Table of Contents
CFA Level 2 – Economics, Session 4 – Reading 16, Trading with the World – LOS b
(Notes, Practice Questions, Sample Questions)
1. The primary benefits derived from tariffs usually accrue to:
A) domestic suppliers of goods protected by tariffs. [Explanation: Tariffs raise domestic prices, benefiting domestic suppliers]
B) foreign producers of goods protected by tariffs.
C) domestic producers of export goods
2. In what way does a tariff differ from a quota? A tariff is:
A) a tax imposed on imports, whereas a quota is a limit on the number of units of a good that can be imported. [Explanation: 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]
B) not significantly different from a quota; tariffs are imposed by world organizations, whereas quotas are imposed by individual countries.
C) a tax imposed by a foreign government, whereas a quota is a limit on the total amount of trade allowed.
3. What is the difference between a tariff and a quota?
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A) A tariff is a tax imposed on imports whereas a quota is a target goal for exports.
B) A tariff is a tax imposed on imports whereas a quota sets a limit on the amount of imports. [Explanation: 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]
C) A quota is a tax imposed on imports whereas a tariff sets a limit on the amount of imports.
4. Who benefits least from tariffs?
A) Foreign consumers.
B) Domestic consumers. [Explanation: 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.]
C) Domestic producers
5. Who benefits the most from a quota?
A) Foreign consumers.
B) Foreign producers.
C) Domestic producers. [Explanation: 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]
6. Suppose the world price of Mercury tennis shoes is $60, but they sell in the U.S. for $75 due to a $15 import tariff. Who will most likely be negatively affected by the tariff?
A) Producers.
B) U.S. Consumers. [Explanation: 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. Consumers in the country lose due to higher prices]
C) Foreign Consumers.
7. 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) benefits the Japanese government and domestic producers. [Explanation: 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]
B) will protect the jobs and high wages of Japanese chain saw industry workers.
C) is more harmful than if the government had limited the amount of chain saws imported
