7&8 - TRADE POLICY INSTRUMENTS Flashcards
WHAT IS A TARIFF?
A tariff is a tax imposed on imported goods, raising their price in the domestic market. It can be a specific amount per unit (specific tariff) or a percentage of the good’s value (ad valorem tariff).
WHAT ARE THE EFFECTS OF A TARIFF ON PRICES?
A tariff creates a wedge between domestic and world prices, making the good more expensive in the importing country. For a small country, the domestic price rises by the full amount of the tariff, whereas a large country may also lower the world price.
WHAT IS CONSUMER SURPLUS, AND HOW DOES A TARIFF AFFECT IT?
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. A tariff reduces consumer surplus by raising the domestic price of the good.
WHAT IS PRODUCER SURPLUS, AND HOW DOES A TARIFF AFFECT IT?
Producer surplus is the difference between what producers receive for a good and the minimum amount they would be willing to accept. A tariff increases producer surplus by raising the price that domestic producers receive.
WHAT IS AN EXPORT SUBSIDY, AND WHAT ARE ITS EFFECTS?
An export subsidy is a payment from the government to domestic producers for exporting goods. It raises the domestic price of the good, lowers the world price, and expands export supply. It results in welfare losses due to consumption and production distortions.
WHAT IS AN IMPORT QUOTA, AND HOW DOES IT WORK?
An import quota is a restriction on the quantity of a good that can be imported. It raises the domestic price like a tariff but generates quota rents for the holders of import licenses instead of government revenue.
WHAT IS A VOLUNTARY EXPORT RESTRAINT (VER)?
A VER is a quota on exports, imposed by the exporting country at the request of the importing country. It is like an import quota, but the rents go to the foreign exporters rather than the importing country’s government.
WHAT ARE THE NET WELFARE EFFECTS OF A TARIFF?
The net welfare effect of a tariff is often a loss due to inefficiencies. Consumer losses exceed the combined gains of producers and the government, resulting in deadweight losses due to consumption and production distortions.
HOW DOES THE SIZE OF A COUNTRY AFFECT THE IMPACT OF A TARIFF?
For a large country, a tariff can lower the world price, leading to a terms-of-trade gain. For a small country, the world price is unaffected, and the domestic price rises by the full tariff amount.
WHAT IS THE DIFFERENCE BETWEEN A TARIFF AND AN IMPORT QUOTA?
Both raise domestic prices, but a tariff generates government revenue, while an import quota benefits the holders of import licenses. Quotas provide no direct revenue to the government but result in higher profits for license holders.
