International Trade Theory and Policy MCQs 2026

Pakistan's trade policy debates often weigh

1. A only CRR settings ✓
2. B only Phillips curve slopes ✓
3. C export promotion and competitiveness against protection of domestic industry ✓
4. D only Okun coefficients ✓

Strategic trade policy arguments claim that

1. A free trade never has exceptions in theory ✓
2. B tariffs always maximize world welfare ✓
3. C H-O theory is false always ✓
4. D targeted subsidies may shift profits in oligopolistic industries ✓

The gravity model of trade predicts larger flows when countries

1. A are always farther apart ✓
2. B are larger economically and closer geographically ✓
3. C have zero GDP ✓
4. D share no borders and no size ✓

Intra-industry trade refers to

1. A two-way trade in similar products within the same industry ✓
2. B only inter-industry Heckscher-Ohlin trade ✓
3. C only raw material exports ✓
4. D only one-way colonial trade ✓

A prohibitive tariff is set so high that

1. A imports become infinite ✓
2. B quotas become unnecessary because trade explodes ✓
3. C imports fall to zero ✓
4. D dumping is required ✓

Tariff revenue accrues to

1. A foreign exporters only ✓
2. B the WTO secretariat ✓
3. C domestic consumers as cash ✓
4. D the government of the importing country ✓

Producer surplus under a tariff on an import-competing good

1. A always falls for domestic producers ✓
2. B is unchanged by definition ✓
3. C equals the tariff revenue only ✓
4. D tends to rise for domestic producers ✓

Consumer surplus from free trade typically

1. A rises as import prices fall and variety expands ✓
2. B always falls when tariffs are cut ✓
3. C is unrelated to prices ✓
4. D equals producer surplus always ✓

Retaliation risk is a drawback of

1. A unconditional free trade only ✓
2. B unilateral tariffs that invite foreign counter-tariffs ✓
3. C MFN liberalization among all ✓
4. D customs unions with no outsiders ✓

The infant industry argument is weaker when

1. A learning effects are strong and temporary help works ✓
2. B protection becomes permanent and firms never become competitive ✓
3. C spillovers justify brief support ✓
4. D monitoring is credible ✓

Preferential trade agreements give

1. A identical MFN treatment to all always ✓
2. B higher tariffs on partners ✓
3. C better market access to partners than to outsiders ✓
4. D no trade among members ✓

A binding tariff ceiling in WTO is

1. A the applied tariff always ✓
2. B a quota volume ✓
3. C the maximum tariff a member has committed not to exceed ✓
4. D an export subsidy rate ✓

Rules of origin determine

1. A the CRR of banks ✓
2. B the Phillips curve ✓
3. C whether a product qualifies as originating in an FTA partner ✓
4. D Okun's law ✓

Safeguard measures under WTO allow

1. A permanent bans without review ✓
2. B unlimited dumping ✓
3. C abolition of MFN forever ✓
4. D temporary protection against import surges under specified conditions ✓

Dumping occurs when a firm sells abroad

1. A only at higher prices than at home ✓
2. B only under free trade agreements ✓
3. C only via WTO auctions ✓
4. D at a price below domestic price or below cost ✓

Autarky means

1. A free trade with all nations ✓
2. B a customs union ✓
3. C a closed economy with no foreign trade ✓
4. D a currency board ✓

The World Trade Organization (WTO) mainly

1. A prints world currency ✓
2. B sets rules for international trade and settles disputes among members ✓
3. C sets each country's income tax ✓
4. D runs commercial banks ✓

GATT stands for

1. A General Agreement on Tariffs and Trade ✓
2. B Global Association of Tax Treaties ✓
3. C General Authority on Trade Tariffs only in Europe ✓
4. D Government Aid for Textile Trade ✓

Most-favoured-nation (MFN) treatment means

1. A concessions to one member are extended to all members ✓
2. B favouring only one friend country forever ✓
3. C banning all third countries ✓
4. D setting identical tariffs to zero always ✓

National treatment under WTO requires

1. A imports always face higher internal taxes ✓
2. B exports be banned ✓
3. C imported goods be treated no less favourably than like domestic goods after entry ✓
4. D quotas on all goods ✓

A voluntary export restraint (VER) is

1. A an import subsidy ✓
2. B an exporting country's agreement to limit exports to a market ✓
3. C a free-trade area ✓
4. D an ad valorem tariff only ✓

A customs union involves

1. A free trade with no common external tariff ✓
2. B free trade among members plus a common external tariff ✓
3. C only a free-trade area without CET ✓
4. D only monetary union ✓

A free trade area (FTA) features

1. A a common external tariff always ✓
2. B a single currency always ✓
3. C free trade among members but independent external tariffs ✓
4. D no rules of origin ✓

Trade creation in a customs union means

1. A switching to higher-cost partner sources ✓
2. B switching from high-cost domestic production to lower-cost partner imports ✓
3. C banning all trade ✓
4. D raising world tariffs ✓

Trade diversion means

1. A switching from a low-cost outside supplier to a higher-cost partner due to preference ✓
2. B always raising world efficiency ✓
3. C identical to free trade ✓
4. D only a tariff cut on all sources ✓

Non-tariff barriers (NTBs) include

1. A only ad valorem tariffs ✓
2. B only specific tariffs ✓
3. C quotas, standards, licensing and other non-tax restrictions ✓
4. D only export subsidies that lower prices abroad ✓

An export subsidy tends to

1. A ban all exports ✓
2. B encourage exports and may lower foreign prices of the good ✓
3. C raise foreign tariffs automatically ✓
4. D eliminate comparative advantage ✓

The balance of trade records

1. A only capital flows ✓
2. B only remittances ✓
3. C exports of goods minus imports of goods ✓
4. D only official reserves ✓

A trade surplus means

1. A imports exceed exports ✓
2. B capital account is always negative ✓
3. C tariffs are zero ✓
4. D exports of goods exceed imports of goods ✓

A trade deficit means

1. A imports of goods exceed exports of goods ✓
2. B exports always exceed imports ✓
3. C budget is in surplus ✓
4. D unemployment is zero ✓

The Stolper-Samuelson theorem links

1. A only money supply to inflation ✓
2. B changes in goods prices to real rewards of factors ✓
3. C only deficits to debt ✓
4. D only quotas to VERs ✓

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

1. A tend to equalize factor prices across countries under strong assumptions ✓
2. B always equalize all goods prices to zero ✓
3. C eliminate all factor mobility needs forever in reality without assumptions ✓
4. D set CRR equal worldwide ✓

Opportunity cost in trade theory is

1. A always measured in money only ✓
2. B what must be given up to produce one more unit of a good ✓
3. C identical to absolute labour hours only ✓
4. D the tariff rate ✓

Anti-dumping duty is imposed to

1. A counteract injurious dumping and protect domestic industry ✓
2. B promote dumping ✓
3. C abolish all tariffs ✓
4. D set CRR ✓

Increasing opportunity costs produce a PPF that is

1. A concave (bowed out) from the origin ✓
2. B a straight line ✓
3. C a circle ✓
4. D upward sloping always ✓

The production possibility frontier with constant costs is

1. A always bowed out ✓
2. B a straight line reflecting constant opportunity cost ✓
3. C a vertical Phillips curve ✓
4. D identical to the budget line of a consumer only ✓

Absolute advantage means a country can

1. A only import that good ✓
2. B never export anything ✓
3. C have higher opportunity cost in all goods ✓
4. D produce a good with fewer resources than another country ✓

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

1. A lower opportunity cost ✓
2. B higher opportunity cost in all goods ✓
3. C absolute disadvantage in everything and refuse trade ✓
4. D identical costs in all goods only ✓

David Ricardo is associated with

1. A the Phillips curve ✓
2. B the quantity theory only ✓
3. C Heckscher-Ohlin factor endowments only ✓
4. D the theory of comparative advantage ✓

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

1. A A refuses all trade ✓
2. B B has absolute advantage in both ✓
3. C opportunity costs differ so each specializes by comparative advantage ✓
4. D costs are identical in both countries ✓

The Heckscher-Ohlin theory explains trade by

1. A differences in factor endowments ✓
2. B identical endowments and tastes only ✓
3. C only transport costs ✓
4. D only currency unions ✓

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

1. A only capital-intensive goods ✓
2. B labour-intensive goods ✓
3. C only gold ✓
4. D nothing at all ✓

A tariff is

1. A a ban on all exports ✓
2. B a tax on imports ✓
3. C a subsidy to importers only ✓
4. D a quota on domestic production only ✓

An import quota is

1. A a percentage tax on imports only ✓
2. B a subsidy to exporters only ✓
3. C a free-trade agreement ✓
4. D a quantitative limit on the volume of imports ✓

A specific tariff is

1. A a fixed duty per unit imported ✓
2. B a percentage of import value ✓
3. C a ban on the product ✓
4. D a voluntary export restraint only ✓

An ad valorem tariff is

1. A a fixed rupee per unit only ✓
2. B a production subsidy ✓
3. C a duty equal to a percentage of the import's value ✓
4. D an export tax only ✓

Free trade advocates argue that open trade

1. A always destroys all domestic industry with no gains ✓
2. B eliminates comparative advantage ✓
3. C requires zero transport costs always ✓
4. D raises efficiency through specialization and competition ✓

Protectionism seeks to

1. A shield domestic industries from foreign competition ✓
2. B maximize imports always ✓
3. C abolish all tariffs and quotas ✓
4. D ban all exports ✓

The infant industry argument for protection claims that

1. A all industries should be protected forever ✓
2. B free trade never helps learning ✓
3. C quotas should be permanent ✓
4. D new industries need temporary shelter to become competitive ✓

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

1. A a tiny price-taking economy always ✓
2. B any country under free trade only ✓
3. C autarky only ✓
4. D a large country that can affect world prices ✓