CHAPTER 7TRADE POLICIES FOR THE DEVELOPING NATIONS

MULTIPLE CHOICE
1. Which of the following is not a major factor that encourages developing nations to form international
commodity agreements?
a
.
Inelastic commodity supply schedules
b
.
Inelastic commodity demand schedules
c
.
Export markets that tend to be unstable
d
.
ecular increases in their terms of trade
!"# $ %&# 1
'. International commodity agreements do not#
a
.
(onsist of consuming and producing nations who desire market stability
b
.
)evy export cutbacks so as to offset rising commodity prices
c
.
*tili+e buffer stocks to generate commodity price stability
d
.
Increase the supply of commodities to prevent rising prices
!"# , %&# 1
-. (oncerning the price elasticities of supply and demand for commodities. empirical estimates suggest
that most commodities have#
a
.
Inelastic supply schedules and inelastic demand schedules
b
.
Inelastic supply schedules and elastic demand schedules
c
.
Elastic supply schedules and inelastic demand schedules
d
.
Elastic supply schedules and elastic demand schedules
!"# ! %&# 1
/. If the demand schedule for bauxite is relatively inelastic to price changes. an increase in the supply
schedule of bauxite will cause a#
a
.
$ecrease in price and a decrease in sales revenue
b
.
$ecrease in price and an increase in sales revenue
c Increase in price and a decrease in sales revenue
.
d
.
Increase in price and an increase in sales revenue
!"# ! %&# 1
0. ! primary goal of international commodity agreements has been the#
a
.
1aximi+ation of members2 revenues via export taxes
b
.
"ationali+ation of corporations operating in member nations
c
.
!doption of tariff protection against industriali+ed nation sellers
d
.
1oderation of commodity price fluctuations when markets are unstable
!"# $ %&# 1
3. Which device has the International &in !greement utili+ed as a way of stabili+ing tin prices?
a
.
1ultilateral contracts
b
.
Export subsidies
c
.
,uffer stocks
d
.
Export tariffs
!"# ( %&# 1
4. Which method has not generally been used by the international commodity agreements to stabili+e
commodity prices?
a
.
%roduction 5uotas applied to the level of commodity output
b
.
,uffer stock arrangements among producing nations
c
.
Export restrictions applied to international sales of commodities
d
.
1easures to nationali+e foreign6owned production operations
!"# $ %&# 1
7. &he 8%E( nations during the 194:s manifested their market power by utili+ing#
a
.
Export tariffs levied for revenue purposes
b
.
Export tariffs levied for protective purposes
c
.
Import tariffs levied for protective purposes
d
.
Import tariffs levied for revenue purposes
!"# ! %&# 1
9. 8ne factor that has prevented the formation of cartels for producers of commodities is that#
a
.
&he demand for commodities tends to be price inelastic
b
.
ubstitute products exist for many commodities
c
.
(ommodity produces have been able to dominate world markets
d
.
%roduction of most commodities is capital intensive
!"# , %&# 1
1:. Which device has been used by the International Wheat !greement to stipulate the minimum prices at
which importers will buy stipulated 5uantities from producers and the maximum prices at which
producers will sell stipulated 5uantities to importers?
a
.
,uffer stocks
b
.
Export controls
c
.
1ultilateral contracts
d
.
%roduction controls
!"# ( %&# 1
11. If the bauxite exporting countries form a cartel to boost the price of bauxite so as to increase sales
revenue. they believe that the demand for bauxite#
a
.
Is inelastic with respect to price changes
b
.
Is elastic with respect to price changes
c
.
Will increase in response to a price increase
d
.
Will not change in response to a price change
!"# ! %&# 1
1'. If the supply schedule for tin is relatively inelastic to price changes. a decrease in the demand schedule
for tin will cause a#
a
.
$ecrease in price and an increase in sales revenue
b
.
$ecrease in price and a decrease in sales revenue
c
.
Increase in price and an increase in sales revenue
d
.
Increase in price and a decrease in sales revenue
!"# , %&# 1
1-. Which of the following could partially explain why the terms of trade of developing countries might
deteriorate over time?
a
.
$eveloping6country exports mainly consist of manufactured goods
b
.
$eveloping6country imports mainly consist of primary products
c
.
(ommodity export prices are determined in highly competitive markets
d
.
(ommodity export prices are solely determined by developing countries
!"# ( %&# 1
1/. Which terms6of6trade concept emphasi+es a nation2s capacity to import?
a
.
Income terms of trade
b
.
(ommodity terms of trade
c
.
,arter terms of trade
d
.
%rice terms of trade
!"# ! %&# 1
10. Which trade strategy have developing countries used to restrict imports of manufactured goods so that
the domestic market is preserved for home producers. who thus can take over markets already
established in the country?
a
.
International commodity agreement
b
.
Export promotion
c
.
1ultilateral contract
d
.
Import substitution
!"# $ %&# 1
13. Which trade strategy have developing countries used to replace commodity exports with exports such
as processed primary products. semi6manufacturers. and manufacturers?
a
.
1ultilateral contract
b
.
,uffer stock
c
.
Export promotion
d
.
Export 5uota
!"# ( %&# 1
14. &o help developing countries expand their industrial base. some industrial countries have reduced
tariffs on designated manufactured imports from developing countries below the levels applied to
imports from industrial countries. &his scheme is referred to as#
a
.
;enerali+ed system of preferences
b
.
Export6led growth
c
.
International commodity agreement
d
.
<eciprocal trade agreement
!"# ! %&# 1
17. Which nation accounts for the largest amount of 8%E(2s oil reserves and production?
a
.
Iran
b
.
)ibya
c
.
Ira5
d
.
audi !rabia
!"# $ %&# 1
19. !ssuming identical cost and demand curves. 8%E( as a cartel will. in comparison to a competitive
industry#
a
.
%roduce greater output and charge a lower price
b
.
%roduce greater output and charge a higher price
c
.
%roduce less output and charge a higher price
d
.
%roduce less output and charge a lower price
!"# ( %&# 1
':. Which of the following situations reduces the likelihood of successful operation of a cartel?
a
.
(artel sales experience a rapid expansion
b
.
&he demand for cartel output is price inelastic
c
.
&he number of firms in the cartel is large
d
.
It is very difficult for new firms to enter the market
!"# ( %&# 1
'1. Which industriali+ation policy used by developing countries places emphasis on the comparative
advantage principle as a guide to resource allocation?
a
.
Export promotion
b
.
Import substitution
c
.
International commodity agreements
d
.
1ultilateral contract
!"# ! %&# 1
''. ! widely used indicator to differentiate developed countries from developing countries is#
a
.
International trade per capita
b
.
<eal income per capita
c
.
*nemployment per capita
d
.
(alories per capita
!"# , %&# 1
'-. (oncerning the hypothesis that there has occurred a long6run deterioration in the developing countries2
terms of trade. empirical studies provide#
a
.
1ixed evidence that does not substantiate the deterioration hypothesis
b
.
8verwhelming support for the deterioration hypothesis
c
.
8verwhelming opposition to the deterioration hypothesis
d
.
"one of the above
!"# ! %&# 1
'/. =or the oil6importing countries. the increases in oil prices in 194-6194/ and 19496197: resulted in all
of the following except#
a
.
,alance of trade deficits
b
.
%rice inflation
c
.
(onstrained economic growth
d
.
Improving terms of trade
!"# $ %&# 1
'0. >ong ?ong and outh ?orea are examples of developing nations that have recently pursued
industriali+ation policies.
a
.
Import substitution
b
.
Export promotion
c
.
(ommercial dumping
d
.
1ultilateral contract
!"# , %&# 1
'3. tabili+ing commodity prices around long6term trends tends to benefit importers at the expense of
exporters in markets characteri+ed by#
a
.
$emand6side disturbances
b
.
upply6side disturbances
c
.
$emand6side and supply6side disturbances
d
.
"one of the above
!"# ! %&# 1
'4. tabili+ing commodity prices around long6term trends tends to benefit exporters at the expense of
importers in markets characteri+ed by#
a
.
$emand6side disturbances
b
.
upply6side disturbances
c
.
$emand6side and supply6side disturbances
d
.
"one of the above
!"# , %&# 1
'7. &o be considered a good candidate for an export cartel. a commodity should#
a
.
,e a manufactured good
b
.
,e a primary product
c
.
>ave a high price elasticity of supply
d
.
>ave a low price elasticity of demand
!"# $ %&# 1
'9. &o be considered a good candidate for an export cartel. a commodity should#
a
.
,e a manufactured good
b
.
,e a primary product
c
.
>ave a low price elasticity of supply
d
.
>ave a high price elasticity of demand
!"# ( %&# 1
-:. &o help developing nations strengthen their international competitiveness. many industrial nations
have granted nonreciprocal tariff reductions to developing nations under the#
a
.
International commodity agreements program
b
.
1ultilateral contract program
c
.
;enerali+ed system of preferences program
d
.
Export6led growth program
!"# ( %&# 1
The diagram below illustrates the international tin market. Assume that producing and consuming
countries establish an international commodity agreement under which the target price of tin is $5 per
pound.
Figure 7.1. Defending !e T"rge Pri#e in F"#e $f C!"nging De%"nd C$ndii$n&
-1. (onsider =igure 4.1. uppose the demand for tin increases from $: to $1. *nder a buffer stock system.
the buffer6stock manager could maintain the target price by#
a
.
elling 10 pounds of tin
b
.
elling -: pounds of tin
c
.
,uying 10 pounds of tin
d
.
,uying -: pounds of tin
!"# , %&# 1
-'. (onsider =igure 4.1. uppose the demand for tin decreases from $: to $'. *nder a buffer stock system.
the buffer6stock manager could maintain the target price by#
a
.
elling 10 pounds of tin
b
.
elling -: pounds of tin
c
.
,uying 10 pounds of tin
d
.
,uying -: pounds of tin
!"# $ %&# 1
--. (onsider =igure 4.1. uppose the demand for tin decreases from $: to $'. *nder a system of export
5uotas. the tin producers could maintain the target price by#
a
.
Increasing the 5uantity of tin supplied by 10 pounds
b
.
Increasing the 5uantity of tin supplied by -: pounds
c
.
$ecreasing the 5uantity of tin supplied by 10 pounds
d
.
$ecreasing the 5uantity of tin supplied by -: pounds
!"# $ %&# 1
The diagram below illustrates the international tin market. Assume that the producing and consuming
countries establish an international commodity agreement under which the target price of tin is $5 per
pound.
Figure 7.'. Defending !e T"rge Pri#e in F"#e $f C!"nging Su(()* C$ndii$n&
-/. (onsider =igure 4.'. uppose the supply of tin increases from : to 1. *nder a buffer stock system.
the buffer6stock manager could maintain the target price by#
a
.
%urchasing 10 pounds of tin
b
.
%urchasing -: pounds of tin
c
.
elling 10 pounds of tin
d
.
elling -: pounds of tin
!"# , %&# 1
-0. (onsider =igure 4.'. uppose the supply of tin decreases from : to '. *nder a buffer stock system.
the buffer6stock manager could maintain the target price by#
a
.
%urchasing 10 pounds of tin
b
.
%urchasing -: pounds of tin
c
.
elling 10 pounds of tin
d
.
elling -: pounds of tin
!"# $ %&# 1
-3. (onsider =igure 4.'. !ssume there exists a cartel of several producers that is maximi+ing total profit. If
one producer cheats on the cartel agreement by decreasing its price and increasing its output. rational
action of the other producers is to#
a
.
Increase their price in order to regain sacrificed profits
b
.
$ecrease their price as well
c
.
?eep on selling at the agreed6upon price
d
.
;ive the product away for free
!"# , %&# 1
-4. ! reason why it is difficult for producers to maintain a cartel is that#
a
.
&he elasticity of demand for the cartel2s output decreases over time
b
.
%roducers in the cartel have the economic incentive to cheat
c
.
Economic profits discourage other producers from entering the industry
d
.
%roducers in the cartel have the motivation to lower price but not to raise price
!"# , %&# 1
-7. 8nce a cartel establishes its profit6maximi+ing price#
a
.
Entry into the industry of new competitors will not affect the cartel2s profits
b
.
8utput changes by cartel members have no effect on the market price
c
.
Each cartel member is tempted to cheat on the cartel price in order to add to its profit
d
.
!ll cartel members have a strong incentive to adhere to the agreed6upon price
!"# ( %&# 1
Figure 7.+. ,$r)d Oi) M"r-e
-9. (onsider =igure 4.-. *nder competitive conditions. the 5uantity of oil produced e5uals#
a
.
/: barrels
b
.
4: barrels
c
.
9: barrels
d
.
11: barrels
!"# $ %&# 1
/:. (onsider =igure 4.-. *nder competitive conditions. the price of a barrel of oil e5uals#
a
.
@4
b
.
@11
c
.
@1'
d
.
@13
!"# , %&# 1
/1. (onsider =igure 4.-. *nder competitive conditions. producer profits total#
a
.
@:
b
.
@1/:
c
.
@'::
d
.
@'7:
!"# ! %&# 1
/'. (onsider =igure 4.-. *nder a profit6maximi+ing cartel. the 5uantity of oil produced e5uals#
a
.
/: barrels
b
.
4: barrels
c
.
9: barrels
d
.
11: barrels
!"# , %&# 1
/-. (onsider =igure 4.-. *nder a profit6maximi+ing cartel. the price of a barrel of oil e5uals#
a
.
@4
b
.
@11
c
.
@13
d
.
@19
!"# ( %&# 1
//. (onsider =igure 4.-. *nder a profit6maximi+ing cartel. producers reali+e#
a
.
%rofits totaling @'7:
b
.
%rofits totaling @-3:
c
.
)osses totaling @1/:
d
.
)osses totaling @17:
!"# ! %&# 1
/0. Import substitution policies make use of#
a
.
&ariffs that discourage goods from entering a country
b
.
Auotas applied to goods that are shipped abroad
c
.
%roduction subsidies granted to industries with comparative advantages
d
.
&ax breaks granted to industries with comparative advantages
!"# ! %&# 1
/3. Export6led growth tends to#
a
.
Exploit domestic comparative advantages
b
.
$iscourage competition in the global economy
c
.
)ead to unemployment among domestic workers
d
.
>elp firms benefit from diseconomies of large6scale production
!"# ! %&# 1
/4. !ll of the following nations except BBBB have recently utili+ed export6led Coutward orientedD growth
policies.
a
.
>ong ?ong
b
.
outh ?orea
c
.
!rgentina
d
.
ingapore
!"# ( %&# 1
/7. &he characteristics that have underlaid the economic success of the Ehigh6performing !sian
EconomiesE have included all of the following except#
a
.
>igh rates of domestic investment
b
.
$iseconomies of scale occurring at low output levels
c
.
)arge endowments of human capital
d
.
>igh levels of labor productivity
!"# , %&# 1
/9. &he development of countries like outh ?orea and ingapore has been underlaid by all of the
following except#
a
.
>igh domestic interest rates
b
.
<F$ and product innovation
c
.
Education and on6the6job training
d
.
>igh levels of saving and investment
!"# ! %&# 1
0:. =or most developing countries#
a
.
%roductivity is high among domestic workers
b
.
%opulation6growth and illiteracy rates are low
c
.
aving and investment levels are high
d
.
!gricultural goods and raw materials constitute much of domestic output
!"# $ %&# 1
01. East !sian economies have performed well by
a
.
8btaining foreign technology
b
.
<emaining open to international trade
c
.
Investing in their people
d
.
!ll of the above
!"# $ %&# 1
0'. East !sian economies started enacting export6push strategies
a
.
,y late 190:s and 193:s
b
.
Immediately after World War II
c
.
In the late 197:s
d
.
In the early ':::s
!"# ! %&# 1
0-. %rior to the formation of the 8rgani+ation of %etroleum Exporting (ountries. individual oil producing
nations.
a
.
8perated like sellers in a competitive market
b
.
,ehaved like individual sellers in a monopoly market
c
.
>ad considerable control over the price of oil
d
.
,oth b and c.
!"# ! %&# 1
0/. ! key factor underlying the instability of primary product prices and export receipts of developing
nations is the
a
.
)ow price elasticity of the demand of primary products
b
.
>igh price elasticity of supply of primary products
c
.
>igh price elasticity of demand of primary products
d
.
"one of the above
!"# ! %&# 1
TRUE.FALSE
1. &he developing nations are most of those in !frica. !sia. "orth !merica. and Western Europe.
!"# = %&# 1
'. 1ost developing6nation exports go to industrial nations while most developing6nation imports
originate in industrial nations.
!"# & %&# 1
-. &he majority of developing6nation exports are primary products such as agricultural goods and raw
materialsG of the manufactured goods exported by developing nations. most are labor6intensive goods.
!"# & %&# 1
/. $eveloping nations overwhelmingly acknowledge that they have benefited from international trade
according to the principle of comparative advantage.
!"# = %&# 1
0. !mong the economic problems facing developing countries have been low dependence on primary6
product exports. unstable export markets. and worsening terms of trade.
!"# & %&# 1
3. =or developing countries. a key factor underlying the instability of primary6product prices and export
receipts is the high price elasticity of demand for products such as tin and copper.
!"# = %&# 1
4. Empirical research indicates that the demand and supply schedules for most primary products are
relatively inelastic to changes in price.
!"# & %&# 1
7. If the demand for coffee is price inelastic. an increase in the supply of coffee leads to falling prices and
rising sales revenues.
!"# = %&# 1
9. "ot only do changes in demand induce relatively wide fluctuations in price when supply is inelastic.
but changes in supply induce relatively wide fluctuations in price when demand is inelastic.
!"# & %&# 1
1:. $eveloping countries have complained that because their commodity terms of trade has deteriorated in
recent decades. they should receive preferential tariff treatment from industriali+ed countries.
!"# & %&# 1
11. &o promote stability in commodity markets. International (ommodity !greements have utili+ed
production and export controls. buffer stocks. and multilateral contracts.
!"# & %&# 1
1'. $uring periods of falling demand for coffee. an International (ommodity !greement could offset
downward pressure on price by implementing policies to increase the supply of coffee.
!"# = %&# 1
1-. &o prevent the market price of tin from rising above the target price. the manager of a buffer stock will
purchase excess supplies of tin from the market.
!"# = %&# 1
1/. &o prevent the market price of tin from falling below the target price. the manager of a buffer stock
would purchase any excess supply of tin that exists at the target price.
!"# & %&# 1
10. %rolonged defense of a price ceiling tends to increase the supply of a commodity held by a buffer stock
manager. thus putting downward pressure on price.
!"# = %&# 1
13. <ather than conduct massive stabili+ation operations. buffer stock officials will periodically revise
target prices should they move out of line with long6term price trends.
!"# & %&# 1
14. ! multilateral contract stipulates the maximum price at which importing nations will purchase
guaranteed 5uantities from producing nations and the minimum price at which producing nations will
sell guaranteed amounts to importing nations.
!"# = %&# 1
17. It is widely agreed that import6substitution policies have been a main contributor to above6average
growth rates in developing countries.
!"# = %&# 1
19. *nder the ;enerali+ed ystem of %references program. the major industrial countries agree to
temporarily reduce tariffs on designated imports from other industrial countries.
!"# = %&# 1
':. &he Enewly industriali+ing countriesE of East !sia have emphasi+ed the implementation of import6
substitution policies to insulate their industries from international competition.
!"# = %&# 1
'1. In recent decades. the East !sian Enewly industriali+ing countriesE have pursued export6led growth
Coutward orientationD as an industriali+ation strategy.
!"# & %&# 1
''. &he purpose of a cartel is to support prices higher than would occur under more competitive
conditions. thus increasing the profits of cartel members.
!"# & %&# 1
'-. ! cartel tends to be most successful in maximi+ing the profits of its members when there are a large
number of producers in the cartel and these producers2 cost and demand conditions greatly differ from
each other.
!"# = %&# 1
'/. When cartel members agree to restrict output to increase the price of their product. a single member of
the cartel has an economic incentive to violate the agreement by increasing its output so as to increase
profits.
!"# & %&# 1
'0. $eveloping countries have often felt that it is easier to protect their manufacturers. via import6
substitution policies. against foreign competitors than to force industrial nations to reduce trade
restrictions on products exported by developing countries.
!"# & %&# 1
'3. Import6substitution policies are supported by the fact that many developing countries have small
domestic markets and thus their producers enjoy the benefits of diseconomies of small6scale
production.
!"# = %&# 1
'4. Export6led growth industriali+ation suffers a major problem# it depends on the willingness and ability
of foreign nations to absorb the goods exported by the country pursuing such a policy.
!"# & %&# 1
'7. &he so6called =our &igers include !ustralia. outh ?orea. &aiwan. and >ong ?ong.
!"# = %&# 1
'9. ,y the 199:s. (hina had departed from a capitalistic economy and shifted to a oviet6type economy
encompassing small6scale. labor6intensive industry.
!"# = %&# 1
-:. $uring the late 197:s and early 199:s. (hina dismantled much of its centrally6planned economy and
permitted free enterprise to replace it.
!"# & %&# 1
-1. In its transition toward capitalism. by the 199:s (hina permitted free enterprise as well as democracy
for its people.
!"# = %&# 1
-'. 1ost of (hina2s manufactured exports have constituted labor6intensive goods.
!"# & %&# 1
--. In 1999 the *nited tates revoked the normal6trade6relations Cmost6favored6nationD status it provided
(hina in retaliation for (hina2s suppression of human rights.
!"# = %&# 1
-/. ! multilateral contract specifies the maximum price at which exporting countries agree to sell a
product and the minimum price at which importing countries agree to buy a product.
!"# & %&# 1
-0. !s a profit6maximi+ing cartel. the 8rgani+ation of %etroleum Exporting (ountries would produce a
greater output and charge a lower price than what would occur in a competitive market.
!"# & %&# 1
-3. &he success of buffer stocks is limited by the fact that stockpiles of a product may be exhausted after
prolonged sales. while funds may be exhausted after prolonged purchases.
!"# & %&# 1
-4. &he *nited "ation (onference on &rade and $evelopment in 193/ was successful in convincing
developing countries to switch from export6led industriali+ation to import6substitution
industriali+ation.
!"# = %&# 1
-7. *nder the ;enerali+ed ystem of %references program. the industriali+ed countries agree to maintain
lower tariffs on imports of natural resources and higher tariffs on imports of manufactured goods.
!"# = %&# 1
-9. &he replacement of imports of one nation with imports of another nation is known as Eimport
substitution.E
!"# = %&# 1
/:. $uring periods of weak demand. the 8rgani+ation of %etroleum (ountries has implemented production
CexportD 5uotas to ensure that excess oil supplies be kept off the market.
!"# & %&# 1
SHORT ANS,ER
1. What are some major trade problems faced by developing nations?
!"#
&rade problems include lack of diversification of economies. unstable export markets. declining terms
of trade over time. and lack of access to markets of advanced countries.
%&# 1
'. !re economic downturns helpful to cartels?
!"#
"o they are generally problematic for cartels. !s market sales dwindle in a weakening economy.
profits fall. (artel members may conclude that they can escape serious decreases in profits by reducing
prices. in expectation of gaining sales at the expense of other cartel members.
%&# 1
ESSA/
1. What are some of the growth strategies that have been employed by the developing nations? >ow
successful are these strategies?
!"#
,esides attempting to stabili+e commodity prices. developing nations have promoted internal
industriali+ation through policies of import substitution and export promotion. (ountries emphasi+ing
export promotion have tended to reali+e higher rates of economic growth than countries emphasi+ing
import6substitution policies.
%&# 1
'. $escribe the flying6geese pattern of economic growth? What countries have pursued this strategy?
!"#
It is widely recogni+ed that East !sian economies have followed the flying6geese pattern of growth.
&his pattern of growth occurs when countries gradually move up in technological development by
following in the pattern of countries ahead of them in the development process. =or example. 1alaysia
and &aiwan take over leadership in apparel and textiles from Hapan as Hapan moves into higher6
technology sectors of automotive and electronic products.
%&# 1