Review Session Dec. 2nd

Transcription

1 International Trade Short answer/multiple choice Review Session Dec. 2nd 1. Other things equal, which one of the following will cause an increase in the ERP in the automobile industry? a. a decrease in the nominal tariff rate on automobiles. b. an increase in the nominal tariff rates on imported inputs used in making automobiles. c. an increase in the world price of imported inputs used in making automobiles. d. a decrease in the nominal tariff rates on imported inputs used in making automobiles. 2. The presence of an export subsidy a. will in crease the price of the export good in the home market and decrease the well-being of home consumers. b. will decrease the price of the export good in the home market and increase the well-being of home consumers. c. will lead to a net gain in welfare in the home country since producer surplus is enhanced. d. can lead to a higher import price in the importing country in the large-country case. 3. The U.S. tariff on ballpoint pens is 0.8 /pen plus 5.4 percent of the value of the pen. This is an example of compound. 4. If a small country produces 100 units of Product X and consumes 140 units at a price of $2 under free trade, but the imposition of a tariff leads to a situation where domestic price is $2.20, domestic production is 120 units, and domestic consumption is 125 units, calculate the gain in producer surplus in this country because of the tariff : This is area a in notes. Free trade: P = 2 and production = 100 Tariff: P = 2.2 and production = 120 area a = (100*0.2) + (20*0.2)/2 = Which of the following is NOT an example of a nontariff barrier to the free flow of goods and services in accordance with comparative advantage? a. import quotas. b. government procurement provisions that favor home products. c. specific duty of $1.00 per unit on each imported item. d. voluntary export quotas (VERs). 6. An import quota specifies the maximum or minimum amount of a good that can be imported into a country; a step to becoming more protectionist would involve smaller or larger quota. 7. Other things equal, which one of the following will cause an increase in the ERP in the automobile industry? SAME AS 1. a. a decrease in the nominal tariff rate on automobiles. b. an increase in the nominal tariff rates on imported inputs used in making automobiles. c. an increase in the world price of imported inputs used in making automobiles. d. a decrease in the nominal tariff rates on imported inputs used in making automobiles. 8. A small country in international trade is defined as a. a country that can influence its volume of trade. b. a country that can influence its terms of trade.

2 c. a country that cannot influence its volume of trade. d. a country that cannot influence its terms of trade. 9. An ad valorem tariff is better than a specific tariff because a. it is hard for importers to avoid it. b. the value of the tariff on all goods is the same c. it accounts for changes in inflation. c. it can always replace a quota 10. Voluntary exports restraints often convey a. monopoly power to the importing country. b. monopoly power to the exporting country. b. revenues to the importing countries. c. benefits to both countries equally. Problems on chapter 8 1. Assume that a small country switches from an import tariff (original situation) to a production subsidy that continues to offer exactly the same amount of protection to the industry. Use the graph below to calculate the net welfare effect of the change in policy. P D S $11 $10 gain Q Answer: $ 4 (specify sign) 2. Assume that an open economy produces bicycles, but must import the wheels (2 wheels per bicycle). The free trade price of bicycles is $150 and the free trade price of wheels is $25 (per wheel). Suppose that the tariff on bicycles is 10% and the tariff on wheels is 20%. a. Calculate the effective rate of protection. DVA = = 100 DVA w/ tariff = = 105 ERP = (DVA w/tariff DVA)/DVA =.05 or 5% b. Which tariff structure would maximize the effective rate of protection? tariff on bicycle no tariff on imported components 2

3 3. The following graph shows the domestic demand curve and the domestic supply curve for good Z in a small country A. The autarky price for good Z is $80 and the world price is $ 60. This country is an open economy trading at the world price. a. Draw on the graph below the word supply curve Sw for good Z. Show along the y-axis the autarky price Pa and the world price Pw. Label all the curves - Sd, the domestic supply - Sw the world supply - and D, the domestic demand. P Sd Sw D Q 100 b. Now assume that the government in country A levies a $6 tariff on each unit imported. Draw the tariff ridden supply curve, St. What is the effect of the tariff on the world price? Increases decreases stays the same Explain why: small country What is the effect of the tariff on the domestic price? Increases decreases stays the same Explain why: a tariff is a tax 3

4 c. As a result of the tariff, production changed by 20% and consumption by 10%. If originally, consumption was 200 and production was 100, calculate the new level of consumption 180 the new level of production 120 the old level of trade 100 and the new level of trade 60 the world price 60 and the domestic price 66 Problems on Chapter 9 1. A small country can import calculators at a world price of $10 per unit. Domestic supply S = P P = 10 S = 100 D = 300 Domestic demand D = P P = 15 S = 125 D = 250 Marginal social benefit per unit of production 10 a. Calculate the total effect on welfare of a specific tariff of $5 per unit on imported calculators. triangles b and d in notes: (25*5)/2 + (50*5)/2 = b. Calculate the total effect of a production subsidy of $5 per unit. (25*5)/2 = 62.5 c. Why does the production subsidy generate a lesser loss in welfare than the tariff? does not affect the domestic price so there are no demand effect d. What should the optimal production subsidy be? such that social benefit less production deadweight loss is maximized 2. Marginal social benefit problem Assume that a small county has the following supply and demand curves for books: Supply curve: Q = P Demand curve: Q = P This country can buy books for $4 on the world market. In addition the country's book industry generates marginal social benefit (MSB) for the consumers according to the following equation: MSB = Q 4

5 The initial situation is free trade. Now assume that the government wishes to take advantage of the marginal social benefits of producing books domestically. Analyze the welfare impact of the following policy. a. the government sets a $1 specific tariff on books Show on the two graphs below the effect of the policy by shading and identifying all the relevant areas of change in welfare. Name the curves. Note: you do not need to draw to scale. P S b = 5 d = D Q MSB 16 total area = = Q Calculate the net welfare impact of the tariff (include sign). (show your calculations and distinguish between the net welfare losses and the welfare gains) Deadweight loss with the tariff = 10 Social benefit gain = 155 Net gain = = 145 b. The government pays a $1 production subsidy to local producers. Calculate the net welfare impact of the subsidy. (show your calculations and distinguish between the net welfare losses and the welfare gains) Deadweight loss with the production subsidy = 5 Social benefit gain = 155 Net gain = = 150 c. Which approach would you recommend? Production subsidy 5