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Chapter 8 Analysis of Tariffs plus Appendixes C & D Link to syllabus.

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Presentation on theme: "Chapter 8 Analysis of Tariffs plus Appendixes C & D Link to syllabus."— Presentation transcript:

1 Chapter 8 Analysis of Tariffs plus Appendixes C & D Link to syllabus

2 Figure 8.2 page 147 The effect of a tariff on producers

3 Figure 8.3 page 150 Effect of a tariff on consumers

4 Figure 8.4 page 152. The net national loss from a tariff

5 U.S. tariff rates (McBrue) Page 106 McC/Brue text

6 Effective Rate of Protection Effective rate of protection is an analysis of the protection given to an industry, taking into account not only the direct effect of tariffs helping that industry, but also the indirect impact of the nation’s tariffs on inputs into that industry. Effective rate of protection = (v’-v)/v [x100], where v is international value added, and v’ is the domestic value added.

7 Effective rate of protection, page 155 So ERP = (v’ – v)/v = (99 – 80)/80 = 23.8%

8 Example of ERP calculations Consider the industry that produces computers. Suppose there is one purchased input, called chips. Both computers and chips can be imported Suppose the world price of computers is $1,500/unit, and that of chips is $600, leaving $900/unit as the domestic value added. If there is a 20% tariff on computers, and free trade in chips, then the price of the computer will rise to $1,800, allowing value added to rise to $1,200. ERP = (1200-900)/900 = 33%. If there is no tariff on computers, but a 25% tariff on chips, then chips Will cost $750, while the price of the finished computer stays at $1500, Leading to a reduction in domestic value added to $750, and ERP=(750-900)/900 = - 16%. If there is a 10% tariff on computers, and 33% on chips, then ERP =-6% If there is 30% tariff on computers, and 30% on chips, then ERP = 30%.

9 Figure 4.4 Specialization and Trade and Tariffs (from Thompson: a different textbook. Not covered in Pugel) Autarky: production and consumption at A. Free trade, production at P, consumption at T. Country exports S (services). With a tariff, production moves to P’ and consumption is at T’. Assuming world prices have not changed, T’ must correspond to a lower level of community indifference than T.

10 Figure 8.5 page 158 A large country imposes a small tariff

11 Fig. 8.5 p. 160. A Large Country Imposes a Small Tariff

12 Figure 8.6 page 16. Nationally optimal tariff

13 Figure C.1 (Appendix C) Derivation of Offer Curve Page 676

14 Figure D.1 p. 676. How a slight tariff can be beneficial to a large country

15 Figure D.2 p. 678. Optimal Tariff

16 Problem #5 page 162. w/tariff w/o tariff World Price $0.10 / lb. $0.10/lb Tariff $ 0.02/lb 0 Domestic Price $0.12/lb $ 0.10/lb Domestic Consumption 20 22 Domestic production 8 6 Imports 12 16 Calculate: a)Domestic consumers’ gain from removing the tariff b) domestic producers’ loss from removing the tariff c)The government tariff revenue loss d)Net effect on national well-being

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