International Trade Theory and Policy MCQs 2026

The gravity model of trade predicts larger flows when countries

1. Aare always farther apart✓
2. Bare larger economically and closer geographically✓
3. Chave zero GDP✓
4. Dshare no borders and no size✓

A trade surplus means

1. Aimports exceed exports✓
2. Bcapital account is always negative✓
3. Ctariffs are zero✓
4. Dexports of goods exceed imports of goods✓

A trade deficit means

1. Aimports of goods exceed exports of goods✓
2. Bexports always exceed imports✓
3. Cbudget is in surplus✓
4. Dunemployment is zero✓

Opportunity cost in trade theory is

1. Aalways measured in money only✓
2. Bwhat must be given up to produce one more unit of a good✓
3. Cidentical to absolute labour hours only✓
4. Dthe tariff rate✓

Autarky means

1. Afree trade with all nations✓
2. Ba customs union✓
3. Ca closed economy with no foreign trade✓
4. Da currency board✓

The production possibility frontier with constant costs is

1. Aalways bowed out✓
2. Ba straight line reflecting constant opportunity cost✓
3. Ca vertical Phillips curve✓
4. Didentical to the budget line of a consumer only✓

The balance of trade records

1. Aonly capital flows✓
2. Bonly remittances✓
3. Cexports of goods minus imports of goods✓
4. Donly official reserves✓

Increasing opportunity costs produce a PPF that is

1. Aconcave (bowed out) from the origin✓
2. Ba straight line✓
3. Ca circle✓
4. Dupward sloping always✓

Factor-price equalization (H-O corollary) suggests trade can

1. Atend to equalize factor prices across countries under strong assumptions✓
2. Balways equalize all goods prices to zero✓
3. Celiminate all factor mobility needs forever in reality without assumptions✓
4. Dset CRR equal worldwide✓

The Stolper-Samuelson theorem links

1. Aonly money supply to inflation✓
2. Bchanges in goods prices to real rewards of factors✓
3. Conly deficits to debt✓
4. Donly quotas to VERs✓

Safeguard measures under WTO allow

1. Apermanent bans without review✓
2. Bunlimited dumping✓
3. Cabolition of MFN forever✓
4. Dtemporary protection against import surges under specified conditions✓

Rules of origin determine

1. Athe CRR of banks✓
2. Bthe Phillips curve✓
3. Cwhether a product qualifies as originating in an FTA partner✓
4. DOkun's law✓

A binding tariff ceiling in WTO is

1. Athe applied tariff always✓
2. Ba quota volume✓
3. Cthe maximum tariff a member has committed not to exceed✓
4. Dan export subsidy rate✓

Preferential trade agreements give

1. Aidentical MFN treatment to all always✓
2. Bhigher tariffs on partners✓
3. Cbetter market access to partners than to outsiders✓
4. Dno trade among members✓

The infant industry argument is weaker when

1. Alearning effects are strong and temporary help works✓
2. Bprotection becomes permanent and firms never become competitive✓
3. Cspillovers justify brief support✓
4. Dmonitoring is credible✓

Retaliation risk is a drawback of

1. Aunconditional free trade only✓
2. Bunilateral tariffs that invite foreign counter-tariffs✓
3. CMFN liberalization among all✓
4. Dcustoms unions with no outsiders✓

Consumer surplus from free trade typically

1. Arises as import prices fall and variety expands✓
2. Balways falls when tariffs are cut✓
3. Cis unrelated to prices✓
4. Dequals producer surplus always✓

Producer surplus under a tariff on an import-competing good

1. Aalways falls for domestic producers✓
2. Bis unchanged by definition✓
3. Cequals the tariff revenue only✓
4. Dtends to rise for domestic producers✓

Tariff revenue accrues to

1. Aforeign exporters only✓
2. Bthe WTO secretariat✓
3. Cdomestic consumers as cash✓
4. Dthe government of the importing country✓

A prohibitive tariff is set so high that

1. Aimports become infinite✓
2. Bquotas become unnecessary because trade explodes✓
3. Cimports fall to zero✓
4. Ddumping is required✓

Intra-industry trade refers to

1. Atwo-way trade in similar products within the same industry✓
2. Bonly inter-industry Heckscher-Ohlin trade✓
3. Conly raw material exports✓
4. Donly one-way colonial trade✓

An export subsidy tends to

1. Aban all exports✓
2. Bencourage exports and may lower foreign prices of the good✓
3. Craise foreign tariffs automatically✓
4. Deliminate comparative advantage✓

Non-tariff barriers (NTBs) include

1. Aonly ad valorem tariffs✓
2. Bonly specific tariffs✓
3. Cquotas, standards, licensing and other non-tax restrictions✓
4. Donly export subsidies that lower prices abroad✓

Trade diversion means

1. Aswitching from a low-cost outside supplier to a higher-cost partner due to preference✓
2. Balways raising world efficiency✓
3. Cidentical to free trade✓
4. Donly a tariff cut on all sources✓

Trade creation in a customs union means

1. Aswitching to higher-cost partner sources✓
2. Bswitching from high-cost domestic production to lower-cost partner imports✓
3. Cbanning all trade✓
4. Draising world tariffs✓

A free trade area (FTA) features

1. Aa common external tariff always✓
2. Ba single currency always✓
3. Cfree trade among members but independent external tariffs✓
4. Dno rules of origin✓

A customs union involves

1. Afree trade with no common external tariff✓
2. Bfree trade among members plus a common external tariff✓
3. Conly a free-trade area without CET✓
4. Donly monetary union✓

A voluntary export restraint (VER) is

1. Aan import subsidy✓
2. Ban exporting country's agreement to limit exports to a market✓
3. Ca free-trade area✓
4. Dan ad valorem tariff only✓

National treatment under WTO requires

1. Aimports always face higher internal taxes✓
2. Bexports be banned✓
3. Cimported goods be treated no less favourably than like domestic goods after entry✓
4. Dquotas on all goods✓

Most-favoured-nation (MFN) treatment means

1. Aconcessions to one member are extended to all members✓
2. Bfavouring only one friend country forever✓
3. Cbanning all third countries✓
4. Dsetting identical tariffs to zero always✓

GATT stands for

1. AGeneral Agreement on Tariffs and Trade✓
2. BGlobal Association of Tax Treaties✓
3. CGeneral Authority on Trade Tariffs only in Europe✓
4. DGovernment Aid for Textile Trade✓

The World Trade Organization (WTO) mainly

1. Aprints world currency✓
2. Bsets rules for international trade and settles disputes among members✓
3. Csets each country's income tax✓
4. Druns commercial banks✓

Dumping occurs when a firm sells abroad

1. Aonly at higher prices than at home✓
2. Bonly under free trade agreements✓
3. Conly via WTO auctions✓
4. Dat a price below domestic price or below cost✓

A terms-of-trade gain from an optimal tariff may arise for

1. Aa tiny price-taking economy always✓
2. Bany country under free trade only✓
3. Cautarky only✓
4. Da large country that can affect world prices✓

The infant industry argument for protection claims that

1. Aall industries should be protected forever✓
2. Bfree trade never helps learning✓
3. Cquotas should be permanent✓
4. Dnew industries need temporary shelter to become competitive✓

Protectionism seeks to

1. Ashield domestic industries from foreign competition✓
2. Bmaximize imports always✓
3. Cabolish all tariffs and quotas✓
4. Dban all exports✓

Free trade advocates argue that open trade

1. Aalways destroys all domestic industry with no gains✓
2. Beliminates comparative advantage✓
3. Crequires zero transport costs always✓
4. Draises efficiency through specialization and competition✓

An ad valorem tariff is

1. Aa fixed rupee per unit only✓
2. Ba production subsidy✓
3. Ca duty equal to a percentage of the import's value✓
4. Dan export tax only✓

A specific tariff is

1. Aa fixed duty per unit imported✓
2. Ba percentage of import value✓
3. Ca ban on the product✓
4. Da voluntary export restraint only✓

An import quota is

1. Aa percentage tax on imports only✓
2. Ba subsidy to exporters only✓
3. Ca free-trade agreement✓
4. Da quantitative limit on the volume of imports✓

A tariff is

1. Aa ban on all exports✓
2. Ba tax on imports✓
3. Ca subsidy to importers only✓
4. Da quota on domestic production only✓

According to H-O, a labour-abundant country tends to export

1. Aonly capital-intensive goods✓
2. Blabour-intensive goods✓
3. Conly gold✓
4. Dnothing at all✓

The Heckscher-Ohlin theory explains trade by

1. Adifferences in factor endowments✓
2. Bidentical endowments and tastes only✓
3. Conly transport costs✓
4. Donly currency unions✓

If country A is more efficient in both goods than B, trade can still benefit both if

1. AA refuses all trade✓
2. BB has absolute advantage in both✓
3. Copportunity costs differ so each specializes by comparative advantage✓
4. Dcosts are identical in both countries✓

David Ricardo is associated with

1. Athe Phillips curve✓
2. Bthe quantity theory only✓
3. CHeckscher-Ohlin factor endowments only✓
4. Dthe theory of comparative advantage✓

Comparative advantage (Ricardo) means a country should specialize where it has

1. Alower opportunity cost✓
2. Bhigher opportunity cost in all goods✓
3. Cabsolute disadvantage in everything and refuse trade✓
4. Didentical costs in all goods only✓

Absolute advantage means a country can

1. Aonly import that good✓
2. Bnever export anything✓
3. Chave higher opportunity cost in all goods✓
4. Dproduce a good with fewer resources than another country✓

Pakistan's trade policy debates often weigh

1. Aonly CRR settings✓
2. Bonly Phillips curve slopes✓
3. Cexport promotion and competitiveness against protection of domestic industry✓
4. Donly Okun coefficients✓

Strategic trade policy arguments claim that

1. Afree trade never has exceptions in theory✓
2. Btariffs always maximize world welfare✓
3. CH-O theory is false always✓
4. Dtargeted subsidies may shift profits in oligopolistic industries✓

Anti-dumping duty is imposed to

1. Acounteract injurious dumping and protect domestic industry✓
2. Bpromote dumping✓
3. Cabolish all tariffs✓
4. Dset CRR✓