EC4333 Lecture3 2008

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EC4333 Lecture3 2008

  1. 1. EC4333 Lecture 3 Dr Stephen Kinsella stephenkinsella.net Trade Tariffs Welfare Analysis
  2. 2. Lisbon Trade Diversion Integration Tariffs Trade Creation Hecksher-Ohlin
  3. 3. 1/3 Recap
  4. 4. EU is an 1. economic solution to a political problem
  5. 5. History of integration 2. matters, and reflects current level of integration
  6. 6. There are 3. welfare effects to greater integration
  7. 7. From Last Week...
  8. 8. Trade Creation is “The increase in trade volume caused by union with a lower cost (more efficient) supplier within the trade bloc”––Viner, 1950
  9. 9. So what?
  10. 10. All about Customs Unions
  11. 11. European integration involved a sequence preferential liberalisations but all of these were reciprocal In example, both Home & Partner drop T on each other’s exports Need to address the 3-nation trade pattern
  12. 12. Why is this important?
  13. 13. Why is this important? Serious Money Involved
  14. 14. 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
  15. 15. Example
  16. 16. 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
  17. 17. Example
  18. 18. 2/3 Tariffs & Welfare
  19. 19. {Definition} A tariff is a tax on goods produced abroad and sold domestically.
  20. 20. Effects of a Tariff
  21. 21. The Effects of a Tariff Price of Steel Domestic supply Equilibrium without trade Price with tariff Tariff Price World without tariff Imports price Domestic with tariff demand S S D D 0 Q Q Q Q Quantity of Steel Imports without tariff Copyright © 2004 South-Western
  22. 22. 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 0 Q Q Quantity of Steel Imports without tariff Copyright © 2004 South-Western
  23. 23. Figure 6 The Effects of a Tariff Price of Steel Consumer surplus with tariff Domestic supply A Equilibrium without trade B Price with tariff Tariff Price World without tariff Imports price Domestic with tariff demand S S D D 0 Q Q Q Q Quantity of Steel Imports without tariff Copyright © 2004 South-Western
  24. 24. Figure 6 The Effects of a Tariff Price of Steel Domestic supply Producer surplus Equilibrium after tariff without trade Price with tariff C Tariff Price World without tariff G Imports price Domestic with tariff demand S S D D 0 Q Q Q Q Quantity of Steel Imports without tariff Copyright © 2004 South-Western
  25. 25. Figure 6 The Effects of a Tariff Price of Steel Domestic supply Tariff Revenue Price with tariff Tariff E Price World without tariff Imports price Domestic with tariff demand S S D D 0 Q Q Q Q Quantity of Steel Imports without tariff Copyright © 2004 South-Western
  26. 26. {Definition} DWT Loss: the reduction in consumer and producer surplus resulting from restricting output below its efficient level
  27. 27. Figure 6 The Effects of a Tariff Price of Steel Domestic supply A Deadweight Loss B Price with tariff C Tariff D E F Price World without tariff G Imports price Domestic with tariff demand S S D D 0 Q Q Q Q Quantity of Steel Imports without tariff Copyright © 2004 South-Western
  28. 28. Exercise
  29. 29. 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
  30. 30. {Story}
  31. 31. 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.
  32. 32. • A tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade.
  33. 33. {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.
  34. 34. 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 Imports price quota Domestic with quota demand S S D D 0 Q Q Q Q Quantity of Steel Imports without quota Copyright © 2004 South-Western
  35. 35. {Story}
  36. 36. 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.
  37. 37. The Effects of an Import Quota
  38. 38. Figure 7 The Effects of an Import Quota Price of Steel Domestic supply Equilibrium without trade Domestic Quota supply A + Import supply Isolandian price with B Equilibrium quota with quota C D E' Price Equot; F World World without = G price Imports price quota Domestic with quota demand S S D D 0 Q Q Q Q Quantity of Steel Imports without quota Copyright © 2004 South-Western
  39. 39. Exercise
  40. 40. 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
  41. 41. 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.
  42. 42. The Lessons for Trade Policy
  43. 43. Lessons for Trade Policy
  44. 44. Both tariffs and import quotas . . . raise domestic prices
  45. 45. Both tariffs and import quotas . . . reduce the welfare of domestic consumers.
  46. 46. Both tariffs and import quotas . . . cause deadweight losses.
  47. 47. Other Benefits of International Trade
  48. 48. Arguments for Restricting Trade
  49. 49. Arguments for Restricting Trade 1. Jobs 2. National Security 3. Infant Industry 4. Unfair Competition 5. Protection-as-a-Bargaining Chip
  50. 50. 3/3 Hecksher-Ohlin Samuelson
  51. 51. Imagine a Pile of Money.
  52. 52. Hecksher Ohlin
  53. 53. Hecksher Ohlin Samuelson
  54. 54. Example
  55. 55. Summary
  56. 56. Next Week European Monetary Union Read Wyplosz, C. ‘European Monetary Union: The Dark Sides of a Major Success’, Economic Policy, 2006.
  57. 57. Thanks
  58. 58. EC4333 Lecture 3 Dr Stephen Kinsella stephenkinsella.net Trade Tariffs Welfare Analysis

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