Final Exam

Key assumptions made that allows strategic trade policy to work effectively in the Brander-Spencer example of Airbus and Boeing

Firms can earn excess returns, the economies of scale are large for each firm, and only one firm can profitably produce aircraft

The World Trade Organization (WTO) was organized as a successor to the

General Agreement of Tariffs and Trade (GATT)

When are preferential trade agreements welfare-IMPROVING?

When they lead to trade creation

To maximize its profits, the monopolist produces at the point

Where the marginal revenue MR earned from selling one more unit equals the marginal cost MC of producing one more unit.

Free Trade and Efficiency argument

Would let consumers and producers make their choices based on the real costs of goods, not artificial prices determined by government policy

The median voter model and trade policy

Does not work well in the area of trade policy,

IN the case of a free trade agreement, the members what tariff rates against the outside world?

-Members act independently in setting tariff rates against the outside world.

In customs area, the members what with regards to tariff rates against the outside world?

-Members agree to establish common tariff rates against the outside world.

Customs unions differ from free trade areas by the manner in which what?

-The manner in which member countries apply tariffs to nonmembers.

if tariffs, quotas, and subsidies each cause net welfare losses, why are they so common, especially in agriculture, among the industrialized countries such as the United States and the members of the European Union? (2 reasons)

-benefits of policies concentrated among rel. small # of people and costs spread among rel. large # people -Long history of protection in agriculture industry

Additional gains from free trade (2) argument

1) Allow escape from the confines of a narrow domestic market 2) Open new horizons for entrepreneurship

"terms-of-trade" argument against free trade

A LARGE country can improve its terms-of-trade by imposing tariffs, and the optimal tariff is positive

Antidumping duty

A tariff applied against the Foreign discriminating monopoly

The prohibitive tariff is a tariff that

A tariff that is so high that it eliminates imports

Protectionism tends to be concentrated in two sectors

Agriculture and clothing

Two industries most commonly receiving protection

Agriculture and clothing

How is an export subsidy by a large country different from an import quota by a large country?

An export subsidy worsens terms of trade while an import quota improves them

Agree or disagree and why? No point in US complaining about trade policies in Japan or Europe. US needs to give up prejudices about free trade

Disagree, coordinated trade policies lead to better outcomes for national welfare, help governments resist pressure from special interest groups, and avoid trade wars.

Problem of Collective Action (explained)

Driven by the idea that individuals may have little incentive to act politically on behalf of groups to which they belong, those groups which are well organized-- typically small groups with a lot at stake-- are often able to get policies that serve their interests at the expense of the majority.

Political argument for free trade

Help to clean up domestic politics

In the exporting country, an export subsidy will (consumers & country welfare)

Hurt consumers and lower the overall economic welfare of the exporting country.

Optimal tariff argument

In a LARGE country, a TARIFF or QUOTA can favorably shift the terms of trade such that the tariff REVENUE EXCEEDS the welfare LOSS

The existence of marginal social benefits which are not marginal benefits for the industry producing the import substitutes is an argument

Is an argument rejecting free trade and supporting governmental involvement

Brander-Spencer analysis states that

Monopoly profits can be moved from one country to another by a government subsidy

Was a subsidy enables both firms to operate profitably a key assumption of Brander-Spencer Airbus & Boeing example?

No it was not. 3 of them were firms can earn excess returns, the economies of scale are large for each firm, and only one firm can profitably produce aircraft

Customs unions and free trade areas are examples of what trading agreements?

Preferential trading agreements (even though they do entail a certain amount of discrimination against nonmembers)

A game-theory explanation of the paradox that even though all countries would benefit if each chose free trade, in fact each tends to follow protectionist policies

Prisoner's dilemma

Main reason explaining why agriculture enjoys protective tariffs in the U.S.?

Producers (who gain) are well organized, while consumers (who lose) are not.

If a good is imported into (SMALL) country H from country F, then the imposition of a tariff in country H

Raises the price in country H and does not affect its price in country F

If a good is imported into (LARGE) country H from country F, then the imposition of a tariff in country H

Raises the price of the good in H and lowers it in F

The fact that trade policy often imposes harm on large numbers of people, and benefits only a few may be explained by

The problem of collective action

An export subsidy doesn't differ from a tariff in which way?

They both result in efficiency loss

Why are international negotiations important in order to reduce tariff rates worldwide?

They help avoid Trade Wars

Collective Action

Trade policy often imposes costs on large number of people, and benefits only a few is explained by this

The median voter model states what and makes what assumptions (2)?

a majority rule voting system will select the outcome most preferred by the median voter. 1) Voters can place all election alternatives along a one-dimensional political spectrum. 2) Voters' preferences are single-peaked, which means that voters choose the alternative closest to their own view

An export subsidy is

a payment to a firm or individual that ships a good abroad

An export subsidy differs from a tariff in four ways, which are

a tariff discourages imports, is applied to imports, generates revenue, and is a tax

Producer Surplus (where on graph)

area above the supply curve and under the price line

Consumer Surplus (where on graph)

area under the demand curve and above the price line

The median voter model implies that

many people will be dissatisfied with the size of government in the economy.

Foreign Discriminating Monopoly

which charges a lower price to Home than to firms in its own local market and is therefore dumping its product into the Home market.