Chapter 14 International Trade

Question 1

What will happen when the production subsidies granted by the government are too large?

Answer 1

• The producer may change from an importer to an exporter
• Pro subsidy too large?

Question 2

Using an international trade diagram, state the effects of granting a production subsidy to the market.

Hint: market price, quantity demanded and supplied, welfare loss

Answer 2

Production subsidy
Production subsidy with welfare loss

Question 3

Define quota rent.

Answer 3

The price difference between the price that importers buy the goods (the world price Pw) and the price that importers sell the goods domestically (the higher domestic price Pd)

Question 4

Define export subsidy.

Answer 4

Payments per unit of exports granted by the government to domestic firms

Question 5

Define tariffs.

Tips: 1st mark is definition, 2nd mark is its purposes

Answer 5

A tax that is imposed on imported goods to protect domestic industries from foreign competition and to raise revenue for the government.

Question 6

Evaluate the effects of export subsidies on all stakeholders.

Answer 6

Positive
Domestic producers and employment
* Quantity supplied increases -> sold at a higher price (Pw+q) and more quantity (Q2 -> Q4)
* Employment ↑: selling at a larger quantity -> requires more resources to produce more goods

Negative
Foreign producers (exporting countries)
* Losing a share of global market due to increase in subsidized exports –> exporting revenue ↓

Taxpayers
* A portion of the tax paid goes to production subsidies, instead of somewhere else with benefits to taxpayers, e.g. spending on merit goods, public welfare etc.

Domestic consumers
* Price increases from Pw to Pw+t
* Quantity they consume decreases from Q1 to Q3 (⸪ exports ↑)

Government
* Spending tax revenue on subsidy (P_w+s-P_w )×(Q_4-Q_3 ) (unit subsidy × quantity)

Allocative efficiency
* QT ↓ & production shifts away from more efficient global producers and towards more inefficient domestic producers
* Government expenses ↑
* Welfare loss

Question 7

Define production subsidy.

Answer 7

Payments per unit of output granted by the government to domestic firms that compete with imports

Question 8

Evaluate the effects of import quotas on all stakeholders.

Answer 8

Positive
Domestic producers and employment
* Quantity supplied increases -> sold at a higher price (Pw+q) and more quantity (Q1 -> Q3)
* Employment ↑: selling at a larger quantity -> requires more resources to produce more goods

Negative
Domestic consumers
* Price increases from Pw to Pw+t
* Variety ↓: less imports
* Quality ↓: domestic producers now have less competition with importers
* Consumer surplus decreases

Allocative efficiency
* QT ↓ & production shifts away from more efficient global producers and towards more inefficient domestic producers
* Welfare loss (quota revenue is counted towards importing country’s deadweight loss)

Neutral
Government
* No revenue, no loss either as the import quota licenses are usually given to exporting countries

Uncertain
Foreign producers
* Quantity of imports in the importing country ↓ –> exporting revenue ↓
* Quota revenue earned by holding the licenses ↑ (buy at Pw, sell at Pw+q)

Question 9

Using an international trade diagram, state the effects of setting up a tariff on the market and government revenue.

Hint: market price, quantity demanded and supplied, welfare loss

Answer 9

Tariff
Tariff with welfare loss

Question 10

Using an international trade diagram, state the effects of setting up an import quota on the market.

Hint: market price, quantity demanded and supplied, welfare loss

Answer 10

Import quota
Import quota with welfare loss

Question 11

Evaluate the effects of production subsidies on all stakeholders.

Answer 11

Positive
Domestic producers and employment
* Quantity supplied increases -> sold at a higher price (Pw+q) and more quantity (Q1 -> Q3)
* Employment ↑: selling at a larger quantity -> requires more resources to produce more goods

Negative
Foreign producers
* Quantity of imports in the importing country ↓ –> exporting revenue ↓

Government
* Spending tax revenue on subsidy (P_w+s-P_w) ×Q_3 (unit subsidy × quantity)

Taxpayers
* A portion of the tax paid goes to production subsidies, instead of somewhere else with benefits to taxpayers, e.g. spending on merit goods, public welfare etc.

Allocative efficiency
* QT ↓ & production shifts away from more efficient global producers and towards more inefficient domestic producers
* Government expenses ↑
* Welfare loss

Neutral
Domestic consumers
* No change in price and Q¬d (maybe a little bit -ve due to decrease in import choices)

Question 12

Evaluate the effects of tariffs on all stakeholders.

Answer 12

Positive:
Domestic producers and employment
* P and Qs increase –> more revenue
- selling at a larger quantity –> require more resources (labour) –> employment increases

Government
- Receive tariff revenue -> can be used on social welfare

Negative:
domestic consumers
- price increases, variety & quality of goods decrease (due to less imports, so domestic producers hav less competitions with foreign producers)
- consumer surplus decreases

foreign producers
- less imports from the importing country -> less revenue

allocative efficiency
- QT ↓ & production shifts away from more efficient global producers and towards more inefficient domestic producers
- Welfare loss

Question 13

Using an international trade diagram, state the effects of granting an export subsidy to the market.

Hint: market price, quantity demanded and supplied, welfare loss

Answer 13

Export subsidy
Export subsidy with welfare loss

Question 14

Define import quotas.

Answer 14

A limit to the quantity of a good that can be imported over a particular time period.