Suppose initially quota has the same
effect as tariff
S
D
Price of Cloth
Quantity of Cloth
60 70 30 20
10
12
S + Q
Tariff
•Tariff = $2 per
unit
•Quota = 30
•Gain in producer
surplus = a
a
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Effect as Tariff - International Economics - Lecture Slides, Slides of Economics
It is the Lecture Slides of International Economics which includes Terms of Trade, Tax on Imported Goods, Nontariff Barriers to Trade, International Factor Movements etc. Key important points are: Effect as Tariff, Initially Quota, Domestic Demand Grows, Price of Cloth, Production, Couple of Questions, Fair Trade, Free Trade, Distortion, Developed Countries
Typology: Slides
2012/2013
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Suppose initially quota has the same
effect as tariff
S
D
Price of Cloth
20 30 60 70^ Quantity of Cloth
10
12
S + Q
Tariff
- Tariff = $2 per unit
- Quota = 30
- Gain in producer surplus = a
a
Now domestic demand grows to D’
S
D
Price of Cloth
20 30 60^ Quantity of Cloth
10
12
S + Q
D’
Under tariff, P is still 12, imports go down to to 10 and the gain in producer surplus remains the same ( a= b + c)
Under quota, at p =12 there is a surplus P↓ to 11, domestic production goes down to 25 and producer surplus goes down to c
40
b
Quota is more restrictive
11
25 55
c
- Fair trade is an organized social
movement that promotes the payment of a fair price as well as social and environmental standards in areas related to the production of a variety of goods.
- The movement focuses on exports
from developing countries to developed countries, most notably handicrafts, coffee, cocoa, tea, bananas, honey, cotton, wine, fresh fruit etc.
- Fair trade's strategic intent is to deliberately work with marginalized producers and workers in order to help them move from a position of vulnerability to security and economic self- sufficiency.
- It also aims at empowering them to become stakeholders in their own organizations and actively play a wider role in the global arena to achieve greater equity in international trade.
- Fair trade proponents include international religious, development aid, social and environmental organizations such as Oxfam, Amnesty International, and Caritas International.
- The next slide shows a photo of a Oxfam store in Galway
Controversy
- Some economists see fair trade as a type
of subsidy that distorts free trade.
- Segments of the left criticize fair trade for
not doing enough.
Chapter 8
- Suppose there is a proposal to impose a new tariff on imported widgets
- There are 10,000 consumers of widgets in the US
- Demand for widgets is perfectly inelastic
- Each American buys a widget no matter what the price
- If the tariff becomes effective, the price of widgets goes up by $
- That is each consumer loses $
- All consumers together lose $10,
- If the tariff becomes effective each of the 3 domestic producers of widget gain $1000.
Case 2: Representative
Democracy
- In order to make your representative aware of your wish you need to hire a lobbyist who charges $
- Who is more likely to hire the lobbyist?
- None of the consumers
- since they each will only lose $1 if the proposed tariff become law.
- and it takes time and effort to get organized.
- But each of the producers has an incentive to hire the lobbyist since he will gain $1000 if the tariff goes into effect.
- None of the consumers
So under Representative
Democracy
- Tariff is likely to be imposed
- This is called rent –seeking behavior
- Occurs when government approves a program that benefits only a small group within society, but the society as a whole pays the cost.
Total trade barriers (tariff and non tariff) in
comparison Source: World Bank
- Facts:
- Imports and exports have conflicting effects.
- Free trade benefits consumers but firms and workers in importing industry can be harmed.
- Regulation can favor one segment of society.
- Domestic industries and firms have a demand for government regulation. 5. Special interest groups lobby for changes that benefit them.
The Political
Economy of Protectionism
Answer
- Not necessarily;
- The loss in one consumer’s surplus due to trade restriction may not even be noticeable to him.
- Consumers cannot easily form groups, get organized and let politicians hear them but firms can.
- Given group support, votes to politician may increase.
- Politicians favor programs having immediate and clear-cut benefits with vague or deferred costs.
- Detailed tariff schedule allows politician to pick up votes for protecting specific good without protests from average consumer. - Tariffs on very similar goods may be very different.
- Firms with comparative advantage
lobby foreign governments for free
trade of exports.
- Firms that compete with imports
would lobby for protection from
imports.
Who does what?
- Two definitions:
1. Cost-based dumping
- A firm sells a product at a price below its cost of production in a foreign market.
2. Price-based
- A firm sells a product in a foreign market at a price lower than the price charged in its home market.
What is dumping?
1. Sporadic dumping
- occasional dumping
2. Persistent dumping
- Because there is more competition in the foreign market than at home.
3. Predatory dumping
- Temporary
- To drive competing firms out of business.