Trade policy instruments Flashcards
What is a tariff?
Tax levied on an imported good
Difference between Fixed Tariff and Ad Valorem Tariff?
Fixed Tariff: fixed for each unit of imported goods
Ad Valorem: Fixed fraction on value of imported goods
Whats the effect of a tariff?
Raises the price of a good in the importing country and lowers it in the exporting country
Who are the winners and loser of a tariff?
Consumers lose in the importing country and wins in the exporting country
Producers win in the importing country and lose in exporting country.
How to calculate consumer surplus?
Substract P x Q from area under demand curve up to Q divided by 2
How to calculate producer surplus?
P x Q minus the area above the supply curve and below the price divided by 2
How to calculate government revenue?
Q(T) * (P(T) - P(T*))
or
S2-D2 (P(T) - P(T))
Net effect on a tariff on welfare?
Consumer loss - producer gain - government revenue
(a+b+c+d)-a-(c+e) = b + d - e
b + d = efficiency loss to the nation
e = terms of trade gain due to lowering of foreign export prices
Whats an export subsidy?
a payment to a firm or individual that ship a good abroad
What’s the effect of an export subsidy?
Consumption + production distortion losses
Worsens Terms of Trade bc it lowers price of export in foreign market.
What is an import quota and whats the effect?
a physical restriction on the quantity of some good that may be imported.
ALWAYS raises the domestic price of the imported good.
Difference between a quota and a tariff?
With quotas, gov. received no revenue - money goes to whoever have import license.
Whats a voluntary export restraint (VER)
quota imposed from the exporting country’s side instead of the importer’s.
Whats a local content requirement?
Regulation that requires some specific fraction of a final good to be produced domestically.
Whats a prohibitive tariff?
Tariff so high that imports are completely eliminated.
What should government impose, if they are concerned about domestic monopoly power?
Tariffs!
With tariffs, monopolistic companies know that if they raise their prices too high, they will still be undercut by imports
- import quota provides absolute protection, since imports never exceeds import level.
If a large country imposes an import quota, it is worse for its social welfare compared to an import tariff.
It depends on who gets the quota rents. If the quota rents go to domestic producers, the quota has the same effect as an import tariff. However, if the quota rents go to foreigners – for example, to foreign firms – domestic social welfare falls by more than in an import tariff.
How to derive a foreign export supply curve?
XS = S* - D*
Which country will end up importing in free trade?
The country with the higher price in autarky
How do you find MD?
Find quantity imported: QD - QS = QW
Find inverse => isolate P
How to graphically show a tax?
shifting down MD by tariff or
shifting up the XS curve by the tariff
What is quota rents and how to calculate?
Profit os those who have the licence.
Quota rents = Import quota x times price differences (PQxPQ^W).