Chapter 4 - Test 1

Small nation

A price taker; faces constant world price level for its import commodity

Import tariff

A tax levied on a in imported product; tax is collected before the shipment can be unloaded at a domestic port; the collected money is called a customs duty

Tariff

A tax levied on a product when it crosses national boundaries

Bonded warehouse

According to U.S. tariff law, dutiable imports can be brought into the U.S. and temporarily left in this, duty free; can be stored, repacked, or further processed here for up to five years; domestically produced goods are not allowed to be put in this; no customs duties are owed at the time of entering; if goods are withdrawn for exportation, payment of duty is not required

Cost-insurance-freight valuation (CIF)

Ad valorem tariffs are levied as a percentage of the imported commodity's total value as it arrives at its final destination; includes transportation costs (insurance and freight); traditionally used by European countries

Tariff escalation

Although raw materials are often imported at zero or low tariff rates, the nominal and effective protection increases at each stage of production

Foreign-trade zone (FTZ)

An area within the U.S. where business can operate without the responsibility of paying customs duties on imported products or materials for as long as they remain within this area and do not enter the U.S. marketplace; customs duties are due only when goods are transferred from the FTZ for U.S. consumption; if the goods never enter the U.S. marketplace, then no duties are paid on those items; can conduct a broader range of business here than in a bonded warehouse

Deadweight loss

Area "b" + "d"

Compound tariff

Combination of specific and ad valorem; ex. $20 plus 5% of the value; often applied to manufactured products embodying raw materials that are subject to tariffs

Protection-biased sector

Consists of import-competing producers, labor unions, representing workers in that industry, and suppliers to the producers in the industry

Protective tariff

Designed to reduce the amount of imports entering a country, thus insulating import-competing producers from foreign competition; allows an increase in the output of import-competing producers that would not have been possible without protection

Infant-industry argument

Does not deny the validity of the case for free trade, but it contends that for free trade to be meaningful, trading nations should temporarily shield their newly developing industries from foreign competition

Level playing field

Domestic producers contend that import restrictions should be enacted to offset these foreign advantages; our producers can compete on equal terms

Ad valorem (of value) tariff

Expressed as a fixed percentage of the value of the imported product (much like a sales tax); usually on manufactured goods because they can be applied to products with a wide range of grade variations

Specific tariff

Expressed in terms of a fixed amount of money per physical unit of the imported product; easy to apply and administer

Revenue tariff

Imposed for the purpose of generating tax revenues and may be placed on either exports or imports

Export tariff

Less common; a tax imposed on an exported product; often used by developing nations; U.S. is not allowed to levy export tariffs--> Constitution

Effective tariff rate

Not only takes into account the nominal tariff rate on a finished product, but also any tariff rate applied to imported inputs that are used in producing the finished product e=(n-ab)/(1-a)

Beggar-thy-neighbor policy

Not sustainable; optimum tariff (only beneficial to the importing nation) and retaliation; hurting your neighbor for your benefit

Tariff evasion

Occurs when individuals or firms evade tariffs by illegal means such as smuggling imported goods into a country

Scientific tariff

Proponents seek to eliminate what they consider to be unfair competition from abroad

Offshore assembly provision (OAP)

Provides favorable treatment to products assembled abroad from U.S. made components

Nominal tariff rate

Rate that is published in the country's tariff schedule; applies to the value of a FINISHED PRODUCT that is imported into a country

Revenue effect

Represents the government's collections of duty; area "c" of small nation model; portion of loss in consumer surplus in monetary terms that is transferred to the gov't; does NOT result in an overall welfare loss--> consumer surplus is merely shifted from the private to the public sector

Free trade argument

States that if each nation produces what it does best and permits trade, over the LONG RUN all will enjoy lower prices and higher levels of output, income, and consumption than could be achieved in isolation; it is persuasive

Large nation

Status applies to U.S. (large importer of autos, steel, oil, and consumer electronics) and to other economic giants such as Japan and the European Union

Smoot Hawley Act of 1930

Tariffs typically hurt consumers so much that jobs decrease; high tariffs made exports crash, which made imports crash because others increased tariffs; valuable inputs (imports) became very expensive; trade winded down

Consumer surplus

The difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay (sum of the surplus for each unit)

Tariff avoidance

The legal utilization of the tariff system to one's own advantage in order to reduce the amount of tariff that is payable by means that are within the law

Protective effect

The loss of the domestic economy resulting from wasted resources used to produce additional products at increasing unit costs; area "b" of small nation model; resources are used less efficiently than they would have been with free trade; real cost to society, not a transfer to other sectors of economy

Consumption effect

The residual not accounted for elsewhere; area "d" of small nation model; real loss of welfare occurs because of the increased price and lower consumption

Producer surplus

The revenue producers receive over and above the minimum amount required to induce them to supply a good; the minimum amount has to cover the producer's total variable costs (sum of the marginal cost of producing each successive unit of output)

Free-on-board valuation (FOB)

The tariff is applied to a product's value as it leaves the exporting country; traditionally used by U.S.

Redistributive effect

The transfer of consumer surplus in monetary terms to the domestic producers of the import-competing product; area "a" of small nation model; does NOT result in an overall loss of welfare for the economy

Customs valuation

Trying to determine the value of an imported product