AP MACRO International Economics 1 — Questions and Answers
Question 1: What is the effect of a tariff on the price of imported goods?
- It decreases the price of imports.
- It increases the price of imports. (Correct answer)
- It has no effect on the price of imports.
- It eliminates imports from the economy.
Correct answer: It increases the price of imports.
A tariff is a tax imposed on imported goods and services. When a tariff is applied, it directly adds to the cost of bringing those goods into the country. This additional cost is typically passed on to consumers, making imported goods more expensive in the domestic market compared to their price before the tariff was imposed.
Question 2: Which of the following is a likely consequence of a country having a trade deficit?
- The country exports more than it imports.
- The country accumulates foreign debt. (Correct answer)
- The country’s currency appreciates.
- The country’s economy enters a recession.
Correct answer: The country accumulates foreign debt.
A trade deficit occurs when a country's imports of goods and services exceed its exports. To finance this deficit, the country must borrow from foreign sources or sell off domestic assets to foreigners. This borrowing leads to an accumulation of foreign debt, as the country needs foreign currency to pay for its excess imports.
Question 3: What does the term "comparative advantage" refer to in international trade?
- The ability to produce more of a good than any other country.
- The ability to produce a good at a lower opportunity cost than another country. (Correct answer)
- The advantage of producing goods that are in high demand internationally.
- The ability to impose tariffs to reduce competition.
Correct answer: The ability to produce a good at a lower opportunity cost than another country.
Comparative advantage is a core principle in international trade theory. It states that a country has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost than another country. This means it gives up less of other goods to produce that specific good, making specialization and trade mutually beneficial even if one country has an absolute advantage in all goods.
Question 4: What happens to the value of a country's currency if it has a trade surplus?
- The currency depreciates.
- The currency appreciates. (Correct answer)
- There is no effect on the currency value.
- The currency becomes less volatile.
Correct answer: The currency appreciates.
A trade surplus means a country exports more goods and services than it imports, leading to a net inflow of foreign currency. This increased demand for the country's currency by foreign buyers (who need it to purchase exports) causes its value to rise relative to other currencies. This appreciation makes the country's exports more expensive and imports cheaper.
Question 5: Which of the following is a reason why countries engage in international trade?
- To gain access to goods and services that are not produced domestically (Correct answer)
- To prevent foreign investment
- To maintain protectionist policies
- To reduce their GDP
Correct answer: To gain access to goods and services that are not produced domestically
Countries engage in international trade primarily to benefit from specialization and to access a wider variety of goods and services than they could produce on their own. This includes obtaining goods that cannot be produced domestically due to lack of resources or technology, or goods that can be produced more efficiently and at a lower cost by other countries due to comparative advantage.
AP MACRO International Economics 1
What is the effect of a tariff on the price of imported goods?