International Trade Test Questions
Week 7 (12) The Instruments of Trade Policy Chapters 9
Problem set
Exercise 7.1
Use your knowledge about trade policy to evaluate each of the following statements:
a. “An excellent way to reduce unemployment is to enact tariffs on imported goods.”
b. “Tariffs have a more negative effect on welfare in large countries than in small countries.”
c. “Automobile manufacturing jobs are heading to Mexico because wages are so much lower there than in the United States. As a result, we should implement tariffs on automobiles equal to the difference between US and Mexican wage rates.”
Exercise 7.2 Home and Foreign produce and consume wheat.
a) Assume the demand for wheat in Home is: D = 100 - 20P
And the supply of wheat in Home is: S = 20 + 20P.
Numerically calculate the demand equation for imported wheat in Home. Draw the corresponding curve. What is the price of wheat in Home if there is no trade with Foreign?
b) Now add Foreign. The demand for wheat in Foreign is: D* = 80 – 20P, while the supply of wheat in Foreign equals S* = 40 + 20P.
Numerically calculate the supply equation for wheat exported by Foreign. Draw in the corresponding curve in the figure you drew for a). What is the price of wheat in Foreign if there would be no trade with Home?
c) Now assume that Home and Foreign start trading wheat. There are no costs of transport. Calculate the equilibrium price of wheat in case of open-border trade. What is the amount of wheat traded? Draw the equilibrium in the figure made for question a) and b).
d) Now Home levies a 0.5 import duty on wheat.
Calculate the price of wheat in Home and Foreign and the corresponding demand and supply of wheat in Home and Foreign. How much wheat is now being traded? (Hint: The demand for imports is affected by a tariff. Consumers now face a higher price: P+t (in case of a specific tariff) or (1+t)P (in case of an ad valorem tariff) instead of P.)
e) Draw the demand and supply curves for wheat in Home and calculate
Problem set
Exercise 7.1
Use your knowledge about trade policy to evaluate each of the following statements:
a. “An excellent way to reduce unemployment is to enact tariffs on imported goods.”
b. “Tariffs have a more negative effect on welfare in large countries than in small countries.”
c. “Automobile manufacturing jobs are heading to Mexico because wages are so much lower there than in the United States. As a result, we should implement tariffs on automobiles equal to the difference between US and Mexican wage rates.”
Exercise 7.2 Home and Foreign produce and consume wheat.
a) Assume the demand for wheat in Home is: D = 100 - 20P
And the supply of wheat in Home is: S = 20 + 20P.
Numerically calculate the demand equation for imported wheat in Home. Draw the corresponding curve. What is the price of wheat in Home if there is no trade with Foreign?
b) Now add Foreign. The demand for wheat in Foreign is: D* = 80 – 20P, while the supply of wheat in Foreign equals S* = 40 + 20P.
Numerically calculate the supply equation for wheat exported by Foreign. Draw in the corresponding curve in the figure you drew for a). What is the price of wheat in Foreign if there would be no trade with Home?
c) Now assume that Home and Foreign start trading wheat. There are no costs of transport. Calculate the equilibrium price of wheat in case of open-border trade. What is the amount of wheat traded? Draw the equilibrium in the figure made for question a) and b).
d) Now Home levies a 0.5 import duty on wheat.
Calculate the price of wheat in Home and Foreign and the corresponding demand and supply of wheat in Home and Foreign. How much wheat is now being traded? (Hint: The demand for imports is affected by a tariff. Consumers now face a higher price: P+t (in case of a specific tariff) or (1+t)P (in case of an ad valorem tariff) instead of P.)
e) Draw the demand and supply curves for wheat in Home and calculate