InternationalEconomics,8e(Krugman) Chapter8 TheInstrumentsofTradePolicy 8.

1 BasicTariffAnalysis
1) pecifictariffsare S A) mporttaxesstatedinspecificlegalstatutes. i B) mporttaxescalculatedasafixedchargeforeachunitofimportedgoods. i C) mporttaxescalculatedasafractionofthevalueoftheimportedgoods. i D) hesameasimportquotas. t E) oneoftheabove. N Answer: B
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2) dvaloremtariffsare A A) mporttaxesstatedinadsinindustrypublications. i B) mporttaxescalculatedasafixedchargeforeachunitofimportedgoods. i C) mporttaxescalculatedasafractionofthevalueoftheimportedgoods. i D) hesameasimportquotas. t E) oneoftheabove. N Answer: C

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3) heexcesssupplycurveofaproductwe(H)importfromforeigncountries(F)increasesas T A) xcessdemandofcountryHincreases. e B) xcessdemandofcountryFincreases. e C) xcesssupplyofcountryHincreases. e D) xcesssupplyofcountryFincreases. e E) oneoftheabove. N Answer: D

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4) upposetheUnitedStateseliminatesitstariffonballbearingsusedinproducingexports.Ballbearingprices S intheUnitedStateswouldbeexpectedto A) ncrease,andtheforeigndemandforU.S.exportswouldincrease. i B) ecrease,andtheforeigndemandforU.S.exportswouldincrease. d C) ncrease,andtheforeigndemandforU.S.exportswoulddecrease. i D) ecrease,andtheforeigndemandforU.S.exportswoulddecrease. d E) oneoftheabove. N Answer: C

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5) specifictariffprovideshomeproducersmoreprotectionwhen A A) hehomemarketbuyscheaperproductsratherthanexpensiveproducts. t B) tisappliedtoacommoditywithmanygradevariations. i C) hehomedemandforagoodiselasticwithrespecttopricechanges. t D) tisleviedonmanufacturedgoodsratherthanprimaryproducts. i E) oneoftheabove. N Answer: A

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6) lowertariffonimportedsteelwouldmostlikelybenefit A A) oreignproducersattheexpenseofdomesticconsumers. f B) omesticmanufacturersofsteel. d C) omesticconsumersofsteel. d D) orkersinthesteelindustry. w E) oneoftheabove. N Answer: C

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7) problemencounteredwhenimplementinganinfantindustrytariffisthat A A) omesticconsumerswillpurchasetheforeigngoodregardlessofthetariff. d B) heindustrymaynevermature. t C) ostindustriesrequiretariffprotectionwhentheyaremature. m D) hetariffmayhurttheindustrysdomesticsales. t E) oneoftheabove. N Answer: B

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8) hichofthefollowingisafixedpercentageofthevalueofanimportedproduct? W A) pecifictariff s B) dvaloremtariff a C) ominaltariff n D) ffectiveprotectiontariff e E) oneoftheabove. N Answer: B

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9) taxof20centsperunitofimportedgarlicisanexampleofa(n) A A) pecifictariff. s B) dvaloremtariff. a C) ominaltariff. n D) ffectiveprotectiontariff. e E) oneoftheabove. N Answer: A

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10) taxof20percentperunitofimportedgarlicisanexampleofa(n) A A) pecifictariff. s B) dvaloremtariff. a C) ominaltariff. n D) ffectiveprotectiontariff. e E) oneoftheabove. N Answer: B

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11) hichtypeoftariffisforbiddenintheUnitedStatesonConstitutionalgrounds? W A) mporttariff i B) xporttariff e C) pecifictariff s D) rohibitivetariff p E) oneoftheabove. N Answer: B

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12) ariffsarenotdefendedonthegroundthatthey T A) mprovethetermsoftradeofforeignnations. i B) rotectjobsandreduceunemployment. p C) romotegrowthanddevelopmentofyoungindustries. p D) reventover-dependenceofacountryononlyafewindustries. p E) oneoftheabove. N Answer: A

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13) hemostvocalpoliticalpressurefortariffsisgenerallymadeby T A) onsumerslobbyingforexporttariffs. c B) onsumerslobbyingforimporttariffs. c C) onsumerslobbyingforlowerimporttariffs. c D) roducerslobbyingforexporttariffs. p E) roducerslobbyingforimporttariffs. p Answer: E

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14) heMetzlerParadox T A) xplainswhytheUnitedStatesusesbothspecificandadvalorumtariffs. e B) xplainswhytheUnitedStatesusesmanynone-tariffbarrierstoimports. e C) eferstothefactthattheUnitedStatesexportedlabor-intensivegoods. r D) snotconsideredtobeofpracticalapplicationintherealworld. i E) oneoftheabove. N Answer: D

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15) heMetzlerParadox T A) ouldtheoreticallyhappenwhenasmallcountryleviesatariff. c B) eferstoasituationwhenanOptimalTariffhurtsacountryseconomicwelfare. r C) eferstoasituationwhentheimpositionofatarifflowersdomesticprices. r D) eferstoasituationwhentheimpositionofatariffhelpsforeignexporters. r E) oneoftheabove. N Answer: C

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16) ariffratesonproductsimportedintotheU.S. T A) avedroppedsubstantiallyoverthepast50years. h B) ereprohibitedbytheconstitution w C) eachedanalltimehighin2002. r D) averisensteadilysince1920. h E) oneoftheabove. N Answer: A

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17) hatisatruestatementconcerningtheimpositionintheU.S.ofatariffonsteel? W A) tlowersthepriceofcheesedomestically. I B) traisesthepriceofcheeseinternationally. I C) traisesrevenueforthegovernment. I D) twillalwaysresultinretaliationfromabroad. I E) oneoftheabove. N Answer: C

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18) hetariffleviedinalargecountry(Home),lowerstheworldpriceoftheimportedgood.Thiscauses T A) oreignconsumerstodemandlessofthegoodonwhichwasleviedatariff. f B) omesticdemandforimportstodecrease. d C) omesticdemandforimportstoincrease. d D) oreignsupplierstoproducelessofthegoodonwhichwasleviedatariff. f E) oneoftheabove. N Answer: D

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19) nthecountrylevyingthetariff,thetariffwill I A) ncreasebothconsumerandproducersurplus. i B) ecreaseboththeconsumerandproducersurplus. d C) ecreaseconsumersurplusandincreaseproducersurplus. d D) ncreaseconsumersurplusanddecreaseproducersurplus. i E) oneoftheabove. N Answer: C

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20) tisarguedthatatariffmayhelppromoteemploymentinasingleindustry,butisnotlikelytohelp I employmentingeneral.Discuss. Answer: Ageneraltariffonallimportsisequivalenttoadepreciationinthevalueofthecountryscurrency.It wouldraisethepricesofallimports,andhaveaconsiderableincomeeffect.Thisincomeeffectwill haveanegativeeffectontotalconsumptionoftheimport-competingsector(aswellastheexportables andnon-tradables).Inaddition,underconditionsofaflexibleexchangerateregime(assumingthe Marshal-LernerConditionshold)itwilllowerthesupplyofthecountryscurrencyintheforeign exchangemarket,andhencecauseanappreciationofthecurrency.Thiswillharmthecountrys exports,andnegativelyaffectthissectorsemployment.
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21) efertoabovefigure.Intheabsenceoftrade,howmanyWidgetsdoesthiscountryproduceandconsume? R Answer: 60

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22) efertoabovefigure.Intheabsenceoftrade,whatisthecountrysconsumerplusproducersurplus? R Answer: $180,$180

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23) efertoabovefigure.Withfreetradeandnotariffs,whatisthequantityofWidgetsimported? R Answer: 100

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24) efertoabovefigure.Withaspecifictariffof$3perunit,whatisthequantityofWidgetimports? R Answer: 80

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25) efertoabovefigure.ThelossofConsumerSurplusduetothetariffequals________. R Answer: $230

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26) efertoabovefigure.Thelowestspecifictariffwhichwouldbeconsideredprohibitiveis________. R Answer: $5

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8.2 CostsandBenefitsofaTariff
1) fagoodisimportedinto(large)countryHfromcountryF,thentheimpositionofatariffincountryH I A) aisesthepriceofthegoodinbothcountries(theLawofOnePrice). r B) aisesthepriceincountryHandcannotaffectitspriceincountryF. r C) owersthepriceofthegoodinbothcountries. l D) owersthepriceofthegoodinHandcouldraiseitinF. l E) aisesthepriceofthegoodinHandlowersitinF. r Answer: E
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2) fagoodisimportedinto(small)countryHfromcountryF,thentheimpositionofatariffIncountryH I A) aisesthepriceofthegoodinbothcountries(theLawofOnePrice). r B) aisesthepriceincountryHanddoesnotaffectitspriceincountryF. r C) owersthepriceofthegoodinbothcountries. l D) owersthepriceofthegoodinHandcouldraiseitinF. l E) aisesthepriceofthegoodinHandlowersitinF. r Answer: B

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3) fagoodisimportedinto(large)countryHfromcountryF,thentheimpositionofatariffincountryHinthe I presenceoftheMetzlerParadox, A) aisesthepriceofthegoodinbothcountries(theLawofOnePrice). r B) aisesthepriceincountryHandcannotaffectitspriceincountryF. r C) owersthepriceofthegoodinbothcountries. l D) owersthepriceofthegoodinHandcouldraiseitinF. l E) aisesthepriceofthegoodinHandlowersitinF. r Answer: C

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4) heeffectiverateofprotectionmeasures T A) hetrueadvalorumvalueofatariff. t B) hequotaequivalentvalueofatariff. t C) heefficiencywithwhichthetariffiscollectedatthecustomhouse. t D) heprotectiongivenbythetarifftodomesticvalueadded. t E) oneoftheabove. N Answer: D

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5) fthetariffoncomputersisnotchanged,butdomesticcomputerproducersshiftfromdomesticallyproduced I semiconductorstoimportedcomponents,thentheeffectiverateofprotectioninthecomputerindustrywill A) ncrease. i B) ecrease d C) emainthesame. r D) ependonwhethercomputersarePCsorSupercomputers. d N E) oneoftheabove. Answer: A

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6) fthetariffoncomputersisnotchanged,butthegovernmentthenaddshithertononexistenttariffson I importedsemi-conductorcomponents,thentheeffectiverateofprotectioninthecomputerindustrywill A) ncrease. i B) ecrease d C) emainthesame. r D) ependonwhethercomputersarePCsorSupercomputers. d E) oneoftheabove. N Answer: B

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7) fasmallcountryimposesatariff,then I A) heproducersmustsufferaloss. t B) heconsumersmustsufferaloss. t C) hegovernmentrevenuemustsufferaloss. t D) hedemandcurvemustshifttotheleft. t E) oneoftheabove. N Answer: B

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8) heimpositionoftariffsonimportsresultsindeadweight(triangle)losses.Theseare T A) roductionandconsumptiondistortioneffects. p B) edistributioneffects. r C) evenueeffects r D) fficiencyeffects. e E) oneoftheabove. N Answer: E

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9) henagovernmentallowsrawmaterialsandotherintermediateproductstoenteracountrydutyfree,this W generallyresultsina(an) A) ffectivetariffratelessthanthenominaltariffrate. e B) ominaltariffratelessthantheeffectivetariffrate. n C) iseinbothnominalandeffectivetariffrates. r D) allinbothnominalandeffectivetariffrates. f E) oneoftheabove. N Answer: B

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10) fthemanyargumentsinfavoroftariffs,theonethathasenjoyedsignificanteconomicjustificationhas O beenthe A) heapforeignlaborargument. c B) nfantindustryargument. i C) venplayingfieldargument. e D) alanceofpaymentsargument b E) omesticlivingstandardargument. d Answer: B

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11) hemainredistributioneffectofatariffisthetransferofincomefrom T A) omesticproducerstodomesticbuyers. d B) omesticbuyerstodomesticproducers. d C) omesticproducerstodomesticgovernment. d D) omesticgovernmenttodomesticconsumers. d E) oneoftheabove. N Answer: B

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12) heprinciplebenefitoftariffprotectiongoesto T A) omesticconsumersofthegoodproduced. d B) oreignconsumersofthegoodproduced. f C) omesticproducersofthegoodproduced. d D) oreignproducersofthegoodproduced. f E) oneoftheabove. N Answer: C

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13) sglobalizationtendstoincreasetheproportionofimportedinputsrelativetodomesticallysupplied A components, A) henominaltariffautomaticallyincreases. t B) herateof(effective)protectionautomaticallydecreases. t C) henominaltariffautomaticallydecreases. t D) herateof(effective)protectionautomaticallyincreases. t E) oneoftheabove. N Answer: D

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14) houldthehomecountrybelargerelativetoitstradepartners,itsimpositionofatariffonimportswould S leadtoanincreaseindomesticwelfareifthetermsofthetraderectangleexceedthesumofthe A) evenueeffectplusredistributioneffect. r B) rotectiveeffectplusrevenueeffect. p C) onsumptioneffectplusredistributioneffect. c D) roductiondistortioneffectplusconsumptiondistortioneffect. p E) oneoftheabove. N Answer: D

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15) hedeadweightlossofatariff T A) sasociallossbecauseitpromotesinefficientuseofnationalresources. i B) sasociallossbecauseitreducestherevenueofthegovernment. i C) snotasociallossbecauseitmerelyredistributesrevenuefromonesectortoanother. i i D) snotasociallossbecauseitispaidforbyrichcorporations. E) oneoftheabove. N Answer: A

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16) policyoftariffreductioninthecomputerindustryis A A) ntheinterestoftheUnitedStatesasawholeandintheinterestofcomputerproducingregionsofthe i country. B) ntheinterestofUnitedStatesasawholebutnotintheinterestofcomputerproducingregionsofthe i country. C) otintheinterestoftheUnitedStatesasawholebutintheinterestsofcomputerproducingregionsof n thecountry. D) otintheinterestoftheUnitedStatesasawholeandnotintheinterestsofcomputerconsumers. n E) oneoftheabove. N Answer: B
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17) hefactthatindustrializedcountrieslevyverylowornotariffonrawmaterialsandsemiprocessedgoods T A) elpsdevelopingcountriesexportmanufacturedproducts. h B) asnoeffectondevelopingcountryexports. h C) urtsdevelopingcountryeffortstoexportmanufacturedgoods. h D) urtsdevelopingcountryeffortstoexportrawmaterials. h E) oneoftheabove. N Answer: C

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18) naninflationaryenvironment,thenovertime I A) specifictariffwilltendtoraisemorerevenuethananadvalorumtariff. A B) nadvalorumtariffwilltendtoraisemorerevenuethanaspecifictariff A C) noptimumtariffwilltendtoraisemorerevenuethananescalatingtariff A D) tariffquotawilltendtoraisemorerevenuethanaspecifictariff. A E) oneoftheabove. N Answer: B

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19) heimpositionoftariffswillhelpanationattainwhichofthefollowinggoals? T A) ecreaseddomesticconsumerprices d B) ncreaseddomesticemployment i C) ncreasedamountandvarietyofgoodsavailableforconsumers i D) ncreasedcompetitionbetweendomesticandforeignproducers i E) oneoftheabove. N Answer: E

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20) hechangeintheeconomicwelfareofacountryassociatedwithanincreaseinatariffequals T A) fficiencyloss-termsoftradegain. e B) fficiencygain-termsoftradeloss. e C) fficiencyloss+taxrevenuegain. e D) efficiencyloss+taxrevenuegain+termsoftradegain. E) oneoftheabove. N Answer: A

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21) heMetzlerParadoxisaspecialcaseoftheoptimumtariffconcept.Discussthisassertion.Wouldtheoptimum T tarifftendtobeahighoneoralowoneinthecasewherethisparadoxexists?Whatconditionswouldbe neededintheinternationalmarketsforacountrysexportsforthisparadoxtoexist?Whydoyousuppose empiricalsupportfortheexistenceofthisparadoxhasnotbeenforthcomingtodate? Answer: TheMetzlerParadoxdescribesanunlikelysituationinwhichtheimpositionofatariffnotonly improvesacountryswelfare,butalsoimprovesthatofitsdomesticconsumers.Ifthisparadoxwere presentthenthemagnitudeoftheoptimumtariffwouldtendtobelarge,sincethewelfaredecreasing decreaseinimportsisnotpresentinthiscase(theimportsactuallyincrease,asworldpricesdrastically drop).TheMetzlerParadoxcouldoccuronlyiftheforeignoffercurvesareinelastic.Itisnotlikelytobe observedbecausetradeelasticitiestendtoberelativelylarge.Also,wereittoexist,itsactivationbya largecountrywouldtendtoevokeforeignretaliation.
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22) omearguethattariffsalwayshurttheimposingcountryseconomicwelfare,andaretypicallydesignedto S shiftresourcesfromonesectortoanother,protectedorpreferredone,withinaneconomy.Findanddiscussa counterexampletothisargument. Answer: Theoptimumtariffistheoreticallyafirst-besttradepolicy.

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23) heeffectiverateofprotectionisaweightedaverageofnominaltariffsandtariffsonimportedinputs.Ithas T beennotedthatinmostindustrializedcountries,thenominaltariffsonrawmaterialsorintermediate componentsorproductsarelowerthanonfinal-stageproductsmeantforfinalmarkets.Whywould countriesdesigntheirtariffstructuresinthismanner?Whotendstobehelped,andwhoisharmedbythis cascadingtariffstructure? Answer: Thecascadingtariffstructureisprobablytheresultofsystematiclobbyingonthepartofmanufacturing interestsandlobbiestolowercostsofproduction(intermsofimportedinputs).Theendresultisin facttocreateeffectiveratesofprotectionfordownstream,orfinalmanufacturingprocessesthatare oftenmuchhigherthannominaltariffsontheseproducts.Animportantgroup,whichishurtbythis areexportersofrawmaterialsandcomponentsindevelopingcountries.
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24) hetwodeadweighttrianglesaretheConsumptiondistortionandProductiondistortionlosses.Itiseasyto T understandwhytheConsumptiondistortionconstitutesalossforsociety.Afterallitraisesthepricesofgoods toconsumers,andevencausessomeconsumerstodropoutofthemarketaltogether.Itseemsparadoxical thattheProductiondistortionisconsideredanequivalentburdenonsociety.Afterall,inthiscase,profits increase,andadditionalproduction(withitsassociatedemployment)comesonline.Thiswouldseemtobe anoffsetratherthananadditiontotheburdenorlossbornebysociety.ExplainwhytheProductiondistortion isindeedalosstosociety,andwhatiswrongwiththelogicthatleadstotheapparentparadox. Answer: TheProductionDistortionrepresentsaninefficientshiftofsocietysresourcestoproduceagood,which itcouldnotsellprofitablyatworldprices.Since(withfullemploymentassumed)theseresourceswere formerlyusedtoproduceexportgoods,whichcouldcompeteprofitably,thenetresultisalossinreal incometothecountry.
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8.3 OtherInstrumentsofTradePolicy
1) nimportantdifferencebetweentariffsandquotasisthattariffs A A) aisethepriceofthegood. r B) eneratetaxrevenueforthegovernment. g C) timulateinternationaltrade. s D) elpdomesticproducers. h E) oneoftheabove. N Answer: B
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2) hroughoutthepost-WorldWarIIera,theimportanceoftariffsasatradebarrierhas T A) ncreased. i B) ecreased. d C) emainedthesame. r D) luctuatedwildly. f E) emonstratedaclassicrandomwalkwithamean-reversiontendency. d Answer: B

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3) ntheexportingcountry,anexportsubsidywill I A) elpconsumersandraisetheoveralleconomicwelfareoftheexportingcountry. h B) urtconsumersbutraisetheoveralleconomicwelfareoftheexportingcountry. h C) urtconsumersandlowertheoveralleconomicwelfareoftheexportingcountry. h D) elpconsumersbutlowereconomicwelfareoftheexportingcountry. h E) oneoftheabove N Answer: C

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4) conomictheoryingeneral,andtradetheoryinparticulararerepletewithequivalencies.Forexample,itis E arguedthatforanyspecifictariffonecanfindanequivalentadvalorumtariff;andthatforanyquotaonecan calculateatariffequivalent.Discussconditionsorsituationsunderwhichaspecificandanadvalorumtariff arenotequivalent.Discussconditionsorsituationswhenatariffandaquotaarenotequivalent. Answer: E.g.,duringaperiodofpriceinflation,anadvalorumtariffwouldbecomeincreasinglymoreeffective. Thegovernmentdoesnotreceiveanyofthequotarevenues,unlesstheimportlicensesaresoldor auctioned.

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8.4 TheEffectsofTradePolicy:ASummary
1) herearenoquestionsforthissection. T Answer: TRUE
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8.5 Appendix1toChapter8:TariffAnalysisinGeneralEquilibrium
1) herearenoquestionsforthissection. T Answer: TRUE
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8.6 Appendix2toChapter8:TariffsandImportQuotasinthePresenceofMonopoly
1) herearenoquestionsforthissection. T Answer: TRUE QuestionStatus: ew N

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