Econ test 2

Effective Tariff Rate Formula

(n-ab)/(1-a) N=nominal tariff rate on the final product A=the ratio (%) of the value of the imported component to the value of the finished product B=the nominal tariff rate on the imported components

Protective Tariff

a tariff designed to reduce the amount of imports entering a country, thus insulating import-competing producers from foreign competition

Revenue Tariff

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

Tariff-Rate Quota

this allows a specific number of goods to be imported at one tariff rate, whereas any imports above this level face a higher tariff rate

Impacts of a tariff (large and small country)

-Higher prices -Deadweight loss -Output is lower then if had free trade -Domestic production up a little bit Only people who may benefit from tariff short term is producers Tariffs hurt our producers and doesn't work well

Compound Tariff

-a combination of specific and ad valorem tariffs -applied to products that contain raw materials that are taxed -the specific neutralizes the cost disadvantage of domestic manufacturers that results from tariff production granted to domestic suppliers of raw materials -the ad valorem grants protection to the finished-goods industry

Common Market

-a group of trading nations that permits the free movement of goods and services among member nations, the inflation of common external trade restrictions against nonmembers, and the free movement of factors of production across national borders within the economic bloc.

Import Quota

-a physical restriction on the quantity of goods that can be imported during a specific time period -it generally limits imports to a level below what would occur under free trade conditions

tariffs vs quotas:

-a quota is restrictive in its barrier and imports -a tariff is not as restrictive -a quota restricts competition -a tariff allows for competition -a quota causes an increase in price when there is an increase in demand -a tariff price stays the same when there is an increase in demand

Common Agricultural Policy (CAP)

-a way of using whatever necessary (export quotas, subsidies, etc) to maintain high prices for farm products -EU says they need it to guarantee food for population and to assist farmers with production and efficiency and standard of living -this makes it difficult for others countries (like the US) to enter into this market -since the price increases, there is more supply, this extra is dumped into the world market at low prices (that don't reflect costs) -this causes a severe downward pressure on world prices (prices are much higher)

Global Quota

-a way to administer import limitations -It allows a specific number of goods to be imported each year, but it does not specify from where the product is shipped or who is allowed to import -When the specific amount has been imported, additional imports of the product are prevented for the remainder of the year

Custom Union

-agreement among two or more trading partners to remove all tariff or nontariff trade barriers between themselves -In addition, each member nation imposes identical trade restrictions against nonparticipants. -This is done to promote free trade within the customs union

Ad valorem (of value) Tariff

-expressed as a fixed percentage of the value of the imported product (like a sales tax) -it tends to maintain a constant degree of protection for domestic producers during periods of changing prices -the real proportional tax burden or protection does not change as the tax base changes Customs valuation-determining the value of an imported product (problem because import prices tend to fluctuate over time and import prices are estimated by customs appraisers who may disagree on product values)

Specific Tariff

-expressed in terms of a fixed amount of money per physical unit of the imported product -the degree of protection it affords domestic producers varies inversely with changes in import prices -it also provides domestic producers more protection during a business recession when cheaper products are purchased -they cushion domestic producers progressively against foreign competitors who cut their prices

Voluntary Export Restraint Agreement

-purpose is to moderate the intensity of international competition, -it is when country agrees to limit their exports to another country in order to help out the importing country's domestic producers

Domestic Content Requirements

-requires a minimum percent of a product's total value must be produced domestically -The effect is to pressure both domestic and foreign firms that sell products in the home country to use domestic inputs (workers) in the production of those products. The demand for domestic inputs thus increases, contributing to higher input prices

Effective Tariff Rate

-takes into account not only 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 -It measures the percentage increase in domestic production activities (value added) per unit of output made possible by tariffs on both the finished product and on imported inputs -A given tariff on a product will have a greater protective effect of it is combined with a low tariff on imported inputs than if the tariff on components is high

Economic Integration

-the process of eliminating restrictions on international trade, payments, and factor mobility -It results in the uniting of two or more national economies in a regional trading arrangement

Nominal Tariff Rate

-the tariff rate that is published in the country's tariff schedule -It applies to the value of a finished product that is imported into a country

Selective Quota

-when import quotas are allocated to specific countries -The use of quotas may lead to a domestic monopoly of production and higher prices -Because a domestic firm realizes that foreign producers cannot surpass their quotas, it may raise its prices

Economic Union

-where national, social, taxation and fiscal policies are harmonized and administered by a supranational institution. -it contains a supranational authority for all trade partners

Infant-industry Argument

In free trade, trading nations should temporarily shield their newly developing industries from foreign competition. Otherwise, mature foreign businesses can drive the young domestic businesses out of the market -Once a protective tariff is imposed, its very difficult to remove, even after industrial maturity -It's very difficult to determine which industries will be capable of realizing comparative advantage potential and thus merit protection -It's not valid for mature, industrialized nations -There may be other ways of insulating a developing industry from cutthroat competition such as the government granting a subsidy

Regional Trading Agreement

member nations agree to impose lower barriers to trade within the group of member nations than to trade with nonmember nations

Free Trade Area

members agree to remove all barriers between partner nations but each has their own restrictions on non partner nations (ex: NAFTA)