Reading 16- LOS b ～ Q1－7

1.Prior to the beginning of summer, the government of Japan places a 150 percent tariff on imported chain saws. Assume for this example that this tariff has a significant impact on the supply of chain saws. The government’s action:

A)   will protect the jobs and high wages of Japanese chain saw industry workers.

B)   benefits the Japanese government and domestic producers.

C)   is more harmful than if the government had limited the amount of chain saws imported.

D)   is supported by the law of comparative advantage.

The correct answer was B)

The Japanese government’s action is an example of a tariff. A tariff is a tax imposed on imports and benefits the Japanese government because it collects the tariff. Domestic producers benefit because the reduction in the supply of imported goods means a higher domestic price.

The other choices are incorrect. A tariff is considered less harmful than a quota (an import quantity limitation) because under a quota, the domestic government does not receive any funds as it would under a tariff (the foreign producers receive the revenue transfer). In the long run, trade restrictions do not protect the net number of jobs in the country. The number of jobs protected by import restrictions will be offset by jobs lost in the import/export industry. Import/export firms will be unable to sell the overpriced domestic products abroad or import and sell the lower priced restricted foreign-made product. The law of comparative advantage supports international trade. According to the law of comparative advantage, both trading partners are better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for those goods for which they are the high-opportunity cost producer.

2.Suppose the world price of Mercury tennis shoes is $75, but they sell in the U.S. for $60. If the U.S. government imposes an import tariff on these shoes in the amount of $15, who will most likely be negatively affected by the tariff?

A)   Producers.

B)   Foreign Consumers.

C)   U.S. Consumers.

D)   U.S. Government.

The correct answer was C)

Tariffs benefit domestic producers of products because the level of imports will be reduced due to an effective increase in the price of the goods. Tariffs also benefit the government because of the taxes they collect. Consumers in the country lose due to higher prices.

3.Who benefits the most from a quota?

A)   Domestic producers.

B)   Foreign consumers.

C)   The government.

D)   Foreign producers.

The correct answer was A)

Quotas restrict the supply of imported goods, which increases the price domestically benefiting domestic producers. Some foreign producers also benefit from the higher prices created by the quota if they receive the revenue transfer (due to higher prices received for all goods sold under the import license). However, overall the foreign producers do not sell as much of their product and have lost revenues.

4.Who benefits least from tariffs?

A)   Domestic producers.

B)   The domestic government.

C)   Foreign consumers.

D)   Domestic consumers.

The correct answer was D)

A tax imposed on imports is called a tariff, which benefits domestic producers and domestic governments. Domestic consumers lose through higher prices, less choice of products, and lower quality products.

5.What is the difference between a tariff and a quota?

A)   A tariff is a tax imposed on imports whereas a quota sets a limit on the amount of imports.

B)   A tariff is a tax imposed on imports whereas a quota is a target goal for exports.

C)   A quota is a tax imposed on imports whereas a tariff sets a limit on the amount of imports.

D)   Quotas benefit domestic governments whereas tariffs benefit domestic producers.

The correct answer was A)

Tariffs are taxes imposed on imports that benefit domestic producers because the higher import price due to the tax allows domestic producers to be more competitive in the local market. Governments also benefit because they collect the tax. Governments do not benefit from quotas because there is no tax involved just the supply of imports is reduced, which benefits domestic producers.

6.In what way does a tariff differ from a quota? A tariff is:

A)   not significantly different from a quota; tariffs are imposed by world organizations, whereas quotas are imposed by individual countries.

B)   imposed on imports, whereas a quota is imposed on exports.

C)   a tax imposed on imports, whereas a quota is a limit on the number of units of a good that can be imported.

D)   a tax imposed by a foreign government, whereas a quota is a limit on the total amount of trade allowed.

The correct answer was C)

The difference between a tariff and a quota is that a tariff is a tax imposed on imported goods, while a quota is an import quantity limitation. Also, a tariff will generate tax revenue, but a quota does not.

7.The primary benefits derived from tariffs usually accrue to:

A)   domestic suppliers of goods protected by tariffs.

B)   domestic producers of export goods.

C)   foreign producers of goods protected by tariffs.

D)   domestic consumers of goods protected by tariffs.

The correct answer was A)

Tariffs raise domestic prices, benefiting domestic suppliers.