CBE International Trade 3 — Questions and Answers
Question 1: In trade theory, 'terms of trade' refers to:
- The legal rules governing trade agreements
- The ratio of export prices to import prices (Correct answer)
- The tariff rates applied to traded goods
- The balance of trade position
Correct answer: The ratio of export prices to import prices
Terms of trade measure the relative price of a country's exports compared to its imports, indicating the purchasing power of exports in terms of imports.
Question 2: Which trade agreement created the world's largest free trade area by GDP when it came into force in 2022?
- CPTPP
- USMCA
- RCEP (Correct answer)
- EU Single Market
Correct answer: RCEP
The Regional Comprehensive Economic Partnership (RCEP), comprising 15 Asia-Pacific nations, became the world's largest free trade agreement by combined GDP when it took effect in January 2022.
Question 3: A specific tariff is calculated as:
- A percentage of the imported good's value
- A fixed dollar amount per unit of the imported good (Correct answer)
- A combination of fixed and percentage charges
- A tariff applied only to specific countries
Correct answer: A fixed dollar amount per unit of the imported good
A specific tariff is a fixed monetary charge per physical unit of the imported good (e.g., $5 per ton), regardless of the good's price.
Question 4: Which concept describes the situation where a domestic industry is protected in its early stages to allow it to grow and compete internationally?
- Comparative advantage
- Infant industry argument (Correct answer)
- Factor price equalization
- Trade diversion
Correct answer: Infant industry argument
The infant industry argument justifies temporary protection of new domestic industries that have not yet achieved the scale or experience to compete with established foreign rivals.
Question 5: The Stolper-Samuelson theorem predicts that trade liberalization will:
- Benefit all factors of production equally
- Benefit the abundant factor and harm the scarce factor (Correct answer)
- Harm all domestic producers
- Have no impact on income distribution
Correct answer: Benefit the abundant factor and harm the scarce factor
The Stolper-Samuelson theorem states that opening to trade raises the real return of the abundant factor and lowers the real return of the scarce factor in each country.
Question 6: When a regional trade agreement diverts trade from a low-cost non-member country to a higher-cost member country, this is called:
- Trade creation
- Trade deflection
- Trade diversion (Correct answer)
- Trade facilitation
Correct answer: Trade diversion
Trade diversion occurs when a preferential trade agreement causes imports to shift from a more efficient non-member producer to a less efficient member producer due to the tariff preference.
Question 7: Which measure captures all cross-border transactions including goods, services, income, and current transfers?
- Trade balance
- Capital account
- Current account (Correct answer)
- Financial account
Correct answer: Current account
The current account records a country's transactions with the rest of the world in goods, services, primary income, and secondary income (current transfers).
CBE International Trade 3
In trade theory, 'terms of trade' refers to: