both countries for free trade.

(b) Show the impact of an export subsidy, if the United States imposes one on soybeans.

(c) What is the price wedge? Is this similar to a price wedge for a regular subsidy on a product?

(d) How much does the U.S. government have to pay for the subsidy?

(e) What is the deadweight loss of the export subsidy? What happens to the world's welfare?

12. Please draw the supply and demand functions for Turkey. Turkey is a small country that exports clothes.

(a) Identify the consumers' plus producers' surpluses and total welfare for Turkey for free trade.

(b) Appraise the impact of an export subsidy, if Turkey imposes one on its clothes exports.

(c) What is the price wedge? Is this similar to a price wedge for a regular subsidy on a product?

(d) Evaluate the amount the Turkish government must pay for the subsidy.

(e) Identify the deadweight loss of the export subsidy, and its impact to the world's welfare.

13. What is the economics of an export subsidy?

14. Which methods could a government grant a subsidy to an exporting firm without transferring money?

15. Please define the four types of trade blocs. Furthermore, give an example of each one.

(a) Free trade area

(b) Customs union

(c) Common market

(d) Economic Union

16. Please explain the economics of a country that has a tariff with one country and forms a trade bloc with another country. Your answer includes a demand and supply functions for a market. You may use horizontal supply functions to simplify the analysis.

17. Identify the role of trade diversion in a trade bloc.

(a) Identify the three benefits of a trade bloc.

(b) Do trade blocs violate GATT and WTO rules?

18. What are the requirements to join the European Union?

(a) What is the European Central Bank?

(b) Which cases did the EU removed a country's regulations?

(c) Why did Great Britain not adopt the euro?

19. What is the North Free Trade Agreement (NAFTA)?

(a) Which country benefited the most from NAFTA?

(b) Which direction is Mexico moving economically?

20. Before the 1980s, what were characteristics of Mexico's economy?

(a) What did the last four Mexican Presidents do with Mexico?

(b) What type of jobs did the North Free Trade Agreement (NAFTA) create in Mcxico?

21. What are trade sanctions?

(a) What are the three reasons why trade sanctions do not work?

(b) Give an example of a trade sanction.