2. 2
Topics to be Covered
Types of Commercial Policies
Tariffs and Types
Consumer Surplus vs. Producer Surplus
Effects of a Tariff
Small Country vs. Large Country Case
Deadweight Costs
Optimal Tariff
Effective Rate of Protection
3. 3
Commercial Policy
Actions taken by government to influence
the country’s volume and composition of
trade
Types of Commercial Policy
Tariff
Quota
Subsidy
Non-tariff Barriers
4. 4
Tariff
A tax imposed by government on either
imports or exports
6. 6
Subsidy
A government payment to a domestic
industry to encourage exports or
discourage imports
7. 7
Non-tariff Barriers
A wide range of government policies other
than tariffs designed to affect the volume
or composition of a country’s international
trade
These NTBs include:
Health and safety standards
Government procurement policy
8. 8
Gains from Free Trade
Economic Gains— increase in standard of living
and economic growth that result from a country’s
engaging in free international trade
Political Gains— increases in well-being that
accrue to a country because expanded trade and
economic interdependency may increase the
likelihood of reduced international hostility
9. 9
Relationship Between Trade and
Economic Growth
Trade enhances economic growth through
imports of capital goods.
Trade enhances international diffusion of
technology.
Trade is pro-competition.
Trade expands market size if economies of scale
exist.
Trade can enlarge the pool of savings necessary
for investment spending.
10. 10
Types of Tariffs
Ad Valorem tariff— a tax equal to a
certain percentage of the good’s
selling price.
Specific tariff— a tax equal to a fixed
amount of money per unit sold.
Compound tariff— a tax with both ad
valorem and specific components.
12. 12
Consumer Surplus
The difference between the amount
consumers are willing to pay to purchase a
given quantity of a good and the amount
they have to pay to purchase the good
14. 14
Producer Surplus
The difference between the price paid in
the market for a good and the minimum
price required by the industry to produce
and market the good
23. 23
Effects of a Tariff Imposed by a Small
Country
Refer to Figure 6.6 Effect of Import Tariff
Price effect
Consumption effect
Production (or protective) effect
Imports effect
Government revenue effect
Consumer surplus effect
Producer surplus effect
25. 25
Welfare Cost of Tariff Imposed by a Small
Country
Deadweight cost— value of wasted
resources devoted to expanded domestic
production and expenditures devoted to
less-desired substitutes brought about by
a tariff
27. 27
Two Deadweight Costs of the Tariff
Refer to Figure 6.7 Deadweight Cost of Tariff
Production deadweight cost— refers to the protective
effect of the tariff which allows domestic firms to increase
production above free trade levels (area b).
Consumer deadweight cost— the value of lost consumer
satisfaction due to a shift in consumption
to less-desired substitutes brought on by the higher price
(area d).
Total deadweight cost = ½ x tariff x reduction
in imports
29. 29
How High are Tariffs?
Refer to Table 6.6 Post-Uruguay Round Bound
Tariffs
Bound tariff rates are the highest rates on goods
that a country has ever imposed.
These tariffs differ by product.
Tariffs are generally lower for high-income
countries.
Tariffs are higher in developing countries.
30. 30
Maximum rate of tariff allowed by World Trade Organization (WTO) to any member state for imports
from another member state.
