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Chapter 8 Analysis of Tariffs plus Appendixes C & D

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1 Chapter 8 Analysis of Tariffs plus Appendixes C & D
Link to syllabus Chapter 8 Analysis of Tariffs: Plus appendices C & D Tariffs: specific, ad valorem. Could note that U.S. constitution prohibits tariffs on exports Previews of conclusions: Tariffs almost always lower world well-being Tariffs usually lower individual country’s well-being Except: optimal tariff. Second best. Income distribution issues

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
Calculation of national effect assumes one-dollar, one-vote metric. Consumers lose a+b+c+d. Producers gain a. Government gets c. Net loss is b+d. Loss is $6 million. Total amount spent on bikes was $480 million, so loss is 1.2% of imports.

5 U.S. tariff rates (McBrue)
Page 106 McC/Brue text U.S. tariff rates (McBrue) U.S. Tariffs from McBrue text. Discussion of protectionism: Uses tariffs, quotas, NTBs, export subsidies. Why such intervention? Don’t understand gains from trade Political consideration Discussion of Multilateral trade arrangements, Free trade zones. Smoot Hawley GATT/WTO European Union Mentions EU protectionism, acting as a trade bloc. Euro NAFTA (1993/4). Criticizes predictions of job losses.

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
Effective rate of protection, (v’-v)/v [x100] ERP percentage by which the entire set of tariffs affects the industry’s value added. (Protection taking into account impact of tariffs on inputs). 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 = ( )/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=( )/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%. ERP Calculations

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. Figure 4.4 Specialization and Trade and Tariffs page 129

10 Figure 8.5 page 158 A large country imposes a small tariff
Large country can have monopsony power, and realize a terms of trade effect. Home country’s gain is e-(b+d). There is arguably a maximum level, whose size depends on foreigners’ elasticities of supply and demand [inverse of elasticity of foreign offer curve] (book derives formula in appendix). This worsens world’s welfare as a whole. Other versions of “optimal tariff”: prohibitive (cannot be optimal in our sense); maximize gov’t revenue. Retaliation.

11 Fig. 8.5 p. 160. A Large Country Imposes a Small Tariff
Figure 8.5 p 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 Figure C.1 (Appendix C) Derivation of Offer Curve Figure C.1 p. 676 (Appendix C) Derivation of Offer Curve Offer curves: Origin is different: prices etc. “cup” toward axis of imported product. Farther out you are, better off you are

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
Figure D.2 page 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 Domestic Price $0.12/lb $ 0.10/lb Domestic Consumption Domestic production Imports Calculate: Domestic consumers’ gain from removing the tariff domestic producers’ loss from removing the tariff The government tariff revenue loss Net effect on national well-being Problem #5 page 162.

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