Chat with AIExam 14: The Impact of Trade Policies
Explain, using offer curves, how a tariff affects a large country in the context of general equilibrium. Can a tariff improve the welfare in the tariff-imposing country if both sets of offer curves are elastic in the relevant ranges? Explain.
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Answered by Examlex AI CopilotIn the context of general equilibrium, a tariff affects a large country by shifting its offer curve outward. An offer curve represents the various combinations of goods that a country is willing to trade at different terms of trade. When a tariff is imposed, the price of imported goods increases, leading to a decrease in the quantity of imports and an increase in the quantity of domestic production. This results in a shift of the offer curve outward, indicating that the country is willing to trade more goods at each terms of trade.
If both sets of offer curves are elastic in the relevant ranges, a tariff can potentially improve the welfare in the tariff-imposing country. When offer curves are elastic, it means that the quantity of goods that a country is willing to trade is responsive to changes in price. In this case, when a tariff is imposed and the offer curve shifts outward, the increase in domestic production and decrease in imports can lead to an overall increase in welfare for the country. This is because the country is able to produce more of the goods it consumes, leading to a higher level of consumer surplus.
However, it's important to note that the overall welfare effects of a tariff also depend on various other factors such as the elasticity of demand for imports, the impact on domestic industries, and potential retaliation from trading partners. Additionally, while a tariff may improve welfare in the short run, it can also lead to inefficiencies and deadweight loss in the long run. Therefore, the decision to impose a tariff should be carefully considered in the context of general equilibrium and the specific characteristics of the economy.
For each of the three statements below, illustrate and explain why the statement is either True or False.
(a) "Other things equal, the imposition of a tariff by a (small) country on an imported good will have a less negative net welfare effect on the country than would the use of a'voluntary' export restraint (VER) by supplying countries of the import, even if the effects on domestic price and the quantity of the good imported are the same in the two situations."
(b) "Other things equal, if a country imposes an export tax of a given amount on a good,then the country can potentially enhance its welfare if it is a 'small' country but cannot possibly enhance its welfare if it is a 'large' country."
(c) "Other things equal, if a (small) country elects to assist an import-competing industry in expanding the industry's output by a given amount, the net welfare effect on the country will be the same whether or not the assistance is given in the form of an import tariff or in the form of a production subsidy to the industry."
(35) Answered by Examlex AI Copilot(a) The statement is True.
Illustration:
Let's consider a small country that imposes a tariff on an imported good. This tariff will increase the domestic price of the good and reduce the quantity of the good imported. On the other hand, if the supplying countries of the import agree to a voluntary export restraint (VER), the domestic price and quantity of the good imported will also be affected in a similar manner.
Ratinal:
The imposition of a tariff by a small country will have a less negative net welfare effect because the tariff revenue stays within the country, whereas with a VER, the exporting countries receive the revenue from the restraint. This means that the welfare loss from the VER is greater than from the tariff, even if the effects on domestic price and quantity of the good imported are the same in both situations.
(b) The statement is False.
Illustration:
If a country imposes an export tax on a good, it will reduce the quantity of the good exported and increase the domestic price. This will affect the welfare of both small and large countries.
Ratinal:
A small country can potentially enhance its welfare by imposing an export tax because it can capture some of the tax revenue. However, a large country can also potentially enhance its welfare by imposing an export tax, as it can still benefit from the tax revenue and the reduction in domestic price.
(c) The statement is False.
Illustration:
If a small country elects to assist an import-competing industry in expanding its output, it can do so through either an import tariff or a production subsidy. Both forms of assistance will lead to an increase in the industry's output.
Ratinal:
The net welfare effect on the country will not be the same in both situations. An import tariff will lead to a welfare loss due to the distortion of domestic prices, while a production subsidy will also lead to a welfare loss due to the cost of the subsidy. Therefore, the net welfare effect will differ depending on whether the assistance is given in the form of an import tariff or a production subsidy.
In the large country case, the imposition of an import quota
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VerifiedB
The presence of an export subsidy (assuming that foreign demand is not perfectly-Inelastic)
(34) Given the following diagram showing country A's demand for imports schedule for good (Dimports), the supply of exports schedule to A from the rest of the world of good X (SROW), and the supply of exports schedule to A from the rest of the world of good X when country A has imposed a specific tariff on imports of good X (S'ROW):
price
quantity
quantity (28) You are given the following information pertaining to large country B with respect to good W (which is produced at home and also imported), both under free trade and with a $10.00 import tariff in place:
domestic price of W under free trade \4 0 world price of W (i.e., price of W from rest-of-the world) under free trade \4 0 domestic price of after imposition of tariff \4 4 world price of W (i.e., price of W from rest-of-the world after imposition of tariff \3 4 domestic production of W under free trade 80 units domestic production of W after imposition of tariff 94 units domestic consumption of W under free trade 120 units domestic consumption of W after imposition of tariff 112 units
Given this information, and assuming that demand and supply curves are straight lines, what is the loss of consumer surplus in country B that occurs because of the imposition of the tariff?
(39) In the general equilibrium graph with a production-possibilities frontier (PPF) and consumer indifference curves,
(38) "While the imposition by a country's government of an import tariff on a good clearly injures the country's domestic consumers of the good, the tariff helps
domestic import-competing producers and enhances overall country welfare
(i.e., the "net welfare effect" is positive). Similarly, the granting of an export
subsidy by the country's government to home producers of a good also injures
home consumers of the good, but the subsidy helps home producers and enhances overall country welfare."Utilizing traditional supply/demand analysis, illustrate and explain the parts of the above statement that are True (if any) and the parts that are False (if any). (You can use a "small-country" case throughout your answer. Also, assume that there are barriers to the import of the good into the country granting the export subsidy.)
(33) "Even if home consumers always have perfectly inelastic demand for a product, at least a portion of the demand curve by those consumers for imports of the product can have the normal downward slope. Further, even if the supply curve of domestic producers is everywhere perfectly inelastic, at least a portion of the supply curve of exports by those producers can have the normal upward slope."
(31) Given the information on prices, production, and consumption in Question #15 above, and assuming that demand and supply curves are straight lines, the impact of the imposition of the tariff is that tariff revenue of the government increases by __________. Further, the "net welfare effect" of the imposition of the tariff is a __________.
(38) (a) Suppose that country A wishes to restrict its imports of good X to 900 units per month, which is a reduction from the current quantity of imports. Assume that A also produces good X domestically. In this context, illustrate and explain why the following statement is either True or False.
"The reduction in imports to 900 units per month will have identical effects on product price in A, quantity produced in A, and welfare in A whether the reduction is accomplished by the imposition of an import tariff by country A or by country A's officials persuading foreign governments to 'voluntarily' restrict their exports to A to 900 units per month."
(b) Suppose that country A wishes to expand its home production of good Y (as well as Imployment in country A's Y industry) by 10 percent, and country A is an importer of good Y.In this context, illustrate and explain why the following statement is either True or False.
"The 10 percent increase in home output and employment in the Y industry will be associated with identical effects on product price,quantity of imports of good Y, and welfare in country A whether the 10 percent increase is accomplished by the imposition of an import tariff or by the granting of a subsidy for production and employment to home producers of good Y."
(35) At the international price of $20/unit, domestic production is 5,000 units and domestic consumption is 6,000 units. With a 20 percent tariff, domestic production increases by 20 percent and domestic consumption decreases by 25 percent. What is the effect of this tariff on the affected parties? What is the net welfare effect on the country as a whole?
(44) In the diagram in Question #19 above, what is the amount of tariff revenue collected by the government when the tariff is in place?
(28) (a) Using a demand/supply diagram, illustrate and explain the effects of the imposition of an export tax on a good Y by a home country's government on (i) the home country's consumers of Y, (ii) the home country's producers of Y, and (iii) the home government's tax revenues. (Assume that the country is a "small" country.) Then indicate the "net welfare effect" of the tax on the country. Why might a country want to impose an export tax? Briefly explain.
(b) Suppose now that the country imposing the export tax in part (a) of this question is a "large" country rather than a "small" country. Is it an advantage or a disadvantage for a country to be "large" rather than "small" when it imposes an export tax? Briefly explain. (No diagrams are necessary in this part of the question.)
(34) Other things equal, a country's consumers' "demand for imports" schedule for a good Tends to be __________ than the country's consumers' overall demand schedule for the Good. In addition, other things equal, a country's producers' "supply of exports" Schedule of a good tends to be __________ than the country's producers' overall supply
Schedule of the good.
(35) In the diagram in Question #19 above, suppose that a subsidy to import-competing Producers is given instead of a tariff being imposed. The subsidy is set to generate the Same amount of domestic production of the good as occurred under the tariff. What Would be the net welfare loss to the country in this situation?
(31) The imposition of an export tax on good X by country A, other things equal,
(24) Demonstrate why economists argue that, from a country welfare perspective, a domestic subsidy is preferable to a tariff for assisting a particular industry. Use either a partial or a general equilibrium model to support your argument.
(40) "The imposition of a tariff on a good will always have a negative welfare effect on acountry." Agree? Disagree? Explain.
(32) An import tariff has a similar impact on a country's export good as an export tax. Explain.
(31) 
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