International Trade - Theory and Policy, 2010a

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Assuming the monopolist maximizes profit, the profit-maximizing output level is found by setting marginal cost equal to marginal revenue. Why? Profit-maximizing output occurs at the quantity level QFT. At that quantity, the monopolist would set the price at PFT, the only price that equalizes demand with its supply. The monopolist’s profit is the difference between total revenue and total cost. Total revenue is given by the product (PFTQFT), the yellow area in the graph. Total cost is equal to average cost (AC) multiplied by output (QFT), given by the checkered area. The monopolist’s profit is represented by the uncheckered yellow rectangular area in Figure 9.4 "Imports from a Foreign Monopoly Firm". Strategic Trade Policy Generally, strategic trade policy refers to cases of advantageous protection when there are imperfectly competitive markets. The case of a foreign monopolist represents one such case. More specifically, though, the presence of imperfect competition implies that firms can make positive economic profit. Strategic trade policies typically involve the shifting of profits from foreign firms to domestic firms. In this way, national welfare can be improved, although it is often at the expense of foreign countries. In this example, we shall consider the welfare effects of a specific tariff set equal to t. The tariff will raise the cost of supplying the product to the domestic market by exactly the amount of the tariff. We can represent this in Figure 9.5 "A Tariff on Imports from a Foreign Monopoly Firm" by shifting the marginal cost curve upward by the amount of the tariff to MC + t. The monopolist will reduce its profit-maximizing output to QTand raise its price to PT. Note that the price rises by less than the amount of the tariff. Figure 9.5 A Tariff on Imports from a Foreign Monopoly Firm Saylor URL: http://www.saylor.org/books Saylor.org 477
Table 9.9 "Welfare Effects of a Tariff" provides a summary of the direction and magnitude of the welfare effects to producers, consumers, and the government in the importing country as a result of the import tariff. The aggregate national welfare effects are also shown. Table 9.9 Welfare Effects of a Tariff Importing Country Consumer Surplus − (a + b + c) Producer Surplus 0 Govt. Revenue + d National Welfare d − (a + b + c) Import tariff effects on the importing country’s consumers. Consumers of the product in the importing country suffer a reduction in surplus because of the higher price that prevails. Refer to Table 9.9 "Welfare Effects of a Tariff" and Figure 9.5 "A Tariff on Imports from a Foreign Monopoly Firm" to see how the magnitude of the change in producer surplus is represented. Import tariff effects on the importing country’s producers. It is assumed that there are no domestic producers of the goods; thus there are no producer effects from the tariff. Saylor URL: http://www.saylor.org/books Saylor.org 478
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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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thirty racks of clothing, then each
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model best describes markets in whi
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2. Each firm produces a product tha
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2. The demand assumption in which e
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Keep in mind that this is the equil
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KEY TAKEAWAYS A market equilibrium
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1. If the product is such that an i
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varieties may increase aggregate we
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7.1 Basic Assumptions of the Partia
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2. The term used to describe a coun
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where XSUS(.) is the export supply
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This implies also that world supply
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1. The price that equalizes one cou
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The price that ultimately prevails
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Surplus", some firm would be willin
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Changes in Producer Surplus Suppose
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2. The term used to describe a meas
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the same price for their product re
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to purchase the Mexican wheat at $1
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The effect on the foreign price is
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The quantity of imports and exports
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the sum of the gains exceeds the su
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indicate the effect of each policy
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7.6 The Optimal Tariff LEARNING OBJ
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zero. Somewhere between a zero tari
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3. The tariff rate that corresponds
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KEY TAKEAWAYS An import tariff wil
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7.8 Import Tariffs: Small Country W
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3. The tariff causes a redistributi
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1. Where on the graph is the level
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We examine the effects of optimal t
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3. Given player one’s optimal pol
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The goal of a cooperative equilibri
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1. Use the information provided in
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7.10 Import Quotas: Large Country P
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An import quota will reduce the qua
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KEY TAKEAWAYS To administer a quot
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demand is equal to the quota level.
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market decreases producer surplus i
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Foreign National Welfare 2. Suppose
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This implies that, in the case of a
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Quota Rents National Welfare + C
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Import Quota (Administered by Givin
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to as tariffication. In this way, f
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Next, consider the effects in this
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In situations where market changes
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where S is the specific export subs
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7.17 Export Subsidies: Large Countr
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the subsidy payments are made, then
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An export subsidy of any size will
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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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Page 434 and 435: time of the founding of the nation,
Page 436 and 437: Chapter 9 Trade Policies with Marke
Page 438 and 439: Market imperfections or market dist
Page 440 and 441: EXERCISE 1. Jeopardy Questions. As
Page 442 and 443: firm’s welfare) by restricting su
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Page 446 and 447: Policy-Imposed Distortions Another
Page 448 and 449: In this section, we will provide an
Page 450 and 451: Welfare-Improving Policies in a Sec
Page 452 and 453: Summary of the Theory of the Second
Page 454 and 455: 9.4 Unemployment and Trade Policy L
Page 456 and 457: Suppose that international market c
Page 458 and 459: 9.2 "Welfare Effects of an Import T
Page 460 and 461: Begin with the same surge of import
Page 462 and 463: eliminate the same unemployment imp
Page 464 and 465: A the variable change is ambiguous
Page 466 and 467: their own production efficiency imp
Page 468 and 469: Suppose that the infant industry ar
Page 470 and 471: This means that in the second perio
Page 472 and 473: The Economic Argument against Infan
Page 474 and 475: world efficiency standards, protect
Page 476 and 477: 9.6 The Case of a Foreign Monopoly
Page 480 and 481: Import tariff effects on the import
Page 482 and 483: This shows that although a tariff c
Page 484 and 485: 2. Recognize that a trade policy ca
Page 486 and 487: consider a large importing country
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Page 490 and 491: 9.8 Public Goods and National Secur
Page 492 and 493: nonexcludable because once it is th
Page 494 and 495: efficiency loss. Nevertheless, the
Page 496 and 497: 5. The term describing a ìgoodî l
Page 498 and 499: the environment. On the other hand,
Page 500 and 501: Pollution Effect National Welfare
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Page 504 and 505: A Source of Controversy For many en
Page 506 and 507: This statement points out that many
Page 508 and 509: noneconomists, providing permits th
Page 510 and 511: [4] World Trade Organization, “Tr
Page 512 and 513: product categories. This type of tr
Page 514 and 515: The key question of interest concer
Page 516 and 517: Figure 9.10 "Harmful Trade Diversio
Page 518 and 519: Free trade area effects on Country
Page 520 and 521: We assume that A has a specific tar
Page 522 and 523: The simple way to do that is to ima
Page 524 and 525: Chapter 10 Political Economy and In
Page 526 and 527: 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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