international economics- tariffs

7/29/2019 International Economics- Tariffs

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Trade Restrictions

Tariffs

Mary Apple Dacay Cirpo BA4B


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In no period in history has trade beencompletely free. There have always

been barriers to trade. We will explore a number of trade

barriers and their effects

In this report, we will concentrate ontariffs.



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Tariffs

- as termed in international trade, are

simply taxes levied on goods as theycross international borders



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Types of Tariff

ad valorem tariffis expressed as afixed percentage of the value of the

traded commodity



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Types of Tariff

Ad valorem tariff

specific tariffis expressed as a fixed

sum per physical unit of the tradedcommodity



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Types of Tariff

Ad valorem tariff

specific tariff

compound is the combination of the advalorem and specific tariff.



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Examples

A 10% ad valorem tariff on importedbicycle

A $10 specific tariff on imported bicycles

5% ad valorem and $10 specific tariff



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Partial Equilibrium

Analysis of a TariffEffects



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Partial equilibrium analysis of a tariff is themost appropriate when a small nationimposes a tariff on imports competing with

the output of a small domestic industry.

We uses a partial equilibrium model, thusfocusing only on the market for a single

good and ignoring any interactions withother markets.

http://www-personal.umich.edu/~alandear/glossary/p.htmlhttp://www-personal.umich.edu/~alandear/glossary/p.html


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Effects of a tariff: small country



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Our equilibriumoccurs at price $3 andquantity 30X. In this

market, if theinternational price isPx=$1, the country willbe an importer of the

item. Domesticproduction will fallfrom 30X to 10X.Domesticconsumption will rise

from 30X to 70X.

These changesgenerate imports of 60units.


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If this nation imposes a 100%ad valorem tariff on theimports of commodity X, Px inthis nation will rise to $2

For the same $1 increase inPx of this nation as a result ofthe tariff, the more elastic andflatter Dx is, the greater theconsumption effect. Similarly,the more elastic Sx is, the

greater the production effect.Thus, the more elastic Dx andSx are, the greater the tradeeffect of the tariff and thesmaller the revenue effect of

the tariff.


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Effects of tariffConsumer and Producer Surplus


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To show the welfare changes from thetariff the concepts of consumer andproducer surplus must be considered.

Consumer surplus is the differencebetween what consumers are willing topay for a specific amount of acommodity and what they actually payfor it.

Graphically, consumer surplus is the areaunder the demand curve and above the pricepaid on every unit purchased


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To show the welfare changes from the tariff theconcepts of consumer and producer surplusmust be considered.

Consumer surplus is the difference between whatconsumers are willing to pay for a specific amount of acommodity and what they actually pay for it.

Producer surplus is the extra payment

received by producers above what neededto have been paid to cause them toproduce the commodity.

Graphically, producer surplus is the area below theprice received and above the supply curve on everyunit sold.


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Consumer Surplus

When the nation moves to

free trade this surplusincreases.

ARB($3.5x70X)1/2=$122.5

The imposition of a tariff

reduces this surplus bythe difference between theinternational and the tariffprice.

From ARB($3.5x70X)1/2=

$122.5 toGRH($2.5x70X)1/2=$62.5

Or by the shaded areaAGHB=$60


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Producer Surplus

Opening the economy to free tradereduces the surplus.

Imposing a tariff increases theproducer surplus.

Producers surplus that results from atariff is given by the shaded areaAGJC=$15.

Reasons:At free trade Px=$1, domestic producersproduce 10X and receive 0ACV=$10 inrevenues. With the tariff and Px=$2, theyproduce 20x and receive 0GJU=$40. Ofthe $30 increase in the revenue of

producers, VCJU=$15 represents theincrease in cost of production, theremainder AGJC=$15 represents theincrease in producers surplus.


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international economics- tariffs

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