6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000 11,500 12,000 0 10 20 30 40 50 60 70 80 90 100 110 Q uantity ofautos Free Trade – Good Restriction – Bad Price ($) S d F S d+w E f G S d+w+t a b c d e g D d h Free Trade : Price = World Price = $8,000 Domestic Production=20; Domestic Consumption=80; Imports=60 Consumer Surplus: a+b+c+d+e+f+g; Producer Surplus = h
Free Trade – GoodRestriction – Bad. g. G. e. f. S d+w+t. a. b. c. d. Free Trade : Price = World Price = $8,000 Domestic Production=20; Domestic Consumption=80; Imports=60 Consumer Surplus: a+b+c+d+e+f+g ; Producer Surplus = h. S d. Price ($). E. F. S d+w. h. D d. - PowerPoint PPT Presentation
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Increased Producer Surplus = a (Redistributive Effect)
Increased Tax Revenue = cDeadweight Loss: Inefficient Production = b
Deadweight Loss:Reduced Consumption = d
Costs of import restrictionsDomestic consumers face increased costs
Low income consumers are especially hurt by tariffs on low-cost imports
Overall net loss for the economy (deadweight loss) Production effect: output that cost more than it has to (b) Consumption effect: surplus lost from reduced
consumption (d) Export industries face higher costs for inputs Cost of living increases Other nations may retaliate
So why restrict trade? Benefits of free trade in final goods are spread
widely Tariffs on intermediate inputs tend to be low
Costs of free trade are felt rapidly by domestic producers Lobbying by business and labor“… those persons who demand cheaper coats would be ashamed of
themselves if they could realize that their demands cut the wages of the women who made those coats.”
Benjamin Harrison, Election Campaign of 1888 Strategic trade policy
Reduce demand for foreign stuff lower its price a lot Big gain on what you still buy
Ways to restrict trade Tariffs Non-Tariff Barriers
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Flavors of tariffsTariff: a tax (duty) on internationally traded products Import tariffs Export tariffs … unconstitutional in US
Raise revenue Favor domestic users of exported commodities
Protective tariff … insulate domestic producers Revenue tariff - raise funds for government Specific tariff - Fixed $/Unit Ad valorem tariff - % of product’s value
“Free-on-board” (FOB) as it leaves port Levied “cost-insurance-freight” (CIF) as it arrives in port
Compound tariff - Combination of fixed and ad valorem tariffs Levied on finished goods whose imported inputs are subject to tariff
Fixed portion offsets tariffs on imports paid by domestic producers % portion protects domestic producers against finished good imports
Effective rate of protection For a finished good,
Effective tariff rate = {Nominal tariff – (% value Imports)x(Tariff on Imports)} (% Domestic Value Added)
The impact of a tariff is often different from its stated amount Tariff Escalation: If domestic value added (domestic
content) is low and tariffs on imports are also low
Effective tariff >> Nominal tariff.
Nominal and Effective Tariff Rates(US and Japan, early 1980s)