ECON Exam 1- Ch. 4-5 Study Questions & Explanations

Quotas tend to be more restrictive than import tariffs because

Quotas directly limit the number of goods that can enter the home nation

Different forms of dumping

Firms with temporary inventories may resort to sporadic dumping to sell their products overseas at lower prices than at home. Firms may resort to predatory dumping to cut prices overseas to eliminate competitors. Persistent dumping refers to an effort to maximize profits when firms continuously sell abroad at lower prices than at home.

Producer and consumer surplus

By influencing market prices, trade restrictions influence consumer and producer surplus. A decrease in the market price results in an increase in consumer surplus and a decrease in producer surplus. By the same token, an increase in the market price results in a decrease in consumer surplus and an increase in producer surplus.

Revenue for quota vs. tariff

Quotas have many of the same economic effects as tariffs but they tend to be more restrictive. A quota's revenue effect generally accrues to domestic importers or foreign exporters, depending on the degree of market power they possess. If government desired to capture the revenue effect, it could auction import quota licenses to the highest bidder in a competitive market

Why might U.S. steel-using firms lobby against the imposition of quotas on foreign steel sold in the United States?

Quotas increase input prices, thereby contributing to higher product prices and loss of competitiveness

Producer Surplus

The difference between the minimum amount that producers would be willing sell their products for and the actual amount they receive

Revenue effect from a voluntary export quota

Under an import quota, the distribution of the revenue effect is indeterminate and depends on the relative bargaining power of foreign producers and domestic buyers. Because voluntary export quotas are typically administered from the supply side of the market, the largest share of the revenue effect tends to be captured by foreign (in this case, Japanese) exporters.

How does the revenue effect of an import quota differ from that of a tariff?

a quota's revenue effect generally accrues to domestic importers or foreign exporters, whereas the tariff's revenue tends to be captured by the government.

True or False: The distribution of the revenue effect would tend to accrue to American automakers

false

Which quota tends to result in a greater welfare loss for the home economy?

A voluntary export quota imposed by a foreign government

True or False: Because voluntary export quotas are typically administered from the demand side of the market, the domestic importer tends to capture the largest share of the quota revenue.

false

The imposition of a tariff on a large nation _________ its terms of trade, while trade volume _______

improves; declines

Suppose a large economy imposes a specific tariff of $1,000 on imported appliances. If the terms-of-trade effect exceeds the deadweight losses resulting from the tariff, its national welfare

increases

Which of the following are the major nontariff trade barriers?

subsidies; antidumping regulations

A _____________ in the market price results in an increase in consumer surplus and a decrease in producer surplus.An _______________ in the market price results in an increase in producer surplus and a decrease in consumer surplus.

A decrease; an increase

Which of the following defines an ad valorem tariff?

A fixed percentage of the value of the imported product as it enters the country

Large nation tariff effects

A large economy that imposes a tariff on imports will realize an improvement in its terms of trade. If the favorable terms-of-trade effect—the tariff revenue extracted from foreign producers in the form of a lower supply price—more than offsets the deadweight losses resulting from the tariff, national welfare will improve

Different types of tariffs

A specific tariff is expressed as a fixed amount of money per unit of the imported product. An ad valorem tariff is a fixed percentage of the value of the imported product as it enters the country. A compound tariff combines a specific tariff and an ad valorem tariff.

Which of the following tariffs provide protection to domestic producers during a business recession?

A specific tariff; a compound tariff

Tariff-rate quota

A tariff-rate quota displays both tariff-like and quota-like characteristics. It allows a specified number of goods to be imported at a lower tariff rate (the within-quota rate), whereas any imports above this level face a higher tariff rate (the over-quota rate). A tariff-rate quota attempts to minimize the consumer costs of protectionism by applying a modest within-quota tariff rate; it also shields home producers from severe import competition with a stiffer over-quota tariff rate. Of a tariff quota's revenue effect, a portion accrues to the domestic government, while the remainder is captured by domestic importers or foreign exporters as windfall profits

Why is a tariff-rate quota viewed as a compromise between the interests of the domestic consumer and those of the domestic producer?

A tariff-rate quota shields home producers from severe import competition with a stiffer over-quota tariff rate; A tariff-rate quota minimizes the consumer costs of protectionism by applying a modest within-quota tariff rate.

Which of the following accurately describe the effects of an import tariff imposed on steel?

An increase in jobs and compensation in the domestic steel industry; A loss of international competitiveness

Import subsidy vs. tariff and quota

Because the price faced by domestic consumers under a domestic production subsidy is the same as under free trade, such a subsidy, unlike a tariff or quota, doesn't distort choices of domestic consumers. Hence, domestic production subsidies avoid the deadweight losses due to the consumption effect.

Why US steel-using firms might lobby against quotas on foreign steel

By contributing to a scarcity of steel in the domestic market, quotas lead to higher steel prices and production costs for domestic steel-using firms. Such cost increases detract from their international competitiveness

Which of the following explains why a subsidy may provide import-competing producers the same degree of protection as tariffs or quotas but at a lower cost in terms of national welfare?

Domestic production subsidies avoid the deadweight losses due to the consumption effect.

arguments for trade restrictions

Economists generally contend that most arguments for trade restrictions cannot withstand empirical analysis. The infant-industry and national security arguments may have some validity, but they must be highly qualified.

Which of the following are major forms of subsidies that governments grant to domestic producers?

Export subsidies; Domestic production subsidies

In 1980, the U.S. auto industry proposed that import quotas be imposed on foreign-produced cars sold in the United States. Which of the following are the consequences of this policy?

Higher employment in the U.S. auto industry; Deadweight losses in production and consumption

nontariff trade barriers

Import quotas Orderly marketing agreements Domestic content requirements Subsidies Antidumping regulations Discriminatory government procurement practices Social regulations Sea transport and freight restrictions

Impact of import quotas

Import quotas enable domestic firms and workers in protected industries to enjoy higher sales, profits, and employment. However, consumers face higher prices and expenditure levels, and the economy as a whole suffers deadweight losses in production and consumption

Which of the following are arguments for trade restrictions that might be considered valid in today's world?

Infant-industry argument; National security argument

Which of the following accurately describe sporadic, persistent, or predatory dumping?

Predatory dumping refers to firms cutting prices overseas to eliminate competitors.

Large nation tariff impact

Since a large nation faces an upward-sloping (rather than a horizontal) product supply curve, when it imposes a tariff, the reduction in quantity demanded puts downward pressure on the supply price, improving the importing country's terms of trade. However, a tariff causes the volume of imports to decrease, which reduces the nation's welfare by reducing its consumption of low-cost imports. In sum, there is a gain because of improved terms of trade and a loss due to a reduced import volume

Tariff's and nations welfare

Since a small nation is a price taker and faces a horizontal world supply schedule, neither the price nor quantity of world output would be affected by the tariff. Thus, the world's welfare will not be affected. Additionally, while a tariff may raise a country's producer surplus, a change in a country's producer surplus has no particular bearing on whether global welfare is increased or decreased by a tariff. By contrast, if a tariff triggers retaliatory tariffs by other countries, the volume of international trade will decline, and world welfare will suffer. By increasing the price of trade goods, tariffs lower the volume of trade. For the world as a whole, there is no favorable terms-of-trade effect to offset the trade volume effect.

Tariffs providing protection

Since a specific tariff is a fixed monetary duty per unit of imported product, the degree of protection afforded by a specific tariff varies inversely with changes in import prices. Thus, during a recession, when cheaper products are purchased, a specific tariff provides better protection than an ad valorem or a compound tariff. More generally, specific tariffs cushion domestic producers progressively against foreign competitors who cut their prices.

Tariff vs. quota

Since import quotas directly limit the number of goods that can enter the home nation, they tend to be more restrictive than import tariffs, which may be circumvented by foreign producers absorbing the tariff as a lower selling price. During periods of rising domestic demand, quotas hold down imports more effectively than tariffs.

subsidies

Subsidies include domestic production subsidies and export subsidies. Methods used to subsidize producers include tax concessions, low interest rate loans, and loan guarantees, as well as outright cash disbursements and insurance arrangements

Although tariffs may improve the welfare of a single nation, the world's welfare may decline. Under what conditions would this be true?

Tariffs lower the volume of trade; A tariff sparks retaliatory tariffs by other nations

impact of import tariff

The benefits and costs of protecting domestic producers from foreign competition are based on the direct effects of an import tariff. On the one hand, import-competing producers and workers can benefit from tariffs through increases in output, profits, jobs, and compensation. On the other hand, a tariff imposes costs on domestic consumers in the form of higher prices for protected products and reductions in the consumer surplus. A tariff placed on imported steel increases the costs of steel-using manufacturers. This increase leads to a higher price charged by the manufacturers and a loss of international competitiveness.

Consumer Surplus

The difference between the amount that buyers would be willing and able to pay for a good and the actual amount the buyer pays

Welfare loss of an import quota vs. a voluntary export quota

Under an import quota, the distribution of the revenue effect is indeterminate and depends on the relative bargaining power of foreign producers and domestic buyers. Because voluntary export quotas are typically administered from the supply side of the market, the largest share of the revenue effect tends to be captured by foreign exporters. Thus, the deadweight loss for the home economy tends to be greater under an export quota than under an import quota.

antidumping laws

Under current rules, dumping can occur when a foreign producer sells goods at less than fair value. Fair value is equated with average total cost plus an 8% allowance for profit. However many economists argue that antidumping laws that use average total cost as a yardstick to determine fair value are unfair. Economic theory suggests that under competitive conditions, firms price their goods at average variable costs that are below average total costs. Therefore, the antidumping laws punish firms that are simply behaving in a manner typical of competitive markets. Moreover, the law is unfair because U.S. firms selling at home are not subject to the same rules.

Voluntary export restraints

Voluntary export restraints are market sharing agreements negotiated by producing and consuming countries. Because voluntary export quotas are typically administered from the supply side of the market, the foreign exporter tends to capture the largest share of the quota revenue. Voluntary export restraints tend to be more costly than tariffs.

While antidumping laws are defined in terms of ______ , it is rational for firms to export their product for losses, provided that prices _______ marginal cost.

average total cost; exceed