Question

3. True or False. Please tell whether each of the following statements is true or false and justify your answer in a few sentences.

(a) “Free trade is always good and governments should not manage trade.”

(b) “Vertical FDI and trade are substitutes, while horizontal FDI and trade are complements.”

(c) An import quota cannot make a country better off.

(d) Increasing returns to scale will lead to monopolies in world trade and therefore consumers will lose from trade.

Answer 1

Answer
a. False
Economically in most cases like tariff, price ceiling , price floor it is beneficial for the government not intervening. But in cases where external cost arise, or cases of monopoly there we find government intervention is economically beneficial.

b. False
Vertical trade and FDI are complements whereas Horizontal FDI and trade are of similar goods and services which are in competiton.

c. False
In a case where a foreing nation is practicing "dumping" it is essential that the home country to impose import quota or somehting similar to prevent market disruption.

d. False
Increasing returns to scale will make monopolies sell more of a good, as the supply increases the price will go down naturally.

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