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21 Free trade versus restricted trade

Chapter Twenty One Free trade versus restricted trade

Multiple Choice Questions

1 B 2 B 3 D 4 D 5 B
6 D

1 The import-competing sectors refer to those sectors that produce goods that are in direct
competition with imports.

Under free trade, the import-competing sector will face competition from foreign imports, which
are substitutes of its products.

To the extent that domestic consumers turn to imports, the demand for the goods produced by the
import-competing sector will drop, leading to a decrease in employment opportunities in the
import-competing sector.

2 (3) is not a trade restriction measure. In fact, if the minimum wage law succeeds in raising labour
wage, domestic wage and hence cost level will rise. Domestic products will be more expensive,
and this helps stimulate import.

4 Hong Kong is too small an economy in the international setting. The effect of its quota on the
USA is very small.

6 When the US quota restriction is relaxed, the USA will issue more quota licences to Hong Kong,
and hence the market price of quota may not necessarily rise. (A) is wrong.

Short Questions

7(a) If Country B promotes free trade, its consumers can enjoy cheap foreign imports.

7(b) It is because the effectiveness of a quota in restricting import is more certain. Its effect does
not depend on the elasticity of demand for imports as a tariff does.

New Introductory Economics 3rd Edition 48 © Pearson Education Asia Limited 2003
Suggested Solutions (2004 reprint with minor amendments)