Presentation on theme: "Chapter 8 Analysis of Tariffs plus Appendixes C & D"— Presentation transcript:
1 Chapter 8 Analysis of Tariffs plus Appendixes C & D Link to syllabusChapter 8 Analysis of Tariffs: Plus appendices C & DTariffs: specific, ad valorem. Could note that U.S. constitution prohibits tariffs on exportsPreviews of conclusions:Tariffs almost always lower world well-beingTariffs usually lower individual country’s well-beingExcept: 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 106McC/BruetextU.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 tradePolitical considerationDiscussion of Multilateral trade arrangements, Free trade zones.Smoot HawleyGATT/WTOEuropean UnionMentions EU protectionism, acting as a trade bloc.EuroNAFTA (1993/4). Criticizes predictions of job losses.
6 Effective Rate of Protection Effective rate of protection is an analysis of the protection given to anindustry, taking into account not only the direct effect of tariffs helpingthat industry, but also the indirect impact of the nation’s tariffs oninputs into that industry.Effective rate of protection = (v’-v)/v [x100], where v is internationalvalue 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 onepurchased input, called chips. Both computers and chips can be importedSuppose the world price of computers is $1,500/unit, and that of chipsis $600, leaving $900/unit as the domestic value added.If there is a 20% tariff on computers, and free trade in chips, then theprice 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 chipsWill cost $750, while the price of the finished computer stays at $1500,Leading to a reduction in domestic value added to $750, andERP=( )/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 consumptionat A.Free trade, production at P, consumptionat 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 levelof 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
13 Figure C.1 (Appendix C) Derivation of Offer Curve Page 676Figure C.1 (Appendix C) Derivation of Offer CurveFigure C.1 p. 676 (Appendix C) Derivation of Offer CurveOffer 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
16 Problem #5 page 162. w/tariff w/o tariff World Price $0.10 / lb $0.10/lbTariff $ 0.02/lbDomestic Price $0.12/lb $ 0.10/lbDomestic ConsumptionDomestic productionImportsCalculate:Domestic consumers’ gain from removing the tariffdomestic producers’ loss from removing the tariffThe government tariff revenue lossNet effect on national well-beingProblem #5 page 162.