ECO 2117 Lecture Notes - Lecture 18: Import Substitution Industrialization, Exchange Rate, Trade Diversion

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crimsongoat0

20 Aug 2016

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ECO2117

April 11 2016

*continuation from last lecture: import substitution (trade strategy 3)

- nominal rate of protection

- t = (p’ - p)/p

- p’ = the tariff inclusive price

- p is the free trade price

- example:

- the price of bananas on the

world market is 1.50 per pound by

a 10% import tariff is levied in

Canada

- this raises the price of bananas

in Canada with 15 cents (new total

is 1.65)

- hence t = (1.65-1.50)/1.50 = 0.1

(10%)

- effective rate of protection

- g = (v’ - v)/v

- v’ is the value added per unit

with the tariff

- v is the value added per unit

under free trade

- example: Nigeria produces USB

sticks but they import most spare

parts (10$ per USB)

- 1G USB self for $15 on the world

market but $20 in Nigeria

- effective rate = (10-5)/5 = 1

(100%)

-importance of overvalued currency

-is often a part of IS strategy

-making things cheap for importers

-you let the exchange rate ﬂoat

-it is ﬁxed by the market

-supply is the pile of local money on the

exchange market

-demand is the pile of local money demanded

by the exporters

-good for exporters

-government sets ofﬁcial exchange rate

-free market exchange rate: 50 rupees for 1

dollar

-ofﬁcial exchange rate: 40 rupees for 1 dollar

-result: demands for foreign exchange exceeds

supply

-policy options:

-meet demand: foreign currency reserve,

borrow money from abroad, etc

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*continuation from last lecture: import substitution (trade strategy 3) The price of bananas on the world market is 1. 50 per pound by a 10% import tariff is levied in. This raises the price of bananas in canada with 15 cents (new total is 1. 65) Hence t = (1. 65-1. 50)/1. 50 = 0. 1 (10%) V" is the value added per unit with the tariff. V is the value added per unit under free trade. Example: nigeria produces usb sticks but they import most spare parts (10$ per usb) 1g usb self for on the world market but in nigeria. Effective rate = (10-5)/5 = 1 (100%) Is often a part of is strategy. Supply is the pile of local money on the exchange market. Demand is the pile of local money demanded by the exporters. Free market exchange rate: 50 rupees for 1 dollar. Of cial exchange rate: 40 rupees for 1 dollar. Result: demands for foreign exchange exceeds supply.

Related Questions

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 largest corporation based in the United States is:

A) General Motors.
B) ExxonMobil.
C) General Electric.
D) Microsoft.

Service exports from the United States equal _____ per year.

A) less than $100 billion
B) approximately $250 billion
C) less than $350 billion
D) approximately $500 billion

In addition to agricultural products and manufactured goods, the United States is also the world's largest exporter of:

A) processed and packaged foods.
B) pharmaceuticals.
C) electronics.
D) business services and retailing.

Before entering a country, marketers need to determine if the country has the required _____ to support their marketing efforts.

A) moral code
B) legal system
C) infrastructure
D) trade bodies

In order for a marketer to operate efficiently in a foreign country, it is crucial that a stable _____ be in place to facilitate trade.

A) free trade agreement
B) tariff
C) infrastructure
D) labor force

Which of the following is not a trade barrier to an exporter?

A) Tariffs
B) Import quotas
C) Subsidies
D) Related party trade

A complete ban on the import of a product is known as a(n):

A) import quota.
B) embargo.
C) revenue tariff.
D) protective tariff.

Exchange control is an administrative barrier to international trade that:

A) requires companies that export to sell foreign currencies to the central bank or other foreign agency, and importers to buy foreign currencies from the same organization.
B) supports domestic industry through grants of money or research support.
C) completely bans the importation of a product.
D) sells products in a foreign market cheaper than they are sold domestically.

When a group of nations agree to the free trade of goods among themselves by abolishing tariffs and trade restrictions, the nations have created a:

A) common market.
B) customs union.
C) trading block.
D) free-trade area.

10.

Which of the following is not an objective of the European Union(EU)?

A) eventually remove all trade barriers to free trade among its members.
B) standardize currencies and regulations between member nations.
C) promote the basic tenets of the WTO and GATT treaty.
D) eventually evolve into an independent political entity.

11.

An organization that provides first-time exporters with expertise in locating foreign buyers, handling paperwork, and conforming to local labeling and testing laws is called a(n):

A) export facilitator.
B) export title company.
C) trade assistance corporation.
D) export management company.

12.

McDonald

ivoryturtle973

1. Importing goods produced by low-wage workers abroad decreasesthe demand for low-skilled U.S. labor that makes competing goods.Supply and demand analysis shows that the equilibrium wage rate oflow-skilled workers making these competing goods and services willfall and experience bears this out. However, dire warnings thatsweatshop labor conditions will be imported along with the foreigngoods are unfounded. Suppose an employer in the United States facescompetition from a foreign producer who pays the equivalent of $1 aday. Explain why, even if there were no minimum wage laws, thisemployer could not succeed by lowering the wage rates of his or herU.S. workers to $1 a day.

2. American Apparel is the largest T-shirt manufacturer in theUnited States. All of its manufacturing is done in a single factorywhich employs 4,000 workers in central Los Angeles. The owner ofthis firm, Dov Charney, has been praised for treating his workerswell:

âPay is performance-related, and amounts to $12 an hour on average,far above California's minimum wage of $6.75. American Apparelstaff can buy subsidized health insurance for $8 a week. They areentitled to free English lessons, subsidized meals and freeparking.â (âThe Hustler,â The Economist, January 4, 2007.)

The article goes on to delineate the high cost of these non-wagebenefits. But Mr. Charney claims not to be an altruist. He issimply trying to maximize profit. Why might Mr. Charenyâs profit behigher by paying all the added benefits to his workers?

3. Answer the following questions:

a. If trade with other countries is prohibited, the Eragoans areconsuming _____ shirts at a price of ______ per shirt.
b. With free trade, for a world price of $4 per shirt, the Eragoansare producing ________ shirts.
c. With free trade, for a world price of $4 per shirt, the Eragoansare consuming ________ shirts.
d. With free trade, for a world price of $4 per shirt, the Eragoansare importing _________ shirts.
e. If the world price is $4 per shirt, and the government of Eragosimposes a tariff of $1, the Eragoans are producing ____________ andimporting _____________shirts.
f. If the world price is $4 per shirt, and the government of Eragosimposes a tariff of $1, how much tariff revenue will the Eragosgovernment collect? ______

bronzeeel187

ECO 2117 Lecture Notes - Lecture 18: Import Substitution Industrialization, Exchange Rate, Trade Diversion

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