Chapter 6: Impacts of International Trade Policy

Question 1

Why do we distinguish small and large countries to assess international trade instruments?

Answer 1

• Size of country influences effect it has on world market: Small countries aren’t able to influence world market prices, but large countries are due to share and influence of country’s trade
• If country is large or small depends on industry and product

Question 2

Effects of Tariffs on prices and sales quantities

Answer 2

Tariff raises the price in home while lowering the price in foreign country, volume traded declines

Question 3

Effects of small country that restricts imports with tariff

Answer 3

• World price not affected, domestic price increases
• Higher domestic prices lead to decreasing demand and increasing production
• Country’s trade balance= Ex-Im improves due to lower imports
• Terms of trade don’t change as world market price unaffected
• Efficiency loss: Production and consumption distortion

Question 4

Effects of small country that restricts imports with quota

Answer 4

• Domestic price increases
• Domestic demand decreases and production increases
• Trade balance improves due to lower imports
• Efficiency loss du to production and consumption distortion
• Domestic firms (or governments) earn quota rents

Question 5

Impacts of decreasing world market price on small country that has introduced a tariff

Answer 5

• domestic price will drop as well
• foreign exporters can improve sales
• price competition links between global and domestic markets remain

Question 6

Impacts of decreasing world market price on small country that has introduced a quota

Answer 6

• exporters can’t sell more on domestic markets because number of imports is strictly fixed by number of licenses
• quota rent will increase
• quotas destroy price competition between foreign and domestic markets

Question 7

Why do foreign countries accept VER?

Answer 7

• doesn’t violate WTO agreements
• fear of Red Tape
• Sell for higher domestic price