Part 2 - Tariffs barriers to trade

Question 1

Tariffs are

Answer 1

the simplest trade policy –on average quite low nowadays (between developed countries), but their effects important to understand other trade policies.

Question 2

Is the non-tariffs barriers more important or less important nowadays?

Answer 2

Non-tariff barriers to international trade have become more important over the last two decades.

Question 3

examples of non-tariff barriers to trade

Answer 3

Non-tariff barriers to trade include inter alia import quotas (limitations on the quantity of imports), export restraints (limitations on the quantity of exports), technical regulations and product standards.

Question 4

Partial equilibrium analysis of trade policy means …

Answer 4

focusing on a single market (here: specific industry directly affected by a trade policy instrument).

Question 5

Tariff definition:

Answer 5

Tariff is a tax levied when a good is imported (when crossing the board and there is a tariff, the good becomes more expensive)

Question 6

A specific tariff is charged:

give an example

Answer 6

as a fixed charge for each unit of imported goods.

For example, $3 per barrel of oil.

Question 7

An ad valorem tariff is charged:

give an example

Answer 7

as a fraction of the value of imported goods.

For example, 25% tariff on the value of imported trucks.

Question 8

An import demand curve (MD) is downward sloping or upward sloping?

Answer 8

downward sloping and defined as the difference between the quantity that Home consumers demand (D) minus the quantity that Home producers supply (S), at each price.

Question 9

Import demand curve (MD) formula

Answer 9

MD = D (home consumers demand) – S (home producers supply)

Question 10

derive home’s import demand curve

Answer 10

PAPER 1 - GRAPH

Question 11

An export supply curve (XS) is downward sloping or upward sloping? define it.

Answer 11

An export supply curve (XS) is upward sloping and defined as the difference between the quantity that Foreign producers supply (S) minus the quantity that Foreign consumers demand (D), at each price.

Question 12

Export supply curve (XS) formula

Answer 12

XS* = S* (quantity that Foreign producers supply) – D* (quantity that Foreign consumers demand)

ou seja depende no quanto os produtores no exterior vão produzir e o quanto os consumidores vão demandar. Se a demanda for maior que a produção a exportação aumentará.

Question 13

World equilibrium:

Answer 13

at intersection between Home import demand (MD) and Foreign export supply (XS):
1. Home demand –Home supply = Foreign supply –Foreign demand OR
2. Home demand + Foreign demand = Home supply + Foreign supply, THAT MEANS
World demand = World supply.

Question 14

derive foreign export supply curve

Answer 14

PAPER 2 - GRAPH

Question 15

World equilibrium graph

Answer 15

PAPER 3 - GRAPH

Question 16

How to express: “A tariff drives a wedge between the prices in the two markets”

Answer 16

PT–t = P*T

Question 17

A tariff makes the price fall in the Home market and rise in the Foreign market

TRUE OR FALSE?

Answer 17

FALSE

TRUS is:
A tariff makes the price rise in the Home market and fall in the Foreign market.

Question 18

A tariff makes the price fall in the Home market and rise in the Foreign market

TRUE OR FALSE?

Answer 18

FALSE

TRUE is:
A tariff makes the price rise in the Home market and fall in the Foreign market.

Question 19

Symmetric countries =

Answer 19

countries of equal size.

Question 20

Main findings (so far) for domestic market in case of symmetric countries, one sector and perfectly competitive product markets:

Answer 20

• Introduction of tariff leads to increase in domestic price for good.
• Import flows for this good decrease.

Question 21

Explain the relation of prices in home market vs foreign market with the introduction of a tariff

Answer 21

A tariff raises the price in Home while lowering the price in Foreign and the volume traded declines.

Question 22

A Tariff in a Small Country

Answer 22

The increase in the price in Home can be less than the amount of the tariff (most of the time is)

• Part of the effect of the tariff causes the Foreign export price to decline. But this effect is sometimes very small.
• When a country (Home) is “small” (relative to Foreign) it has no effect on the foreign (world) price&raquo_space; price in home market rises to PT = Pw+ t

Question 23

explain the domestic market in case of asymmetric countries and the domestic economy (Home) being smaller than the foreign one (Foreign):

Answer 23

• Introduction of tariff leads to increase in domestic price for good (and this increase is larger than in the case of symmetric countries).
• Import flows for this good decrease (and this fall in imports is larger than in the case of symmetric countries).

Question 24

Consumer surplus – when price increases, the quantity demanded…

Answer 24

decreases as well as the consumer surplus.

Question 25

Producer surplus

Answer 25

measures the amount that producers gain from sales by computing the difference in the price received from the minimum price at which they would be willing to sell.

Question 26

Producer surplus - When price increases, the quantity supplied...

Answer 26

increases as well as the producer surplus.

Question 27

Producer surplus - When price increases, the quantity supplied...

Answer 27

increases as well as the producer surplus.

Question 28

What is the welfare-effect of a tariff? (formula)

Answer 28

Consumer loss –producer gain –government revenue

Question 29

A tariff raises the price in the importing country:

Answer 29

* Consumer surplus decreases. * Producer surplus increases. * Government collects tariff revenue equal to tariff rate times quantity of imports with tariff: t⋅QT= (PT–PT* ) (D2–S2)

Question 30

Change in welfare due to the tariff is

Answer 30

b+ d –e.

Question 31

Efficiency loss

Answer 31

arises since tariffs distort incentives to consume and produce (triangles b and d).

Question 32

Terms of trade gain

Answer 32

arise since tariffs (may) lower foreign export prices (rectangle e).

Question 33

Only for “large” or "small" countries, terms of trade gain might exceed efficiency loss (e > b + d), implying a welfare-gain due to the tariff?

Answer 33

Only for “large”

Question 34

the economic effect of the introduction of a tariff for the importing country (one sector and perfectly competitive product markets) - Domestic market of comparable size to foreign market (symmetric countries):

Answer 34

− Domestic price of good increases and import volume of the goods decreases. − Consumers are worse off and producers and the government are better off. − Welfare-effect might be positive or negative.

Question 35

Main findings on the economic effect of the introduction of a tariff for the importing country (one sector and perfectly competitive product markets) - Domestic market substantially smaller than foreign market (asymmetric countries):

Answer 35

− Domestic price of good increases substantially and import volume of the goods decreases substantially. − Consumers are worse off and producers and the government are better off. − Welfare-effect is negative.

Question 36

Free Trade and Tariffs in the Presence of Monopoly, which means one producer only producing a domestic good. We assume that the country is small on the world market, what happens to the price of the imported good?

Answer 36

so the price of the import good is unaffected by its trade policy.   Furthermore, we assume that imports are available in unlimited quantities at the world price (PW).

Question 37

Free trade limits monopoly power, true or false?

Answer 37

TRUE

Question 38

With free trade, the monopolist’s (usual) behavior is not possible, but the monopolist produces to the point where marginal costs are equal to...

Answer 38

the world price (PW).

Question 39

What is the volume of domestic production and imports for a monopolist under free trade and a perfectly competitive domestic industry?

Answer 39

We observe the same import volume and domestic production as would be the case in a perfectly competitive domestic industry.

Question 40

Tariffs in the Presence of Monopoly

Answer 40

A tariff allows the monopolist to raise its price from PW to PW+ t, but the price is still limited by the threat of imports (because otherwise the monopolist would charge PM). Hence, the monopolist sells Qt at the price Pw+ t, leading to an increase in domestic production and a fall in the import volume to Dt – Qt.

Question 41

How does the introduction of a tariff in a small country with a domestic monopolist affects the price charged?

Answer 41

* A tariff raises the maximum prices the domestic monopolist can charge to PW+ t, increasing the domestic price and output and decreasing imports. * One important exception: When a tariff is so high that imports are completely eliminated (a prohibitive tariff), any further tariff increases have no effect in a perfectly competitive industry, but do allow a monopolist to raise its price closer to the profit-maximizing price PM.

Question 42

prohibitive tariff:

Answer 42

When a tariff is so high that imports are completely eliminated