Module M12 Quiz: International Trade and Synthesis
25 questions ยท Introductory ยท Mix of multiple choice, calculation, and short answer
How to use
Attempt each question before clicking Show Answer. For calculation questions, write out your working first.
Question 1
Lesson L01 ยท Trade
Comparative advantage means a country should specialise in goods where it has:
Type: Multiple Choice
- A) The lowest absolute cost of production
- B) The lowest opportunity cost of production relative to other goods
- C) The highest wages
- D) The most natural resources
Show Answer
Answer: B) The lowest opportunity cost of production relative to other goods
Comparative advantage is about opportunity cost, not absolute cost. A country has comparative advantage if it gives up less of other goods to produce this good.
Question 2
Lesson L01 ยท Trade
Australia produces iron ore at an opportunity cost of 2 tonnes wheat per tonne of ore. Japan produces at an opportunity cost of 5 tonnes wheat per tonne of ore. Who has comparative advantage in iron ore?
Type: Calculation
Show Answer
Answer: Australia (lower opportunity cost: 2 vs 5 wheat/tonne ore)
Australia gives up less wheat per tonne of ore โ lower opportunity cost in ore โ comparative advantage in ore.
Question 3
Lesson L01 ยท Trade
Even if Australia is more efficient at producing everything, why should it still trade?
Type: Short Answer
Show Answer
Answer: Comparative advantage means even a more efficient country has varying relative efficiencies. By specialising in goods with lowest opportunity cost and trading, Australia can consume beyond its own production possibilities โ trade expands consumption options for all parties.
Absolute advantage is irrelevant โ only relative opportunity costs determine trade gains.
Question 4
Lesson L01 ยท Trade
Australia's main export advantage lies in:
Type: Multiple Choice
- A) Manufacturing electronics
- B) Mining (iron ore, LNG, coal) and agriculture โ reflecting our factor endowments (land, mineral resources)
- C) Tourism only
- D) Financial services
Show Answer
Answer: B) Mining (iron ore, LNG, coal) and agriculture โ reflecting our factor endowments (land, mineral resources)
Factor endowments (abundant land and mineral resources, small population) give Australia comparative advantage in resource-intensive exports.
Question 5
Lesson L01 ยท Trade
The terms of trade refers to:
Type: Multiple Choice
- A) The tariff rate on imports
- B) The relative price at which two countries exchange goods โ it must lie between each country's domestic opportunity costs for both to gain
- C) The balance of trade (exports minus imports)
- D) Trade agreement conditions
Show Answer
Answer: B) The relative price at which two countries exchange goods โ it must lie between each country's domestic opportunity costs for both to gain
Terms of trade: the price ratio between exported and imported goods. Both countries gain from trade when the terms of trade lie between their domestic opportunity costs.
Question 6
Lesson L02 ยท Trade
When Australia opens to cheaper imported manufactured goods, which group gains?
Type: Multiple Choice
- A) Only domestic manufacturers
- B) Domestic consumers (lower prices) and export industries (trading partners earn AUD to buy Australian exports)
- C) No one gains from imports
- D) Only foreign countries
Show Answer
Answer: B) Domestic consumers (lower prices) and export industries (trading partners earn AUD to buy Australian exports)
Imports benefit domestic consumers through lower prices and support Australia's export industries by giving trading partners the income to purchase Australian goods.
Question 7
Lesson L02 ยท Trade
World steel price is $500/tonne; domestic production cost is $700/tonne. Australia opens to imports. Change in consumer surplus if demand is Q=1000-0.5P.
Type: Calculation
Show Answer
Answer: Consumer surplus increases by approx $30,000
At $700: Q_d=650. At $500: Q_d=750. ฮCS โ (700-500)ร650 + 0.5ร(700-500)ร100 = $130,000 + $10,000 = $140,000 (using trapezoid method).
Question 8
Lesson L03 ยท Trade
A tariff on imported steel benefits which group at whose expense?
Type: Multiple Choice
- A) Consumers at the expense of producers
- B) Domestic steel producers at the expense of steel-using manufacturers and consumers
- C) Both producers and consumers
- D) Foreign steel producers
Show Answer
Answer: B) Domestic steel producers at the expense of steel-using manufacturers and consumers
A tariff raises domestic steel prices โ domestic producers gain but all steel-using industries (cars, construction) and consumers face higher costs.
Question 9
Lesson L02 ยท Trade
Australia's automotive industry closed manufacturing by 2017 partly due to import competition. From a welfare perspective this is:
Type: Multiple Choice
- A) Purely negative โ jobs were lost
- B) Ambiguous โ workers and shareholders lost but consumers gained lower prices and resources were freed for higher-productivity uses
- C) Purely positive โ consumers benefited
- D) Neither positive nor negative
Show Answer
Answer: B) Ambiguous โ workers and shareholders lost but consumers gained lower prices and resources were freed for higher-productivity uses
Import competition creates distributional effects. The aggregate welfare calculation may be positive but transition costs for displaced workers are real.
Question 10
Lesson L02 ยท Trade
The compensation principle in trade theory states:
Type: Multiple Choice
- A) All workers must be compensated for job losses
- B) The gains from trade are large enough that winners could in principle compensate losers and still be better off โ though this may not happen in practice
- C) Tariffs should compensate domestic producers
- D) Consumers should pay producers for lower prices
Show Answer
Answer: B) The gains from trade are large enough that winners could in principle compensate losers and still be better off โ though this may not happen in practice
The Kaldor-Hicks compensation principle: net positive welfare change means gainers could compensate losers. Whether they actually do is a policy choice.
Question 11
Lesson L03 ยท Trade
A tariff on imports creates deadweight loss because:
Type: Multiple Choice
- A) Government revenue is wasted
- B) Production is distorted โ domestic producers expand at higher than world cost, and consumption is suppressed below the efficient level
- C) Consumers pay more tax
- D) Imports are always better than domestic production
Show Answer
Answer: B) Production is distorted โ domestic producers expand at higher than world cost, and consumption is suppressed below the efficient level
Tariff DWL: (1) inefficient domestic production that costs more than imports; (2) consumption foregone by consumers who would value imports above world price but less than tariff price.
Question 12
Lesson L03 ยท Trade
World price=\(50; tariff=\)20; domestic supply at $70: Qs=400; domestic demand at $70: Qd=600; imports=200. Government tariff revenue=
Type: Calculation
Show Answer
Answer: $4,000
Revenue = tariff ร imports = $20 ร 200 = $4,000
Question 13
Lesson L03 ยท Trade
Why is a quota generally considered less desirable than a tariff that achieves the same import reduction?
Type: Short Answer
Show Answer
Answer: A tariff generates government revenue (area C) while achieving the same import reduction and market price as an equivalent quota. Under a quota, area C accrues to quota licence holders (often importers), not the government โ a transfer with no efficiency advantage.
Tariffs and equivalent quotas have the same welfare effects except for who receives area C.
Question 14
Lesson L03 ยท Trade
Australia's tariff on imported cars was 5% when it was phased out. If a $30,000 car had a 5% tariff, what was the tariff amount?
Type: Calculation
Show Answer
Answer: $1,500
Tariff = 5% ร $30,000 = $1,500. This adds $1,500 to the domestic price.
Question 15
Lesson L03 ยท Trade
Which argument for tariff protection has the strongest economic basis?
Type: Multiple Choice
- A) Protecting all domestic industries equally
- B) The infant industry argument โ temporary protection for industries with learning-by-doing potential that will become internationally competitive
- C) Protecting high-wage industries
- D) Retaliating against all trading partners
Show Answer
Answer: B) The infant industry argument โ temporary protection for industries with learning-by-doing potential that will become internationally competitive
The infant industry argument has theoretical validity: temporary protection can allow an industry to move down its learning curve to international competitiveness. It requires eventual removal and careful selection.
Question 16
Lesson L04 ยท Trade
Australia's single largest export by value is:
Type: Multiple Choice
- A) Coal
- B) Education services
- C) Iron ore
- D) LNG
Show Answer
Answer: C) Iron ore
Iron ore is consistently Australia's largest export by value, accounting for ~$130bn/year, primarily exported to China.
Question 17
Lesson L04 ยท Trade
ChAFTA (China-Australia Free Trade Agreement) entered into force in 2015. China's tariff on Australian beef was 25%. If Australian beef exports to China were $600m pre-FTA, and doubled to $1.2bn after tariff elimination, estimate the approximate annual tariff removed.
Type: Calculation
Show Answer
Answer: ~$150m
Pre-FTA: $600m of beef faced 25% tariff = $150m tariff. After FTA, this $150m no longer paid, benefiting Australian producers and Chinese consumers.
Question 18
Lesson L04 ยท Trade
In 2020 China imposed tariffs on Australian barley and restrictions on wine. What economic risk does this illustrate?
Type: Short Answer
Show Answer
Answer: Trade concentration risk: when a large share of exports go to a single partner, that partner can use market access as political leverage. Australia's high dependence on China (~30% of exports) creates vulnerability to politically motivated trade restrictions.
Diversification of export markets reduces the leverage any single partner has.
Question 19
Lesson L04 ยท Trade
Which best describes the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership)?
Type: Multiple Choice
- A) A bilateral FTA between Australia and Japan
- B) A regional multilateral trade agreement covering 11 Pacific Rim countries including Australia, Japan, Canada, and Mexico
- C) A WTO agreement
- D) A trade deal between Australia and China only
Show Answer
Answer: B) A regional multilateral trade agreement covering 11 Pacific Rim countries including Australia, Japan, Canada, and Mexico
The CPTPP is a 11-country regional FTA covering ~500m people and 13% of global GDP, with deep provisions on services, investment, and IP.
Question 20
Lesson L04 ยท Trade
Australia's education exports (~$35bn pre-COVID) were disrupted by border closures in 2020-21. This illustrates:
Type: Multiple Choice
- A) The benefits of trade protection
- B) The costs of service trade disruption โ education exports depend on international student mobility and are highly vulnerable to border policies
- C) That service exports are unimportant
- D) That Australia should focus only on goods exports
Show Answer
Answer: B) The costs of service trade disruption โ education exports depend on international student mobility and are highly vulnerable to border policies
Service exports (especially education requiring physical presence) are more disruption-prone than goods โ a key vulnerability revealed by COVID.
Question 21
Lesson L05 ยท Market Structure
The five main sources of market failure are:
Type: Multiple Choice
- A) Taxes, regulation, government spending, inflation, unemployment
- B) Market power, externalities, public goods, common resources, and information asymmetry
- C) Supply shocks, demand shocks, bubbles, crashes, and regulation
- D) Monopoly, oligopoly, monopsony, duopsony, and cartel
Show Answer
Answer: B) Market power, externalities, public goods, common resources, and information asymmetry
The five canonical market failures where competitive markets fail to achieve allocative efficiency: power, externalities, public goods, commons, and information.
Question 22
Lesson L05 ยท Market Structure
The efficiency-equity trade-off means:
Type: Multiple Choice
- A) Efficient policies always increase equity
- B) Policies that improve efficiency may worsen the distribution of income โ and redistribution may reduce productive incentives
- C) Equity and efficiency always improve together
- D) Only equity matters in policy
Show Answer
Answer: B) Policies that improve efficiency may worsen the distribution of income โ and redistribution may reduce productive incentives
A key tension in economics: many efficiency-improving policies create winners and losers; redistribution may dampen incentives. Policy must balance both.
Question 23
Lesson L05 ยท Market Structure
Australia's Gini coefficient is approximately 0.33. A Gini of 0 represents perfect equality and 1 represents maximum inequality. Australia is:
Type: Calculation
Show Answer
Answer: Moderately unequal โ more equal than the US (~0.39) but less equal than Nordic countries (~0.25-0.28)
Gini=0.33 places Australia in the middle of OECD countries โ less unequal than developing nations but more unequal than Scandinavian countries.
Question 24
Lesson L05 ยท Market Structure
Name the five types of market failure and give one Australian policy example for each.
Type: Short Answer
Show Answer
Answer: 1. Market power: ACCC competition regulation. 2. Externalities: carbon price/Safeguard Mechanism. 3. Public goods: ABC, national defence funding. 4. Common resources: Murray-Darling water licences. 5. Information asymmetry: APRA prudential regulation of banks.
Each market failure type requires a different policy instrument.
Question 25
Lesson L05 ยท Market Structure
Which debate in Australian microeconomics most closely mirrors the core efficiency vs equity trade-off?
Type: Multiple Choice
- A) Whether the RBA should raise rates
- B) Housing affordability policy โ restricting negative gearing reduces investment returns (efficiency cost) but may improve first-home buyer access (equity benefit)
- C) Whether to join CPTPP
- D) Whether to privatise Australia Post
Show Answer
Answer: B) Housing affordability policy โ restricting negative gearing reduces investment returns (efficiency cost) but may improve first-home buyer access (equity benefit)
Negative gearing reform is the quintessential micro efficiency-equity debate in Australia โ investors benefit from the tax concession (efficiency of capital allocation?) vs first home buyers priced out (equity concern).