chapter 5.1 Flashcards
is levied as a fixed charge for
each unit of imported goods.
For example, $1 per kg of cheese
specific tariff
is levied as a fraction of
the value of imported goods.
For example, 25% tariff on the value of imported
cars.
ad valorem tariff
the difference
between the quantity that foreign producers
supply minus the quantity that foreign
consumers demand, at each price.
export supply curve
is the difference
between the quantity that domestic
consumers demand minus the quantity that
domestic producers supply, at each price.
import demand curve
In equilibrium,
import demand = ?
domestic demand – domestic supply = ?
world demand = ?
export supply
foreign supply – foreign demand
world supply
acts as an added cost of transportation,
making shippers unwilling to ship goods unless the
price difference between the domestic and foreign
markets exceeds the tariff.
tariff
If shippers are unwilling to ship wheat, there is WHAT for wheat in the domestic market and WHAT in the foreign market.
excess
demand
excess
supply
If shippers are unwilling to ship wheat, there is excess
demand for wheat in the domestic market and excess
supply in the foreign market.
what happens to the price of wheat?
The price of wheat will tend to rise in the domestic market.
The price of wheat will tend to fall in the foreign market.
a tariff will make the price of a good _
in the domestic market and will make the price
of a good _ in the foreign market, until the
price difference equals the tariff.
PT – P*T = t
PT = P*T + t
rise
fall
THIS raises the price in Home while lowering the price in Foreign
tariff
The price of the good in foreign (world) markets
should _ if there is a significant drop in the
quantity demanded of the good caused by the
domestic tariff.
fall
Because the price in domestic markets rises
(to PT), domestic producers should _ and domestic consumers should
_.
The quantity of imports falls from QW to QT
supply more
demand less
Because the price in foreign markets falls (to
P*T), foreign producers should _ and
foreign consumers should _.
The quantity of exports falls from QW to QT
supply less
demand more
The quantity of domestic import demand
equals the quantity of foreign export supply
when
PT – P*T = t
the increase in the price of the
good in the domestic country is less than the
amount of the _
tariff.
t or f
Part of the tariff is reflected in a decline of the
foreign country’s export price, and thus is not
passed on to domestic consumers. But this effect is often not very significant.
t
When a country is “small”, it has no effect on
the foreign (world) price of a good, why?
because its
demand for the good is an insignificant part of
world demand.
measures how
much protection a tariff or other trade policy provides
domestic producers.
effective rate of protection
It represents the change in value that an industry adds to the
production process when trade policy changes.
effective rate of protection
The change in value that an industry provides depends on
the change in prices when trade policies change.
Effective rates of protection
often differ from tariff rates
because tariffs affect sectors other than the protected sector,
a fact which affects the prices and value added for the
protected sector.
Effective rates of protection
raises the price of a good in the
importing country, so we expect it to hurt
consumers and benefit producers there.
tariff
How to measure these costs and benefits of tariff?
We use the concepts of consumer surplus and
producer surplus.
t or f
the government gains tariff
revenue from a tariff.
truelalu
measures the amount
that a consumer gains from a purchase by the
difference in the price he pays from the price
he would have been willing to pay.
Consumer surplus
The price he would have been willing to pay
is determined by WHAT
a demand (willingness to
buy) curve.
When the price increases, the quantity demanded
decreases as well as the WHAT
consumer surplus.
measures the amount that
a producer gains from a sale by the difference
in the price he receives from the price he
would have been willing to sell at.
Producer surplus
The price he would have been willing to sell at is
determined by a WHAT
supply (willingness to sell) curve.
When price increases, the quantity supplied
increases as well as WHAT
the producer surplus.
tariff raises the price of a good in the
importing country, making its consumer
surplus ___ and making its producer surplus ___
decrease (making its consumers
worse off)
increase (making its producers better off).
For a “large” country that can affect foreign (world)
prices, the welfare effect of a tariff is WHAT
ambiguous.
T OR F
The terms of trade increases because the tariff lowers foreign
export (domestic import) prices.
T
The tariff distorts production and consumption decisions:
producers produce too much and consumers consume too
little compared to the market outcome.
efficiency loss.
the
tariff rate times the quantity of imports.
Government revenue from the tariff
T OR F
If the terms of trade gain exceeds the
efficiency loss, then national welfare will
decrease under a tariff, at the expense of
foreign countries.
f
increase
“If the terms of trade gain exceeds the
efficiency loss, then national welfare will
increase under a tariff, at the expense of
foreign countries.”
t or f
An export subsidy can also be specific or ad valorem
t
is a payment per unit exported.
A specific subsidy
is a payment as a proportion of the
value exported.
An ad valorem subsidy
raises the price of a good in the
exporting country, making its consumer surplus
decrease (making its consumers worse off) and
making its producer surplus increase (making its
producers better off).
export subsidy
t or f
through export subsidy, government revenue will increase.
false; decrease
t or f
An export subsidy raises the price of a good in
the exporting country, while lowering it in
foreign countries.
t
In contrast to a tariff, an export subsidy
worsens the___ by lowering the
price of domestic products in world markets.
terms of trade
t or f
An export subsidy unambiguously produces a
positve effect on national welfare.
f; negative
a restriction on the quantity
of a good that may be imported.
import quota
This restriction is usually enforced by issuing
licenses to domestic firms that import, or in
some cases to foreign governments of
exporting countries.
import quota
t or f
A binding import quota will push up the price
of the import because the quantity demanded
will exceed the quantity supplied by domestic
producers and from imports.
t
t or f
When a quota instead of a tariff is used to
restrict imports, the government receives
revenue.
false - no revenue
“When a quota instead of a tariff is used to
restrict imports, the government receives no
revenue.”
the revenue from selling imports at high
prices goes to quota license holders: ?
either
domestic firms or foreign governments.
extra revenues are called
quota rents.
works like an
import quota, except that the quota is imposed
by the exporting country rather than the
importing country.
voluntary export restraint
these restraints are usually
requested by the importing country.
voluntary export restraint
The profits or rents from this policy are earned
by foreign governments or foreign producers.
voluntary export restraint
is a regulation
that requires a specified fraction of a final
good to be produced domestically.
local content requirement
It may be specified in value terms, by
requiring that some minimum share of the
value of a good represent domestic valued
added, or in physical units.
local content requirement
From the viewpoint of domestic producers of
inputs, a _____ provides
protection in the same way that an import
quota would.
local content requirement
t or f
From the viewpoint of firms that must buy
domestic inputs, however, the LOCAL CONTENT requirement place a strict limit on imports, but
allows firms to import more if they also use
more domestic parts.
f - does not
From the viewpoint of firms that must buy
domestic inputs, however, the requirement
“does not” place a strict limit on imports, but
allows firms to import more if they also use
more domestic parts.
provides neither
government revenue (as a tariff would) nor
quota rents.
Local Content Requirement
t or f
Local Content Requirement
Instead the difference between the prices of
domestic goods and imports is averaged into
the price of the final good and is passed on to
consumers.
t
t or f
The tariff-rate quota is a one-tiered tariff
f - two-tiered
t or f
A specified number of goods (up to the
quota limit) may be imported at one (lower)
tariff rate, while imports in excess of the
quota face a higher tariff rate
t
Other Trade Policies
Export credit subsidies
Government procurement
Bureaucratic regulations
A subsidized loan to exporters
Export credit subsidies
Government agencies are obligated to purchase from
domestic suppliers, even when they charge higher prices
(or have inferior quality) compared to foreign suppliers.
Government procurement
Safety, health, quality or customs regulations can act as
a form of protection and trade restriction.
Bureaucratic regulations
The practice of selling a product at a
lower price in export markets than at
home (or exporting at prices below
production cost)
Dumping
clear unwanted
inventories or cope with excess capacity
Sporadic dumping
to undermine foreign
competitors
Predatory dumping
reaping greater profits
by engaging in price discrimination
Persistent dumping
Types of non-tariff barriers
Dumping
Government procurement policies
Social regulations (health,
environmental and safety rules can also
restrict trade)
Sea transport and freight restrictions
