The Instruments of Trade policy

Question 1

What are trade or commercial policies generally associated with?

Answer 1

Trade or commercial policies are generally associated with restrictions and regulations that deal with the nation’s trade or commerce.

Question 2

What is the term used to describe the restrictions imposed on the free flow of international trade?

Answer 2

The term used to describe the restrictions imposed on the free flow of international trade is trade restrictions.

Question 3

Why are trade restrictions rationalized?

Answer 3

Trade restrictions are rationalized in terms of national welfare, although they are often advocated by special interest groups that stand to benefit from such restrictions.

Question 4

What is the goal of free trade?

Answer 4

The goal of free trade is to maximize world output and benefit all nations.

Question 5

Are there any nations that impose no restrictions on international trade?

Answer 5

Practically all nations impose some restrictions on the free flow of international trade, regardless of the benefits of free trade.

Question 6

What are the two types of Trade restrictions?

Answer 6

1. Tarrifs
2. NonTariff Trade Barriers

Question 7

What is the most important type of trade restriction historically?

Answer 7

The most important type of trade restriction historically has been the tariff.

Question 8

How would you define a tariff?

Answer 8

A tariff is a tax or duty imposed on a traded commodity when it crosses a national boundary.

Question 9

What is an import tariff?

Answer 9

An import tariff is a tax or duty imposed on imported goods when they enter a country.

Question 10

What is an export tariff?

Answer 10

An export tariff is a tax or duty imposed on goods that are exported out of a country.

Question 11

Which type of tariff is more important: import tariffs or export tariffs?

Answer 11

Import tariffs are generally more important and commonly used than export tariffs.

Question 12

Are export tariffs allowed in the United States?

Answer 12

Export tariffs are prohibited by the U.S. Constitution, meaning the United States does not impose export tariffs.

Question 13

In what situations do developing countries often apply export tariffs

Answer 13

Developing countries may apply export tariffs on their traditional exports, such as Ghana on cocoa and Brazil on coffee, to seek better prices and generate revenue.

Question 14

Why do developing nations rely heavily on export tariffs?

Answer 14

Developing nations often rely on export tariffs as they are relatively easy to collect and can be a source of revenue for the government.

Question 15

What is an ad valorem tariff?

Answer 15

An ad valorem tariff is a type of tariff that is a fixed percentage of the value of the traded commodity.

Question 16

How does an ad valorem tariff work?

Answer 16

An ad valorem tariff is calculated based on a percentage of the value of the imported commodity.

For example, a 10 percent ad valorem tariff on bicycles means that customs officials collect 10 percent of the value of each imported bicycle as a tariff payment.

Question 17

What is a specific tariff?

Answer 17

A specific tariff is a type of tariff that is a fixed amount per physical unit of the traded commodity.

Question 18

How does a specific tariff work?

Answer 18

A specific tariff is a fixed sum collected on each imported unit of the commodity, regardless of its price

For example, a specific tariff of $10 on imported bicycles means that customs officials collect a fixed amount of $10 on each imported bicycle, regardless of its price.

Question 19

What is the difference between an ad valorem tariff and a specific tariff?

Answer 19

An ad valorem tariff is based on a percentage of the value of the traded commodity, while a specific tariff is a fixed amount per unit of the commodity.

Question 20

Can you provide an example of how ad valorem and specific tariffs are applied to imported bicycles?

Answer 20

If there is a 10 percent ad valorem tariff on bicycles, customs officials would collect $10 for each $100 imported bicycle and $20 for each $200 imported bicycle. In contrast, a specific tariff of $10 on bicycles means that customs officials would collect $10 for each imported bicycle, regardless of its price.

Question 21

What is a compound duty?

Answer 21

A compound duty is a type of tariff that combines both an ad valorem tariff and a specific tariff.

Question 22

How does a compound duty work?

Answer 22

A compound duty consists of two components: an ad valorem tariff, which is a percentage of the value of the traded commodity, and a specific tariff, which is a fixed amount per unit of the commodity.

For example, a compound duty of 5 percent ad valorem and a specific duty of $10 on imported bicycles means that customs officials collect $15 for each $100 bicycle and $20 for each $200 imported bicycle.

Question 23

What is the difference between a compound duty and other types of tariffs?

Answer 23

A compound duty combines both an ad valorem tariff and a specific tariff, whereas other types of tariffs are based solely on either the value of the commodity or a fixed amount per unit.

Question 24

Can you provide an example of how a compound duty is applied to imported bicycles?

Answer 24

If there is a compound duty of 5 percent ad valorem and a specific duty of $10 on imported bicycles, customs officials would collect $15 for each $100 bicycle and $20 for each $200 imported bicycle, taking into account both the percentage and the fixed amount components of the tariff.

Question 25

Are agricultural commodities subject to high or low trade barriers?

Answer 25

Agricultural commodities are still subject to relatively high trade barriers.

Question 26

How do tariff rates in developing nations compare to developed nations?

Answer 26

Tariff rates in developing nations are generally higher than in developed nations.

Question 27

What is the average tariff rate on industrial products in developed nations?

Answer 27

The average tariff rate on industrial products in developed nations is 5 percent or less.

Question 28

What has happened to tariffs since the end of World War II?

Answer 28

Tariffs have been sharply reduced since the end of World War II.

Question 29

When is the partial equilibrium analysis of a tariff most appropriate?

Answer 29

The partial equilibrium analysis of a tariff is most appropriate when a small nation imposes a tariff on imports competing with the output of a small domestic industry.

Question 30

What is the impact of the tariff on world prices in the partial equilibrium analysis?

Answer 30

The tariff does not affect world prices in the partial equilibrium analysis because the nation is small.

Question 31

What is the impact of the tariff on the rest of the economy in the partial equilibrium analysis?

Answer 31

The tariff does not affect the rest of the economy in the partial equilibrium analysis because the industry is small.

Question 32

What is partial equilibrium analysis of a tariff?

Answer 32

It is a method of analyzing the effects of a tariff on a single market or industry, assuming that other markets or industries are unaffected.

Question 33

How does free trade affect the consumption and production of commodity X in Nation 2?

Answer 33

With free trade at the world price of Px = $1, Nation 2 will consume 70X units, of which 10X units are produced domestically and 60X units are imported.

Question 34

How does a 100 percent ad valorem tariff affect the consumption and production of commodity X in Nation 2?

Answer 34

With a 100 percent ad valorem tariff, Px in Nation 2 will rise to $2, and Nation 2 will consume 50X units, of which 20X units are produced domestically and 30X units are imported.

Question 35

How can you represent the free trade foreign supply curve and the tariff-inclusive foreign supply curve of commodity X to Nation 2 on a graph?

Answer 35

The free trade foreign supply curve is a horizontal line at Px = $1, and the tariff-inclusive foreign supply curve is a horizontal line at Px = $2. The graph also shows the domestic demand and supply curves of commodity X in Nation 2, which intersect at Px = $3 and Qx = 30. The graph illustrates how the tariff reduces the quantity demanded and increases the quantity supplied of commodity X in Nation 2, creating a deadweight loss.

Question 36

What is the effect of a tariff on the domestic consumption and production of commodity X in Nation 2?

Answer 36

A tariff reduces the domestic consumption and increases the domestic production of commodity X in Nation 2, as the price rises from $1 to $2.

Question 37

What is the effect of a tariff on the imports of commodity X in Nation 2?

Answer 37

A tariff reduces the imports of commodity X in Nation 2, as the quantity imported falls from 60X to 30X

Question 38

What is the meaning of SF + T in the graph of the market for commodity X in Nation 2?

Answer 38

SF + T is the new foreign supply curve of commodity X to Nation 2 after the imposition of a tariff. It is equal to the original foreign supply curve SF plus the amount of the tariff T.

Question 39

What is the consumption effect of a tariff?

Answer 39

The consumption effect of a tariff is the reduction in domestic consumption due to the higher price

Question 40

What is the production effect of a tariff?

Answer 40

The production effect of a tariff is the expansion of domestic production due to the higher price.

Question 41

What is the trade effect of a tariff?

Answer 41

The trade effect of a tariff is the decline in imports due to the higher price and the lower quantity demanded.

Question 42

What is the revenue effect of a tariff?

Answer 42

The revenue effect of a tariff is the amount of money collected by the government from the tariff on each imported unit.

Question 43

What happens to the price of commodity X when Nation 2 imposes a 100 percent import tariff?

Answer 43

The price of commodity X increases from PX = $1 to PX = $2.

Question 44

What happens to consumption when Nation 2 imposes a 100 percent import tariff?

Answer 44

Consumption falls from AB = 70X to GH = 50X.

Question 45

What happens to production when Nation 2 imposes a 100 percent import tariff?

Answer 45

Production increases from AC = 10X to GJ = 20X.

Question 46

What happens to imports when Nation 2 imposes a 100 percent import tariff?

Answer 46

Imports decline from CB = 60X to JH = 30X.

Question 47

How much does the government of Nation 2 collect in import duties when a 100 percent import tariff is imposed?

Answer 47

The government of Nation 2 collects MJHN = $30 in import duties.

Question 48

What happens to consumer surplus when Nation 2 imposes a 100 percent import tariff?

Answer 48

Consumer surplus declines by AGHB = $60 = a+b+c+d.

Question 49

What happens to producer surplus when Nation 2 imposes a 100 percent import tariff?

Answer 49

Producer surplus increases by AGJC = $15 = a.

Question 50

What is the reduction in consumer surplus when Nation 2 imposes a 100 percent import tariff?

Answer 50

The reduction in consumer surplus is AGHB = a + b + c + d = $60.

Question 51

What is the amount collected by the government as tariff revenue when a 100 percent import tariff is imposed?

Answer 51

The government collects MJHN = c = $30 as tariff revenue.

Question 52

How is the increased producer surplus or rent distributed to domestic producers when Nation 2 imposes a 100 percent import tariff?

Answer 52

The increased producer surplus or rent, AGJC = a = $15, is redistributed to domestic producers of commodity X.

Question 53

What does the sum of the areas of triangles CJM and BHN represent in the context of a 100 percent import tariff?

Answer 53

The sum of the areas of triangles CJM = b = $5 and BHN = d = $10 represents the protection cost, or deadweight loss, to the economy.

Question 54

What does the production component of the protection cost or deadweight loss represent in the context of a tariff?

Answer 54

The production component (CJM = b = $5) of the protection cost or deadweight loss arises because the tariff leads to the transfer of domestic resources from the more efficient production of exportable commodity Y to the less efficient production of importable commodity X in Nation 2.

Question 55

What does the consumption component of the protection cost or deadweight loss represent in the context of a tariff?

Answer 55

The consumption component (BHN = d = $10) of the protection cost or deadweight loss arises because the tariff artificially increases the price of commodity X (PX) relative to commodity Y (PY) and distorts the pattern of consumption in Nation 2.

Question 56

What is one of the resulting effects of a tariff?

Answer 56

A tariff redistributes income from domestic consumers (who pay a higher price for the commodity) to domestic producers (who receive the higher price).

Question 57

How does a tariff impact the distribution of income between factors of production?

Answer 57

A tariff leads to a redistribution of income from the nation’s abundant factor (which produces exportable goods) to the nation’s scarce factor (which produces importable goods).

Question 58

What are the inefficiencies that arise from the redistribution of income caused by a tariff?

Answer 58

The inefficiencies, or protection costs, associated with a tariff are known as deadweight loss. These inefficiencies occur due to the distortion of resource allocation and the resulting reduction in overall economic efficiency.

Question 59

What is one of the effects of a tariff on income distribution?

Answer 59

A tariff redistributes income from domestic consumers to domestic producers.

Question 60

How can the cost per domestic job saved due to a tariff be calculated?

Answer 60

The cost per domestic job saved can be calculated by dividing the loss of consumer surplus by the number of jobs “saved” in the industry as a result of the tariff.

Question 61

What is the balance-of-payments effect of a tariff?

Answer 61

> A tariff has a balance-of-payments effect. As the tariff increases, it leads to a decrease in imports, thereby reducing trade deficits in the balance of payments.

Question 62

What is the rate of effective protection?

Answer 62

The rate of effective protection refers to the measure of protection provided to domestic industries, taking into account not only the nominal tariff rate but also the effects on intermediate inputs and factors of production.

Question 63

How is the nominal tariff calculated?

Answer 63

The nominal tariff is calculated based on the price of the final commodity.

Question 64

Why is the nominal tariff rate important to consumers?

Answer 64

The nominal tariff rate indicates by how much the price of the final commodity increases as a result of the tariff, which directly affects consumers’ purchasing power and costs.

Question 65

Why is the effective tariff rate important to producers?

Answer 65

The effective tariff rate indicates the level of protection provided to domestic processing of the import-competing commodity, which directly affects producers’ competitiveness and profitability.

Question 66

How is the rate of effective protection calculated?

Answer 66

The rate of effective protection is calculated based on the domestic value added or processing that occurs in the nation

Question 67

What is domestic value added?

Answer 67

Domestic value added refers to the value contributed domestically in the production of a commodity. It is calculated by subtracting the cost of imported inputs from the price of the final commodity.

Question 68

Does the rate of effective protection typically exceed or match the nominal tariff rate?

Answer 68

The rate of effective protection usually exceeds the nominal tariff rate.

Question 69

Why does a nation sometimes impose lower tariff rates on imported inputs compared to the final commodity?

Answer 69

This is done to encourage domestic processing and employment. By providing favorable conditions for importing inputs, the nation aims to stimulate domestic production and create more jobs.

Question 70

Can you provide an example of how a nation may use differential tariff rates to promote domestic production?

Answer 70

An example is when a nation imports raw materials duty-free or imposes lower tariff rates on inputs (e.g., importing wool duty-free) to incentivize domestic production of the final commodity (e.g., cloth) and boost domestic employment

Question 71

How do consumers perceive the impact of the $10 tariff on the price of suits?

Answer 71

Consumers perceive the $10 tariff as a 10 percent increase in the price of the suits they purchase.

Question 72

How do producers view the $10 tariff in relation to the value of domestic processing?

Answer 72

Producers view the $10 tariff as 50 percent of the $20 portion of the suit produced domestically, representing a much greater degree of protection than the 10 percent nominal tariff rate indicates.

Question 73

What rate of tariff protection is important to producers in stimulating domestic production?

Answer 73

The effective rate of tariff protection is important to producers in stimulating domestic production.

Question 74

When does the effective rate of protection exceed the nominal tariff rate?

Answer 74

The effective rate of protection exceeds the nominal tariff rate when the imported input is admitted duty-free or a lower tariff rate is imposed on the imported input compared to the final commodity produced with the imported input.