Trade policies

Exercise 1, from KOM

1. Home's demand and supply curves for wheat are:

D = 100 - 20P S = 20 + 20P

Derive and graph Home's import demand schedule. What would the price of wheat be in the absence of trade?

2. Now add Foreign, which has a demand curve

D∗ = 80 - 20P

and a supply curve

S∗ = 40 + 20P

Derive and graph Foreign's export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade

3. Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equilibrium under free trade. What is the world price? What is the volume of trade?

4. Assume that Home imposes a specific tariff t = 0.5 on wheat imports.

(a) Determine and graph the effects of the tariff on the following:
(i) the price of wheat in each country;
(ii) the quantity of wheat supplied and demanded in each country;
(iii) the volume of trade.

(b) Determine the effect of the tariff on the welfare of each of the following groups:
(i) Home import-competing producers;
(ii) Home consumers;
(iii) the Home government.

(c) Show graphically and calculate the terms of trade gain, the efficiency loss, and the total effect on welfare of the tariff.

Exercise 2, from KOM

Suppose that Foreign had been a much larger country, with domestic demand and supply

D^∗ = 800 - 200P S^∗ = 400 + 200P

Notice that this assumption implies that the Foreign price of wheat in the absence of trade would have been the same as in the previous problem.

1. Recalculate the free trade equilibrium and the effects of a 0, 5 specific tariff by Home.

2. Relate the difference in results to the discussion of the small country case in the text.

Exercise 3

Consider Fig. 1 and answer to the following questions.

1. In the absence of Trade how many units of the good does this country produce and consume?

2. In the absence of trade what is the country's consumer plus producer surplus?

3.With free trade and no tariffs, what is the amount of the good imported?

4. With a specific tariff t = 3 per unit, what is the amount of the good imported?

5. What is the effect of the tariff on the welfare of producers, consumers and government?

Exercise 4, from KOM

The nation of Acirema is "small" and unable to affect world prices. It imports peanuts at the price of $10 per bag. The demand and supply curves are:

D = 400 - 10P S = 50 + 5P.

Determine the free trade equilibrium. Then calculate and graph the following effects of an import quota that limits imports to 50 bags.

1.The increase in the domestic price.

2.The quota rents.

3.The consumption distortion loss.

4.The production distortion loss.