Chapter 9 - The Instruments of Trade Policy Flashcards
What is tariffication?
Analysis of trade policy focuses on import tariffs. They have become a reference point, because they are the most common form of trade policy. Multilateral organisations such as the World Bank and World Trade Organisation often insist that members convert all trade policies to tariffs.
What is a specific tariff? Give an example.
Tariffs that are levied as fixed charge for each unit of goods imported. Example: A specific tariff of £10 on each imported bicycle where an international price of £100 means that customs officials collect the fixed sum of £10.
What is an ad valorem tariff? Give an example.
Tariffs that are levied as a fraction of the value of imported goods. Example: A 20% ad valorem tariff on bicycles generates a £20 payment on each £100 imported bicycle.
Graphically show and explain the effect of a tariff on a small country.
1) The efficient loss arises because a tariff distorts incentives to consume and produce. 2) Producers and consumers act as if imports were more expensive than they actually are. 3) The triangle on the left is the production distortion loss and the triangle on the right is the consumption distortion loss.
How would you determine the World Trade Equilibrium? (4)
To determine the world price Pw, and the quantity traded, Qw, define two curves: 1) Home import demand curve Shows the maximum quantity of imports the home country would like to consume at each price of the imported good. 2) That is, the excess of what Home consumers demand over what home producers supply: MD = D(P) - S(P) 3) Foreign export supply curve Shows the maximum quantity of exports foreign would like to provide the rest of the world at each price. 4) That is the excess of what foreign producers supply over what foreign consumers demand: XS = S*(P*) - D*(P*)
Draw the World Trade Equilibrium. What are the features of this equilibrium? (5)
1) In world trade equilibrium, Pw adjusts to ‘clear’ the world market. 2) That is, Pw adjusts until the amount of wheat that Foreign Exports is equal to the amount of wheat that Home imports. 3) A ‘demand shock’ for wheat can be captured by a shift in Home’s MD curve. 4) A ‘supply shock’ captured by a shift in Foreign’s XS curve. 5) These will have implications for Pw.
Show graphically and explain the effects of a tariff on a large country. (5)
1) In the absence of a tariff, the world price of wheat (Pw) would be equalised in both countries. 2) With the tariff in place, the price of wheat rises to P(T) at home and falls to P*(T) = P(T)-t in Foreign. 3) In Home: producers supply more and consumers demand less due to the higher price, so that fewer imports are demanded. 4) In Foreign: producers supply less and consumers demand more due to the lower price, so that fewer exports are supplied. 5) Thus, the volume of wheat traded declines due to the imposition of the tariff.
What is the terms of trade externality? (3)
1) The increase in the domestic Home price is less than the tariff, because part of the tariff is reflected in a decline in Foreign’s export price. 2) The world price of a country’s exports is called its ‘terms of trade’. 3) Since Home’s tariff pushes down the price of Foreign’s export, Home’s tariff is said to have a negative ‘terms-of-trade’ externality on Foreign.
What are the costs and benefits of a tariff? (5)
1) A tariff raises the price of a good in the importing country and lowers it in the exporting country. As a result of these price changes: 2) Consumers lose in the importing country and gain in the exporting country. 3) Producers gain in the importing country and lose in the exporting country. 4) Government imposing the tariff gains revenue. 5) Since the world price of Foreign’s export good falls, Home country gains ‘as a whole’ and Foreign looses ‘as a whole’.
What national welfare arguments can be made against free trade? (4)
1) Activist trade policies can sometimes increase the welfare of the nation as a whole. Two theoretical arguments agains the policy of free trade: 2) The terms of trade argument for a tariff. 3) Domestic market failure: The ‘infant-industry’ argument is the most theoretically compelling, but open to capture in practice. 4) Meanwhile, there is economic evidence for the terms of trade argument of protection.
Suppose that in the absence of trade, the price of wheat at Home exceeds the corresponding price in Foreign. What would happen if trade is opened between the two countries? (2) What is the meaning of arbitraged?
1) If trade is opened between the two countries, Foreign exports wheat to Home. 2) The export of wheat raises its price in Foreign and lowers its price in Home until the initial difference in prices has been arbitraged away. Arbitraged means that the two prices converge, this can take place regionally and internationally.
Derive Home’s Import Demand Curve
Derive Foreign’s Export Supply Curve
What is an import quota?
What is an export restraint?
An import quota is a limit on the quantity of a good that a country can import.
An export restrainit is a limit on the quantity of a good that a country can export.
Graphically show the effect of a tariff on consumer surplus.
Graphically show the effect of a tariff on producer surplus.
Graphically show the costs and benefits of a tariff for the importing country.
Graphically show the net welfare effects of a tariff.
Graphically show the effects of an Export Subsidy
