Chapter 10: Trade Policy in Developing Countries 1.

The infant industry argument was an important theoretical basis for A. Neo-colonialist theory of international exploitation. B. Import - substituting industrialization. . !istoriography of the industrial re"olution in #estern $urope. %. $ast-Asian miracle. $. None of the abo"e. Answer& B '. (ophisticated theoretical arguments supporting import-substitution policies include A. Terms of trade effects. B. (cale economy arguments. . )earning cur"e considerations. %. The problem of appropriability. $. None of the abo"e. Answer& % *. +eneral e,uilibrium considerations lead to the realization that import-substituting policies ha"e an effect of A. %iscouraging exports. B. $ncouraging exports. . $ncouraging an efficient use of a country-s resources. %. +enerating large tariff re"enues for the go"ernment $. None of the abo"e. Answer& A .. !istorically those few de"eloping countries which ha"e succeeded in significantly raising their per-capita income le"els A. %id not accomplish this with import-substituting industrialization. B. %id accomplish this with import-substituting industrialization. . Tended to pro"ide hea"y protection to domestic industrial sectors. %. /a"ored industrial to agricultural or ser"ice sectors. $. None of the abo"e. Answer& A

0. (tatistical e"idence suggests that

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A. B. . %. $.

/ree trade policies promote economic growth more effecti"ely than do import substitution policies. Import substituting policies tend to promote effecti"e exploitation of scale economies. Import substitution tends to lead to relati"ely low effecti"e rates of protection. Import substitution is to this day the preferred growth strategy promoted by the #orld Ban1. None of the abo"e.

Answer& A 2. The wage differential theory which argued that shifting resources from agriculture to manufacturing entailed positi"e social benefits implied that A. /ree trade policies would promote competiti"eness. B. /ree trade policies would promote economic growth for both static and dynamic reasons. . 3rotectionism was li1ely to lead to economic stagnation. %. 3rotectionism and import substitution was li1ely to promote economic growth. $. None of the abo"e. Answer& % 4. The !arris-Todaro model A. )ead to a re5ection of the import substitution strategy for economic de"elopment. B. (upported the protectionist strategy for economic growth. . Implied that the free trade approach was not li1ely to promote economic growth. %. Both b and c $. None of the abo"e. Answer& A

6. The growth successes of the high performance Asian economies

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A. B. . %. $.

(upports the belief that economic de"elopment re,uires import substitution policies. 7e5ects the belief that export-oriented industrialization is li1ely to promote economic de"elopment. 7e5ects the belief that economic de"elopment re,uires import substitution policies. (uggests that free trade policies are re,uired for successful economic de"elopment. None of the abo"e.

Answer& 8. The high correlation between rapid growth in exports and rapid economic growth obser"ed in se"eral $ast Asia countries in recent decades pro"es that A. $xport promoting trade policy leads to relati"ely rapid economic growth. B. A free-trade orientation of trade policy results in rapid economic growth. . $xports help growth9 whereas imports impede growth. %. Trade policy is perhaps the most important policy area for promotion of economic de"elopment. $. None of the abo"e. Answer& $ 1:. The relati"ely rapid economic growth experienced by hile in the late 186:s A. (upported the con"entional )atin American reliance on import substitution. B. 7elied on the !arris-Todaro model to explain this growth. . 7e5ected the con"entional )atin American reliance on import substitution. %. %emonstrated the importance of mar1et failure as a reason for import substitution. $. None of the abo"e. Answer& 11. #hich of the following could explain why the terms of trade of de"eloping countries might deteriorate o"er time; A. %e"eloping country exports consist mainly of manufactured goods B. %e"eloping country exports consist mainly of primary products. . ommodity export prices are determined in highly competiti"e mar1ets. %. ommodity export prices are solely determined by de"eloping countries. $. None of the abo"e. Answer&

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1'. #hich trade strategy ha"e de"eloping countries used to restrict imports of manufactured goods so that the domestic mar1et is preser"ed for home producers9 who thus can ta1e o"er mar1ets already established in the country; A. International commodity agreement. B. $xport promotion. . <ultilateral contract. %. Import substitution. $. None of the abo"e. Answer& % 1*. To help de"eloping countries expand their industrial base9 some industrial countries ha"e reduced tariffs on designated manufactured imports from de"eloping countries below the le"els applied to imports from industrial countries. This policy is called A. $xport-led growth. B. +eneralized system of preferences. . <ost /a"ored Nation. %. 7eciprocal trade agreement. $. None of the abo"e. Answer& B 1.. #hich industrialization policy used by de"eloping countries places emphasis on the comparati"e ad"antage principle as a guide to resource allocation; A. $xport promotion. B. Import substitution. . International commodity agreements. %. Infant Industry promotion. $. None of the abo"e. Answer& A 10. Taiwan and (outh =orea are examples of de"eloping nations that ha"e recently pursued these industrialization policies A. Import substitution. B. $xport promotion. . ommercial dumping. %. <ultilateral contract. $. None of the abo"e. Answer& B

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12. To help de"eloping nations strengthen their international competiti"eness9 many industrial nations ha"e granted tariff reductions to de"eloping nations under the A. International commodity agreements program. B. <ultilateral contract program. . +eneralized system of preferences program. %. $xport led growth program $. None of the abo"e. Answer& 14. A reason why it is difficult for de"eloping countries to maintain a cartel is that A. The elasticity of demand for a cartel-s output decreases o"er time. B. 3roducers in the cartel ha"e an economic incenti"e to cheat. . $conomic profits discourage other producers from entering the industry. %. 3roducers in the cartel ha"e the moti"ation to lower prices but not to raise prices. $. None of the abo"e. Answer& B 16. Import substitution policies ma1e use of A. Tariffs that discourage goods from entering a country. B. >uotas applied to goods that are shipped abroad. . 3roduction subsidies granted to industries with comparati"e ad"antage. %. Tax brea1s granted to industries with comparati"e ad"antage. $. None of the abo"e. Answer& A 18. $xport-led growth tends to A. %iscourage competition in the global economy. B. $xploit domestic comparati"e ad"antages. . )ead to unemployment among domestic wor1ers. %. !elp firms benefit from diseconomies of large-scale production $. None of the abo"e. Answer& B

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':. All the following nations except ??????? ha"e recently utilized export-led growth policies. A. !ong =ong B. (outh =orea . Argentina %. (ingapore $. None of the abo"e. Answer& '1. The de"elopment of countries li1e (outh =orea has been supported by all of the following except. A. !igh domestic interest rates. B. %iseconomies of scale occurring at low output le"els. . )arge endowments of human capital %. !igh le"els of labor producti"ity. $. None of the abo"e. Answer& A ''. /or most de"eloping countries A. 3roducti"ity is high among domestic wor1ers. B. 3opulation growth and illiteracy rates are low . (a"ing and in"estment le"els are high %. Agricultural goods and raw materials constitute a high proportion of domestic output. $. None of the abo"e. Answer& % '*. In 18889 the per-capita income in hina was roughly ?????of that in the @.(. A. one hundredth B. Ane ninth . Ane half %. The same as $. None of the abo"e. Answer& B

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'.. The B$ast Asian <iracleB is A. The ability of so many people to li"e in such small areas. B. The fact that so many Influenza "arieties originate from this region. . The fact that poor dualistic economies managed to escape the "icious circle of po"erty. %. The ability to maintain large positi"e trade balances with the @.(. $. None of the abo"e. Answer& '0. The infant industry argument is that A. omparati"e ad"antage is irrele"ant to economic growth B. %e"eloping countries ha"e a comparati"e ad"antage in agricultural goods. . %e"eloping countries ha"e a comparati"e ad"antage in manufacturing. %. %e"eloping countries ha"e a potential comparati"e ad"antage in manufacturing. $. None of the abo"e. Answer& % '2. The infant industry argument calls for acti"e go"ernment in"ol"ement A. Anly if the go"ernment forecasts are accurate. B. Anly if some mar1et failure can be identified. . Anly if the industry is not one already dominated by industrial countries. %. Anly if the industry has a high "alue added. $. None of the abo"e. Answer& B '4. The imperfect capital mar1et 5ustification for infant industry promotion A. Assumes that new industries will tend to ha"e low profits. B. Assumes that infant industries will soon mature. . Assumes that infant industries will be in products of comparati"e ad"antage. %. Assumes that ban1s can allocate resources efficiently. $. None of the abo"e. Answer& A

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'6. Brazil-s export record in 1888 illustrates the principle that A. A large country will tend to ha"e few exports. B. A small country will tend to ha"e a high export ratio. . 3rotectionist policies tend to discourage exports. %. $xport-promoting policies do not tend to wor1. $. None of the abo"e. Answer& '8. The disappointment with import-substitution policies is in part because A. The rapid and continuous growth record of (outh American countries. B. <any countries pursuing this strategy experienced stagnation in their growth. . This policy is inconsistent with sophisticated economic growth models. %. This policy tended to create world-class industrial competitors. $. None of the abo"e. Answer& B *:. Import substitution policies ha"e o"er time tended to in"ol"e all but the following A. A"erlapping import ,uotas. B. $xchange controls. . %omestic content rules. %. (imple tariffs. $. <ultiple exchange rate schemes. Answer& % *1. A dual economy is one in which A. lass warfare ta1es on the form of tournament duels. B. <inority groups dominate political power. . (ophisticated high-wage industrial sectors coexist with low-wage traditional sectors. %. A country exports both traditional and sophisticated non-traditional products. $. None of the abo"e. Answer&

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*'. In a typical dual economy A. )abor is paid the same wage throughout the economy. B. apital earns the same return throughout the economy. . apital often earns higher returns in the sophisticated high-wage sector. %. apital often earns higher returns in the traditional low-wage sector. $. None of the abo"e. Answer& % **. The symptoms of dualism are an indication that the economy is not wor1ing well9 especially in its A. )abor mar1et. B. apital mar1et. . )and mar1et. %. $ducational structure. $. None of the abo"e. Answer& A *.. An efficient economy would set the marginal product in the traditional sector A. )ower than that in the modern non-traditional sector. B. !igher than that in the modern sophisticated sector. . $,ual to that in the modern sophisticated sector. %. )ower in the relati"ely capital intensi"e sector. $. !igher in the relati"ely capital intensi"e sector. Answer& *0. The !3A$ C!igh 3erformance Asian $conomiesD countries A. !a"e all consistently supported free trade policies. B. !a"e all consistently maintained import-substitution policies. . !a"e all consistently maintained non-biased efficient free capital mar1ets. %. !a"e all maintained openness to international trade. $. None of the abo"e. Answer& %

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Essay Questions 1. It is argued that import substitution is a misguided trade policy if the intent is to promote long-term economic growth. $xplain the reasons underlying this argument.

Answer& Import substitution promotes that economic acti"ity in which the country is relati"ely inefficient. This lowers the real income at any gi"en time and decreases the resources which can be used for in"estment purposes9 hence lower growth rates. An additional answer is that import substitution by creating a protected domestic mar1et fails to pro"ide incenti"es to produce high9 or world class ,uality - which means this country cannot mar1et in foreign countries. #ith such a Cpercei"edD limited mar1et9 endogenous economic growth will not be forthcoming. /inally9 it may be that exposure to world competition has its own dynamic effect promoting economic growth. '. The @nited (tates9 as it began its long and successful growth in the early 18th entury9 consciously promoted domestic production through such acti"ities as tariffs9 lay-s American (ystem9 and many direct subsidies to railroads9 canal companies9 farmers Cfree landD etc. Today we "iew this blatant example of large scale and extensi"e import-substitution industrialization as ha"ing been "ery successful. omment and relate to your answer to ,uestion 1.

Answer& This is an interesting point and emphasizes that economic models tend to be ahistorical. That is9 they lac1 the historic perspecti"eE and thus may be misleading as guides to long run issues9 such as economic growth. *. lassical and Neoclassical trade theory ma1es the case that free trade can bring a country to an optimum and economically efficient use of its resourcesE and hence is an optimal trade-policy9 if the ob5ecti"e is maximizing long term economic growth. There are those who argue that the experience of the Asian Miracle countries9 such as Taiwan9 (outh =orea and (ingapore "erify this argument in the real world. $xplain. There are others who argue that the experience of these countries cannot be used to "erify or support the argument abo"e. $xplain.

Answer& Both arguments may indeed be made. These countries did in fact tend to promote exports in a consistent set of policies. !owe"er9 they tended to do this "ia conscious National industrial-policy Ce.g.9 (outh =orea using Bthe Fapanese systemBD9 and hence Cwith the possible exception of !ong =ongD do not pro"ide a good test-tube for the long run effects of a free-trade stance.

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It has been argued that economic dualism that typifies relati"ely poor less de"eloped countries9 is a barrier to participation in the global "illage9 and lessens the probability that such countries can ta1e their place in the economic growth race. $xplain this argument.

Answer& $conomic dualism, first systematically explored by )ewis9 describes economies in which the marginal cost of shifting labor from the traditional to the modern sector is zero. This means that the modern sector en5oys a perfectly elastic labor supply9 and two wage le"els exist simultaneously. The latter is typical of a distorted labor mar1et9 and indicates that the country is not on its production possibility frontier. !owe"er9 it does not indicate that such a country cannot parta1e in international trade. The traditional sector can produce commodities "ery cheaply Cthe wage is close to zeroDE and the modern sector can respond flexibly to demand patterns abroad because of its elastic Cand inexpensi"eD supply of labor. 0. The migration model of !arris and Todaro pro"ided an important theoretical criti,ue of the manufacturing-biased import-substitution trade-policy stance. $xplain.

Answer& The )ewis model9 as indicated in the pre"ious ,uestion9 pro"ided a rationale for manufacturing-biased import substitution trade policy9 since the marginal cost of expanding manufactures is close to zero C5ust high enough to induce a wor1er to migrate from the farm to the city. !owe"er9 !arris and Todaro identified an important negati"e social Cand economicD externality associated with this process9 namely the problems associated with unplanned and "ery rapid urbanization combined with rapidly rising expectations of urban migrants.

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Graphical/Numerical Pro lems

1. If Am)1 wor1ers are employed in manufacturing then what is the marginal producti"ity of labor in manufacturing; Answer& Am#m '. If Am)1 wor1ers are employed in manufacturing then what is the marginal producti"ity of labor in agriculture; Answer& Af#f *. If manufacturing labor were to increase to Am)'9 how much "alue would the economy as a whole gain; Answer& the triangle AB . .. #hy would wor1ers not shift from agriculture to manufacturing in the initial situation where wages are higher in the latter; Answer& imperfections in the labor mar1et 0. If the economy were in the initial position Cwhere Am)1 wor1ers were in manufacturing9 what trade policy might gain AB of economic welfare; Answer& import-substitution gi"ing protection to manufacturing.

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