International Trade Practice Questions

8 representative multiple-choice questions on international trade for AP Macroeconomics, drawn from our 15-question bank for this module. Work through each one, then open “Show answer” for the correct choice and an explanation. For scored, timed practice across the full bank, take a full practice test.

1. 1. A country has comparative advantage in producing a good when it can produce that good at:

   • A. A lower absolute cost than other countries
   • B. A lower opportunity cost than other countries
   • C. A higher quality than other countries
   • D. A lower labor cost than other countries
   Show answer

   Correct answer: B. A lower opportunity cost than other countries

   Comparative advantage is about opportunity cost, not absolute cost. A country should specialize where it gives up the least to produce one more unit. Ricardo's 1817 insight: even if Portugal is better at producing both wine and cloth than England, both countries benefit when each specializes in what it gives up least to make. The fact that one country is more efficient overall (absolute advantage) does NOT determine what each should trade.

2. 2. When a country imposes a tariff on imported steel, which of the following is most likely to occur?

   • A. Domestic steel prices fall, consumers gain, and deadweight loss disappears
   • B. Domestic steel production increases, consumers pay higher prices, and deadweight loss occurs
   • C. Imports increase as domestic consumers seek alternatives
   • D. All parties (consumers, producers, government) gain equally
   Show answer

   Correct answer: B. Domestic steel production increases, consumers pay higher prices, and deadweight loss occurs

   Tariffs raise domestic prices above the world price. Domestic producers expand production because they can now compete. Consumers pay more and buy less. Imports drop. Two deadweight loss triangles emerge: one from inefficient domestic production (firms producing above world cost) and one from lost consumer transactions (buyers priced out). Government collects revenue from the tariff on remaining imports, but consumers lose more than producers and government combined gain.

3. 3. Which of the following best describes the primary difference between a tariff and a quota?

   • A. Tariffs reduce imports, while quotas increase them
   • B. Tariffs generate revenue for the government, while quotas generate revenue for foreign producers or importers with licenses
   • C. Tariffs affect only consumer prices, while quotas affect only producer prices
   • D. Quotas are always more efficient than tariffs
   Show answer

   Correct answer: B. Tariffs generate revenue for the government, while quotas generate revenue for foreign producers or importers with licenses

   Both tariffs and quotas reduce imports and raise domestic prices. The key difference is who pockets the price markup on imported goods. Tariffs send the revenue to the government (the tariff rate times units imported). Quotas distribute quota rents to whoever holds the import licenses, which are typically given to politically connected firms for free rather than auctioned. This is why economists generally view tariffs as more transparent than quotas, even though both create the same deadweight loss.

4. 4. Deadweight loss from a tariff occurs because:

   • A. Government revenue is always less than consumer losses
   • B. Some mutually beneficial trades no longer occur at the higher domestic price
   • C. Tariffs always cause recessions
   • D. Domestic producers produce less than they would without the tariff
   Show answer

   Correct answer: B. Some mutually beneficial trades no longer occur at the higher domestic price

   Deadweight loss from a tariff has two sources, and both reflect mutually beneficial trades that stop happening. On the production side, inefficient domestic producers expand because the tariff shields them from lower-cost imports, which wastes resources. On the consumption side, buyers who would have purchased at the world price refuse to pay the higher tariff-inclusive price, so those transactions never occur. The value that those trades would have generated simply disappears. Government revenue doesn't count as deadweight loss because it's a transfer rather than destruction of surplus.

5. 5. Worker productivity: Worker X can make 10 units of good A or 5 units of good B per day. Worker Y can make 12 units of good A or 4 units of good B per day. Who has comparative advantage in good B?

   • A. Worker X (because X's opportunity cost of B is 2 units of A, lower than Y's 3 units)
   • B. Worker Y (because Y has higher productivity in good A)
   • C. Both workers have equal comparative advantage in B
   • D. Neither worker has comparative advantage in B
   Show answer

   Correct answer: A. Worker X (because X's opportunity cost of B is 2 units of A, lower than Y's 3 units)

   Worker X's opportunity cost of 1 unit of B = 10A / 5B = 2 units of A. Worker Y's opportunity cost of 1 unit of B = 12A / 4B = 3 units of A. X gives up less A per unit of B, so X has comparative advantage in good B and should specialize there. Y has comparative advantage in A. This is a classic AP FRQ pattern, and students often get it wrong by focusing on absolute productivity rather than opportunity cost.

6. 6. Arguments FOR trade protection typically include all of the following EXCEPT:

   • A. National security concerns for strategic industries
   • B. Protection of infant industries that may become competitive in the future
   • C. Prevention of dumping (selling below cost to drive out competitors)
   • D. Maximization of global welfare and efficiency
   Show answer

   Correct answer: D. Maximization of global welfare and efficiency

   Free trade maximizes global welfare through comparative advantage, so protection cannot be justified on those grounds. Valid protection arguments are narrow and specific: national security requires preserving domestic capacity in strategic sectors (defense, food, semiconductors); infant industry arguments allow protection until domestic firms develop scale economies; anti-dumping provisions prevent predatory pricing. The AP exam treats these as limited exceptions, not challenges to the basic efficiency case for free trade. The long-term empirical record strongly favors open trade, which is why free trade remains the baseline policy prescription.

7. 7. When a tariff is imposed, the tariff revenue collected by the government:

   • A. Represents a deadweight loss to society
   • B. Is equal to the tariff per unit multiplied by the quantity of imports remaining after the tariff
   • C. Is greater than the total loss to consumers
   • D. Is typically zero, because tariffs eliminate all imports
   Show answer

   Correct answer: B. Is equal to the tariff per unit multiplied by the quantity of imports remaining after the tariff

   Tariff revenue = (tariff rate per unit) × (quantity of imports remaining after the tariff). If the tariff is $10 and imports fall from 40 units to 20 units, revenue = $10 × 20 = $200. Revenue is a transfer from consumers to the government, not deadweight loss. The deadweight loss comes from the two triangles representing trades that no longer occur because of the tariff-induced price increase.

8. 8. An exporting nation benefits from trade when the world price is higher than its autarky price. In this scenario:

   • A. Both producers and consumers gain equally
   • B. Consumers gain from lower prices, but producers lose
   • C. Producers gain from higher prices and increased output, but consumers lose from higher prices; total surplus still increases
   • D. The nation experiences deadweight loss because of trade
   Show answer

   Correct answer: C. Producers gain from higher prices and increased output, but consumers lose from higher prices; total surplus still increases

   When a country exports, domestic prices rise toward the world price. Producers gain: they sell at a higher price and produce more, with producer surplus expanding substantially. Consumers lose: they pay more and consume less. But the producer gains exceed the consumer losses, so total surplus rises. This is the fundamental case for free trade from the producer side. US soybean farmers benefit this way because they're among the most productive in the world, and export access lifts their revenue above what the domestic market alone would support.