Chapter 9: The Instruments of Trade Policy
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> They would have been willing to pay $10 for the 10th unit, however, and thus receive $____ in consumer surplus from that unit.
$1
Basic Tariff Analysis: Measuring the Amount of Protection---> Before the tariff it would have been worth assembling a car locally if it could be done for $2,000($8,000-$6,000) ; after the tariff, local assembly takes place only if it can be done for ______
$1,400($8,000-$6,000)
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> For example, suppose that the maximum price at which consumers will buy 10 units of a good is $10. Then the 10th unit of the good purchased must be worth $_____ to consumers.
$10
Basic Tariff Analysis: Measuring the Amount of Protection---> now it will take place even if it costs as much as $4,000 (the difference between the ____ and the ____).
$10,000 price and the cost of parts
Basic Tariff Analysis: Effects of a Tariff ---> If Home imposes a tax of $2 on every bushel of wheat imported, shippers will be unwilling to move the wheat unless the price difference between the two markets is at least ____
$2
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> A producer willing to sell a good for $2 but receiving a price of $5 gains a producer surplus of $____
$3
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> They would also have been willing to pay $12 for the 9th unit; in that case, they would have received $____ of consumer surplus on that unit, and so on.
$3
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> If, for example, a consumer would have been willing to pay $8 for a bushel of wheat but the price is only $3, the consumer surplus gained by the purchase is ____
$5
Basic Tariff Analysis: Measuring the Amount of Protection---> Before the tariff, domestic assembly would take place only if it could be done for $2,000 (the difference between the $8,000 price of a completed automobile and the ______) or less
$6,000 cost of parts
Basic Tariff Analysis: Measuring the Amount of Protection---> Now suppose that the second country, to encourage domestic production of parts, imposes a 10 percent tariff on imported parts, raising the cost of parts of domestic assemblers from $6,000 to $_____
$6,600.
Basic Tariff Analysis: Measuring the Amount of Protection---> To encourage a domestic auto industry, the first country places a 25 percent tariff on imported autos, allowing domestic assemblers to charge $10,000 instead of ____
$8,000.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> or, replacing these concepts by the areas in Figure 9-9, _____
(a + b + c + d) - a - (c + e) = b + d - e.
Basic Tariff Analysis: In the early 19th century, for example, the United Kingdom used tariffs _____ to protect its agriculture from import competition
(the famous Corn Laws)
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> That is, there are two ____ whose area measures loss to the nation as a whole and a ____ whose area measures an offsetting gain.
-"triangles" -"rectangle"
Basic Tariff Analysis: Measuring the Amount of Protection---> The tariff on parts, then, while providing positive protection to parts manufacturers, provides negative effective protection to assembly at the rate of _____
-30% (-600/2,000)*100 = -30%
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> Normally, Home supply and demand will depend on the price in terms of _____, and Foreign supply and demand will depend on the price in terms of ____
-Home currency -Foreign currency
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Domestic production rises from ____ to ____ while domestic consumption falls from ____ to ____
-S1 to S2 -D1 to D2
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> A useful way to interpret these gains and losses is the following: The triangles represent the ____ that arises because a tariff distorts incentives to consume and produce, while the rectangle represents the _____ that arise because a tariff lowers foreign export prices
-efficiency loss -terms of trade gain
Costs and Benefits of a Tariff: As a result of these price changes, consumers lose in the _____ and gain in the _____
-importing country -exporting country
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> If it were worth less, they would ____; if it were worth more, they would _____
-not purchase it -have been willing to purchase it even if the price were higher
Other Instruments of Trade Policy: Export Subsidies: Theory ---> Like a tariff, an export subsidy can be either ____ (a fixed sum per unit) or ____ (a proportion of the value exported).
-specific -ad valorem
Costs and Benefits of a Tariff: A tariff raises the price of a good in ____ and lowers it in _____
-the importing country -the exporting country
The Effects of Trade Policy: A Summary All four trade policies benefit producers and hurt consumers. The effects of the policies on economic welfare are at best ambiguous; ____ definitely hurt the nation as a whole, while tariffs and import quotas are potentially beneficial only for _____
-two of the policies -large countries that can drive down world prices
Basic Tariff Analysis: Measuring the Amount of Protection---> That is, the 25 percent tariff rate provides assemblers with an effective rate of protection of ____ percent.
100
Basic Tariff Analysis: Measuring the Amount of Protection---> In this case it would be wrong to say that the assemblers receive only _____ percent protection
25
Other Instruments of Trade Policy: Local Content Requirements ---> Consider, for instance, the earlier automobile example in which the cost of imported parts is $6,000. Suppose that purchasing the same parts domestically would cost $10,000 but that assembly firms are required to use 50 percent domestic parts. Then they will face an average cost of parts of _____ , which will be reflected in the final price of the car.
= $8,000 (0.5 * $6,000 + 0.5 * $10,000)
Basic Tariff Analysis: ____ are taxes that are levied as a fraction of the value of the imported goods (for example, a 25 percent U.S. tariff on imported trucks—see the following box).
Ad valorem tariffs
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> _____ are at the core of the case for trade policy activism discussed in Chapter 10.
Additional benefits and costs not captured by consumer and producer surplus
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Let's look, then, at the net effect of a tariff on welfare. The net cost of a tariff is _____
Consumer loss - producer gain - government revenue
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> _____ measures the amount a consumer gains from a purchase by computing the difference between the price he actually pays and the price he would have been willing to pay.
Consumer surplus
Basic Tariff Analysis: Effects of a Tariff ---> Production of the imported good rises from S1 to S2 , while consumption of the good falls from ____ to _____
D! to D2
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> As a result, Home import demand is _____
D1 - S1
Other Instruments of Trade Policy: Other Trade Policy Instruments ---> There are many other ways in which governments influence trade. We list some of them briefly: 1. _____: This is like an export subsidy except that it takes the form of a subsidized loan to the buyer. The United States, like most other countries, has a government institution, the Export-Import Bank, that is devoted to providing at least slightly subsidized loans to aid exports.
Export credit subsidies.
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> ____ is the excess of what Foreign producers supply over what Foreign consumers demand
Foreign export supply
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> Home demand - Home supply = _____
Foreign supply - Foreign demand.
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> Now let's allow foreign trade. Since the price of wheat in Home exceeds the price in Foreign, shippers begin to move wheat from ____ to _____
Foreign to Home
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> Let's suppose there are two countries, ___ and ____, both of which consume and produce wheat, which can be costlessly transported between the countries
Home and Foreign
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> Thus we quote prices in both markets in terms of ____
Home currency
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> By adding and subtracting from both sides, this equation can be rearranged to say that ____
Home demand + Foreign demand = Home supply + Foreign supply
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> ____ is the excess of what Home consumers demand over what Home producers supply
Home import demand
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> World equilibrium occurs when ____
Home import demand equals Foreign export supply (Figure 9-3)
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> Suppose that in the absence of trade, the price of wheat is higher in ____
Home than it is in Foreign
Other Instruments of Trade Policy: Import Quotas: Theory ---> ____ are thus able to buy imports and resell them at a higher price in the domestic market.
License holders
Other Instruments of Trade Policy: Local Content Requirements ---> _____ have been widely used by developing countries trying to shift their manufacturing base from assembly back into intermediate goods.
Local content laws
Other Instruments of Trade Policy: Voluntary Export Constraints ---> Some voluntary export agreements cover more than one country. The most famous multilateral agreement is the ____-, which limited textile exports from 22 countries until the beginning of 2005.
Multi-Fiber Arrangement
Other Instruments of Trade Policy: Other Trade Policy Instruments ---> 2. ______: Purchases by the government or strongly regulated firms can be directed toward domestically produced goods even when these goods are more expensive than imports. The classic example is the European telecommunications industry. The nations of the European Union in principle have free trade with each other. The main purchasers of telecommunications equipment, however, are phone companies—and in Europe, these companies have until recently all been governmentowned. These government-owned telephone companies buy from domestic suppliers even when the suppliers charge higher prices than suppliers in other countries. The result is that there is very little trade in telecommunications equipment within Europe.
National procurement.
Other Instruments of Trade Policy: Voluntary Export Constraints ---> Such multilateral voluntary restraint agreements are known by yet another three-letter abbreviation: _____
OMA, for "orderly marketing agreement."
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> If P is the price and Q the quantity supplied at that price, then producer surplus is ____
P times Q minus the area under the supply curve up to Q (Figure 9-8)
Basic Tariff Analysis: Effects of a Tariff ---> The tariff raises the price in Home to Pt and lowers the price in Foreign to _____
P*T - t
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> At P*a , supply and demand would be equal in the absence of trade, so the Foreign export supply curve intersects the price axis at _____
P*a
Basic Tariff Analysis: Effects of a Tariff ---> At the trade volume QT , Home import demand equals Foreign export supply when _____
PT - PT* = t
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The tariff raises the domestic price from PW to PT to but lowers the foreign export price from ____ to ____
PW to P*T
Basic Tariff Analysis: Effects of a Tariff ---> The effects of a tariff in the "small country" case where a country cannot affect foreign export prices are illustrated in Figure 9-5. In this case, a tariff raises the price of the imported good in the country imposing the tariff by the full amount of the tariff, from ____ to _____
PW to PW + t
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> At ____, Home supply and demand are equal in the absence of trade, so the Home import demand curve intercepts the price axis at Pa
Pa
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> _____ is an analogous concept.
Producer surplus
Costs and Benefits of a Tariff: _____ gain in the importing country and lose in the exporting country
Producers
Basic Tariff Analysis: Effects of a Tariff ---> In the absence of a tariff, the price of wheat would be equalized at ______ in both Home and Foreign, as seen at point 1 in the middle panel, which illustrates the world market
Pw
Basic Tariff Analysis: Effects of a Tariff ---> Thus the volume of wheat traded declines from QW , the free trade volume, to _____, the volume with a tariff
QT
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> This is equal to the tariff rate t times the volume of imports _____
QT = D2 - S2
Other Instruments of Trade Policy: Other Trade Policy Instruments ---> 3. _____: Sometimes a government wants to restrict imports without doing so formally. Fortunately or unfortunately, it is easy to twist normal health, safety, and customs procedures in order to place substantial obstacles in the way of trade. The classic example is the French decree in 1982 that all Japanese videocassette recorders had to pass through the tiny customs house at Poitiers—effectively limiting the actual imports to a handful.
Red-tape barriers.
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> At P1 Foreign producers supply S*1 , while Foreign consumers demand only D*1 , so the amount of the total supply available for export is ______
S*1 -D*1
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> At the price P1, Home consumers demand D1 , while Home producers supply only ___ .
S1
Basic Tariff Analysis: _____ are levied as a fixed charge for each unit of goods imported (for example, $3 per barrel of oil).
Specific tariffs
Other Instruments of Trade Policy: Voluntary Export Constraints ---> A ____ is a quota on trade imposed from the exporting country's side instead of the importer's.
VER
Other Instruments of Trade Policy: Voluntary Export Constraints ---> This calculation also emphasizes that, from a national point of view, ____ are much more costly than tariffs.
VERs
The Effects of Trade Policy: A Summary Why, then, do governments so often act to limit imports or promote exports?
We turn to this question in Chapter 10.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Further ambiguity is introduced by the role of the government: ____
Will it use its revenue to finance vitally needed public services or waste that revenue on $1,000 toilet seats?
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> or, in other words ____
World demand = World supply.
Other Instruments of Trade Policy: Export Subsidies: Theory ---> The consumer loss is the area ____
a + b
Other Instruments of Trade Policy: Export Subsidies: Theory ---> the producer gain is the area ____
a + b + c
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Since the price consumers face rises from PW to PT , the consumer surplus falls by the area indicated by _____.
a + b + c + d
Basic Tariff Analysis: Effects of a Tariff ---> From the point of view of someone shipping goods, a tariff is just like ____
a cost of transportation.
Basic Tariff Analysis: Measuring the Amount of Protection---> The answer is usually expressed as ____
a percentage of the price that would prevail under free trade. An import quota on sugar could, for example, raise the price received by U.S. sugar producers by 35 percent.
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> If the price is P1 , the quantity demanded is D1 and the consumer surplus is measured by the areas labeled ____ and ____
a plus b.
Basic Tariff Analysis: Tariffs are the oldest form of trade policy and have traditionally been used as ____
a source of government income.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Figure 9-9 illustrates the costs and benefits of ____
a tariff for the importing country
Basic Tariff Analysis: Measuring the Amount of Protection---> Measuring protection would seem to be straightforward in the case of a tariff: If the tariff is an ad valorem tax proportional to the value of the imports, the tariff rate itself should measure the ____; if the tariff is specific, dividing the tariff by the price net of the tariff gives us the ad valorem equivalent
amount of protection
Other Instruments of Trade Policy: Local Content Requirements ---> This means that the effective price of inputs to the firm is ____.
an average of the price of imported and domestically produced inputs.
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> If the price is P1 , the quantity supplied will be S1, and producer surplus is measured by ____.
area c
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> The import demand curve MD is downward sloping because ____
as price increases, the quantity of imports demanded declines
Other Instruments of Trade Policy: Local Content Requirements ---> In the United States, a local content bill for ____ was proposed in 1982 but was never acted on.
automobiles
Other Instruments of Trade Policy: Local Content Requirements ---> Instead, the difference between the prices of imports and domestic goods in effect gets ____.
averaged in the final price and is passed on to consumers
Other Instruments of Trade Policy: Export Subsidies: Theory ---> the government subsidy (the amount of exports times the amount of the subsidy) is the area ____
b + c + d + e + f + g
Other Instruments of Trade Policy: Export Subsidies: Theory ---> The net welfare loss is therefore the sum of the areas _____
b + d + e + f + g
Other Instruments of Trade Policy: Export Subsidies: Theory ---> Of these, ___ and ____ represent consumption and production distortion losses of the same kind that a tariff produces
b and d
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The negative effects consist of the two triangles ___ and ____.
b and d.
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> If the price rises to P2 , the quantity demanded falls to D2 and consumer surplus falls by ____
b to equal just a
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> Now suppose that in order to get consumers to buy 11 units, the price must ____
be cut to $9.
Basic Tariff Analysis: Their true purpose, however, has usually been twofold:_____
both to provide revenue and to protect particular domestic sectors.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The government gains by _____.
collecting tariff revenue
Costs and Benefits of a Tariff: The method for measuring costs and benefits of a tariff depends on two concepts common to much microeconomic analysis: ____ and ____.
consumer and producer surplus
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> For now, however, we will focus on ____ as measured by consumer and producer surplus.
costs and benefits
Other Instruments of Trade Policy: Export Subsidies: Theory ---> So an export subsidy unambiguously leads to ____
costs that exceed its benefits.
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> The same procedure used to derive consumer surplus from the demand curve can be used to ____
derive producer surplus from the supply curve
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> The export of wheat raises its price in Foreign and lowers its price in Home until the _____ has been eliminated.
difference in prices
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The second triangle is the _____ resulting from the fact that a tariff leads consumers to consume too little of the good.
domestic consumption distortion loss
Other Instruments of Trade Policy: Local Content Requirements ---> From the point of view of the _____, a local content regulation provides protection in the same way an import quota does.
domestic producers of parts
Other Instruments of Trade Policy: Export Subsidies: Theory ---> This leads to the additional terms of trade loss _____ , which is equal toffthe quantity exported with the subsidy
e + f + g
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> If the price rises to P2 , the quantity supplied rises to S2, and producer surplus rises to ____
equal c plus the additional area d
Other Instruments of Trade Policy: Export Subsidies: Theory ---> The effects of an export subsidy on prices are ____
exactly the reverse of those of a tariff (Figure 9-11).
Basic Tariff Analysis: Effects of a Tariff ---> If no wheat is being shipped, however, there will be an excess demand for wheat in Home and an ____ in Foreign.
excess supply
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> However, we assume that the _____ between the currencies is not affected by whatever trade policy is undertaken in this market.
exchange rate
Other Instruments of Trade Policy: Tariffs are the simplest trade policies, but in the modern world, most government intervention in international trade takes other forms, such as ____, ____, ____ and ____.
export subsidies, import quotas, voluntary export restraints, and local content requirements.
Other Instruments of Trade Policy: Export Subsidies: Theory ---> An ____ is a payment to a firm or individual that ships a good abroad.
export subsidy
Other Instruments of Trade Policy: Local Content Requirements ---> An interesting innovation in local content regulations has been to allow firms to satisfy their local content requirement by ____
exporting instead of using parts domestically.
Other Instruments of Trade Policy: Local Content Requirements ---> From the point of view of the ______, however, the effects are somewhat different.
firms that must buy locally
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Consider first the ______.
gain to domestic producers.
Basic Tariff Analysis: In developing the theory of trade in Chapters 3 through 8, we adopted a ____. That is, we were keenly aware that events in one part of the economy have repercussions elsewhere.
general equilibrium perspective
Basic Tariff Analysis: However, in many (though not all) cases, trade policies toward one sector can be reasonably well understood without ____
going into detail about those policies' repercussions on the rest of the economy
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> There is a third player here as well: the ____.
government.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> They receive a higher price and therefore have ____
higher producer surplus.
Basic Tariff Analysis: Measuring the Amount of Protection---> In analyzing trade policy in practice, it is important to ask ____
how much protection a tariff or other trade policy actually provides.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Since these gains and losses accrue to different people, the overall cost-benefit evaluation of a tariff depends on ____
how much we value a dollar's worth of benefit to each group.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> So consumers are ____
hurt by the tariff
Basic Tariff Analysis: Measuring the Amount of Protection---> However, there are two problems with trying to calculate the rate of protection this simply. First, ____
if the small country assumption is not a good approximation, part of the effect of a tariff will be to lower foreign export prices rather than to raise domestic prices
Other Instruments of Trade Policy: Import Quotas: Theory ---> An _____is a direct restriction on the quantity of some good that may be imported.
import quota
Other Instruments of Trade Policy: Voluntary Export Constraints ---> From an economic point of view, however, a voluntary export restraint is exactly like an ____ where the licenses are assigned to foreign governments and is therefore very costly to the importing country.
import quota
Basic Tariff Analysis: The importance of tariffs has declined in modern times because modern governments usually prefer to protect domestic industries through a variety of nontariff barriers, such as ____ (limitations on the quantity of imports) and ___ (limitations on the quantity of exports—usually imposed by the exporting country at the importing country's request).
import quotas export restraints
Other Instruments of Trade Policy: Voluntary Export Constraints ---> Voluntary export restraints are generally imposed at the request of the ____ and are agreed to by the exporter to forestall other trade restrictions.
importer
Other Instruments of Trade Policy: Voluntary Export Constraints ---> A VER is always more costly to the ____ than a tariff that limits imports by the same amount.
importing country
Other Instruments of Trade Policy: Local Content Requirements ---> Local content does not place a strict limit on ____.
imports.
Basic Tariff Analysis: In the late 19th century, both Germany and the United States protected their new industrial sectors by _____
imposing tariffs on imports of manufactured goods.
Basic Tariff Analysis: Until the introduction of the ____, for instance, the U.S. government raised most of its revenue from tariffs.
income tax
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> A tariff distorts the incentives of both producers and consumers by ____
inducing them to act as if imports were more expensive than they actually are.
The Effects of Trade Policy: A Summary This table certainly does not look like an advertisement for _____.
interventionist trade policy
Other Instruments of Trade Policy: Import Quotas: Theory ---> The restriction is usually enforced by _____
issuing licenses to some group of individuals or firms.
Other Instruments of Trade Policy: Export Subsidies: Theory ---> In addition, and in contrast to a tariff, the export subsidy worsens the terms of trade because _____
it lowers the price of the export in the foreign market from PW to P*S
Other Instruments of Trade Policy: Export Subsidies: Theory ---> In the exporting country, consumers are hurt, producers gain, and the government loses because ____
it must expend money on the subsidy
Basic Tariff Analysis: Measuring the Amount of Protection---> Even though there is no change in the tariff on assembled automobiles, this policy makes it _____
less advantageous to assemble domestically.
Other Instruments of Trade Policy: Export Subsidies: Theory ---> The price in the exporting country rises from PW to PS, but because the price in the importing country falls from PW to P*S , the price increase is ____
less than the subsidy
Other Instruments of Trade Policy: Import Quotas: Theory ---> It is important to avoid having the misconception that import quotas somehow ____
limit imports without raising domestic prices.
Basic Tariff Analysis: Effects of a Tariff ---> This is the normal result of a tariff and of any trade policy that _____
limits imports.
Other Instruments of Trade Policy: Local Content Requirements ---> A _____ is a regulation that requires some specified fraction of a final good to be produced domestically.
local content requirement
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> Consumer surplus can be derived from the _____
market demand curve (Figure 9-6)
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The ____ are summarized in Figure 9-10.
net welfare effects of a tariff
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> Suppose that the price is $9. Then consumers are willing to purchase only the 11th unit of the good and thus receive ____
no consumer surplus from their purchase of that unit.
Basic Tariff Analysis: Measuring the Amount of Protection---> A simple example illustrates this point: Suppose that an automobile sells on the world market for $8,000 and that the parts out of which that automobile is made sell for $6,000. Let's compare two countries: ____
one that wants to develop an auto assembly industry and one that already has an assembly industry and wants to develop a parts industry
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> Then the 11th unit must be worth ____ to consumers
only $9
Basic Tariff Analysis: Effects of a Tariff ---> The increase in the price in Home, from to , is less than the amount of the tariff, because _____
part of the tariff is reflected in a decline in Foreign's export price and thus is not passed on to Home consumers
Basic Tariff Analysis: For the most part, then, trade policy can be examined in a _____. When the effects on the economy as a whole become crucial, we will refer back to general equilibrium analysis
partial equilibrium framework
Other Instruments of Trade Policy: Local Content Requirements ---> The important point is that a local content requirement does not ____
produce either government revenue or quota rents.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Before the tariff, producer surplus was equal to the area below PW but above the supply curve; with the price rising to PT , this surplus rises by the area labeled a. That is, ____.
producers gain from the tariff
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The first triangle is the _____ resulting from the fact that the tariff leads domestic producers to produce too much of this good.
production distortion loss
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Thus the economy produces at home additional units of the good that it could ____.
purchase more cheaply abroad
Costs and Benefits of a Tariff: To compare these costs and benefits, it is necessary to ____.
quantify them.
Other Instruments of Trade Policy: Import Quotas: Theory ---> The profits received by the holders of import licenses are known as ____
quota rents
Basic Tariff Analysis: Measuring the Amount of Protection---> Trade policies aimed at promoting economic development, for example (Chapter 11), often lead to ____
rates of effective protection much higher than the tariff rates themselves.
Other Instruments of Trade Policy: Voluntary Export Constraints ---> The difference is that what would have been revenue under a tariff becomes ____ by foreigners under the VER, so that the VER clearly produces a loss for the importing country
rents earned
Costs and Benefits of a Tariff: In addition, the government imposing the tariff gains _____.
revenue
Basic Tariff Analysis: Effects of a Tariff ---> In Foreign, the lower price leads to reduced supply and increased demand, and thus a _____
smaller export supply (as seen in the move from point 1 to point 3 on the XS curve).
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> More important is the question of whether the direct gains to producers and consumers in a given market accurately measure the ____.
social gains
Basic Tariff Analysis: Measuring the Amount of Protection---> This effect of trade policies on foreign export prices is ____
sometimes significant
Other Instruments of Trade Policy: Import Quotas: Theory ---> When the rights to sell in the domestic market are assigned to governments of exporting countries, as is often the case, the transfer of rents abroad makes the costs of a quota _____.
substantially higher than the equivalent tariff
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> Generalizing from this example, if P is the price of a good and Q the quantity demanded at that price, then consumer surplus is calculated by _____
subtracting P times Q from the area under the demand curve up to Q (Figure 9-7).
Other Instruments of Trade Policy: Import Quotas: Theory ---> In some important cases, notably ____ and ____, the right to sell in the United States is given directly to the governments of exporting countries.
sugar and apparel
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The costs and benefits to different groups can be expressed as ____
sums of the areas of five regions, labeled a, b, c, d, e.
Basic Tariff Analysis: Effects of a Tariff ---> Thus the price in Home will rise and that in Foreign will fall until the price difference is ____
t
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Since ______, the government's revenue is equal to the sum of the two areas c and e
t = PT - P*T
Basic Tariff Analysis: A ____, the simplest of trade policies, is a tax levied when a good is imported.
tariff
Costs and Benefits of a Tariff: Consumer and Producer Surplus ---> Some of the difficulties related to the concepts of consumer and producer surplus are ______.
technical issues of calculation that we can safely disregard
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> If the country cannot affect world prices (the "small country" case illustrated in Figure 9-5), region e, which represents the _____, disappears, and it is clear that the tariff reduces welfare.
terms of trade gain
Other Instruments of Trade Policy: Import Quotas: Theory ---> When imports are limited, the immediate result is _____
that at the initial price, the demand for the good exceeds domestic supply plus imports
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Despite these problems, it is common for analysts of trade policy to attempt to compute the net effect of a tariff on national welfare by assuming ____
that at the margin, a dollar's worth of gain or loss to each group is of the same social worth.
Basic Tariff Analysis: Effects of a Tariff ---> In Home, producers supply more at the higher price, while consumers demand less, so ____
that fewer imports are demanded (as you can see in the move from point 1 to point 2 on the MD curve).
Basic Tariff Analysis: Measuring the Amount of Protection---> The second problem is ____
that tariffs may have very different effects on different stages of production of a good
Other Instruments of Trade Policy: Local Content Requirements ---> Instead, it allows firms to import more, provided ____.
that they also buy more domestically.
Other Instruments of Trade Policy: Import Quotas: Theory ---> The difference between a quota and a tariff is ____
that with a quota, the government receives no revenue.
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> To determine the world price and the quantity traded, it is helpful to define two new curves: _____ and ____, which are derived from the underlying domestic supply and demand curves.
the Home import demand curve and the Foreign export supply curve
Basic Tariff Analysis: Effects of a Tariff ---> With the tariff in place, however, shippers are not willing to move wheat from Foreign to Home unless ____-
the Home price exceeds the Foreign price by at least t
Other Instruments of Trade Policy: Local Content Requirements ---> In some cases this fraction is specified in physical units, like ____
the U.S. oil import quota in the 1960s
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The gain depends on ____.
the ability of the tariff-imposing country to drive down foreign export prices.
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> Trade will arise in such a market if prices are different in ____
the absence of trade
Other Instruments of Trade Policy: Import Quotas: Theory ---> For example, the United States has a quota on imports of foreign cheese. The only firms allowed to import cheese are certain trading companies, each of which is allocated the right to import a maximum number of pounds of cheese each year; the size of each firm's quota is based on ____.
the amount of cheese it imported in the past.
Other Instruments of Trade Policy: Export Subsidies: Theory ---> When the government offers an export subsidy, shippers will export the good up to the point at which the domestic price exceeds the foreign price by ____
the amount of the subsidy.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> As we saw in Figure 9-7, consumer surplus is equal to _____
the area above the price but below the demand curve
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> As we saw in Figure 9-8, producer surplus is equal to ____
the area below the price but above the supply curve.
Other Instruments of Trade Policy: Import Quotas: Theory ---> In the end, an import quota will raise domestic prices by the same amount as a tariff that limits imports to the same level (except in _____)
the case of domestic monopoly, in which the quota raises prices more than this; see the appendix to this chapter
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> In the important case of a small country that cannot significantly affect foreign prices, this last effect drops out; thus ____
the costs of a tariff unambiguously exceed its benefits.
Basic Tariff Analysis: Effects of a Tariff ---> As a result of the tariff, then, imports fall in ____
the country imposing the tariff.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Against these losses must be set the terms of trade gain measured by the rectangle e, which results from ____
the decline in the foreign export price caused by a tariff.
Basic Tariff Analysis: Measuring the Amount of Protection---> Reasoning similar to that seen in this example has led economists to make elaborate calculations to measure _____
the degree of effective protection actually provided to particular industries by tariffs and other trade policies.
Other Instruments of Trade Policy: Import Quotas: Theory ---> The truth is that an import quota always raises ____
the domestic price of the imported good.
The Effects of Trade Policy: A Summary The effects of the major instruments of trade policy are usefully summarized by Table 9-1, which compares _____.
the effect of four major kinds of trade policy on the welfare of consumers.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> If, for example, the producer gain accrues mostly to wealthy owners of resources, while consumers are poorer than average, the tariff will be viewed differently than if ____
the good is a luxury bought by the affluent but produced by low-wage workers.
Other Instruments of Trade Policy: Voluntary Export Constraints ---> The most famous example is ___
the limitation on auto exports to the United States enforced by Japan after 1981
Other Instruments of Trade Policy: Import Quotas: Theory ---> This causes the price to be bid up until ____
the market clears.
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> The cost of an additional unit of consumption to the economy is the price of an additional unit of imports, yet because the tariff raises the domestic price above the world price, consumers reduce their consumption to ____
the point at which that marginal unit yields them welfare equal to the tariff-inclusive domestic price
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> This means that the value of an additional unit of production to the economy is _____, yet domestic producers expand production to the point at which the marginal cost is equal to the tariff-inclusive price.
the price of the unit of imports it saves
Basic Tariff Analysis: Measuring the Amount of Protection---> A tariff on an imported good raises ____
the price received by domestic producers of that good
Other Instruments of Trade Policy: Local Content Requirements ---> This is sometimes important. For example, U.S. auto firms operating in Mexico have chosen to export some components from Mexico to the United States, even though those components could be produced in the United States more cheaply, because doing so allows _____.
them to use less Mexican content in producing cars in Mexico for Mexico's market.
Basic Tariff Analysis: Measuring the Amount of Protection---> This effect is often the tariff's principal objective—_____
to protect domestic producers from the low prices that would result from import competition.
Basic Tariff Analysis: In either case, the effect of the tariff is ____
to raise the cost of shipping goods to a country
Other Instruments of Trade Policy: Voluntary Export Constraints ---> As we will see in Chapter 10, certain political and legal advantages have made VERs preferred instruments of ____
trade policy in some cases.
Other Instruments of Trade Policy: Voluntary Export Constraints ---> In other words, the bulk of the cost represents a ____ rather than a loss of efficiency
transfer of income
Other Instruments of Trade Policy: Voluntary Export Constraints ---> A study of the effects of the three major U.S. voluntary export restraints of the 1980s— in textiles and apparel, steel, and automobiles—found that about ____ of the cost to consumers of these restraints was accounted for by the rents earned by foreigners.
two-thirds
Other Instruments of Trade Policy: Fortunately, once we have understood tariffs, it is not too difficult to ____
understand these other trade instruments.
Basic Tariff Analysis: Nonetheless, an understanding of the effects of a tariff remains vital for ___-
understanding other trade policies
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> Because the supply of goods available for export rises as the price rises, the Foreign export supply curve is ____
upward sloping
Other Instruments of Trade Policy: Local Content Requirements ---> In other cases the requirement is stated in ____, by requiring that some minimum share of the price of a good represent domestic value added
value terms
Basic Tariff Analysis: Effects of a Tariff ---> The size of this effect on the exporters' price, however, is often very small in practice. When a small country imposes a tariff, its share of the world market for the goods it imports is usually minor to begin with, so that its import reduction has ____
very little effect on the world (foreign export) price.
Other Instruments of Trade Policy: Voluntary Export Constraints ---> A variant on the import quota is the ____, also known as a voluntary restraint agreement (VRA).
voluntary export restraint (VER)
Basic Tariff Analysis: Effects of a Tariff ---> Introducing a tariff, then, drives a ____ between the prices in the two markets.
wedge
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> In each country, ____ is a simple competitive industry in which the supply and demand curves are functions of the market price
wheat
Other Instruments of Trade Policy: Import Quotas: Theory ---> In assessing the costs and benefits of an import quota, it is crucial to determine ____
who gets the rents.
Other Instruments of Trade Policy: Import Quotas: Theory ---> When a quota instead of a tariff is used to restrict imports, the sum of money that would have appeared with a tariff as government revenue is collected by ____.
whoever receives the import licenses.
Basic Tariff Analysis: Supply, Demand, and Trade in a Single Industry ---> At the price Pw where the two curves cross, ___ equals ____
world supply equals world demand
Costs and Benefits of a Tariff: Measuring the Costs and Benefits ---> Domestic consumers also face a higher price, which makes them ____
worse off
