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International EconomicsProblem Set

Question # 00011969
Subject: Economics
Due on: 04/10/2014
Posted On: 04/10/2014 08:00 AM

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

Problem Solving
1. Aoslia is a small country that takes the world price of corn as given. Its domestic supply anddemand 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 equilibriumprice and quantity?
(b) Suppose Aoslia decides to engage in trade. Determine the quantity demanded, quantitysupplied, and import given the world price of $6 per bushel of corn.
(c) If the Aoslia government imposes a tari? in the amount of $1 (i. e. , t = $1), what is thenew domestic price? What is the amount imported?
(d) Determine the e?ect of the tari? on the Aoslian consumers, producers, and the government.
(e) Calculate the terms-of-trade gain. What is the net e?ect of the tari? on Aoslia’s welfare?Explain
2. Refer to the above problem. Suppose the Aoslian government applies an import quota thatlimits imports to 12 bushels of corn.
(a) Determine the quantity demanded, quantity supplied, and the new domestic price withthe quota.
(b) Calculate the quota rent.
(c) Assuming that the quota licenses are allocated to domestic producers, what is the nete?ect of the quota on Aoslia’s welfare?
(d) Assuming that the quota rents are earned by foreign exporters, what is the net e?ect ofthe 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 surplusunder free trade.
(b) Suppose the Home government imposes a tari? in the amount of $4 (i.e., t = $4). Whatis the new Home price? What is the price received by the foreign exporters?
(c) Determine the terms of trade for Home with the tari?.
(d) Does Home welfare increase or decrease due to the tari?? Explain.
4. Refer to the problem above. At what amount would the tari? be considered prohibitive?Explain

Web Links
1. In September 2009, in a move intended to assist the domestic tire industry, President Obamaimposed tari?s on tires imported from China. The positions of supporters and opponents ofthe measure are available in the Washington Post article “U.S. to Impose Tari? on Tires FromChina,” Sept. 12, 2009 at .washingtonpost.com/wp-dyn/content/article/2009/09/">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 Multi?bre Arrangement can be found at .wto.org/">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.usitc.gov/">http://www.usitc.gov/. Under “Tari? A?airs” click the link to the Tari? Search Tool. Type“cotton textiles” into the search box at the top of the page, then click the Search button. Selecta major grouping in the left frame (for example, 4202.92.60).
Are tari?s 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 panelof the following ?gure.

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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International Economics Problem Set Solution

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Tutorial Preview …the xxxxx actually xxxxxxxx by them xxxxxx both consumer xxxxxxx and xxxxxxxx xxxxxxx will xxxxxx in economic xxxxxxx as both xxxxxx and xxxxxx xxx the xxxxxxxx will increase xx the market xxxxx will xxxxxxxx xxx industrial xxxxxx and consumer xxxxxxxx this brings xxxxxxx to xxx xxxxxxx as xxxx will increase xxxxxxxxxx opportunity and xxxxxx 3) xxxxxx xxxxxxxxxx loss xxxxxxx This can xxxx be stated xx loss xxxx xxx total xxxxxxx or social xxxxxxx due various xxxxxxx like xxxxxxxxxx xxxxxx price xxxxxx or price xxxxxxxxx monopoly pricing xxx externalities xxxx xxxxxxx for xxxxxxxxxx burden due xx the lost xxxxxxx to xxxxxxxxxxxx xx the xxxxx which are xxxxxxxxxxx like producer, xxxxxxxxxx and xxxxxxxxx xx What xx a terms-of-trade xxxxx Answer: Tariff xxxxx a xxxxxxxxxxx xxxx in xxxxxxxxx the terms xx trade gain xx other xxxxxx xxx difference xxxxxxx the import xxxxxx…
Attachments
International_Economics_Problem_Set_Solution.docx (24.7 KB)
Preview: and xxxxxxxxx What xx a terms-of-trade xxxxxxxxxxxxxxxxxx plays a xxxxxxxxxxx role xx xxxxxxxxx the xxxxx of trade xxxx In other xxxxxx the xxxxxxxxxx xxxxxxx the xxxxxx tariff and xxxxxx tariff determines xxxx This xxx xx understood xxxx the steeper xxxxxxxx revenue than xxx demand xxxxx xxxxx will xxxxxx in terms xx trade gains xx this xxxx xxxxxx price xxxx be lower xxxxx more exporters xxxx their xxxxx xxxx of xxxxx actually increases xxxx the tariff xxxxx the xxxxxxx xxxxxx prices xxxxxx quota rents xxxxxxxxxx economic rent xx the xxxxxx xxxxxxxx by xxx right or xxxxxxx holder for xxxxxxxxx under xxx xxxxx This xx generally equivalent xx the domestic xxxxx of xxxxxxxx xxxxxx net xx the tariff xxxx the world xxxxxx multiplied xxxx xxx imported xxxxxxxx Problem Solving:Aoslia xx a small xxxxxxx that xxxxx xxx world xxxxx of corn xx given Its xxxxxxxx supply xxx xxxxxx for xxxx is given xx the following:D x 45 x xxx = xx - 9Assume xxxxxxxxx that Aoslia xxxx not xxxx xx trade xxxx is the xxxxxxx equilibriumprice and xxxxxxxxxxxxxxxxxxxxxxx S x x gives x = 9 xxx Q = xx Suppose xxxxxx xxxxxxx to xxxxxx in trade xxxxxxxxx the quantity xxxxxxxxx quantity xxxxxxxxx xxx import xxxxx the world xxxxx of $6 xxx bushel xx xxxx Answer:Given xx = 6, xx have that xx = xx x 3(6) x 27 and xx = 3(6) xxx 9 x xx so xx = D1 xxx S1 = xx – x x 18 xx the Aoslia xxxxxxxxxx imposes a xxxxxx in xxx xxxxxx of xx (i e x t = xxxx what xx xxx new xxxxxxxx price? What xx the amount xxxxxxxxxxxxxxxxxxx new xxxxxxxx xxxxx is.....
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