International Trade worksheet
The answer key prints on its own page, so hand out everything before it.
International Trade: practice worksheet
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
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
3. Country A can produce 100 units of wheat or 50 units of cloth. Country B can produce 80 units of wheat or 40 units of cloth. According to the theory of comparative advantage:
- (A) Country A has comparative advantage in both goods
- (B) Both countries have the same opportunity costs, so there are no gains from trade
- (C) Country A should produce wheat and Country B should produce cloth
- (D) Country B has comparative advantage in both goods
4. 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
5. A nation that lowers its trade barriers will most likely experience:
- (A) Decreased consumer choice and higher prices
- (B) Increased consumer choice, lower prices, and net gains in total welfare
- (C) Complete job loss in all industries
- (D) Reduced government revenue and no other effects
6. 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
7. Suppose the world price of a good is $10, but the domestic price without trade is $15. After opening to trade, the country will:
- (A) Export the good because domestic producers are more efficient
- (B) Import the good because foreign producers offer a lower price
- (C) Neither import nor export the good
- (D) Set a price ceiling to protect domestic consumers
8. 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
9. A small country currently has a domestic price of $50 for tomatoes. The world price is $30. If the government imposes a $10 tariff on imported tomatoes, what will be the new domestic price in the country?
- (A) $30
- (B) $40
- (C) $50
- (D) $60
10. 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
International Trade: answer key
1. (B) 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. (B) 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. (B) Country A's opportunity cost of wheat: 50/100 = 0.5 cloth per wheat. Country B's opportunity cost of wheat: 40/80 = 0.5 cloth per wheat. Identical opportunity costs. When opportunity costs are equal, neither country has comparative advantage, and specialization provides no gains from trade. This is a rare but important edge case. In a textbook problem, look for different opportunity cost ratios to identify where specialization benefits both countries.
4. (B) 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.
5. (B) Lowering trade barriers gives consumers access to imports at world prices, which means more variety, lower prices, and higher consumer surplus. Domestic producers face tougher competition. Some lose surplus. But aggregate analysis shows consumer gains exceed producer losses, yielding net welfare gains. The China trade example fits: Peterson Institute estimated $850 per American family in annual savings by 2010 even as certain industries and communities were hit hard.
6. (B) 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.
7. (B) When world price ($10) is below domestic price ($15), foreign producers can sell more cheaply than domestic producers. Consumers shift to the cheaper imports, and the country becomes an importer. Domestic producers lose surplus because they now receive only the $10 world price and produce less. Consumers gain because they pay less and buy more. The net effect is positive: consumer gains exceed producer losses, which is why economists advocate free trade.
8. (A) 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.
9. (B) The tariff adds to the world price, so the new domestic price = world price + tariff = $30 + $10 = $40. This is still below the autarky price of $50, so the country will still import tomatoes, just less than before. Quantity imported falls, consumer surplus shrinks (less than complete autarky but more than free trade), domestic producer surplus grows, and the government collects tariff revenue equal to $10 per imported unit. The two deadweight loss triangles are smaller than they would be at the autarky price.
10. (D) 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.