CBE International Trade 2 — Questions and Answers
Question 1: Which trade policy tool imposes a fixed limit on the quantity of a good that can be imported?
- Tariff
- Import quota (Correct answer)
- Voluntary export restraint
- Subsidy
Correct answer: Import quota
An import quota is a quantitative restriction that sets a maximum limit on the amount of a specific good that can be imported during a given period.
Question 2: The Heckscher-Ohlin theorem predicts that a country will export goods that intensively use its:
- Scarce factors of production
- Abundant factors of production (Correct answer)
- Most advanced technology
- Cheapest currency
Correct answer: Abundant factors of production
The Heckscher-Ohlin theorem states that countries export goods whose production requires intensive use of their relatively abundant factors, such as labor or capital.
Question 3: When a country's currency depreciates, what typically happens to its trade balance in the short run according to the J-curve effect?
- Immediately improves
- Temporarily worsens before improving (Correct answer)
- Remains unchanged
- Permanently deteriorates
Correct answer: Temporarily worsens before improving
The J-curve effect describes how a currency depreciation initially worsens the trade balance because import/export volumes adjust more slowly than prices.
Question 4: Which organization replaced GATT as the primary international body governing trade rules in 1995?
- IMF
- World Bank
- WTO (Correct answer)
- UNCTAD
Correct answer: WTO
The World Trade Organization (WTO) replaced the General Agreement on Tariffs and Trade (GATT) in January 1995 as the main international body overseeing global trade rules.
Question 5: A trade surplus occurs when a country's:
- Imports exceed exports
- Exports exceed imports (Correct answer)
- Capital inflows exceed outflows
- Government spending exceeds revenue
Correct answer: Exports exceed imports
A trade surplus exists when the value of a country's exports is greater than the value of its imports over a given period.
Question 6: Which of the following best describes 'dumping' in international trade?
- Exporting goods at prices above domestic market prices
- Selling exports below cost or below home-market price (Correct answer)
- Restricting exports to raise domestic prices
- Imposing tariffs on competing foreign goods
Correct answer: Selling exports below cost or below home-market price
Dumping occurs when a country's firms sell exported goods at prices below production cost or below what they charge in their home market, often to gain market share.
Question 7: The Marshall-Lerner condition states that a currency depreciation will improve the trade balance only if the sum of the price elasticities of demand for exports and imports is:
- Less than zero
- Equal to one
- Greater than one (Correct answer)
- Equal to zero
Correct answer: Greater than one
The Marshall-Lerner condition requires that the sum of the absolute values of the price elasticities of export and import demand exceeds one for depreciation to improve the trade balance.
CBE International Trade 2
Which trade policy tool imposes a fixed limit on the quantity of a good that can be imported?