Essay on POSTWk7 Feb24 Tariffs Spring2015

Submitted By mozotron
Words: 1047
Pages: 5

Wk7: Tues., 2/24/2015
Today
•Analysis of Tariffs
– Small country vs. large country
– Terms of trade effect

Thursday
•NTBs: Nontariff Barriers
– Diversity of instruments and effects
– Quotas
– Quota Revenue

Outline



Definition of Tariffs
Use: Revenue or Protection?



‘Small’ vs. ‘Large’ Country in World Trade



Graphical Analysis of Tariff



Small country case
Large country case

What is a Tariff?
• Tax on traded products


Tax on imported good; tax on exported good

• Specific (amount per unit)


ts = amount per unit ($.50 per gallon)



P + ts

• Ad Valorem (percent of value)


ta = percent of value (5 % of value)



P + ta P = (1+ta) P

Importance as Revenue Source

United States
1789-1850
1900
1990s

Tariff Revenue as %
Of Total Revenue
90-95%
50%
1-2%

Tariff Revenue as % Of Total Revenue
Various countries, Circa 1994








United States
Japan
1.24
Sweden
Norway
Denmark
United Kingdom

1.55
.84
.51
.05
.08





China
25.37
India
20.74
Pakistan







Lesotho
51.75
Belize
47.96
Guinea
Dominican Republic
Gambia
42.04

23.28

47.43
43.68

Effects of Tariff
Positive Analysis
– Impact on Pd, Qd, Qs and M
– Revenue consequences for government
– Possible impact on Pw

Normative Analysis
– Impact on the well-being of Consumers,
Producers, the Nation as a whole

Defining ‘Small’ and ‘Large’ Country in
International Trade

Large Country in Trade
AUTARKY

Price

Sd

Price

foreign
Sf

Pd
Dd
Q large nation

P*
Df
Q rest of world

Small Country in Trade
AUTARKY

Price
Pd

Price

S

Sf

D

P*
Q
small nation

Df
Q
foreign or rest of world

Tariff Analysis
Small Country Importing Freely

Small Nation: Free Trade
Price
$540

Sd

Pd=$300
210

P*
Dd
0.6

1.6

omit

Q (mill. bikes)

Small Nation Sets t = 10%
P
$540

Sd

Pd’=$330
Pd =$300
210

$300+$30
P*

Dd
0.6

1.6

Q

Domestic Output Expands
P
$540

Sd

$330
$300
210

$300+$30
P*

Dd
QS QS’

QD

Q

Domestic Consumption Falls
P
$540

Sd

$330
$300
210

$300+$30
P*

Dd
QS QS’ QD’ QD

Q

Imports Shrink to M’
P
$540

Sd

$330
300
210

$300+$30
P*

Dd
QS QS’ QD’ QD
M’

Q

Tariff Revenue Increases
P
$540
$330
300
210

govt collects $30 on each foreign bike
Sd
c

$300+$30
P*

Dd
QS QS’ QD’ QD
M’

Q

Tariff Revenue Collected
P

Area c is $30 x iMports

$540
$330
300
210

Sd c $300+$30
P*

Dd
QS QS’ QD’ QD
M’

Q

Positive Effects of Tariff
SMALL COUNTRY CASE
• Increases Pd
• Increases QS
• Lowers QD
• Lowers iMports
• Raises Tariff Revenue

Normative Effects of Tariff
Focus on impact on three groups: consumers producers nation Consumer Surplus Before Tariff
P
$540

Sd

Pd=$300
210

P*
Dd
recall

0.6

1.6

Q (mill. Bikes)

Consumer Surplus After Tariff
Area Has Shrunk to Smaller Triangle
$540

Sd

Pd’=$330
Pd =$300
210

$300+$30

Dd
0.6

1.6

P*

Q (mill. Bikes)

Consumer Surplus After Tariff
P

Lost Amount is a+b+c+d

$540
Pd’=$330
Pd =$300
210

Sd a b

c

$300+$30

d

P*

Dd
QS QS’ QD’ QD

Q (mill. Bikes)

Producer Surplus Before Tariff
P
$540

Sd
$300+$30

Pd =$300
210

P*

Dd
0.6

1.6

Q (mill. Bikes)

Producer Surplus After Tariff
Area Has Increased to Larger Triangle
$540

Sd

Pd’=$330
Pd =$300
210

$300+$30

Dd
0.6

1.6

P*

Q (mill. Bikes)

Producer Surplus After Tariff
Amount of increase is area a
$540
Pd’=$330
Pd =$300
210

Sd a b

c

d

$300+$30
P*

Dd
QS QS’ QD’ QD

Q (mill. Bikes)

Normative Effects of Tariff
SMALL COUNTRY CASE
• Consumers Loss
• Producers Gain
• Govt Revenue
NATION

Area - (a + b + c + d)
Area + a
Area
+c
Area
-b
-d

TARIFFS FOR SMALL NATIONS UNAMBIGOUSLY
HARMFUL TO LIVING STANDARDS

Source of Losses
‘Deadweight’ Losses
• Triangle d – consumption efficiency loss
• Consumer surplus lost/self-imposed loss

• Triangle b – production efficiency loss
• Value of domestic resources wasted in production of extra units of domestic output; this loss is
Cost of extra
Initial cost of the domestic output replaced imports

-

If time remaining:

Tariff…