Econ 360 Spring 2020 Second Midterm Name 693255

Econ 360 Spring 2020 Second Midterm Name

Draw a graph with the following information: The world price of soybeans is $2.00 per bushel with a domestic supply of 60 Q/million bushels and a domestic demand of Q/millions bushels. The importing country is small enough not to affect the world price. A. Suppose government puts a tariff of $0.25 per bushel on soybean imports. How much will the tariff reduce imports? Draw the new graph. B. Given a tariff of $0.25 per bushel on soybean imports, how much will domestic production increase? C. How much revenue will the government raise from a $0.25 per bushel tariff on soybean imports?

Paper For Above instruction

The provided assignment involves analyzing the impact of a tariff on soybean imports within the context of international trade economics. The questions require constructing supply and demand graphs, understanding the effects of tariffs, and calculating changes in imports, domestic production, and government revenue. Additionally, the broader conceptual understanding of tariffs, deadweight losses, policy implications, and the distinctions between small and large countries in trade are central to the discussion.

In a representative scenario, the world price (set externally) remains at $2.00 per bushel, with the domestic supply at 60 million bushels and domestic demand varying based on the price. When the government imposes a tariff of $0.25 per bushel, the effective import price increases from the world price, leading to a decline in the quantity of imports. This scenario reflects common trade policy interventions aimed at protecting domestic producers and generating government revenue, but also introduces inefficiencies in resource allocation.

Graphically, the initial equilibrium point where domestic supply and demand intersect determines the original imports at the world price. The imposition of the tariff shifts the effective price faced by importers upward by $0.25, reducing imports to a new, lower level. The magnitude of this reduction depends on the price elasticity of demand and supply.

Quantitatively, to calculate the reduction in imports, one would examine the differences in quantities demanded and supplied at the new price versus the initial equilibrium. The increase in domestic production results from domestic suppliers responding to higher prices, incentivized by the tariff. This expansion can be estimated by the shift along the supply curve from the initial to the new equilibrium point.

Government revenue from the tariff is computed as the tariff rate multiplied by the quantity of imports after the tariff is enforced. This revenue stream reflects a transfer from consumers and importers to the government, but also signifies an efficiency loss elsewhere in the economy through deadweight loss. The deadweight loss arises because some mutually beneficial transactions no longer occur due to the increase in price, leading to lost welfare that cannot be transferred to any other party.

Analyzing the impact of tariffs within a broader economic context, it is important to understand why tariffs create deadweight losses. These losses represent the net reduction in economic efficiency due to market distortions caused by protective tariffs. They occur because tariffs lead to reduced consumption and production that would otherwise be mutually beneficial, thus decreasing overall societal welfare.

The effect of a tariff differs markedly between small and large countries. Small countries, like the scenario in the assignment, do not influence world prices and therefore face a horizontal supply curve at the world price. Large countries, however, can influence world prices through their trade policies, leading to complex effects on global markets, including potential price changes and shifts in trade balances. As a result, their policy decisions can have broader implications beyond domestic welfare.

Non-tariff measures, such as quotas, subsidies, and technical standards, also serve to regulate trade flows. Quotas, for example, directly restrict the quantity of imports or exports, often leading to higher prices similar to tariffs. These measures can be used to achieve similar policy objectives but may have different legal and economic implications, including potential distortions and rent-seeking behavior.

Politicians often resort to protectionist measures to shield domestic industries from foreign competition. Economists, however, tend to favor tariffs over quotas for several reasons. First, tariffs generate government revenue, which can offset some economic costs. Second, tariffs are transparent and easier to implement and enforce compared to quotas, which often lead to rent-seeking and corruption. Third, tariffs tend to cause less market distortion because they allow market forces to allocate resources more efficiently, whereas quotas create artificial scarcity.

Intellectual property rights (IPR) protect the creations of individuals and companies from unauthorized use, fostering innovation and economic growth. International agreements such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) under the World Trade Organization establish minimum standards for IPR protection globally. The benefits of protecting IPR include promoting technological advancement and attracting foreign direct investment. However, costs include potential monopolistic practices and reduced access to essential medicines and technologies in developing countries.

Clothing and textiles are heavily protected in both developed and less-developed countries due to their strategic importance to employment, industry development, and cultural factors. These sectors often employ large numbers of workers and have historical significance, making protection politically viable despite counter-economic arguments advocating free trade. Tariffs and quotas in these industries aim to safeguard jobs and domestic industries but also lead to higher prices for consumers and distortions in global markets.

The concept of infant industry protection argues that new industries may need temporary shielding from international competition until they mature and become competitive globally. Difficulties in implementing this argument include determining the appropriate duration of protection, avoiding support to industries that would have grown without intervention, and the risk of creating inefficient monopolies. Careful assessment and phased policy adjustments are necessary to avoid long-term distortions.

Countries justify industry protection through several arguments, including infant industry concerns, national security, protecting strategic sectors, and preserving employment. However, these arguments often face problems such as rent-seeking, lobbying, and the risk that protection becomes entrenched rather than temporary. Many of these justifications are non-economic and politically motivated, making their economic efficiency questionable.

Economic sanctions are often used as tools for foreign policy, aimed at pressuring governments or entities to change behavior. Their effectiveness varies; they may be successful in influencing political decisions but can also have unintended humanitarian and economic consequences. Sanctions often face issues like evasion, unintended diplomatic repercussions, and economic hardship for the general population, diminishing their overall utility.

U.S. firms seeking protection from foreign competition have several legal avenues, including antidumping cases, countervailing duty proceedings, Section 201 petitions (global safeguard measures), and trade remedy laws. Each method applies under specific circumstances, such as unfair trade practices, subsidies, or sudden surges in imports. The outcomes of successful cases can include tariffs or import restrictions, offering temporary relief but potentially sparking retaliatory measures or trade tensions.

Primary income comprises earnings from cross-border investments, such as interest and dividends, while secondary income includes transfers like remittances and aid. These income flows influence a country’s balance of payments, and persistent deficits or surpluses can lead to exchange rate adjustments, economic imbalances, and changes in foreign reserves.

The current account includes trade in goods and services, primary income, and secondary income. Historic large deficits in the U.S. from the 1990s to 2007 led to increased borrowing from abroad, a buildup of foreign debt, and adjustments in exchange rates. Such deficits also posed risks of currency crises and dependency on foreign capital inflows, impacting economic stability.

Official reserve assets comprise foreign currencies, gold, Special Drawing Rights (SDRs), and reserve positions with the IMF. These assets are vital for maintaining international liquidity, intervening in foreign exchange markets, and supporting economic stability during balance of payments crises.

In examining the table with savings and current account balances, total savings (private plus public) can be calculated as the sum of household, corporate, and government savings. The current account balance reflects net income from trade and income flows. Economies with large deficits rely heavily on foreign borrowing, which has implications for their macroeconomic stability and policy priorities.

The benefits of free capital movement include increased investment opportunities, efficiency gains, and economic growth. Conversely, costs involve potential financial instability, rapid capital flight, and inequality. Allowing free flow of capital requires effective regulation and sound macroeconomic policies to mitigate these risks.

Current account deficits may not necessarily be harmful if financed by productive investments that boost future income. However, persistent deficits can lead to increased foreign debt, currency depreciation, and vulnerability to external shocks. The overall impact depends on the sustainability of deficits and the country's economic fundamentals.

References

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• Peterson Institute for International Economics. (2009). The Future of the Global Economy. PIIE Policy Brief.
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