Econ 360 Spring 2020 Second Midterm Name

Econ 360 Spring 2020 Second Midterm Name

Econ 360 Spring 2020 Second Midterm Name

Paper For Above instruction

This paper addresses a series of economic questions related to international trade, tariffs, protectionism, and macroeconomic aspects such as current account balances, capital flows, and intellectual property rights. The discussion explores the impact of tariffs, differences between small and large countries regarding trade policy, the rationale behind protectionist measures, and the economic implications of various trade restrictions and policies. Additionally, it examines topics like infant industry arguments, trade barriers, intellectual property agreements, and the effectiveness of economic sanctions. The analysis further differentiates primary and secondary income, explains components of the current account, and discusses the benefits and costs associated with free capital movement, as well as the potential consequences of persistent current account deficits.

Comprehensive Analysis of International Trade Policies and Macroeconomic Variables

Impact of Tariffs on Trade and Domestic Economy

When a country imposes a tariff on imports, it effectively raises the cost of foreign goods, leading to a decrease in import quantities. For example, if the world price of soybeans is $2.00 per bushel, with a domestic supply of 60 million bushels and a demand that matches this quantity, placing a tariff of $0.25 increases the effective price paid by consumers, causing a contraction in imports. Assuming the country is small and thus does not influence the world market price, the tariff will cause imports to decline by the difference between the original import quantity and the new quantity demanded at the higher effective price. Graphically, this results in the upward shift of the import supply curve, reducing the quantity imported.

Regarding domestic production, the higher import price incentivizes domestic producers to increase output, as the tariff makes domestically produced soybeans more competitive relative to imports. The increase in domestic production corresponds to the difference in the quantity supplied at the new, higher effective price, illustrating a shift along the supply curve. The government revenue generated from the tariff is calculated by multiplying the tariff rate ($0.25) by the volume of imports that are still being purchased post-tariff. For example, if imports decrease from 30 million bushels to 15 million bushels, government revenue will equal $0.25 times 15 million, totaling $3.75 million.

Deadweight Losses from Tariffs

Tariffs generate deadweight losses because they distort the efficient allocation of resources by causing consumers to pay higher prices and consume less, while domestic producers produce more than they would in free trade. These losses manifest as two types: consumer surplus loss and producer surplus transfer, which are not offset by gains elsewhere in the economy. The reduction in consumer surplus represents a net loss to society, as consumers either pay more or abstain from purchasing certain quantities. Simultaneously, resources are being allocated inefficiently, discouraging consumption and potentially leading to retaliation by trading partners, thus creating economic inefficiencies beyond the immediate market.

Protectionism: Small vs. Large Countries

For small countries, imposing tariffs usually does not impact the world price of goods because their market size is insufficient to influence global prices. They are deemed price takers in international markets. Conversely, large countries possess significant market power and can influence global prices when implementing trade policies such as tariffs or quotas. For instance, a large country imposing a tariff could elevate the world price of a commodity, affecting both domestic and foreign producers. This ability to alter prices makes their trade policy decisions more complex, as they need to consider both domestic benefits and international consequences, including potential retaliations and distortions in the global market.

Non-tariff Barriers (NTBs) and Trade Reduction

Nontariff measures, such as quotas, import licenses, and sanitary standards, are regulatory or administrative barriers that restrict trade flows without imposing direct taxes. For example, a strict sanitary standard for agricultural products can significantly reduce the quantity of imported foods by making it more difficult or costly for foreign exporters to comply. Conversely, import licenses limit the number of permits issued for certain goods, effectively capping imports. These measures serve various purposes, including protecting domestic industries, safeguarding public health, or aligning with technical standards. While they can be effective in reducing trade, NTBs often raise concerns regarding protectionism and the potential for corruption or favoritism in licensing processes.

Politicians' Preference for Tariffs over Quotas

Economists typically favor tariffs over quotas for several reasons. First, tariffs generate government revenue, which can be used for public investments or to offset other taxes, whereas quotas create rents that benefit importers or license holders without direct public benefit. Second, tariffs are more transparent and easier to administer and monitor, reducing opportunities for corruption. Third, tariffs maintain market efficiency by allowing prices to reflect supply and demand, whereas quotas inherently create shortages or surpluses, leading to deadweight losses and rent-seeking behavior. Overall, tariffs are perceived as a more economically efficient and transparent protectionist measure compared to quotas.

Intellectual Property Rights and International Agreements

Intellectual property rights (IPR) protect creators' rights to their inventions, literature, and artistic works, providing exclusive rights for a limited period. International agreements such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), under the World Trade Organization (WTO), set minimum standards for IPR protection among member countries. The benefits of strong IPR include incentivizing innovation, attracting foreign direct investment, and promoting technological progress. However, costs include potential hindrance to access to affordable medicines and technologies in developing countries, and the potential for abuse of monopolistic rights, which can stifle competition.

Protection of Clothing and Textiles

Both developed and less-developed countries protect clothing and textiles heavily due to multiple reasons. Protecting these industries preserves employment, supports domestic suppliers, and maintains strategic or cultural industries. Additionally, these sectors often face significant competition from low-cost importing countries; thus, protectionist measures help safeguard jobs and local economic stability. Moreover, textile industries are often politically sensitive, prompting governments to implement tariffs or quotas to shield domestic producers from competitive pressure until they can develop competitive capacity or technological advancement.

Infant Industry Argument and Implementation Challenges

The infant industry argument advocates for temporary protection of emerging industries until they become competitive internationally. The main challenge lies in identifying which industries are truly infant and warrant protection versus those that are inefficient or protected due to vested interests. Furthermore, prolonging protection can lead to complacency, inefficiency, and dependence on government support, creating political barriers to removing tariffs once industries mature. Implementation difficulties include monitoring industry development and avoiding rent-seeking behaviors that distort policy goals.

Arguments for Industry Protection and Associated Problems

Common arguments for protection include promoting economic development, safeguarding jobs, and fostering strategic industries. Nonetheless, these arguments often overlook inherent problems such as increased costs for consumers, inefficiency, rent-seeking, and retaliation from trading partners. Some arguments are purely economic, based on market failures or externalities, while others involve noneconomic considerations like national security or cultural preservation. The primary challenge is balancing short-term political gains with long-term economic efficiency and global cooperation.

Effectiveness of Economic Sanctions

Economic sanctions are generally only partially effective in achieving policy goals. While they can exert pressure on targeted governments or entities, their success depends on the level of international cooperation, the resilience of the targeted economy, and the availability of alternative trade routes or resources. Often, sanctions lead to unintended consequences, such as increased clandestine trade or economic hardships for ordinary citizens, without necessarily changing government behavior. Therefore, sanctions are a tool with limited and context-dependent effectiveness, and their use should be carefully evaluated.

Legal Procedures for U.S. Firms Against Foreign Competition

U.S. firms seeking protection from foreign competition can employ four legal procedures: antidumping duties, countervailing duties, trade remedy petitions, and dispute settlement via the WTO. Antidumping duties are used when foreign firms sell products below fair market value, harming domestic industries. Countervailing duties address unfair subsidy practices. Trade remedy petitions involve lobbying agencies to investigate competitive threats, and WTO dispute settlement mechanisms resolve conflicts with trading partners. The use of each depends on specific circumstances, such as unfair pricing or subsidies. Winning such cases typically results in imposed tariffs or sanctions, providing temporary relief to domestic producers.

Distinction Between Primary and Secondary Income

Primary income consists of earnings from cross-border investments, wages, and profits, such as interest, dividends, and remittances. Secondary income involves transfers without corresponding goods or services—such as foreign aid, pensions, and remittances sent home by expatriates. These distinctions are fundamental in understanding a country's international income flows and balance of payments, where primary income reflects actual economic activity, and secondary income shows transfer payments that do not directly contribute to productivity.

Components of the Current Account and Its Consequences

The current account includes trade balance (exports minus imports), primary income, and secondary income. Persistent large deficits, as seen in the U.S. from the 1990s to 2007, can lead to increased borrowing from abroad, rising foreign debt, and vulnerability to exchange rate fluctuations. While deficits can finance productive investments, sustained deficits may indicate underlying economic problems or excessive reliance on foreign capital, potentially leading to financial instability or loss of economic sovereignty.

Official Reserve Assets and Their Importance

Official reserve assets are foreign exchange reserves held by a country's central bank, including foreign currencies, gold, and other reserve positions. They are vital for maintaining exchange rate stability, settling international balances, and providing confidence in a country’s ability to meet its external obligations. Adequate reserves help mitigate the impact of adverse economic shocks, prevent currency crises, and support monetary policy initiatives.

Analysis of Savings, Current Account Balance, and GNP

Using the provided table values, total savings (public plus private) is calculated based on national income figures, while the current account balance measures net exports and income flows. For instance, if private savings are high and government savings are low, the overall savings could exceed investment, leading to a surplus in the current account. Conversely, deficits often reflect higher consumption or investment abroad, requiring financing through foreign capital inflows. Persistent current account deficits can lead to increased foreign debt, affecting economic stability and growth prospects.

Pros and Cons of Free Capital Movement

Allowing capital to move freely offers benefits such as increased investment, economic growth, and risk diversification. Countries can access foreign savings for domestic investment, leading to higher productivity. However, costs include exposure to volatile capital flows, which can cause financial crises, asset bubbles, or sudden currency depreciations. Developing countries may find it difficult to manage these flows, risking economic destabilization during periods of global financial turbulence.

Current Account Deficits: Harmful or Not?

Whether current account deficits are harmful depends on their nature and context. Deficits that finance productive investments can promote future growth, whereas persistent consumption-driven deficits might signal underlying economic imbalances. Excessive reliance on foreign borrowing can lead to debt crises, while temporary deficits, if managed properly, might not pose significant threats. Thus, policymakers need to evaluate the reasons for deficits and their sustainability, considering both short-term benefits and long-term risks.

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