4.1.6 Restrictions on free trade Quiz: Pearson Edexcel Economics A, Unit 4

The 20 questions

1. Which is a reason for restricting free trade?

   • To remove all government revenue from taxes on goods that are traded across borders
   • To increase the number of foreign firms competing in the domestic market for all goods
   • To protect infant industries that cannot yet compete with established foreign producers
   • To guarantee that all imports are cheaper than domestic goods in every market at all times

2. Which of the following is a tariff?

   • A rule requiring imported goods to meet detailed safety and labelling standards before sale
   • A tax on imported goods, which raises their price for domestic buyers
   • A payment made by government to domestic producers for each unit they produce
   • A limit on the physical quantity of a good that may be imported in a year

3. Which is a quota?

   • A tax on each unit of a good that is imported into the domestic market from abroad
   • A limit on the physical quantity of a good that can be imported in a given period
   • A payment to domestic firms that lowers their costs of production and their selling prices
   • A set of technical standards that foreign goods must meet before they are allowed on the market

4. Which is a subsidy to domestic producers?

   • A requirement that foreign firms must share their technology with domestic partners before entering
   • A payment from government per unit of output, which lowers the costs of domestic producers
   • A ban on all imports of a particular good for a period of time to protect domestic firms
   • A tax charged on each unit of a good imported from a foreign country into the domestic market

5. Which is an example of a non-tariff barrier?

   • A limit of 500 units a year on the number of foreign cars that can enter the domestic market
   • A tax of 10 per cent on all goods imported from a specified country into the domestic market
   • Strict safety or labelling standards that foreign goods must meet before they can be sold domestically
   • A direct payment from government to domestic producers for every unit of output they make in a year

6. A specific tariff of £2 per unit is imposed on an imported good whose world price is £10. What is the domestic price, before any change in demand?

   • £20, since the tariff is doubled when it is applied to each imported unit in the domestic market
   • £8, since the tariff reduces the price that importers receive for each unit they bring in
   • £12, since the world price plus the tariff gives the domestic price
   • £10, since tariffs are paid by foreign producers and so leave domestic buyers' prices unchanged

7. A quota cuts imports of a good from 100 units to 60 units a year. Which is the most likely effect on the domestic market?

   • The domestic price falls and domestic producers sell less, while consumers buy more at the lower price
   • The domestic price and quantity are both unchanged, because quotas do not affect the market at all
   • Imports rise to 140 units, because quotas always encourage more foreign firms to enter the domestic market
   • The domestic price rises and domestic producers sell more, while consumers buy less at the higher price

8. What is the most likely effect of a subsidy to domestic producers on the market for a good?

   • Domestic supply expands and prices can fall, letting domestic firms compete more strongly with imports
   • No change in supply, because subsidies affect only the government budget and never the behaviour of producers
   • Domestic supply falls and prices rise, because subsidies always reduce the incentive to produce for the market
   • Imports rise sharply, because subsidies make domestic goods more expensive than foreign goods in every market

9. Which is a likely effect of protectionist policies on consumers?

   • Higher real incomes, because protection always increases the number of jobs in the domestic economy
   • Lower prices and a wider range of products, because protection makes foreign goods cheaper for buyers
   • No effect at all, because protection only changes the behaviour of producers and never affects buyers
   • Higher prices and less choice, which reduce their real purchasing power

10. Which is a likely effect of protectionist policies on domestic producers?

    • Protected firms lose all sales, because protection means they must compete directly with cheaper foreign producers
    • Protected firms always become more efficient, because competition from imports is removed by the policy
    • Protected firms face less competition and may sell more, but they may become less efficient over time
    • Protected firms are forced to close, since protection always makes domestic production uncompetitive

11. Which is the likely effect of a tariff on government revenue?

    • It always reduces government revenue, because tariffs are paid by foreign producers who then stop trading
    • It always raises revenue by the same amount as the tariff rate, whatever happens to the volume of imports
    • It raises revenue from the tariff, although revenue can fall if imports drop sharply
    • It has no effect on government revenue, because tariffs are offset by the same amount in lower income taxes

12. A tariff is raised on a good with highly price-elastic demand. Which is the most likely effect on tariff revenue?

    • Revenue rises sharply, because price-elastic demand means that imports are unaffected by any change in price
    • Revenue rises by exactly the same proportion as the tariff rise, whatever the size of the fall in imports
    • Revenue is unchanged, because price-elastic demand means that consumers always bear the full burden of the tariff
    • Revenue may fall, because imports fall sharply and reduce the tax base to which the tariff applies

13. Which is an example of dumping?

    • A foreign firm raising its export price to cover the tariff imposed by the importing country's government
    • A foreign firm selling exports below its own cost or below its price in the home market to win market share
    • A domestic firm disposing of unsold stock by giving it away to employees at no cost in the home market
    • A government selling surplus food to other countries at a price above the world price for the same product

14. Which argument for protection is the most consistent with a long-run gain to the economy?

    • Protection of declining industries with no prospect of recovery, so that jobs are kept at any cost to the economy
    • Permanent protection of every industry, so that no domestic firm ever faces competition from foreign rivals again
    • Protection of a domestic industry to raise prices for consumers, so that producers earn higher profits each year
    • Temporary protection of an infant industry that can become competitive, so that future comparative advantage is developed

15. Why might a non-tariff barrier be harder to challenge than a tariff?

    • It is always set at a higher level than any tariff, so the WTO has no power to review it at all
    • It is presented as a health, safety or technical rule, so it can be hard to show it is a disguised trade restriction
    • It applies only to services and never to physical goods, so WTO rules do not cover it at all
    • It is always removed after a single year by law, so there is no need for any challenge to be made against it

16. Which is the best evaluation of protectionism as a policy to protect employment?

    • It has no effect on employment, because jobs depend only on the exchange rate and never on trade policy
    • It may save jobs in protected sectors, but higher prices and retaliation can cost jobs and reduce living standards elsewhere
    • It guarantees full employment in all sectors, because foreign firms are then forced to hire domestic workers
    • It always creates more jobs than free trade in every sector and region, with no costs to any other part of the economy

17. Which protectionist policy is most likely to raise domestic output without any direct cost to the government budget?

    • A non-tariff barrier, since it requires the government to pay compensation to foreign producers each year
    • A subsidy to domestic producers, since it costs the government nothing and raises domestic output directly
    • A tariff, since it always costs the government more than a subsidy of the same size per unit of output
    • A quota on imports, since it restricts supply from abroad without government spending on subsidies

18. Protection is often described as regressive. Why?

    • Protection has no effect on any household, because it changes only the prices paid by businesses and never by consumers
    • Protection lowers the price of goods for high-income households, who buy most of the imported goods in the market
    • Protection increases the income of low-income workers in all sectors, which reduces poverty and inequality in the economy
    • Higher prices on protected goods take a larger share of the income of low-income households, who spend more of their income on them

19. Which protectionist measure creates a 'quota rent' that accrues to importers or foreign suppliers rather than government?

    • A subsidy, because the payment goes to foreign producers who are competing in the domestic market
    • A non-tariff barrier, because the rules raise the costs for domestic consumers without any transfer at all
    • A tariff, because the tax paid on each unit goes straight to foreign suppliers as extra profit
    • A quota, because the limited supply raises prices that importers or licence holders can capture

20. Which is the best reason to be sceptical of the infant industry argument for protection?

    • Governments may pick the wrong industries, and protection can persist after an industry has matured
    • Infant industries never need protection, since new firms always have lower costs than established foreign rivals
    • Protection always makes infant industries more efficient, so there is no reason to doubt the argument in any case
    • The argument applies only to agriculture, so it cannot justify protection of manufacturing in any economy

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