trade areas and customs unions

trade areas and customs unions

Short Answer
1. What is the difference between free-trade areas and customs unions?
2. How do consumer and producer surplus add to a country’s welfare?
3. Define deadweight loss.
4. What is a terms-of-trade gain?
5. Define quota rents.

Problem Solving
1. Aoslia is a small country that takes the world price of corn as given. Its domestic supply and demand for corn is given by the following:
D = 45 − 3P
S = 3P − 9
(a) Assume initially that Aoslia does not open to trade. What is the autarky equilibrium price and quantity?
(b) Suppose Aoslia decides to engage in trade. Determine the quantity demanded, quantity supplied, and import given the world price of $6 per bushel of corn.
(c) If the Aoslia government imposes a tariff in the amount of $1 (i. e. , t = $1), what is the new domestic price? What is the amount imported?
(d) Determine the effect of the tariff on the Aoslian consumers, producers, and the government.
(e) Calculate the terms-of-trade gain. What is the net effect of the tariff on Aoslia’s welfare? Explain
2. Refer to the above problem. Suppose the Aoslian government applies an import quota that limits imports to 12 bushels of corn.
(a) Determine the quantity demanded, quantity supplied, and the new domestic price with the quota.
(b) Calculate the quota rent.
(c) Assuming that the quota licenses are allocated to domestic producers, what is the net effect of the quota on Aoslia’s welfare?
(d) Assuming that the quota rents are earned by foreign exporters, what is the net effect of the quota on Aoslia’s welfare?

PS 02A (Trade Policy Instruments)—Page 1 of 3
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Econ-4040-001 14SS
International Economics
Problem Set 02A (Trade Policy Instruments)

(a) Assume that the world price is P W = $5. Determine the consumer and producer surplus under free trade.
(b) Suppose the Home government imposes a tariff in the amount of $4 (i.e., t = $4). What is the new Home price? What is the price received by the foreign exporters?
(c) Determine the terms of trade for Home with the tariff.
(d) Does Home welfare increase or decrease due to the tariff? Explain.
4. Refer to the problem above. At what amount would the tariff be considered prohibitive? Explain

Web Links
1. In September 2009, in a move intended to assist the domestic tire industry, President Obama imposed tariffs on tires imported from China. The positions of supporters and opponents of the measure are available in the Washington Post article “U.S. to Impose Tariff on Tires From China,” Sept. 12, 2009 at http://www.washingtonpost.com/wp-dyn/content/article/2009/09/ 11/AR2009091103957.html.
According to the article, how many jobs were lost from 2004 to 2009 in the U.S. tire industry?
2. Further information on the Multifibre Arrangement can be found at http://www.wto.org/ english/tratop e/texti e/texintro e.htm#MFA. Note that textiles were to be brought into conformance with WTO rules by 2005 (10 years after 1995). The question is whether developed countries still impose trade restrictions on textile imports. To answer this, go back to http://www.usitc.gov/. Under “Tariff Affairs” click the link to the Tariff Search Tool. Type “cotton textiles” into the search box at the top of the page, then click the Search button. Select a major grouping in the left frame (for example, 4202.92.60).
Are tariffs being imposed on products in that group?

PS 02A (Trade Policy Instruments)—Page 2 of 3

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3. Suppose Home is a large country whose supply and demand curves are given in the left panel of the following figure.

Text Problems
1. Ch. 7, #3 (use text graphs for part b.)
2. Ch. 7, #6
3. Ch. 7, #7

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4. Ch. 7, #9

PS 02A (Trade Policy Instruments)—Page 3 of 3

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