Question 1

Which of the following best describes the concept of comparative advantage in the context of free trade?

Accepted Answer

A country should specialize in producing goods for which it has the lowest opportunity cost compared to other countries.

Question 2

Suppose Canada imposes a per-unit tariff $$T on $$imported steel. Which of the following is the most likely immediate effect on the domestic market?

Accepted Answer

Domestic production increases and consumer surplus decreases.

Question 3

Which of the following is NOT a valid argument for trade protection according to economic theory?

Accepted Answer

Protecting against low-wage foreign labour.

Question 4

A country restricts the quantity of imported dairy products and imposes high tariffs to maintain domestic prices above the free-market level. What is this system called?

Accepted Answer

Supply management

Question 5

If a quota and a volume-equivalent tariff are imposed on imports, which country generally prefers the quota and why?

Accepted Answer

The exporting country, because quotas can raise the price foreign suppliers receive.

Question 6

Which of the following best describes the deadweight loss caused by a tariff?

Accepted Answer

The reduction in consumer surplus that is not offset by gains to producers or government.

Question 7

Consider the following scenario: Under free trade, domestic production is $$Q_0$$ and domestic consumption is $$Q_1. $$After a tariff is imposed, production rises to $$Q_2$$ and consumption falls to $$Q_3. $$What is the new level of imports?

Accepted Answer

$$Q_2Q_3$$

Question 8

Which of the following is a key difference between a free trade area (FTA) and a customs union?

Accepted Answer

A customs union has a common external tariff against non-members, while an FTA does not.

Question 9

Which of the following best describes the concept of trade diversion?

Accepted Answer

Trade within a group replaces trade that used to take place with countries outside the group, leading to inefficient resource use.

Question 10

Which of the following is an example of a non-tariff barrier (NTB)?

Accepted Answer

An import quota on foreign textiles.

Question 11

Suppose the government imposes a countervailing duty on imported solar panels. What is the primary purpose of this policy?

Accepted Answer

To offset the effects of foreign export subsidies.

Question 12

During the Great Depression, many countries raised tariffs on imports. What was the main economic consequence of this policy?

Accepted Answer

It reduced global trade and worsened the economic situation.

Question 13

Which of the following is a key provision of the US-Mexico-Canada Agreement (USMCA, formerly NAFTA)?

Accepted Answer

The principle of national treatment and a dispute-settlement mechanism.

Question 14

What is the main argument against regional trade agreements from a global perspective?

Accepted Answer

The costs of trade diversion may outweigh the benefits of trade creation.

Question 15

Which of the following best describes the infant industry argument for protection?

Accepted Answer

New industries need protection to grow large enough to achieve economies of scale.

Question 16

If Canada imposes a 'carbon tariff' on imports from countries without equivalent climate policies, what is the intended economic effect?

Accepted Answer

To protect domestic firms' competitive positions by adjusting for cost differences.

Question 17

Which of the following is a consequence of trade creation within a regional trade agreement?

Accepted Answer

Efficient specialization according to comparative advantage.

Question 18

After the elimination of tariffs under CUFTA, the Canadian wine industry began producing higher quality wines. This is an example of:

Accepted Answer

Trade creation and industry restructuring due to increased competition.

Question 19

Which of the following is true about the World Trade Organization (WTO)?

Accepted Answer

It replaced the General Agreement on Tariffs and Trade (GATT) in 1995.

Question 20

Suppose a country implements a tariff that increases domestic producer surplus by area 1 and government revenue by area 3, but decreases consumer surplus by area $$1 + 2 + 3 + 4. $$What is the deadweight loss from the tariff?

Accepted Answer

$$2 + 4$$

Microeconomics Study Notes: Chapter 20 – Trade Policy

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