Trade policy instruments

Question 1

What is a tariff?

Answer 1

Tax levied on an imported good

Question 2

Difference between Fixed Tariff and Ad Valorem Tariff?

Answer 2

Fixed Tariff: fixed for each unit of imported goods

Ad Valorem: Fixed fraction on value of imported goods

Question 3

Whats the effect of a tariff?

Answer 3

Raises the price of a good in the importing country and lowers it in the exporting country

Question 4

Who are the winners and loser of a tariff?

Answer 4

Consumers lose in the importing country and wins in the exporting country

Producers win in the importing country and lose in exporting country.

Question 5

How to calculate consumer surplus?

Answer 5

Substract P x Q from area under demand curve up to Q divided by 2

Question 6

How to calculate producer surplus?

Answer 6

P x Q minus the area above the supply curve and below the price divided by 2

Question 7

How to calculate government revenue?

Answer 7

Q(T) * (P(T) - P(T*))
or
S2-D2 (P(T) - P(T))

Question 8

Net effect on a tariff on welfare?

Answer 8

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

Question 9

Whats an export subsidy?

Answer 9

a payment to a firm or individual that ship a good abroad

Question 10

What’s the effect of an export subsidy?

Answer 10

Consumption + production distortion losses

Worsens Terms of Trade bc it lowers price of export in foreign market.

Question 11

What is an import quota and whats the effect?

Answer 11

a physical restriction on the quantity of some good that may be imported.

ALWAYS raises the domestic price of the imported good.

Question 12

Difference between a quota and a tariff?

Answer 12

With quotas, gov. received no revenue - money goes to whoever have import license.

Question 13

Whats a voluntary export restraint (VER)

Answer 13

quota imposed from the exporting country’s side instead of the importer’s.

Question 14

Whats a local content requirement?

Answer 14

Regulation that requires some specific fraction of a final good to be produced domestically.

Question 15

Whats a prohibitive tariff?

Answer 15

Tariff so high that imports are completely eliminated.

Question 16

What should government impose, if they are concerned about domestic monopoly power?

Answer 16

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.

Question 17

If a large country imposes an import quota, it is worse for its social welfare compared to an import tariff.

Answer 17

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.

Question 18

How to derive a foreign export supply curve?

Answer 18

XS = S* - D*

Question 19

Which country will end up importing in free trade?

Answer 19

The country with the higher price in autarky

Question 20

How do you find MD?

Answer 20

Find quantity imported: QD - QS = QW

Find inverse => isolate P

Question 21

How to graphically show a tax?

Answer 21

shifting down MD by tariff or

shifting up the XS curve by the tariff

Question 22

What is quota rents and how to calculate?

Answer 22

Profit os those who have the licence.

Quota rents = Import quota x times price differences (PQxPQ^W).