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Chapter 13 Review Questions - Developing Economies | ECON 175, Assignments of Economics

Drake UniversityEconomics

Material Type: Assignment; Class: DEVELOPING ECONOMIES; Subject: Economics; University: Drake University; Term: Unknown 1989;

Typology: Assignments

Pre 2010

Uploaded on 07/30/2009

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Hello all. Since we are not going to have class this coming Wednesday, April 19th, I am
therefore including the key (answers) at the end of these questions. Nonetheless, if you have any
questions on this assignment, or you feel that you need additional explanations on some points or
aspects of this chapter (13), please do not hesitate to contact me.
Please be advised that when we meet on the following Wednesday, April 26th, we will be
discussing questions on Chapter 14, not 13—I shall place review questions on Chapter 14 on my
Web page late next week.
-------------------------------------------------------------------------------------------
Econ. 175: Ch 13; Review Questions (22 questions)
A. Multiple-Choice Questions
1. The nominal rate of protection shows the extent to (or the percentage by) which the domestic
price of imported goods exceeds
a. what the price would be without tariffs.
b. the cost of intermediate inputs.
c. the social opportunity costs of the good.
d. the no-trade equilibrium price.
2. An economic community
a. attempts to raise prices by restricting quantity.
b. seeks to stabilize commodity prices.
c. seeks concessional loans.
d. pursues/imposes a common external tariff.
e. none of the above.
3. The long-run social benefits of infant industry protection are more likely to be realized if
a. investors believe that tariff barriers are permanent.
b. investors believe that tariff barriers are transitory.
c. tariff barriers increase over time.
d. tariff barriers are replaced with quotas over time.
4. The share of the poorest 20% in world trade is on the order of
a. 3%.
b. 2%.
c. 1%.
d. 10%.
5. Which of the following is a major argument of trade pessimists?
a. Increased productivity of developed country agriculture
b. Increased efficiency in industrial use of raw materials
c. Protectionism against labor-intensive manufactures
d. All of the above
1
pf3
pf4
pf5

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Download Chapter 13 Review Questions - Developing Economies | ECON 175 and more Assignments Economics in PDF only on Docsity!

Hello all. Since we are not going to have class this coming Wednesday, April 19th, I am

therefore including the key (answers) at the end of these questions. Nonetheless, if you have any questions on this assignment, or you feel that you need additional explanations on some points or aspects of this chapter (13), please do not hesitate to contact me. Please be advised that when we meet on the following Wednesday, April 26th, we will be discussing questions on Chapter 14, not 13—I shall place review questions on Chapter 14 on my Web page late next week.

Econ. 175: Ch 13; Review Questions (22 questions)

A. Multiple-Choice Questions

  1. The nominal rate of protection shows the extent to (or the percentage by) which the domestic price of imported goods exceeds a. what the price would be without tariffs. b. the cost of intermediate inputs. c. the social opportunity costs of the good. d. the no-trade equilibrium price.
  2. An economic community a. attempts to raise prices by restricting quantity. b. seeks to stabilize commodity prices. c. seeks concessional loans. d. pursues/imposes a common external tariff. e. none of the above.
  3. The long-run social benefits of infant industry protection are more likely to be realized if a. investors believe that tariff barriers are permanent. b. investors believe that tariff barriers are transitory. c. tariff barriers increase over time. d. tariff barriers are replaced with quotas over time.
  4. The share of the poorest 20% in world trade is on the order of a. 3%. b. 2%. c. 1%. d. 10%.
  5. Which of the following is a major argument of trade pessimists? a. Increased productivity of developed country agriculture b. Increased efficiency in industrial use of raw materials c. Protectionism against labor-intensive manufactures d. All of the above
  1. Which of the following is a major argument of trade optimists? a. Industrial policy can increase productivity of developing country manufacturing b. New synthetic substitutes are constantly being discovered and improved c. Developing country efficiency/productivity would improve with trade liberalization d. All of the above
  2. Which of the following countries provides the best example of a successful import substitution development strategy? a. Chile. b. South Korea. c. Argentina. d. Botswana.
  3. Which of the following is a non-tariff barrier policy tool? a. Sanitary regulations. b. Average duties. c. Phased liberalization. d. Ad valorem tax.
  4. The most important role of the World Trade Organization is a. to promote market oriented economic policies. b. to settle trade disputes. c. to provide development assistance. d. to help countries choose the appropriate level of a tariff or quota. e. both a and b.
  5. Import substitution policies include a. infant industry protection. b. artificially overvalued exchange rates. c. tariffs and quotas. d. all of the above. e. a and b only.
  6. If a group of countries form a unit that frees internal trade, establishes a common set of external tariffs, but takes no further steps towards economic integration, it is called a a. trade creating association. b. free trade area. c. customs union. d. common market.
  7. Suppose that the free trade price of widgets is $5,000. Now widgets are produced with two inputs, zipples and flugles. Only one unit of each is required to produce one widget, and the free trade price of the inputs is as follows: $2500 per zipple and $1500 per flugle. Suppose there is a tariff on imports of widgets of 20%, making the tariff-inclusive price of widgets $6,000. Finally, suppose there are tariffs on zipples and flugles of 5% and 10%, respectively (so that the tariff inclusive prices of these inputs are $2,625 and $1,650. What is the effective rate of protection?

h. New protectionism

C. Open-Ended, Long-Answer Questions

  1. A country simultaneously raises tariffs on certain manufactured goods and overvalues the exchange rate. Why might these seemingly contradictory policies be pursued together?
  2. What are some of the potential drawbacks of devaluing the exchange rate as part of an export promotion policy?

Answers:

1. A

2. D

3. B

4. C

5. D

6. C

7. B

8. A

9. E

10. D

11. C

  1. D [Based on g = (v'-v)/v, p. 568 of the text, where v = 1000 (5000 – 4000) and v' = 1725 (6000 – 4275).]
  2. C
  3. (a) When tariffs on final/finished goods exceed those on intermediate and capital good or inputs. (b) Because if the import duty/tariff/tax on inputs (e.g., on zipples and flugles in question

12 above) is carelessly imposed at a rate higher than on outputs (widgets in the same question),

then you will end up hurting yourself because you would be discouraging the import of inputs while encouraging the import of final or finished products.

  1. (a) development of further synthetic substitutes in developed countries; (b) increased productivity/efficiency of developed country agriculture, as well as agricultural protection in these countries; (c) increased productivity/efficiency in industrial use of raw materials, e.g., fuel efficient cars, hence less need for oil; (d) low income elasticity of demand for unprocessed and/or primary products; (e) developed country protectionism against labor-intensive or simple manufactures (“new protectionism”).
  2. A currency is devalued when the rate at which the central bank will exchange the local currency for foreign convertible currency, such as dollars, is increased by the central bank, or monetary authority. A depreciation is the gradual decrease in the purchasing power of a domestic currency in foreign markets relative to domestic markets; it is an informal/spontaneous loss of value.
  1. Such a strategy is usually adopted with the hope (or under the pretext) of importing capital/inputs/intermediate goods and essential food staples cheaper, deemed necessary for import substitution industrialization. But if remedial or ameliorative measures (such as imposition of import duties on luxury imports) are not simultaneously adopted, such strategies can hurt exporters, especially those of agricultural products, thereby also hurting the country’s balance of payment situation (see p. 565 of the text). Furthermore, an overvalued currency can hurt import-competing industries, as well as, accordingly, further exacerbate balance of payments difficulties and/or external debt. In addition, if overvaluation is not accompanied by selective tariffs on non-essential/luxury imports, domestic markets might get flooded by non-essential consumer items, thereby, once again, hurting the country’s balance of payments. Income distribution/redistribution effects of such policies are obvious: unprotected exporters (often farmers) and import- competing industries (and their employees) will lose while the owners of capital, both domestic and foreign, will gain—a roundabout form of subsidizing. “Income-substitution policies have in practice often worsened the local distribution of income by favoring the urban sector and higher-income groups while discriminating against the rural sector and lower-income groups” (Text, p. 566).
  2. See “The IS Industrialization Strategy and Results,” pp. 564-65.
  3. See “Trade Pessimist Arguments,” pp. 575-76.
  4. See end-of-text glossary.
  5. An import substitution strategy often needs to be selective and/or discriminatory: making some imports (such as essential food or capital good items) easy/cheap—by, for example, currency overvaluation—while making other imports (such as luxury consumer items and manufactured or finished products) difficult/expensive through selective import duties.
  6. (a) Currency devaluation in pursuit of export promotion can be effective if the devaluing country’s exports are price elastic. Most LDC exports, however, are not price elastic, which means devaluation might result in a lowering, not raising, of their export earnings. Likewise, most LDC imports (such as essential consumer goods, food stuffs, and capital goods or inputs for industrialization) are also price inelastic, which means that devaluation might result in higher payments for such essential imports. This means that careless devaluation might end up hurting, not helping, LDC balance of trade, hence balance of payments. (b) To the extent that devaluation increases the price of imported goods and services, it can accordingly raise domestic wages and prices, and contribute to price inflation. (c) Tactless devaluation can also precipitate capital flight as it means loss of purchasing power of the affected currency. (d) Devaluation can also have (income) distribution effect—for this see p. 575 of the text, the first full paragraph.