International Trade - Theory and Policy, 2010a

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3. The tariff rate that corresponds to free trade. 4. The tariff rate that is just sufficient to eliminate trade with the rest of the world. 5. Of higher, lower, or the same, this is how national welfare in free trade compares with national welfare in autarky. 6. Of higher, lower, or the same, this is how national welfare at the optimal tariff compares with national welfare in autarky. 7. Of higher, lower, or the same, this is how national welfare at the maximum revenue tariff compares with national welfare at the optimal tariff. 8. Of higher, lower, or the same, this is how producer welfare in free trade compares with producer welfare in autarky. 9. Of higher, lower, or the same, this is how consumer welfare in free trade compares with consumer welfare in autarky. 7.7 Import Tariffs: Small Country Price Effects LEARNING OBJECTIVES 1. Identify the effects of a specific tariff on prices in both countries and the quantity traded. 2. Know the equilibrium conditions that must prevail in a tariff equilibrium. The small country assumption means that the country’s imports are a very small share of the world market—so small that even a complete elimination of imports would have an imperceptible effect on Saylor URL: http://www.saylor.org/books Saylor.org 329
world demand for the product and thus would not affect the world price. Thus when a tariff is implemented by a small country, there is no effect on the world price. The small country assumption implies that the export supply curve is horizontal at the level of the world price. The small importing country takes the world price as exogenous since it can have no effect on it. The exporter is willing to supply as much of the product as the importer wants at the given world price. When the tariff is placed on imports, two conditions must hold in the final equilibrium—the same two conditions as in the case of a large country—namely, PMexT=PUST+T and XSUS(PUST)=MDMex(PMexT). However, now PTUS remains at the free trade price. This implies that, in the case of a small country, the price of the import good in the importing country will rise by the amount of the tariff, or in other words PMexT=PFT+T. As seen in Figure 7.17 "Depicting a Tariff Equilibrium: Small Country Case", the higher domestic price reduces import demand and export supply to QT. Figure 7.17 Depicting a Tariff Equilibrium: Small Country Case Saylor URL: http://www.saylor.org/books Saylor.org 330
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This text was adapted by The Saylor
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Chapter 1 Introductory Trade Issues
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However, rapid growth in the value
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As of 2009, 153 countries were memb
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International trade is a field in e
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imported, the U.S. government colle
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Kenya 12.7 Ghana 13.1 Generally spe
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Average tariffs can be measured as
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When the bubble bursts, the demand
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missed deadlines are commonplace in
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a well-known “bicycle theory” a
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But at the same time that many deve
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Recent opposition to trade liberali
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ought back to the United States and
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conference attended by the main all
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One of the key principles of the GA
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arriers. [1] The trade remedy laws
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ound tariff rate the country reache
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instead, they are put into place ov
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5. The WTO principle to treat an im
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subsidies. Recall that export subsi
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As a result of Uruguay Round negoti
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Agreement, or TRIPS. The TRIPS inte
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1.7 The World Trade Organization LE
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1. Consultations. The DSB first dem
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countries from choosing more destru
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P, P+ CAFTA-DR FTA PE MA OM R SG U.
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0806.10.20 $1.13/m 3 (Feb. 15-Mar.
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Tariffs vary according to time of e
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1.9 Appendix B: Bound versus Applie
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EXERCISE 1. Jeopardy Questions. As
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2.1 The Reasons for Trade LEARNING
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For example, the Ricardian model of
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2. Learn the major historical figur
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could end up with more of both good
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The primary issue in the analysis o
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Real wages (and incomes) of individ
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he begins planting seeds in the sec
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In this way, we might raise the wel
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2.3 Ricardian Model Assumptions LEA
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Utility Maximization and Demand In
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United States L C + L W = L France
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2. Suppose that the unit labor requ
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KEY TAKEAWAYS The equation aLC QC
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comparative advantage in newspaper
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−aLCaLW⎡⎣⎢hrslbhrsgal=gallb
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KEY TAKEAWAYS Labor productivity i
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2.6 A Ricardian Numerical Example L
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With full employment of labor, prod
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At this point, we can already see a
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The answer to some of these questio
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wC=PCaLC. If production occurs in t
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Thus a good way to think about how
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Similarly, by rearranging the above
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production. But where will they fin
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The focus on real wages allows us t
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Real Wages in Autarky To calculate
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exchange. Thus the real wage of che
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2.11 The Welfare Effects of Free Tr
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Free trade will raise aggregate wel
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Chapter 3 The Pure Exchange Model o
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A Simple Example of Trade Suppose t
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3.2 Determinants of the Terms of Tr
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Persuasion The art of persuasion ca
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KEY TAKEAWAY The terms of trade is
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two individuals make a voluntary ex
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3.4 Three Traders and Redistributio
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is not motivated by profit but inst
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The changes described above assume
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3.6 The Nondiscrimination Argument
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clothing worker. The same applies i
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the page, scroll down to the “Bou
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4.1 Factor Mobility Overview LEARNI
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argument that free trade can only b
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them, but only if the prices are ve
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4.3 Time and Factor Mobility LEARNI
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factor to be moved and become produ
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KEY TAKEAWAY The immobile factor m
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wine workers and cheese workers. Th
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In autarky, the quantity demanded o
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4.7 Depicting a Free Trade Equilibr
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0 the variable does not change A th
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Thus cheese workers are most likely
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Real Wage of Wheat Workers in Terms
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wages. However, these extra profits
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French production and consumption i
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5.1 Chapter Overview LEARNING OBJEC
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less-developed countries have much
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would rise, while the wage rate wou
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Ricardian model, then factor prices
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4. This is by which industries diff
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where KC and KS are the quantities
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Let aLC[labor−hrsrack] represent
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The capital-labor ratio in an indus
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that would employ all the capital i
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The Relationship between Endowments
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Suppose the exogenous variables of
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Adding these two equations vertical
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3. Write the magnification effect f
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tariffs or other government regulat
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If the price of clothing had risen,
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Table 5.6 Numerical Values for Exog
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w∧>PC∧>PS∧>r∧. The effect i
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2. Suppose the price of cheese fall
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this requires a fair amount of adva
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workers per unit of capital in the
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of quantities CS″/CC″. Since CS
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In Figure 5.8 "Free Trade Equilibri
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5.11 National Welfare Effects of Fr
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calculating changes in real income
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who has deposits in a pension plan
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export industry in order to benefit
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Income is redistributed among indiv
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Thus it is always possible to find
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affects the capital-labor ratios in
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1. Describe the pattern of factor f
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assumed to be freely and costlessly
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expansion of output in the export s
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[1] See R. W. Jones, “A Three-Fac
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product line for a representative t
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The total amount of revenue earned
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The horizontal length of Figure 5.1
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Our prime concern, however, is the
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An alternative version of the magni
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8. The magnification effect for pri
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can be used to transport tomatoes o
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esponds to the excess supply of wor
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The effect on workers is, in genera
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Factor Rewards over Time Now let’
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Figure 5.20 Dynamic Import-Capital
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In summary, the models suggest that
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[1] See J. P. Neary, “Short-Run C
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6.2 Economies of Scale and Returns
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produced and if the costs of this e
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6.3 Gains from Trade with Economies
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United States aLC = 1 L = 100 Franc
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Page 290 and 291: KEY TAKEAWAYS A market equilibrium
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Page 300 and 301: where XSUS(.) is the export supply
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Page 328 and 329: zero. Somewhere between a zero tari
Page 332 and 333: KEY TAKEAWAYS An import tariff wil
Page 334 and 335: 7.8 Import Tariffs: Small Country W
Page 336 and 337: 3. The tariff causes a redistributi
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Page 340 and 341: We examine the effects of optimal t
Page 342 and 343: 3. Given player one’s optimal pol
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Page 348 and 349: 7.10 Import Quotas: Large Country P
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Page 352 and 353: KEY TAKEAWAYS To administer a quot
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Page 362 and 363: Quota Rents National Welfare + C
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Page 368 and 369: Next, consider the effects in this
Page 370 and 371: In situations where market changes
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2. Identify the effects of a counte
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Table 7.12 "Welfare Effects of the
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Consumer Surplus − (G + H + I + J
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KEY TAKEAWAYS An antisubsidy law,
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9. What is the change in government
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Notice that a unique set of prices
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in the import country and in the ca
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Figure 7.36 Welfare Effects of a VE
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the quota rents will benefit, but p
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A the variable change is ambiguous
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Mexico, and all wheat sold in Mexic
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7.23 Export Taxes: Large Country We
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Because there are both positive and
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− the variable decreases 0 the va
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If a domestic consumption tax is im
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Equivalency between Domestic and Tr
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An import tariff applied on an impo
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KEY TAKEAWAYS Domestic production
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a Domestic Production Subsidy", whi
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Domestic policies can affect trade
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+ the variable increases − the va
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Domestic consumption taxes are ofte
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Figure 8.3 Inducing Exports with a
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8.7 Consumption Tax Effects in a Sm
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Since the cost to consumers exceeds
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When a specific consumption tax “
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time of the founding of the nation,
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Chapter 9 Trade Policies with Marke
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Market imperfections or market dist
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firm’s welfare) by restricting su
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are neatly kept and homes are well
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Policy-Imposed Distortions Another
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In this section, we will provide an
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Welfare-Improving Policies in a Sec
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Summary of the Theory of the Second
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9.4 Unemployment and Trade Policy L
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Suppose that international market c
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9.2 "Welfare Effects of an Import T
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Begin with the same surge of import
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eliminate the same unemployment imp
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A the variable change is ambiguous
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their own production efficiency imp
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Suppose that the infant industry ar
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This means that in the second perio
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The Economic Argument against Infan
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world efficiency standards, protect
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9.6 The Case of a Foreign Monopoly
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Assuming the monopolist maximizes p
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Import tariff effects on the import
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This shows that although a tariff c
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2. Recognize that a trade policy ca
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consider a large importing country
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the subsidy is set too high, the lo
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9.8 Public Goods and National Secur
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nonexcludable because once it is th
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efficiency loss. Nevertheless, the
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5. The term describing a ìgoodî l
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the environment. On the other hand,
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Pollution Effect National Welfare
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Govt. Revenue Pollution Effect + e
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A Source of Controversy For many en
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This statement points out that many
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noneconomists, providing permits th
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[4] World Trade Organization, “Tr
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product categories. This type of tr
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The key question of interest concer
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Figure 9.10 "Harmful Trade Diversio
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Free trade area effects on Country
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We assume that A has a specific tar
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The simple way to do that is to ima
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Chapter 10 Political Economy and In
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do indeed seek to maximize national
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a representative democracy, governm
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3. This type of lobbying does not i
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much larger than the number of firm
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We can now ask whether a household
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Large groups are much less effectiv
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Because the per-producer benefit of
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clearly he or she would vote for th
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10.7 The Lobbying Problem in a Demo
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Chapter 11 Evaluating the Controver
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the results from any one model. Ins
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increase in national welfare. This
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4. The enhancement of this is what
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of the real world. The real world c
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Another way to deflect the concern
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For example, an optimal tariff or o
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Stuart Mill in hisPrinciples of Pol
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11.5 The Economic Case against Sele
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to eliminate some of the inefficien
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effects, it would then need to meas
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to avoid the use of any such policy
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Selected protection requires detail
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11.6 Free Trade as the “Pragmatic
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