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    Seminar 7 - Analysis of A Tariff (Quest)

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    Seminar 7 - Analysis of A Tariff (Quest)

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    Ali Ch
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    Seminar 7 - Analysis of a Tariff (quest)

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    19 views2 pages

    Seminar 7 - Analysis of A Tariff (Quest)

    Uploaded by

    Ali Ch

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    © All Rights Reserved
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    Seminar 7 – Instruments of Trade Policy

    1. Home’s demand curve for wheat is D = 100 - 20P. Its supply curve is S = 20 + 20P. Derive and graph
    Home’s import demand schedule. What would the price of wheat be in the absence of trade?
    2. Now add Foreign, which has a demand curve D* = 80 - 20P and a supply curve S* = 40 + 20P.
    a. Derive and graph Foreign’s export supply curve and find the price of wheat that would
    prevail in Foreign in the absence of trade.
    b. Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and
    graph the equilibrium under free trade. What is the world price? What is the volume of
    trade?
    3. Home imposes a specific tariff of 0.5 on wheat imports.
    a. Determine and graph the effects of the tariff on the following: (1) the price of wheat
    in each country; (2) the quantity of wheat supplied and demanded in each country;
    (3) the volume of trade.
    b. Determine the effect of the tariff on the welfare of each of the following groups: (1)
    Home import-competing producers; (2) Home consumers; (3) the Home
    government.
    c. Show graphically and calculate the terms of trade gain, the efficiency loss, and the
    total effect on welfare of the tariff.
    4. Suppose Foreign had been a much larger country, with domestic demand.
    D* = 800 - 200P, S* = 400 + 200P.
    (Notice that this implies the Foreign price of wheat in the absence of trade would have been the
    same as in problem 2.) Recalculate the free trade equilibrium and the effects of a 0.5 specific tariff
    by Home. Relate the difference in results to the discussion of the small country case in the text.
    5. You have been asked to quantify the effects of removing a country’s tariff on sugar. The hard part of
    the work is already done: Somebody has estimated how many pounds of sugar would be produced,
    consumed, and imported by the country if there were no sugar duty. You are given the information
    shown in the table.

    Situation with Import Tariff Estimated Situation without


    Tariff
    World price $0.10 per pound $0.10 per pound
    Tariff $0.02 per pound 0
    Domestic price $0.12 per pound $0.10 per pound
    Domestic consumption 20 22
    (billions of pounds per year)
    Domestic production 8 6
    (billions of pounds per year)
    Imports (billions of pounds per 12 16
    year)

    Calculate the following measures:


    a. The domestic consumers’ gain from removing the tariff.
    b. The domestic producers’ loss from removing the tariff.
    c. The government tariff revenue loss.
    d. The net effect on national well-being.
    6. Suppose that Canada produces 1.0 million bicycles a year and imports another 0.4 million; there is
    no tariff or other import barrier. Bicycles sell for $400 each. Parliament is considering a $40 tariff on
    bicycles like the one portrayed in Figures 8.2 through 8.4. What is the maximum net national loss
    that this could cause Canada? What is the minimum national loss if Canada is a small country that
    cannot affect the world price? (Hint: Draw a diagram like Figure 8.4 and put the numbers given here
    on it. Next, imagine the possible positions and slopes of the relevant curves.)
    7. A small country has a straight-line, upward-sloping domestic supply curve and a straight-line,
    downward-sloping domestic demand curve for one of its key export products. The world price for
    this product is $150 per ton. The country currently has an export tax of $10 per unit, and it exports
    10 million tons per year. The country’s government is considering reducing its export tax to $5 per
    ton, and it asks you to determine if this will reduce by half the inefficiency caused by the export tax.
    Use a graph to conduct your analysis and provide your response.

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