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Questions and Answers
What is the world price?
What is the world price?
A country becomes an importer if its autarky price is lower than the world price.
A country becomes an importer if its autarky price is lower than the world price.
True
What happens to domestic consumer surplus when a country imposes a quota?
What happens to domestic consumer surplus when a country imposes a quota?
It decreases.
If the price under autarky is higher than the world price, the country is an __________.
If the price under autarky is higher than the world price, the country is an __________.
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Match the welfare analysis with the corresponding trade condition:
Match the welfare analysis with the corresponding trade condition:
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Which step is NOT part of solving quota problems?
Which step is NOT part of solving quota problems?
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Deadweight loss occurs when quota rent is owned by an external entity.
Deadweight loss occurs when quota rent is owned by an external entity.
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When the new equilibrium indicates an increase in domestic producer surplus, what happens to the domestic consumer surplus?
When the new equilibrium indicates an increase in domestic producer surplus, what happens to the domestic consumer surplus?
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The difference in surplus/loss from changes in consumer and producer surplus is termed __________.
The difference in surplus/loss from changes in consumer and producer surplus is termed __________.
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In a situation where the world price exceeds the autarky price, what is the result?
In a situation where the world price exceeds the autarky price, what is the result?
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What is the first step in solving tariff problems?
What is the first step in solving tariff problems?
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The new price under a tariff is higher than the world price.
The new price under a tariff is higher than the world price.
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What happens to domestic consumer surplus when a tariff is imposed?
What happens to domestic consumer surplus when a tariff is imposed?
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The quantity demanded at the new price level is represented as Quantity Demanded(Pw + ______).
The quantity demanded at the new price level is represented as Quantity Demanded(Pw + ______).
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Match the following tariff impacts to their effects:
Match the following tariff impacts to their effects:
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What is the new equilibrium quantity after imposing a tariff?
What is the new equilibrium quantity after imposing a tariff?
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Imposing a quota has the same effects as imposing a tariff in a small importing country.
Imposing a quota has the same effects as imposing a tariff in a small importing country.
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What type of revenue does the government collect from tariffs?
What type of revenue does the government collect from tariffs?
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The domestic deadweight loss (DWL) is smaller under a tariff compared to a quota when ______ is earned by foreigners.
The domestic deadweight loss (DWL) is smaller under a tariff compared to a quota when ______ is earned by foreigners.
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Which equation represents the effect of a tariff?
Which equation represents the effect of a tariff?
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Study Notes
Determinants of Trade
- International trade is beneficial to both trading parties.
- Welfare analysis and the small country model can be used to study the winners and losers of international trade.
World Price
- World Price: The price of a good that prevails in the world market for that good
- When a country opens up to world trade, the equilibrium price under autarky (no trade) is compared to the world price.
- If the world price is higher, the country is an exporter.
- If the world price is lower, the country is an importer.
- If the price under autarky is lower than the world price, the country has a comparative advantage.
Welfare Analysis of Exporter
- When a country opens up to trade, the domestic price rises to the world price.
- Domestic producers gain from the higher price and increased sales.
- Domestic consumers lose from the higher price and reduced consumption.
- The gain in producer surplus outweighs the loss in consumer surplus, resulting in a net gain in welfare.
Welfare Analysis of Importer
- When a country opens up to trade, the domestic price falls to the world price.
- Domestic consumers gain from the lower price and increased consumption.
- Domestic producers lose from the lower price and reduced sales.
- The gain in consumer surplus outweighs the loss in producer surplus, resulting in a net gain in welfare.
Welfare Analysis under Tariff
- A tariff is a tax on imported goods
- Tariffs raise the price of imported goods, leading to:
- Increased domestic production
- Decreased domestic consumption
- Revenue for the government
- Tariffs create deadweight loss because they reduce the overall welfare of the country.
Welfare Analysis under Quota
- A quota is a limit on the quantity of goods that can be imported.
- Quotas raise the price of imported goods, leading to:
- Increased domestic production
- Decreased domestic consumption
- Quotas create deadweight loss because they reduce the overall welfare of the country.
How to Solve Quota Problems
- Find the initial equilibrium under the world price, taking free trade into consideration.
- Find the new supply curve: For each price level, increase the quantity supplied by the amount of the quota.
- Find the new equilibrium: The intersection of the new supply curve and the demand curve determines the equilibrium.
- Find the difference in surplus/loss.
- Ownership Matters!: If a domestic producer/consumer/government owns the quota rent, then the rent is part of the domestic economic surplus. Otherwise, it is a deadweight loss.
How to Solve Tariff Problems
- Find the initial equilibrium under the world price, taking free trade into consideration.
- Find the new price level: The new price is t dollars higher than the world price.
- Find the new equilibrium, taking free trade into consideration: The intersection of the new price level curve and the demand curve pins down the equilibrium.
- Find the difference in surplus/loss.
Equivalence of Quota and Tariff
- Given a tariff t and the world price Pw, imposing the following quota has the same effect as the tariff: Quota(t, Pw ) = Quantity Demanded(Pw +t)−Quantity Supplied(Pw +t).
- Given a quota γ and the world price Pw, imposing the following tariff has the same effect as the quota: γ = Quantity Demanded(Pw + t) − Quantity Supplied(Pw + t).
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Description
Explore the key concepts of international trade, including the determinants of trade, world pricing, and welfare analysis of exporters. This quiz covers how trade impacts both producers and consumers and the implications of comparative advantage. Test your understanding of these fundamental trade theories.
