Question

1. Which of the following statements is (are) correct?
(x) A tax placed on imported goods is called a tariff and an import quota is a limit placed on the quantity of goods brought into a country.
(y) Countries that impose trade restrictions use tariffs and import quotas to reduce the competition faced by domestic firms.
(z) Gains from trade are based on the principle of comparative advantage and economists, in general, use the principle of comparative advantage to advocate unrestricted (free) trade.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

2. The producer that can produce a product with a higher opportunity cost
(x) does not have a comparative advantage in the production of that good.
(y) may not have an absolute advantage in the production of that good.
(z) should export instead of import that product.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Answer 1

ans) 1) Tariff is the tax or duty imposed by government on imports. Import quota is a trade restriction which limits the quantity of imports in a country to protect domestic industries.

Countries impose trade restrictions by increasing the tariff and decreasing the import quota to protect domestic industries.

Comparative advantage is used as a principle of trade and economists use comparative advantage to defend free market. Comparative advantage states that countries should specialise and export in which they have comparative advantage i.e. less opportunity cost than other nations.

Therefore, option a is correct.

2) A producer who is producing at higher opportunity cost does not have comparative advantage, although it may or may not have an absolute advantage i.e. can or cannot produce a commodity more than the other country. But comparative advantage shows more efficiency, this is the reason that countries trade on basis of comparative advantage. The country having high opportunity cost i.e. less comparative advantage should import while country with more comparative advantage i.e. less opportunity cost should export.

Therefore option b is correct.

note that (y) is correct because word may is used. If it would not have used 'may' and instead would have stated that country 'does not have absolute advantage' then that statement would have been wrong. Because having comparative advantage does not necessarily mean that country 'does not have' or 'have' absolute advantage.