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EC4333 Lecture 4 EMU

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Economic and Monetary Union, introduced.

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EC4333 Lecture 4 EMU

  1. 1. Lecture 4 Stephen Kinsella stephenkinsella.net Recap Tariffs Welfare Analysis
  2. 2. {Story}
  3. 3. EU is an 1. economic solution to a political problem
  4. 4. History of integration 2. matters, and reflects current level of integration
  5. 5. There are 3. welfare effects to greater integration
  6. 6. Recap
  7. 7. Trade Creation is “The increase in trade volume caused by union with a lower cost (more efficient) supplier within the trade bloc”––Viner, 1950
  8. 8. Trade Creation (High Cost to Low Cost) P Supply Home Punion post tax Pworld post tax P* Punion pre tax Pworld pre tax Demand Home Q B C* D
  9. 9. Trade Diversion (Low Cost to High Cost) P Supply Home P* Punion post tax Pworld post tax Punion pre tax Pworld pre tax Demand Home Q B C* D
  10. 10. Beach on the Enlargement
  11. 11. {Definition} A tariff is a tax on goods produced abroad and sold domestically.
  12. 12. Effects of a Tariff
  13. 13. The Effects of a Tariff Price of Steel Domestic supply Equilibrium without trade Price Tariff with tariff Price World without tariff price Imports Domestic with tariff demand S S D D Quantity 0 Q Q Q Q of Steel Imports without tariff Copyright © 2004 South-Western
  14. 14. Price of Steel Consumer surplus before tariff Domestic supply Producer surplus Equilibrium before tariff without trade Price World without tariff price Domestic demand S D Quantity 0 Q Q of Steel Imports without tariff Copyright © 2004 South-Western
  15. 15. Figure 6 The Effects of a Tariff Price of Steel Consumer surplus with tariff Domestic supply A Equilibrium without trade B Price Tariff with tariff Price World without tariff price Imports Domestic with tariff demand S S D D Quantity 0 Q Q Q Q of Steel Imports without tariff Copyright © 2004 South-Western
  16. 16. Figure 6 The Effects of a Tariff Price of Steel Domestic supply Producer surplus Equilibrium after tariff without trade Price Tariff with tariff C Price World without tariff G price Imports Domestic with tariff demand S S D D Quantity 0 Q Q Q Q of Steel Imports without tariff Copyright © 2004 South-Western
  17. 17. Figure 6 The Effects of a Tariff Price of Steel Domestic supply Tariff Revenue Price Tariff with tariff E Price World without tariff price Imports Domestic with tariff demand S S D D Quantity 0 Q Q Q Q of Steel Imports without tariff Copyright © 2004 South-Western
  18. 18. {Definition} DWT Loss: the reduction in consumer and producer surplus resulting from restricting output below its efficient level
  19. 19. Figure 6 The Effects of a Tariff Price of Steel Domestic supply A Deadweight Loss B Price Tariff with tariff C D E F Price World without tariff G price Imports Domestic with tariff demand S S D D Quantity 0 Q Q Q Q of Steel Imports without tariff Copyright © 2004 South-Western
  20. 20. Exercise
  21. 21. The Effects of a Tariff Before Tariff After Tariff Change A+B+C+D CS A+B -(C+D+E+F) +E-F PS G C+G +C Govt. None E +E Revenue A+B+C+D A+B+C+E Total Surplus -(D+F) +E+F+G +G
  22. 22. {Story}
  23. 23. The Effects of a Tariff • A tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade. • With a tariff, total surplus in the market decreases by an amount referred to as a deadweight loss.
  24. 24. {The Effects of an Import Quota} An import quota is a limit on the quantity of a good that can be produced abroad and sold domestically.
  25. 25. Price of Steel Domestic supply Equilibrium without trade Domestic Quota supply + Import supply Isolandian price with Equilibrium quota with quota Price World World without = price price Imports quota Domestic with quota demand S S D D Quantity 0 Q Q Q Q of Steel Imports without quota Copyright © 2004 South-Western
  26. 26. {Story}
  27. 27. The Effects of an Import Quota Because the quota raises the domestic price above the world price, domestic buyers of the good are worse off, and domestic sellers of the good are better off. License holders are better off because they make a profit from buying at the world price and selling at the higher domestic price.
  28. 28. The Effects of an Import Quota
  29. 29. Figure 7 The Effects of an Import Quota Price of Steel Domestic supply Equilibrium without trade Domestic Quota supply A + Import supply Isolandian B price with Equilibrium quota with quota E' C D F Equot; Price World World without = G price price Imports quota Domestic with quota demand S S D D Quantity 0 Q Q Q Q of Steel Imports without quota Copyright © 2004 South-Western
  30. 30. Exercise
  31. 31. Before After Quota Change Quota A+B+C+D -(C+D CS A+B +E’+E’’+F +E’+E”+F) PS G C+G +C License None E’+E’’ +(E’+E’’) Holder A+B+C+D A+B+C Total Surplus -(D+F) +E’+E’’+F+G +E’+E’’+G
  32. 32. The Effects of an Import Quota With a quota, total surplus in the market decreases by an amount referred to as a deadweight loss. The quota can potentially cause an even larger deadweight loss, if a mechanism such as lobbying is employed to allocate the import licenses.
  33. 33. The Lessons for Trade Policy
  34. 34. Other Benefits of International Trade
  35. 35. Arguments for Restricting Trade
  36. 36. CASE STUDY: Trade Agreements and the World Trade Organization
  37. 37. CASE STUDY: Trade Agreements and the World Trade Organization
  38. 38. CASE STUDY: Trade Agreements and the World Trade Organization
  39. 39. Summary
  40. 40. Next Week • European Monetary Union • Read Wyplosz, C. ‘European Monetary Union: The Dark Sides of a Major Success’, Economic Policy, 2006.
  41. 41. Thanks

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