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TAMU ECON 452 - Krugman09Slides

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Copyright © 2012 Pearson Addison-Wesley. All rights reserved.Chapter 9The Instruments of Trade PolicyCopyright © 2012 Pearson Addison-Wesley. All rights reserved.9-2Preview• Partial equilibrium analysis of tariffs in a single industry: supply, demand, and trade• Costs and benefits of tariffs• Export subsidies• Import quotas• Voluntary export restraints• Local content requirementsCopyright © 2012 Pearson Addison-Wesley. All rights reserved.9-3Types of Tariffs• A tariff is a tax levied when a good is imported. •A specific tariff is levied as a fixed charge for each unit of imported goods.– For example, $3 per barrel of oil.•An ad valorem tariff is levied as a fraction of the value of imported goods.– For example, 25% tariff on the value of imported trucks.Copyright © 2012 Pearson Addison-Wesley. All rights reserved.9-4Supply, Demand, and Trade in a Single Industry• Consider how a tariff affects a single market, say that of wheat.• Suppose that in the absence of trade the price of wheat is higher in Home than it is in Foreign.• With trade, wheat will be shipped from Foreign to Home until the price difference is eliminated.Copyright © 2012 Pearson Addison-Wesley. All rights reserved.9-5Supply, Demand, and Trade in a Single Industry (cont.)•An import demand curve is the difference between the quantity that Home consumers demand minus the quantity that Home producers supply, at each price.• The Home import demand curve MD = D – S intercepts the price axis at PAand is downward sloping:– As price increases, the quantity of imports demanded declines.Copyright © 2012 Pearson Addison-Wesley. All rights reserved.9-6Fig. 9-1: Deriving Home’s Import Demand CurveCopyright © 2012 Pearson Addison-Wesley. All rights reserved..8-7Example 9-1 Import DemandSuppose Home has demand P = 14 – Q and supply P = 6 + Q.• What is Home autarkic price?4614 =→+=−AAAQQQ1041414 =−=−=AAQPCopyright © 2012 Pearson Addison-Wesley. All rights reserved..8-8Example 9-1 Import Demand• What is Home import demand curve?PQQPD−=→−= 1414PQQPS+−=→+= 66()PPQQMSD+−−−=−= 614MQPPM2110220 −=→−=Copyright © 2012 Pearson Addison-Wesley. All rights reserved..8-9Exercise 9-1 Import DemandUS demand is P = 38 – Q and US supply is P = 26 + Q.• What is the US autarkic price?• What is the US import demand curve?Copyright © 2012 Pearson Addison-Wesley. All rights reserved..8-10Exercise Solutions 9-1 Import DemandUS demand is P = 38 – Q and US supply is P = 26 + Q.• What is the US autarkic price?62638 =→+=−AAAQQQ3263838 =−=−=AAQPCopyright © 2012 Pearson Addison-Wesley. All rights reserved..8-11Exercise Solutions 9-1 Import Demand• What is the US import demand curve?PQQPD−=→−= 3838PQQPS+−=→+= 2626()PPQQMSD+−−−=−= 2638MQPPM2132264 −=→−=Copyright © 2012 Pearson Addison-Wesley. All rights reserved.9-12Supply, Demand, and Trade in a Single Industry (cont.)•An export supply curve is the difference between the quantity that Foreign producers supply minus the quantity that Foreign consumers demand, at each price.• The Foreign export supply curve XS*= S*–D*intersects the price axis at PA* and is upward sloping: – As price increases, the quantity of exports supplied rises.Copyright © 2012 Pearson Addison-Wesley. All rights reserved.9-13Fig. 9-2: Deriving Foreign’s Export Supply CurveCopyright © 2012 Pearson Addison-Wesley. All rights reserved.9-14Supply, Demand, and Trade in a Single Industry (cont.)• In equilibrium, import demand = export supply,home demand – home supply= foreign supply – foreign demand,home demand + foreign demand = home supply + foreign supply,world demand = world supply.Copyright © 2012 Pearson Addison-Wesley. All rights reserved.9-15Fig. 9-3: World EquilibriumCopyright © 2012 Pearson Addison-Wesley. All rights reserved..8-16Example 9-2 Export SupplySuppose Foreign has demand P* = 12 – Q* and supply P* = Q*.• What is Foreign autarkic price?612***=→=−AAAQQQ661212**=−=−=AAQPCopyright © 2012 Pearson Addison-Wesley. All rights reserved..8-17Example 9-2 Export Supply• What is Foreign export supply curve?*12*12**PQQPD−=→−=****PQQPS=→=()*12****PPQQXDS−−=−=*216**212*XQPPX +=→+−=Copyright © 2012 Pearson Addison-Wesley. All rights reserved..8-18Example 9-2 World Equilibrium• What is the world price under free trade?• What are Home imports at this price?• What are Foreign exports at this price?8212220* =→+−=−→= PPPXM41620)8(220220 =−=−=−= PM4)8(212*212* =+−=+−= PXCopyright © 2012 Pearson Addison-Wesley. All rights reserved..8-19Example 9-2 World Equilibrium• What is Home quantity demanded at this price?• What is Home quantity supplied at this price?• These numbers appear on the home graph.1614814 DQQQP ==→−=→−=12686 SQQQP ==→+=→+=Copyright © 2012 Pearson Addison-Wesley. All rights reserved..8-20Example 9-2 World Equilibrium504Quantity TradedWorld PriceX*M10 8 6Copyright © 2012 Pearson Addison-Wesley. All rights reserved..8-21Exercise 9-2 Export SupplyMexican demand is P* = 34 – Q* and supply P* = 22 + Q*.• What is the Mexican autarkic price?• What is the Mexican export supply curve?Copyright © 2012 Pearson Addison-Wesley. All rights reserved..8-22Exercise 9-2 World Equilibrium• What is the world price under free trade?• What are US imports at this price?• What are Mexican exports at this price?• What is US quantity demanded at this price?• What is US quantity supplied at this price?Copyright © 2012 Pearson Addison-Wesley. All rights reserved..8-23Exercise Solutions 9-2 Export SupplyMexican demand is P* = 34 – Q* and supply P* = 22 + Q*.• What is the Mexican autarkic price?62234***=→+=−AAAQQQ2863434**=−=−=AAQPCopyright © 2012 Pearson Addison-Wesley. All rights reserved..8-24Exercise Solutions 9-2 Export Supply• What is the Mexican export supply curve?*34*34**PQQPD−=→−=*22*22**PQQPS+−=→+=()*34*22***PPQQXDS−−+−=−=*2128**256*XQPPX +=→+−=Copyright © 2012 Pearson Addison-Wesley. All rights reserved..8-25Exercise Solutions 9-2 World Equilibrium• What is the world price under free trade?• What are US imports at this price?• What are Mexican exports at this price?30256264* =→+−=−→= PPPXM46064)30(264264 =−=−=−= PM46056)60(256*256* =+−=+−=+−= PXCopyright © 2012 Pearson Addison-Wesley. All rights reserved..8-26Exercise Solutions 9-2 World


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