Question

1. For small countries, free trade results in a higher level of national welfare than tariff protection.

a. True b. False

2.

Suppose that Germany levies a tariff on oranges, but none are grown in Germany. This tariff has

a. both a protective effect and revenue effect.

b. no effects on trade.

c. only a revenue effect.

d. only a protective effect.

3. Tariff avoidance is the legal utilization of the tariff system to one's own advantage in order to reduce the amount of tariff that is payable by means that are within the law.

a. True b. False

Answer 1

Answer 1: 'For small countries, free trade results in a higher level of national welfare than tariff protection.' This statement is True because the larger countries have greater market power over their terms of trade. According to this terms-of-trade argument, a positive tariff is never welfare improving for an small country. When the terms of trade are uncertain, there are a variety of circumstances under which a small country may experience a welfare gain from tariffs. Further, empirical evidence showing that trade increases aggregate volatility in an economy suggests that such trade-related risk may be important.

Import restrictions slow the movement of workers out of low-skilled manufacturing jobs, so this policy destroys jobs elsewhere in the economy. Free trade means fierce competition between producers as the market is open to everyone, foreign and domestic. This, of course, drives the price of goods and services down for consumers, leaving them better off. It also gives consumers a much wider choice of goods and services. If we embraced free trade, the gains would be widely diffused across the population, in the form of millions of consumers being slightly better off.

Answer 2: Suppose that Germany levies a tariff on oranges, but none are grown in Germany. This tariff has only a revenue effect. Reason is that since oranges are not grown in Germany, the protective effect is out of scope, hence the only effect is revenue effect. Increased prices are going to lower demand of oranges, resulting in a net decline in orange sales, leading to lower revenue and hence effect on revenue due to tariffs.

Answer 3: Tariff avoidance is the legal utilization of the tariff system to one's own advantage in order to reduce the amount of tariff that is payable by means that are within the law. True

Every country uses tariffs for their own economic and social benefits so that they can manage the demand and supply of the goods and services in question. Though, it is not very clear from the question, that Germany produces Oranges domestically, the assumption is that no oranges are produced domestically and they are imported and these tariffs are impacting demand due to higher tariffs.