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Chapter 5 - Trade & Macro
5.1 Macroeconomic Factors
– exchange rates– interest rates– government fiscal balance
5.2 International Agricultural Trade
–Trade agreements
5.3 Trade Theory
–Gains from trade–Distortions (tariffs & subsidies)–Farm programs
1) Exchange Rates
Affects the competitiveness of agr. Products
Early 1970’s – floating exchange rates
Policy – over or under value exchange rate
What is the impact of a ER distortion?
Example 1:
Argentina: Overvalued Exchange Rate (exporter)
Shift of excess demand functionLower producer priceLower quantity exportedLoss of producer surplus
– due to resource endowments– Canada land rich, capital poor
– => export agr & import manufactures
Gains from trade
• Trade allows for specialization – increased welfare
CA
M
A
US
M
A
P
P
P
P√√↵
>√√
↵
Gains from Trade
.
Agr.
Manufactures
P1
P2
W1 W2
ES/ED Framework
• Excess Demand (ED)• Excess Supply (ES)
Gains from trade (versus no trade)
• depend on the impact of a country on world prices
• Small country – no price impact• Large country – prices adjust, impacts smaller
2 Country Model – 1 good
• e.g. US/Canada cattle market
• Assume: Canada - low cost producer
• How are consumers and farmers affected by trade between the two countries?
• Winners and losers – distribution effects
– US – consumers gains, farmers lose– CA – consumers lose, farmers gain
Gains from Trade
.Canada USTrade Sector
ED
ES
PW
PUS
PCA
Trade
WUS
WCA
Analysis: Trade Distortions
1 ) Import Tariff• Fixed-tariff rate vs ad valorem
• Small country (fixed tariff)
– domestic price increases
– Supply increases, demand decreases
– imports reduced
– Net dead weight loss
• Large country
– domestic price increases
– world price decreases
– Imports decrease; domestic output increases
– Consumers lose; producers gain
– Government gains tariff revenue
– Net welfare gain
– Potential to compensate consumers
Import Quota
• Binding quota
– if it restricts imports below free trade imports
• Similar price effects to a tariff
– Imports lower
– Domestic price higher
– World price lower
– Rents to importers
• Quota value: right to import– Based on difference between new world price and
domestic price
Large Country – Import Quota
World MarketDomestic Market
ED0
ES
S
D
Pw
.
Q
PQ
IQ
PWQ
Large Country - Tariff
.
World MarketDomestic Market
ED0
ED1
ES
S
D
PwTR
Import tariff – Small Country
Pw
PT
S
D
ab G income
Government income – few transactions
Export Subsidy
• Used extensively
– Purpose: support domestic income (price) support– Subsidy to export the excess supply– US (EEP) starting in 1985– EU (ERP) – export restitutions – 1970’s– not unique to agriculture – e.g. Bombardier
• price support program – increases ES
• Subsidy Impacts– world price falls (large country)– Domestic price falls– Exports expand– Government payments = (Ps-PWs)*exports
• value of exports increase relative to free trade