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ECN 306 Notes Exam 2.docx

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Arizona State University
ECN 306
Jose Mendez

Ch8 Tariffs Impacts: - Lower living standard of country imposing tariff - Helps groups tied to product even if it hurts country as a whole - A different policy can always do better Types: - Specific: set $/unit (ex. $.50/gallon) - Ad Valorem: % of value Terms of trade gain: - Tariff = imports (M) decrease, Pw decreases - Benefit: pay less for each M - Causes exporters to ‘eat’ the price of the tariff - The Pw of M decreases, therefore the new price of M does not increase the full price of the tariff Normative Effects: Small Country (Pw is fixed) - Consumer surplus shrinks - Producer surplus grows - Losses: - (d): consumption efficiency loss - (b): production efficiency loss Normative Effects: Large Country (Pw is influenced) - Possible to make cl large enough to offset -(b+d) Prohibitive Tariff: tariff is large enough to cut off trade - Any tariff increase above the prohibitive line (tp), will NOT affect the standard of living Free Trade is always better than no trade - Small tariff can benefit welfare of large country - (b+d) < cl = nation better off - (b+d) > cl = nation worse off - Large tariff causes deadweight losses - (b+d) = deadweight loss if tariff too high NTBs: (Nontariff Barriers) - Quotas (q) - Must be less than free trade amount - Voluntary export restraints (VERs) Direct Effects - Limit quantity - Increase cost of access to home market - Create uncertainty Small countries are price takers. Their demand does not influence the world price. Quota: “Voldemort of trade barriers - lack transparency” - Shifts the supply curve (S) to the right(out) by amount of the quota - At P below Pw, only domestic supply - At P above Pw, supply from everywhere - Domestic Price: increase - Domestic Production: increase - Quantity Consumed: decrease - Imports: decrease - “equivalent to a tariff effect” except government doesn’t collect revenue - Normative Effects: - Consumer loss = -(a+b+cq+d) - Producer gain = a - Government Revenue = cq or 0 - Nation = -(b+d) Welfare Losses: Tariff (gain of cl revenue) < Quota (no cl gained, lose b+d) < VER (worst- loss of b+d and cl) US keeps cq - Government auctions right to import - Government sets tariff on top of quota - Domestic industry gets right to import US ‘shares’ cq - Government accepts bribes, US/Foreigners capture Foreigners keep cq - First come, first serve - Foreign government given right to allocate licenses (VER) Growing Market - +Tariff: no increase in b+d - +Quota: increase in b+d (greater potential loss) - D: consumption inefficiency loss - B: production inefficiency loss - Potential loss of tariff revenue, cq Ch 11 Interwar period - Economic hardship, loss of infrastructure/population - UK lost role of Lender of Last Resort by returning to GOLD STANDARD Key Consequences: 1. No World lender of last resort a. UK misjudged effects of returning to gold b.Worldwide liquidity crisis c. Numerous sovereign defaults 2. Beggar-thy-neighbor Policy: raise personal living standard by impoverishing others a. Competitive devaluation of currency b.Raised tariffs c. US Role i. Fordney-McCumber Tariff: intended to help US farmers who overexpanded in WWI and were unable to pay debts 1. Europe unable to earn $ to pay war debts ii. Smoot-Hawley Tariff 1. Hoover promised farmers protection, Congress extended to other sectors 2. Became most protectionist tariff bill in US history 3. Foreign retaliation was fast and widespread Reciprocal Trade Agreement Act RTAA (1934): shaped trade policy to present day - Congress transferred tariff-setting authority to President - Intro of MFN provision (Most Favored Nation), (NTR) Normal Trade Relation - US - Products treated at the provisions of best-treated country (lowest duty available) - President responsible to open up foreign markets, role for export interests Administrative Protection: - Congress regrets transfer of tariff power to President - Eliminated power of President to act in certain trade cases - Unfair Trade Laws made easier for US to obtain protection for industries - Gives US trade policy schizophrenic appearance to foreigners - Executive Branch: considers impact on consumers/exporters as import-competing industries - Promote open trade - Congress: focus on narrow/local interests, more protectionist, makes Unfair Trade Laws easier to use against foreign firms Bretton Woods: 1944 - IBRD: International Bank for Reconstruction and Development (World Bank) - IMF: International Monetary Fund - ITO: International Trade Organization GATT: Rules for orderly trade, promote efficient/fair trading (most efficient supplier wins) 1. Transparency: no quotas, publish trade rules 2. Market Access: multilateral trade negot
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