Exam 15: Arguments for Interventionist Trade Policies

Suppose that a relatively capital-abundant country is exporting the capital-intensive good and importing the labor-intensive good, but that the "specific-factors" model of Chapter 8 applies rather than the Heckscher-Ohlin model. Assess the effect on the return to labor of the imposition of a tariff on the labor-intensive good.

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Question 1

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In the specific-factors model, factors of production are not perfectly mobile between industries, unlike in the Heckscher-Ohlin model. This means that the imposition of a tariff on the labor-intensive good will have different effects on the return to labor compared to the Heckscher-Ohlin model.

In this specific-factors model, the relatively capital-abundant country is already exporting the capital-intensive good and importing the labor-intensive good. The imposition of a tariff on the labor-intensive good will likely lead to a decrease in the import of this good, as it becomes more expensive for the country to import. This could potentially lead to a decrease in the demand for labor in the industries producing the labor-intensive good, as they are now facing higher costs due to the tariff.

On the other hand, the industries producing the capital-intensive good may benefit from the tariff, as it could lead to an increase in demand for their product domestically. This could potentially lead to an increase in the return to capital in these industries.

Overall, the imposition of a tariff on the labor-intensive good in a specific-factors model could lead to a decrease in the return to labor in the industries producing this good, while potentially increasing the return to capital in the industries producing the capital-intensive good. However, the specific effects would depend on the specific factors of production and their mobility between industries in the specific-factors model.

In the "payoff matrix" in Question #22 above, Firm H a "dominant strategy" and Firm F a "dominant strategy."

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Question 2

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Given the following "payoff matrix" for two interdependent firms in duopoly, where the figure in the lower left of each box shows Firm H's profit and the figure in the upper right of each box shows Firm F's profit: In this situation Firm F will __________.

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Question 3

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In the situation in the diagram in Question #14 above, the amount of former foreign monopoly profit that has been transferred as revenue to the home country's government because of the imposition of the tariff is __________.

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Question 4

It is noted in the text that the infant industry argument is more frequently used in developing countries than in developed countries. Why might this be the case? Does this necessarily have to be the case?

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Question 5

In the following diagram, offer curve 0A₀ of country A is the free-trade offer curve, and the other four offer curves represent A's offer curves under four different tariff rates. Of these four other curves, only one of them can possibly be an offer curve which is associated with A's "optimum tariff." Which one?

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Question 6

In world of two "large" countries, if one country imposes a tariff, the welfare of the Tariff-imposing country will definitely improve (assuming no retaliation) if, the tariff-Imposing country

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Question 7

If, in a tariff game between two governments, both countries are on their tariff reaction functions, then each country maximizing its welfare given the tariff of the other country. In this situation, there incentive for each country to reduce its tariff unilaterally.

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Question 8

In the "reaction function" diagram of Question #18 above, if the firms are at point A and if both firms are seeking to maximize profit, the foreign firm wants to its sales in this market, and the home firm its sales in this market.

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Question 9

A tariff placed upon a product in order to offset a foreign export subsidy is called

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Question 10

(a) Assume that there are only two firms in an industry - a home firm and a foreign firm - and that the firms are competing in third-country markets. (You can have them competing in each other's domestic markets if you wish.) Explain a "reaction function diagram" for the two firms, including the definition of a "reaction function" in this context and a brief discussion of why the reaction functions slope as they do (although you do not need to derive the functions formally). Then use a reaction function diagram (possibly along with other diagrams) to explain how a "strategic trade policy" action by the home firm's government can potentially enhance the home firm's market share in third-country markets. (b) Briefly explain, in a two-country setting, how tariff reaction functions of the two governments can be constructed. Then, in a broader context, briefly indicate why this type of "game" can lead to a need for multilateral trade negotiations (such as those sponsored by GATT/WTO).

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Question 11

The Krugman economies-of-scale "strategic trade policy" model stresses that protection given to a home firm will, other things equal, the marginal cost of producing each level of home output and will the marginal cost of producing each level of foreign output.

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Question 12

The macroeconomic interpretation of a trade deficit for a country utilizes which one of the following expressions (where Y = national income, C = consumption, I = investment, G = government spending on goods and services, X = exports, and M = imports)?

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Question 13

Would it be possible for the infant industry argument to be applicable to a perfectly-competitive industry? Why or why not?

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Question 14

The "optimum tariff rate" for a country is that rate which, assuming no retaliation,

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Question 15

In the "reaction function" diagram of Question #18 above, if economies of scale exist for both firms, then protection instituted in the home market to keep out the foreign firm's product will, other things equal, cause HH to shift to the __________.

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Question 16

In a two-country world, the terms-of-trade impact of a tariff will definitely improve the welfare of the tariff-imposing country (assuming no retaliation) if the tariff-imposing country

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Question 17

Why do you suppose that "reaction functions" are not used in analyzing the market structure of perfect competition (or even monopolistic competition)? If you were to draw reaction functions for any home firm and any foreign firm engaged in perfect competition, what would the functions look like?

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Question 18

In the situation in the diagram in Question #14 above, the loss of consumer surplus for home consumers because of the imposition of the tariff is __________.

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Question 19

Starting from the "payoff matrix" situation in Question #22 above, suppose that a subsidy of $40 is now given to Firm H. Other things equal, with this subsidy, Firm H will __________.

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Question 20

Showing 1 - 20 of 37

Exam 15: Arguments for Interventionist Trade Policies

In the "payoff matrix" in Question #22 above, Firm H __________ a "dominant strategy" and Firm F __________ a "dominant strategy."

Given the following "payoff matrix" for two interdependent firms in duopoly, where the figure in the lower left of each box shows Firm H's profit and the figure in the upper right of each box shows Firm F's profit: In this situation Firm F will __________.

In the situation in the diagram in Question #14 above, the amount of former foreign monopoly profit that has been transferred as revenue to the home country's government because of the imposition of the tariff is __________.

It is noted in the text that the infant industry argument is more frequently used in developing countries than in developed countries. Why might this be the case? Does this necessarily have to be the case?

In world of two "large" countries, if one country imposes a tariff, the welfare of the Tariff-imposing country will definitely improve (assuming no retaliation) if, the tariff-Imposing country

If, in a tariff game between two governments, both countries are on their tariff reaction functions, then each country __________ maximizing its welfare given the tariff of the other country. In this situation, there __________ incentive for each country to reduce its tariff unilaterally.

In the "reaction function" diagram of Question #18 above, if the firms are at point A and if both firms are seeking to maximize profit, the foreign firm wants to __________ its sales in this market, and the home firm __________its sales in this market.

A tariff placed upon a product in order to offset a foreign export subsidy is called

The Krugman economies-of-scale "strategic trade policy" model stresses that protection given to a home firm will, other things equal, __________ the marginal cost of producing each level of home output and will __________ the marginal cost of producing each level of foreign output.

The macroeconomic interpretation of a trade deficit for a country utilizes which one of the following expressions (where Y = national income, C = consumption, I = investment, G = government spending on goods and services, X = exports, and M = imports)?

Would it be possible for the infant industry argument to be applicable to a perfectly-competitive industry? Why or why not?

The "optimum tariff rate" for a country is that rate which, assuming no retaliation,

In the "reaction function" diagram of Question #18 above, if economies of scale exist for both firms, then protection instituted in the home market to keep out the foreign firm's product will, other things equal, cause HH to shift to the __________.

In a two-country world, the terms-of-trade impact of a tariff will definitely improve the welfare of the tariff-imposing country (assuming no retaliation) if the tariff-imposing country

Why do you suppose that "reaction functions" are not used in analyzing the market structure of perfect competition (or even monopolistic competition)? If you were to draw reaction functions for any home firm and any foreign firm engaged in perfect competition, what would the functions look like?

In the situation in the diagram in Question #14 above, the loss of consumer surplus for home consumers because of the imposition of the tariff is __________.

Starting from the "payoff matrix" situation in Question #22 above, suppose that a subsidy of $40 is now given to Firm H. Other things equal, with this subsidy, Firm H will __________.

Early Trade Theories: Mercantilism and the Transition to the Classical World of David Ricardo

The Classical World of David Ricardo and Comparative Advantage

Extensions and Tests of the Classical Model of Trade

Introduction to Neoclassical Trade Theory: Tools to Be Employed

Gains From Trade in Neoclassical Theory

Offer Curves and the Terms of Trade

The Basis for Trade: Factor Endowments and the Heckscher-Ohlin Model

Empirical Tests of the Factor Endowments Approach

Post Heckscher-Ohlin Theories of Trade and Intra-Industry Trade

Economic Growth and International Trade

International Factor Movements

The Instruments of Trade Policy

The Impact of Trade Policies

Political Economy and Us Trade Policy

Economic Integration

International Trade and the Developing Countries

The Balance-Of-Payments Accounts

The Foreign Exchange Market

International Financial Markets and Instruments: an Introduction

The Monetary and Portfolio Balance Approaches to External Balance

Price Adjustments and Balance-Of-Payments Disequilibrium

National Income and the Current Account

Economic Policy in the Open Economy Under Fixed Exchange Rates

Economic Policy in the Open Economy Under Flexible Exchange Rates

Prices and Output in the Open Economy: Aggregate Supply and Demand

Fixed or Flexible Exchange Rates

The International Monetary System: Past, Present, and Future

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In the "payoff matrix" in Question #22 above, Firm H a "dominant strategy" and Firm F a "dominant strategy."

If, in a tariff game between two governments, both countries are on their tariff reaction functions, then each country maximizing its welfare given the tariff of the other country. In this situation, there incentive for each country to reduce its tariff unilaterally.

In the "reaction function" diagram of Question #18 above, if the firms are at point A and if both firms are seeking to maximize profit, the foreign firm wants to its sales in this market, and the home firm its sales in this market.

The Krugman economies-of-scale "strategic trade policy" model stresses that protection given to a home firm will, other things equal, the marginal cost of producing each level of home output and will the marginal cost of producing each level of foreign output.