Download INTERNATIONAL ECONOMICS ECON 30074 LECTURE 8 TRADE

INTRODUCTION
In the previous lectures we dealt with the
determinants and the effects of international
trade
• Models of inter-industry trade (Ricardo,
Specific Factors, Heckscher-Ohlin)
INTERNATIONAL ECONOMICS
ECON 30074
• Models of intra-industry trade (economies of
scale and imperfect competition)
LECTURE 8
And, we have established the existence of gains
from trade
TRADE POLICY:
The policy implication: countries should
pursue policies of free trade?
PARTIAL EQUILIBRIUM ANALYSIS
However, in the real world we observe a variety
of trade policies
Warning!! These lecture notes are to help students during the lectures. Reading these notes without
attending lectures can be misleading. © Estela Montado, University of Bristol
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Main trade policy instruments
The relevant questions are :
Tariffs: tax levied when a good is imported
(specific versus ad valorem)
1-What are the effects of protectionist trade
policies?
2-Why do we observe such policies?
3-What should trade policy be?
Subsidies: payment to a firm that ships a good
abroad (specific versus ad valorem)
In this lecture
Non-tariff barriers
Partial equilibrium analysis : examine direct
effects of a trade policy in market z on the prices
and quantities in market z
Import quotas: limits on the quantity of
imports
Voluntary Exports Restraints (VER): limits
on the quantity of exports (generally imposed by
the exporting country at the importing country’s
request)
Do not consider indirect effects or secondary
effects in other markets
Next lecture
General equilibrium analysis: examine the full
general equilibrium effects of the introduction
of a tariff
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Supply, demand and trade in an industry
b) Foreign: Export Supply Curve (Fig. 2)
p
- Single commodity (rice), no transportation
costs. Perfectly competitive markets
p
D*
XS
S*
P2
- Two large countries (home and foreign)
p1
p*A
p
In the absence of trade, price of rice is higher in
home than in foreign
D*2
When trade takes place, determine world market
price and quantity using concepts of import
demand curve and export supply curve
D*1
S *1
S *2
Q
S *1 – D*1
S *2 – D*2
Q
c) World Equilibrium (Fig. 3)
p
a) Home: Import Demand Curve (Fig. 1)
p
XS
p
S
pp
pW
pA
p2
p1
MD
MD
D
S 1 S 2 D2 D1
Q
D2 - S 2
D1 - S 1
QW
Q
Q
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Small versus Large Country (Fig. 4)
Welfare Analysis (Fig. 6)
p
S
p
XS large
pT
a
pW
b
pW
XS small
c
d
e
p*T
D
QW
Q
d) Effects of a Tariff: a) Large Country
(Fig. 5)
HOME
p
p
WORLD
p
S1
D1
Q
FOREIGN
Producer Surplus:
XS
A
pT
D2
QT
S*
S
S2
+ (a)
Government Revenue: + (c + e)
E
pW
t
p*T
MD
D
Q
- (a + b + c + d)
Net Welfare Effect:
+ e - (b + d)
D*
B
QT
Consumer Surplus:
MDT
QW
Q
Q
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Effects of a Tariff: b) Small Country (7)
HOME
Welfare Analysis
WORLD
p
Producer Surplus:
p
S
+ (a)
Government Revenue: + (c)
pT
t
pW
XS
MD
D
MDT
Q
QT
Consumer Surplus:
- (a + b + c + d)
Net Welfare effect:
- (b + d)
Q
3) Effects of Import Quota: Large country
(Fig. 8)
HOME
p
S
HOME
WORLD
p
pT
pW
p
D
a
c
b
d
S
XS
A
pq
pW
E
p*q
D
S1
S2
QT
D2
D1
B
Qq
Q
9
QUOTA
Q
Qq
MD
Q
10
Conclusions: an import quota will raise
domestic prices by the same amount as a tariff
that limits imports to the level specified in the
quota (under perfect competition)
p
S
pq
a
pW
p* q
b
c
d
Key issue: to whom should the right to sell in
the domestic market be assigned?
e
D
Voluntary Export Restraints (VER): A
quota on trade volumes imposed from the
exporting country’s side instead of the
importer’s side
Q
Welfare Analysis: (quota licences sold by
government)
Producer Surplus:
+ (a)
With a VER, the right so sell in the domestic
market is assigned to foreign producers
Government Revenue: + (c + e)
Consumer Surplus:
- (a + b + c + d)
Net Welfare Effect:
+ e - (b + d)
The otherwise government revenue becomes
rents received by foreign firms
Welfare effect: + (a)
- (a + b + c + d)
Net: - (b + c + d)
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4) Effect of Export Subsidy: Large country
(Fig. 9)
HOME
p
D
Welfare analysis
WORLD
p
S
A XS
pS
pW
Producer Surplus:
+ (a + b + c)
Consumer Surplus:
- (a + b)
Government Revenue: - (b + c + d + e + f + g)
E
*
pS
B
MDS
Net welfare effect:
- (b + d + e + f + g)
MD
QS
Q
5) Domestic Monopoly: a) Tariff (Fig. 10)
The threat of import competition forces the
monopolist to charge the competitive price
Q
p
HOME
p
pS
pW
MC
pM
a
b
c
d
f
pT
p* S
e
pW
g
MR
Q
SF ST
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D
DT
DF
Q
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Domestic Monopoly: b) Quota (Fig. 11)
Domestic Monopolist - Welfare effect
A quota leads to lower domestic output and a
higher price than a tariff that yields the same
level of imports
p
MC
pq
QUOTA
pW
MRq
Dq
D
Q
Sq
Domestic Monopoly: c) Tariff vs. Quota
(Fig. 12)
p
MC
pq
pW + t
QUOTA
pW
MRq
Sq
ST
Dq
D
Q
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