The instruments of trade policy

14 important questions on The instruments of trade policy

What is the purpose of tariffs?

1) Provide revenue
2) Protect particular domestic sectors

Describe the import demand curve

It is downward sloping because as price increases, the quantity of imports demand declines.

Describe how the export supply curve is derived

It is upward sloping because the supply of goods available for export rises as the price rises.
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Where is the world equilibrium price?

Where import demand of Home equals export supply of Foreign

Describe the effects of a tariff

A tariff raises the price in Home (country that imposed the tariff) and lowers the price in Foreign. The volume traded declines. Home import demand equals Foreign export supply when P_T - P*_T = t.

Describe the effects of a tariff in a small country

When a country is small, a tariff it imposes cannot lower the foreign export price of the good it imports. As a result, the price of the import rises and the quantity of imports demand falls.

What are problems with trying to calculate the rate of protection?

1. If the small country assumption is not a good approximation, part of the effect of a tariff will be to lower foreign export prices rather than to raise domestic prices.
2. Tariffs may have very different effects on different stages of production of a good.

What are the costs and benefits of a tariff for the importing country?

Gain to domestic producers
Consumer loss
Government revenue
  Triangles (b & d) represent the efficiency loss that arises because a tariff distorts incentives to consume and produce.
Rectangle (e) represents the terms of trade gain that arises because a tariff lowers foreign export prices.

What are the effects of an export subsidy?

The price in the exporting country rises, but because the price in the importing country falls, the price increase is less than the subsidy.

What are the effects of an import quota?

It always raises the domestic price of the imported good.

What is the difference between a quota and a tariff?

With a quota, the government receives no revenue. The sum of money is collected by whoever receives the import licenses.

Definition of the voluntary export restraint

A quota on trade imposed from the exporting country's side instead of the importer's.

What is the difference between a VER and a tariff by the same amount?

The revenue under a tariff becomes rents earned by foreigners under the VER.

Definition of a local content requirement

A regulation that requires some specified fraction of a final good to be produced domestically.

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