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Lecture 42

Lecture 42-Tariffs

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Jack Carr

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th Tuesday, April 6 , 2010 Canada does not have comparative advantage in production of textiles Before trade (BT) P BT> PW Q BT= domestic quantity demanded/supplied After trade (AT) P AT= PW Q SAT= Domestic quantity supplied Q D = Domestic quantity demanded DAT S Q AT - AT= Imports Terms of Trade Index of export prices Index of import prices Insight: If terms of trade increaseuntry is better off Tariffs Definition: tax imposed on imported goods Why do countries impose tariffs? To protect import-.42509L3JL3/:897L08³850.L,OL39070898´ Example: (1) Country imports good (and also produces good domestically) (2) Country is small and takes the world price as given Before Tariff PD= domestic price (= world price) QS= domestic quantity supplied QD= domestic quantity demanded Q D Q =Simports After Tariff P 1 = new domestic price = world price + D 1 tariff Qs = domestic quantity supplied > Qs Q D1= domestic quantity demanded < Q D 1 1 Q D = Q S imports (which decline) Revenues from tariff = [Q 1± Q ] * Tariff D S (Shaded area) Politics of Tariff Reductions (Freer Trade) Tariff Reduction 1. Relatively few workers lose jobs and lobby against freer trade suffer big losses => 2
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