T6: Policy Instruments of International Trade

Question 1

What happens to welfare when we go from autarky to free trade?

Answer 1

gain in welfare from new area uncovered

Question 2

How do we find the home import curve demand and supply curve?

Answer 2

We put the home market supply and demand curve onto one graph and track it across onto the import market graph

Import demand curve= we have to show the quantity of imports (difference between D and S in the home market) demanded at different prices in the home market and reflect this on the import market graph

Small Country Supply demand curve = is constant with price in a small country (because no impact on world supply)

Large Country Supply demand curve = is upward sloping because the large country is a price maker, meaning if its home price is below the world price, meaning it can export goods to the world at a higher price

Question 3

What is the welfare change from a tariff on a small country?

Answer 3

ALWAYS A WELFARE LOSS

deadweight arising from those producers who are now producing the good inefficiently, when they could be imported more efficiently overseas OR from consumers who will nolonger import because of the increased price

Question 4

What is the difference between a tariff on a small country and a large country?

Answer 4

Small countries have no impact on the world

Question 5

What are the relevant prices on the world market to a large country?

Answer 5

Pw Initial world price
P* New world price = price for home exporters
Pw+t = price paid by home consumers
Pw-P* = price paid by foreign exporters (must accept selling goods at lower price)