Question

Part I: True or False. If false, briefly explain your answer (2 points each). Answer all five. 1. An intra industry trade index of 1 indicates that very little intra industry trade is taking place. 2. External economies of scale occurs when a firm's average costs fall as the total industry output rises Foreign Direct Investment includes the hiring of workers in foreign countries as well as purchase of equipment and software. Quotas are generally preferred to tariffs because they are more flexible and it is easier to extract government revenue from foreigner producers. 3. 4. Ina small country, the positive gains of a tariff to domestic producer surplus and government revenue will be outweighed by losses to consumer surplus. 5.

Answer 1

1. False. The intra-industry trade index ranges between 0 and 1. A value of 0 implies that the trade is only inter-industry while the value of 1 implies that the whole trade happening is intra-industry,

2. True.

3. False. The foreign direct investment includes investment in the foreign country, reinvesting the profits and developing the capital or production facilities along with mergers and acquisitions. The process of hiring workers, however, is not included in the FDI.

4. False. Tariffs are the form of taxes which are being imposed on the imports or exports and are easy to extract as a necessary payment, while quotas instead of levying taxes focus on restricting the output or the level of imports and exports which does not generate any revenue for the government.

5. False. The loss to consumer surplus in case of a small country because of tariff is so high that the gains to the government revenue and producer surplus are not able to outweigh them. Because being the small country, the tariff does not affect the price in the world and even though the imports are reduced, this reduction in exports by the rest of the world is so small to be noticeable and thus there is not any effect on the welfare on the outside world, but the small country suffers.