ECON 3601 Lecture Notes - Lecture 8: Import Quota, Economic Surplus, Final Good

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Lecture 8 – The Instruments of Trade Policy

Types of Tariffs

• A tariff is a tax levied when a good is imported.

• A specific tariff is levied as a fixed charge for each unit of imported goods.

– For example, $3 per barrel of oil.

• An ad valorem tariff is levied as a fraction of the value of imported goods.

– For example, 25% tariff on the value of imported trucks.

Supply, Demand, and Trade in a Single Industry

• An import demand curve is the difference between the quantity that Home consumers demand

minus the quantity that Home producers supply, at each price.

• The Home import demand curve

MD = D – S

intercepts the price axis at PA and is downward sloping:

– As price increases, the quantity of imports demanded declines.

• An export supply curve is the difference

between the quantity that Foreign producers supply minus the quantity that Foreign consumers

demand, at each price.

• The Foreign export supply curve

XS* = S* – D*

intersects the price axis at PA

* and is upward sloping:

As price increases, the quantity of exports supplied rises.

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• In equilibrium,

import demand = export supply,

home demand – home supply

= foreign supply – foreign demand,

home demand + foreign demand

= home supply + foreign supply,

world demand = world supply.

Effects of a Tariff

• A tariff acts like a transportation cost, making sellers unwilling to ship goods unless the Home

price exceeds the Foreign price by the amount of the tariff:

PT – t = PT*

• A tariff makes the price rise in the Home market and fall in the Foreign market.

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Document Summary

Lecture 8 the instruments of trade policy. Types of tariffs: a tariff is a tax levied when a good is imported, a specific tariff is levied as a fixed charge for each unit of imported goods. For example, per barrel of oil: an ad valorem tariff is levied as a fraction of the value of imported goods. For example, 25% tariff on the value of imported trucks. Supply, demand, and trade in a single industry: an import demand curve is the difference between the quantity that home consumers demand minus the quantity that home producers supply, at each price, the home import demand curve. Md = d s intercepts the price axis at pa and is downward sloping: Xs* = s* d* intersects the price axis at pa. As price increases, the quantity of exports supplied rises: in equilibrium, import demand = export supply, home demand home supply. = foreign supply foreign demand, home demand + foreign demand.

Related Questions

Trade Policy.

The demand for cars in Home is q = 30 â P and the supply of cars in Home is q = P. The demand for cars in Foreign is q = 10 â P and the supply of cars in Foreign is q = P.

a) Calculate the autarky equilibrium price and quantity in each country.

b) Who is the importer of cars and who is the exporter?

c) Write the import demand for Home and the export supply for Foreign.

d) Find the equilibrium world price under free trade. What is the amount of cars traded between the two countries?

e) Suppose the country that is the importer imposes a tariff of $2 per unit on car imports. Find the new equilibrium world price under the tariff. What is the amount of cars traded between the two countries now? Show this in a graph with the import demand for Home and the export supply for Foreign.

f) Look at figure 1 for Home and fill in the table below (with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.

g) Look at figure 2 for Foreign and fill in the table below ((with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.

h) Does Home experience a terms of trade gain or loss as a result of the tariff? Does Foreign experience a terms of trade gain or loss as a result of the tariff?

carminerat489

PLease explain how you got your answers! :)

The domestic demand function for portable radios is given by Q=5,000-100P, where price (p) is measured in dollars and quantity is measured in thousands of radios per year. The domestic supply curve for radios is given by Q=150P. Suppose portable radios can be imported at a world rpice of $10 per radio.

a) If trade were completely free, how many radios would be imported?

b) The government imposed a $5 tariff on portable radios. How would this atriff change the market equilibrium? How many radios would be imported?

c) What is the change in net producer's surplus resulting fromthis tariff?

d) what is the change in net consumer's surplus resulting from this tariff?

e) What is the deadweight loss resulting from this tariff?

f) Instead of imposinga tariff, the government reached an agreement with foreign suppliers to "voluntarily" limit the portable radios they export to 1,250 per year. What is the deadweight loss resulting from this agreement?

indigotrout976

The demand for computers in a certain country is given by D = 20000 â 300P; where P is the price of a computer. Supply by domestic computers producers is S = 10000 + 100P.

(a) Assuming that the economy is closed, find the equilibrium price and production quantity of computers.

(b) The economy opens to trade. The world price of a computer is $20. Find the domestic quantities demanded and supplied and the quantity of imports or exports. Who will support the opening of the computer market to trade and who will oppose it?

(c) The government imposes a tariff of $1 per computer. Find the effects on domestic quantities demanded and supplied and on the quantity of imports or exports. Also find the tariff revenue collected by government. Who will support the imposition of tariff and who will oppose it?

(d) Suppose the government imposes an import quota of 1600 computers. Find the equilibrium price in the domestic computer market, as well as the quantities produced by domestic firms and purchased by domestic consumers.

ECON 3601 Lecture Notes - Lecture 8: Import Quota, Economic Surplus, Final Good

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