Trade policy instruments

Question 1

What are 3 different forms of restrictions to trade?

Answer 1

1. Tariffs
2. Quotas
3. Non-tariff barriers

Question 2

What is partial equilibrium analysis?

Answer 2

It is an analysis where we only analyse one good, ignore income effects in other markets and welfare is strictly defined by consumption/production of that good.

Question 3

What is specific and what is ad valorem tariff?

Answer 3

Specific tariff is charged per unit of good and ad valorem tariff is charged as a percentage of the value of goods.

Question 3

What is specific and what is ad valorem tariff?

Answer 3

Specific tariff is charged per unit of good and ad valorem tariff is charged as a percentage of the value of goods.

Question 4

What are the assumptions?

Answer 4

1. 2 countries 1 good
2. Perfect competition
3. There are gains from trade because P*

Question 5

What is an import demand curve?

Answer 5

At any price P, x axis denotes the Q supplied and Q demanded and the difference between them.

Question 6

What are the effects of tariffs?

Answer 6

They create a difference between the domestic price and world price.

Question 7

What happens when Home imposes tariffs as a big country?

Answer 7

1. World market price decreases
2. Decreased imports by Home and exports by Foreign
3. Since Pw is lower, the domestic price will not fully be equal to Pw+T, it will be a little less.

Question 8

What is a consumption distortion?

Answer 8

Without tariff the domestic consumers would be consuming more, since the price would be lower.

Question 9

What is a production distortion?

Answer 9

Without a tariff domestic producers would be producing less.

Question 10

Are there terms of trade gains from tariffs?

Answer 10

Only if a country is big and can affect the world price.

Question 11

What are other trade policy instruments?

Answer 11

Export subsidies, import quotas and voluntary export restraint.

Question 12

What happens when export subsidy is introduced?

Answer 12

World market price is lower and domestic price goes up.

Question 13

Why are the net social losses from subsidies?

Answer 13

1. Production and consumption distortions.

2. Worse terms of trade.

Question 14

What is an import quota?

Answer 14

It is a limited amount of good that is allowed to be imported, raises prices just like a tariff. Whoever gets quota licenses gets quota rents.

Question 15

What is a voluntary export restraint?

Answer 15

It is when foreign countries shrink their exports due to the threat of their trading partner.