MCQ Quiz

Assertion (A): An import quota and an equivalent tariff will always have the exact same effect on national welfare.
Reason (R): Both policy instruments restrict imports to the same quantity and raise the domestic price to the same level.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): The formation of a customs union always increases the welfare of member countries.
Reason (R): A customs union eliminates tariffs between members, leading to trade creation where high-cost domestic production is replaced by lower-cost member imports.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Regarding the balance of payments accounts, consider the following statements:
(1) A current account deficit implies that a country's domestic savings are insufficient to finance its domestic investment.
(2) The capital account records payments for goods and services, as well as income from foreign investments.
(3) To finance a current account deficit, a country must generate a surplus in its capital and financial accounts (net borrowing or asset sales).
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

If a 'small' country imposes a tariff on an imported good, the net impact on national welfare is calculated as:

• A net loss equal to the production distortion loss plus the consumption distortion loss.
• A net gain equal to the tariff revenue minus the loss in consumer surplus.
• A net loss equal to the loss in consumer surplus minus the gain in producer surplus.

A government is choosing between an import tariff and an import quota that restricts imports to the same quantity. The quota will result in a larger welfare loss to the domestic economy than the tariff if:

• The quota rents are captured by foreign exporters.
• The domestic industry has increasing returns to scale.
• The demand for the imported good is perfectly inelastic.

Regarding the effects of government export subsidies, consider the following statements:
(1) An export subsidy increases the price of the subsidized good in the domestic market of the exporting country.
(2) For a large country, an export subsidy leads to an increase in the world price of the exported good.
(3) The net welfare of the exporting country generally declines because the cost of the subsidy and the associated deadweight losses exceed the gain in producer surplus.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Assertion (A): Capital restrictions are generally effective at permanently maintaining an overvalued exchange rate.
Reason (R): Capital controls limit the ability of domestic residents to sell domestic currency and buy foreign assets, reducing selling pressure on the currency.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

If a small country implements an export subsidy, the immediate impact on the domestic price of the subsidized good and domestic welfare is:

• Domestic price rises; Domestic welfare falls.
• Domestic price falls; Domestic welfare rises.
• Domestic price rises; Domestic welfare rises.

Assertion (A): A country with an absolute advantage in producing all goods can still benefit from trade by specializing in goods where it has a comparative advantage.
Reason (R): Comparative advantage is determined by the opportunity cost of production, not the absolute resource cost.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Consider the economic impact of a Voluntary Export Restraint (VER):
(1) A VER is a quota on trade imposed by the exporting country, typically at the request of the importing country's government.
(2) Unlike a tariff, a VER generates government revenue for the importing country.
(3) The 'rents' generated by the supply restriction in a VER are typically captured by the foreign exporters, resulting in a welfare loss for the importing country.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Regarding the static effects of regional integration, consider the following statements:
(1) Trade creation occurs when high-cost domestic production is replaced by lower-cost imports from a member country within the trading bloc.
(2) Trade diversion occurs when lower-cost imports from a non-member country are replaced by higher-cost imports from a member country due to preferential tariff treatment.
(3) Regional integration always increases national welfare because trade creation effects are guaranteed to exceed trade diversion effects.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Consider the functions of major international organizations:
(1) The World Trade Organization (WTO) is primarily responsible for providing long-term development loans to low-income countries.
(2) The International Monetary Fund (IMF) focuses on ensuring the stability of the international monetary system and providing temporary balance of payments support.
(3) The World Bank's main objective is to reduce poverty and promote economic development, often through funding infrastructure and institutional reform.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Assertion (A): An export subsidy imposed by a large country increases the welfare of the exporting country.
Reason (R): Export subsidies increase the price received by domestic producers, encouraging higher production and export volumes.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): Under the WTO's 'Most Favored Nation' (MFN) principle, a country must apply the same tariff rates to all WTO members.
Reason (R): Regional Trading Agreements (RTAs) like the EU or USMCA are permitted exceptions to the MFN principle.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): From the perspective of the importing country, a Voluntary Export Restraint (VER) is generally more costly than an equivalent tariff.
Reason (R): Under a VER, the 'quota rents' (the difference between the domestic price and world price) are captured by the foreign exporters rather than collected as government revenue by the importing country.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Consider the economic implications when a large country imposes a tariff on imports:
(1) A large country can force foreign exporters to lower their prices to maintain market share, effectively improving the large country's terms of trade.
(2) It is theoretically possible for a large country to experience a net increase in national welfare if the terms of trade gain exceeds the deadweight loss from reduced trade volume.
(3) Unlike a small country, a large country's tariff does not distort domestic consumption or production decisions.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

From the perspective of the importing country, a Voluntary Export Restraint (VER) is generally considered the most damaging trade restriction because:

• It creates the largest deadweight loss by prohibiting all imports above a certain threshold.
• It results in the loss of tariff revenue and the transfer of quota rents to the exporting country.
• It triggers an automatic retaliation from the World Trade Organization.

The primary distinction between a Customs Union and a Free Trade Area (FTA) is that in a Customs Union:

• Member countries adopt a common external trade policy against non-members.
• Factors of production like labor and capital can move freely between members.
• Member countries harmonize all fiscal and monetary policies.

Consider the hierarchy and characteristics of regional trading agreements:
(1) In a Free Trade Area (FTA), member countries remove trade barriers among themselves but maintain independent trade policies toward non-members.
(2) A Customs Union extends an FTA by adopting a common external trade policy against non-members.
(3) A Common Market is distinguished from a Customs Union by the adoption of a common currency among all member states.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Assertion (A): According to the Heckscher-Ohlin model, a capital-abundant country will export labor-intensive goods.
Reason (R): Countries have a comparative advantage in producing goods that intensively use their relatively abundant factors of production.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

When a large country implements an export subsidy, it experiences a deterioration in its terms of trade because:

• The increase in domestic production floods the world market, driving down the world price of its exports.
• Domestic consumers demand higher wages to compensate for the higher domestic price of the good.
• Trading partners automatically retaliate with countervailing duties.

A small country imposes a tariff on an imported good. Consider the following statements regarding the welfare effects:
(1) The domestic price of the good increases by the full amount of the tariff, leading to an increase in domestic production.
(2) Consumer surplus decreases by an amount equal to the gain in producer surplus plus the government revenue collected.
(3) The net welfare loss (deadweight loss) arises because the tariff causes both production inefficiencies and consumption inefficiencies.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Consider the nature and purpose of capital restrictions:
(1) Capital restrictions limit the ability of domestic residents to own foreign assets or foreigners to own domestic assets.
(2) In the long run, restricting capital outflows generally increases the cost of capital for domestic firms by limiting access to foreign funding.
(3) Capital restrictions are synonymous with trade protectionism, such as tariffs on imported machinery.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

A 'large' country can theoretically increase its national welfare by imposing a tariff if:

• The gain from the terms of trade improvement exceeds the deadweight loss from efficiency distortions.
• The tariff revenue collected is strictly greater than the loss in consumer surplus.
• The protection allows domestic infant industries to achieve economies of scale immediately.

Regional integration is most likely to result in a net welfare loss (Trade Diversion) when:

• The lowest-cost domestic producer is replaced by a higher-cost producer from a member country.
• A low-cost non-member producer is replaced by a higher-cost member producer due to preferential tariff treatment.
• A high-cost domestic producer is replaced by a lower-cost member producer.

An analyst is distinguishing between different stages of regional integration. Consider the following statements:
(1) A Common Market allows for the free movement of labor and capital among member countries, whereas a Customs Union does not.
(2) An Economic Union requires members to harmonize economic policies and establish common economic institutions.
(3) Members of an Economic Union must necessarily adopt a single common currency.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Country A requires 10 hours to produce wheat and 20 hours to produce cloth. Country B requires 20 hours to produce wheat and 10 hours to produce cloth. According to the Ricardian model:

• Country A has a comparative advantage in wheat.
• Country B has an absolute advantage in both goods.
• Trade will not occur because the labor costs are reciprocal.

Intra-industry trade, where a country simultaneously imports and exports goods within the same industry (e.g., automobiles), is best explained by:

• Differences in labor productivity between trading partners.
• Product differentiation and increasing returns to scale.
• Significant differences in factor endowments.

Assertion (A): A currency depreciation will immediately improve a country's trade balance.
Reason (R): The Marshall-Lerner condition states that depreciation improves the trade balance only if the sum of the price elasticities of demand for exports and imports is greater than one.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Consider the following statements regarding the sources of comparative advantage and gains from trade:
(1) The Ricardian model posits that comparative advantage arises primarily from differences in labor productivity and technology between countries.
(2) The Heckscher-Ohlin model attributes comparative advantage to differences in consumer preferences rather than factor endowments.
(3) Newer trade models suggest that countries may trade similar goods (intra-industry trade) to exploit economies of scale and provide greater product variety.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Assertion (A): A large country can theoretically increase its national welfare by imposing a tariff on imports, provided the trading partner does not retaliate.
Reason (R): By imposing a tariff, a large country forces foreign exporters to lower their prices to maintain market share, thereby improving the large country's terms of trade.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

An analyst is comparing import quotas and tariffs. Consider the following statements:
(1) If a government auctions import licenses for a fee, the welfare effect of a quota can be identical to that of an equivalent tariff.
(2) Quota rents represent the profit that accrues to the government regardless of how the quota is administered.
(3) If the domestic demand for the import rises, a quota results in a higher domestic price and no increase in imports, whereas a tariff results in higher imports at a constant domestic price.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Which feature is required for a regional trading bloc to be classified as an Economic Union but is NOT required for a Common Market?

• Free movement of labor and capital.
• Coordination of economic institutions and harmonization of economic policies.
• A common external tariff against non-members.

Assertion (A): The infant industry argument suggests that temporary trade protection can be beneficial for developing countries.
Reason (R): New industries in developing countries may lack the economies of scale and experience ('learning by doing') required to compete with established foreign firms initially.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): A country running a current account deficit must be investing more than it is saving.
Reason (R): The national income identity states that the Current Account equals National Savings minus Domestic Investment (CA = S - I).

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): Offshoring of production to low-wage countries necessarily reduces the average real wage in the domestic economy.
Reason (R): Offshoring functions similarly to technological progress, allowing the domestic economy to specialize in higher-value tasks, which can increase overall productivity and average wages.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

While trade provides net benefits, it also generates costs. Consider the following statements:
(1) International trade tends to equalize factor prices, which can lead to lower wages for scarce factors of production in import-competing industries.
(2) The 'infant industry' argument suggests that new industries require temporary protection from foreign competition to develop economies of scale.
(3) Trade liberalization typically results in immediate and costless reallocation of resources from declining to expanding sectors.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Assertion (A): A country with a Current Account surplus must have a Capital and Financial Account deficit (excluding official reserve changes).
Reason (R): The Balance of Payments must sum to zero; therefore, a net inflow of money from trade (exports > imports) must be matched by a net outflow of money for investment (purchasing foreign assets).

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Which of the following best distinguishes a capital restriction from a trade restriction?

• Capital restrictions limit the flow of financial assets, whereas trade restrictions limit the flow of goods and services.
• Capital restrictions are prohibited by the WTO, whereas trade restrictions are allowed under certain conditions.
• Capital restrictions affect the current account, whereas trade restrictions affect the capital account.

Consider the relationship between geopolitics and global economic integration:
(1) Globalization is characterized by the integration of goods, capital, and information markets, often driven by private sector actors.
(2) Geopolitical risk tends to increase when countries prioritize national self-determination and security over economic cooperation (nationalism).
(3) 'Reshoring' supply chains is a strategy used by multinational corporations to increase their exposure to global efficiency gains and reduce domestic production costs.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

In contrast to the Ricardian model, the Heckscher-Ohlin model attributes the source of comparative advantage primarily to differences in:

• Labor productivity arising from technological differences.
• Relative abundance of factor endowments like capital and labor.
• Economies of scale in production processes.

The 'Infant Industry' argument for temporary trade protection is primarily based on the existence of:

• Static economies of scale that require a large initial market share to lower average costs.
• Dynamic learning-by-doing effects where costs fall over time with cumulative production experience.
• Monopolistic competition in the global market preventing entry.