Topics in International Economics
Text: Robert J. Carbaugh, International Economics, 14th Edition (South-Western).
Test 2 study questions (final)
Part I: Terms DEFINE BASED ON READINGS AND NOTE
(Response should be at least one paragraph).
Part II: Graphical expositions SHOW ALL WORK AND EXPLAINATIONS
Assume perfect competition and use partial equilibrium analysis unless otherwise specified. Note, the possible dynamic gains from some of the commercial policies below are not being considered.
Graph and explain the impacts of an import tariff on a small importing country.
When a tariff has been imposed on goods imported by a small country it has no effect on the international price. The price of the imported goods will rise by the amount of the tariff. This will make the domestic producers to increase the price of their goods and increase the profits that they gain from the sale of their products. Even though they increase the price of the product, it does not reach that of the imported products. This means that there will be a movement along the domestic supply curve due to the change in price charged and the quantity supplied.
An increase in the price level will lead to a decrease in the quantity demanded and an increase in the quantity produced.
An increase in price from P0-P1, will lead to a decrease in the equilibrium quantity from Q0-Q1.
When a tariff is imposed, the government gains from revenue from the tax, while the producers gain from the increase in price. The only group that looses is the consumers; this is the net national loss.
2. Graph and explain the impact of an import tariff on a large importing country and discuss the conditions under which an optimum tariff rate can result in a net gain for the large importing country.
Large importing countries have an impact on the international prices of commodities. So when a country imposes a tariff, the price of the goods will increase but not with the same amount as that of the tariff. This is because it will be reflected on the global prices of the goods. There will be an improved terms of trade because the tariff will cause the international price to decrease. However the improved terms of trade, which is meant to create a trade surplus, is subject to; at exactly which point in the production and sale process the tariff is imposed.
The imposition of a tariff by a large importing country will lead to loss of efficiency costs attributed to the international price disturbance due to a decline in the demand for the goods.
as noted above there will a slight decrease in the quantity demanded due to a slight price increase because the international price will be decreased at the global level.
3. Analyze and explain the impact of an import tariffs in the two cases when the demand curve and supply curve have zero elasticity (for large country case).
When the supply and demand curve has zero elasticity, then it means that they are perfectly inelastic. This means a change in the price level will have no effect on the quantity demanded by the consumers. In this case the consumer surplus is not affected by the increase in price.
For a small importing country, there will not be a decline in the quantity demanded and the two winning teams will have a bigger reward; the government will have increased revenue while the domestic producers will experience increased profits. The consumers will still acquire the utility they desire from the consumption of the goods.
In a large importing country, there will be no changes in the international price, because the tariff will not alter the quantity demanded. In this case the loss of efficiency cost will not be incurred and the domestic government will experience an increase in the revenue collected.
PS
D0 D1
P1
P0
4. Analyze and explain the impact of an import tariff using general equilibrium analysis.
The imposition of an import tariff will increase the equilibrium price and consequently decrease the equilibrium quantity. This is because the tariff will be passed on to the consumer through the price; an increase in price will make consumers demand less of the product. In this case, a tariff can be used to regulate the demand and consumption of a product by a government. The higher the tariff, the lower the demand for the product and the reverse is also true.
5. Analyze and explain the impact of an export tariff (assume constant cost technology and exporter with market power).
When an export tariff is placed on a product, the price of the product becomes high to the consumer who is basically considered to be out of the country. This will lead to an increase in the international price of the good especially if the export tariff is placed on a large exporting country. An increase in the price of the commodity will lead to a decline in the demand for it internationally.
In a free market scenario where international organizations and cartels do not control the demand and supply of goods, the low demand of the commodity will lead to a decrease in the price by either reducing the tariff or completely doing away with it. The international market will be returned back to its initial equilibrium point.
6. Compare the impacts of a tariff to a quota under the condition of an increase in domestic demand.
When there is an increase in domestic demand of a good then it means that more of a specific good is being imported in order to cater for the demand. When a tariff is imposed, the price of the good will increase and the consumers will have a reduced purchasing power as it is the same as having a part of their income reduced. This will lead to a decrease in the demand as the good will no longer be affordable to the public.
When a quota is put in place, the quantity of a good that is imported is reduces, the shortage will lead to an increase in the price of the product. This will increase the marginal utility of the good and more people will be willing to purchase the good, however there it will low on supply.
7. Compare the impacts of a quota under the condition of an increase in domestic demand for a monopoly.
A monopoly is a firm that has competitive advantage that allows it to thrive as the only producer for a market. When there is an increase in domestic demand, then it means the monopoly can increase the price and supply minimum quantity in order to increase sales and revenue. However when it is easier to import a close substitute of the product, people will opt for the import. If a quota is placed, then the monopoly is given back its control power over the market. This is a move that will reduce consumer welfare as they stand the chance of being exploited by increases in domestic prices. This is the reason why monopolies are usually closely monitored and controlled by the government. This is by placing price roofs.
8. Compare the impacts of an import tariff to an import quota under the condition of an increase in domestic supply.
An increase in supply ensures that the price of the imported good is kept low, when a tariff is imposed, the good becomes expensive to import hence the price will be increased. An increase in the price of the good will deter consumers from purchasing it.
When a quota is imposed, the price will increase as a result of a shortage in supply of the good. This will means that the welfare of the consumers will not be properly catered for. The imposition of a tariff will decrease supply as a reaction to the decrease in demand of the good. The quota simply limits the quantity supplied and allows the market forces to come into play afterwards.
9. Explain how an import quota is a more reliable form of protection subject to varying elasticities of supply and demand.
Import quotas places a limit that cannot be surpassed by any importer, the market forces will come into play later on. However the imposition of taxes in order to reduce demand or supply is completely dependent on the market forces which can only work freely if they are not interfered by any other force including cartels and backstreet trade. This is not reliable as the expected consumer reaction may not be achieved as consumers are known to be subjective and not objective.
10. Analyze the impact of an export quota (voluntary export restraint) with and without trade diversion.
An export quota means that the maximum quantity that can be exported is set to a specific limit. The effect is that there will be a decrease in imports of the commodity in other countries. If the country is a large exporting country, there will be an increase in the international price of the good as it is limited in supply. Domestically there will increase in the quantity supplied and this will lead to a decrease in price and an increase in consumption. The quantity produced will remain the same.
11. Analyze the impact of a tariff rate quota (two-tier tariff).
Tariff rate quota is based on the understanding that imports are subject to a lower rate of tax to be charged depending on a predetermined limited quantity. An increase in the quantity imported will lead to an increase in the tariff charged. The impact is that large imports will cost more and are to be discouraged. The domestic government is likely to earn more revenue from tariff rate quota because the higher the quantity of import the higher the tariff charged.
12. Analyze the impact of imposing domestic content requirements.
Domestic content requirement limits the variety of a particular good because there are certain contents that are insisted upon and others are disregarded completely. It increases domestic demand for good as such a policy is based on domestic research and analysis. There is usually a decrease in export of the commodity to other countries and an increase in import of close but differentiated commodities as consumers seek to satisfy their need for consumption.
13. Analyze the impact of a producer subsidy.
Producer subsidies means that the government gets to cater for some payments in order to decrease the variable cost experienced by the producer. By doing so, the producer subsidies will decrease the equilibrium price charged by the producer and increase the quantity produced in the market. It also allows for easier expansion of the producers and this increases resource utilization and output.
14. Analyze the impact of an export subsidy (small=- country case).
An export subsidy for a small exporting country will increase the exports for the goods. This will domestically decrease the quantity available and increase lead to a positive balance of trade. However there will have no impact on the international price as the quantity exported will be negligible at the global level.
15. Analyze the impact of an export subsidy (large country case).
An export subsidy will increase the quantity of goods exported; this will lead to a decrease in the international price as a large exporting country will have will have an impact on the international business. A decrease in the international price will discourage other exporters from selling their gods internationally and eventually there will be a decline in the international quantity available for trade. Domestically there will a decrease in the quantity available and domestically the exported goods may become expensive.
16. Show how persistent dumping occurs when domestic and foreign demand curve elasiticities vary.
Dumping is basically when one country sells its goods in another country at a cheaper price. It is sometimes meant to decrease international competition and at times meant to decrease surplus in the supplying country. When the domestic demand is inelastic as compared to the foreign demand, the suppliers will decrease the price in the foreign market in order to increase the sales. However when the domestic market ]has a more elastic demand curve dumping will not be imposed as changes in the price will lead to changes in responsive quantities.
Part III: Narratives LONG RESPONSES BASED ON NOTES AND READINGS
1. Discuss the various forms of dumping.
Sporadic dumping – it is the sale of a product abroad at a lower price than domestically in order to do away with the surplus of the same good without having the need to reduce the price domestically.
Persistent dumping- it is a sale in products as result of decrease in international prices due to a type of price discrimination employed
Predatory dumping- it is characterized by a competition with other foreign market in an emerging market. This leads to the sale of the goods at a lower price and it finally drives out all competition after which the prices are hiked again.
Explain the nature of anti-dumping measures and their effectiveness.
Some of the anti dumping measures include protectionism policies that ensure that import of goods from a country regardless of their prices is restricted. This aids in supporting the domestic industries to flourish. Anti dumping measures are effective in two ways; ensuring that domestic industries grow and by restricting free trade between countries. These restrictions limit the variety of goods that consumers have to choose from and limits the opportunities of the country, most of the time the restrictions are based on political gain rather than economical gain. This is the reason as to why they are put in place in developed countries like the U.S but free trade is encouraged in emerging markets mostly in developing countries.
Cite and explain any two NTBs other than the ones analyzed in Part II.
NTBs are non tariff barriers to trade; they are theoretically supposed to restrict the importation of goods without the use of a tariff. They include the following;
Import bans- this occurs when a country completely refuses a product to be imported to the country for various reasons including health and safety which are the most common.
Increase in the trade documents for importation for instance the use of certificate of origin, certificate of authenticity and increase in license fees. This makes the importing process to be long, tedious and expensive in the end it is not effective.
4. Discuss the mainstream case against protectionism.
Protectionism is imposed when a country restricts the importation of locally produced goods in order to nurture and protect the domestic companies. This is because imported goods are usually cheaper and they do not offer fair competition to locally produced goods that are relatively expensive. Protectionism in this case encompasses the implementation of several economic policies that will restrict the quantity demanded of the imported goods. Protectionism will include the use of import quotas, tariffs and even the tariff rate quota.
Protectionism aids in creating domestic employment because it fosters domestic production of goods, at the same time it allows for a country to control the value of the domestic currency. Devaluation at times can lead to massive financial losses. As much as protectionism aids in protecting especially emerging markets that are always a target of international trade, it has its drawbacks. This is because free trade between two countries regardless of whether one is more efficient in production makes both countries to be better off; pareto efficiency is established.
5. Explore the political economy of protectionism.
When it comes to trade liberalism and international trade, the decision is usually a political as much as it is an economic issue. Decisions on whether to restrict trade within a country is domestically determined based on the political stand of the country. A good example is the agricultural industry is a subjected to extreme level of protectionism domestically and globally. This is based on the following premise;
The industry is a labor intensive industry and offers a lot of employment opportunity and contributes much to the income of the country. If not properly handled massive income is to be lost.
The industry is the main source of food and decrease in supply of food can result in social, political and economic problems that if left unchecked cannot be reversed.
The textile and manufacture industry is also protected because it aids in times of recession and avoids a country actually going into a depression. Most of the owners of the means of production in the two industries have political influence and hence any policy that works against their labor, income and sales is highly discouraged.
6. What is the case against the Uruguay Round from a LIC/LMIC perspective and explain the resistance against the Doha Development Round.
The Uruguay round was initially supposed to aid in decreasing the structural inefficiencies experienced and trade spill over experienced by the imposition of certain economic policies in developing countries. The Uruguay Round aided in the agricultural industry as prior to the round there was an international decline in the price of agricultural products and demand was steadily increasing as supply decreased. The resistance against the Doha Development Round was because some of the countries felt that there was over emphasis on some industries at the expense of others and most of the developing countries were the victims.
LIC and LMIC, least industrialized countries are supposed to gain from the round, but due to influence from the developed nations, these countries are simply exploited while the developed countries benefit. The Doha development round is supposed to lower the trade restrictions but the resistance is because most of the developed countries fear losses while developing countries fear exploitation.
7. Discuss the various agreements agreed to under the Uruguay Round and how these impinged the policy space available to L/MIC.
The various agreements involve;
General agreements about the tariff and quotas to be imposed on imports
Increase in agricultural products trade between countries at a subsidized rate.
There is a clearly provided process of converting restrictions on tariffs imposed.
Clearly set rules on export and import subsidies, sanitary conditions and phytosanitary measures.
Part IV: Numerical (I will give you other practice problems)
a. Suppose that WVA (world value added) is 300 – 200 = 100. Calculate the EPR (effective protection rate) for the output given a 20 percent NPR (nominal protection rate) on the output (2).
Value added in production process= 300-200=100
A 20% protection
100%=300
120%= (120× 300)/ 100 = 360
The price can change up to 360 instead of 300
360-200=160
ERP= (160 -60)/60=1.67 × 100= 167%
b. Recalculate the ERP assuming WVA is 300 – 250 = 50 and the tariff on output is 20 percent. (2)
Value added in protection process = 300 -250= 50
A 20% protection
100%=300
120%= (120× 300)/ 100 = 360
360-250=110
ERP= (110-50)/50 = 1.2 × 100= 120%
c. Recalculate the ERP assuming in a) the tariff on input is 20 percent and there is no tariff on the output. (2)
100%= 300
80%= (80 ×300)/100 =240
Value added= 300 -240= 60
ERP= 60/60 = 100%
