420 final itouch - Offer curves how they are used, how you...

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Offer curves – how they are used, how you drive them, how/in which direction do countries specialize offer curve The offer curve is the combination of all tangencies of all indifference curves (intersecting with the international exchange rate). This is found within the Edgeworth box diagram. OFFer curves encourage countries to specialize even when they do have an absolute advantage in the production of both goods. Trade diversion A policy of protection against non members of the union. In general, trade diversion means that a free trade area diverts trade, away from a more efficient supplier outside the FTA, towards a less efficient supplier within the FTA. In some cases, trade diversion will reduce a country’s naional welfare but in some cases national welfare could improve despite the trade diversion. Trade diversion occurs when lower cost imports from outside the custom unions are replaced by high cost imports from a union member due to the preferential treatment given to member nations. It is harmful because it reduces welfare by shifting production from more efficient producers outside the customs union to less efficient producers inside the custom union. The international allocations of resources are therefore worsened and the production is shifted away from the comparative advantage base. Consumer and producer surplus when a tariff is imposed Transfer pricing Making sure profits created are moved to where taxes are lowest, done if taxes on corporations are too high and if host countries have profit limiting. Also known as profit remittances. Sometimes done through overcharging subsidiaries for inputs. A large share of world trade consists of transfer of goods, intangibles and services within multinational evterprises. To determine tax liability in each jurisdiction, the right price (arm’s length price). This is a strategy used by MNCs to take advantage of differing tax rates in different countries. Through intra-firm trade, MNCs overprice the products shipped to an affiliate in a high tax country so that it will have a small profit. Similarly, they will under price products and ship them to a low tax country so that it will have a large profit. The result is a net tax saving. It is difficult for a host country government to determine whether MNC’s implement transfer pricing strategy because the transferred products are often unique and there is no local market for such products to identify what their reasonable prices are.
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Impact of import restrictions on factor prices Factor prices are the price paid for and received by the services of factors of productions (labor, capital, land, and entrepreneurship) when exchange through factor markets. Like prices in other markets, factor price adjusts to balance the forces of demand and supply. Goods are mobile internationally, but only some factors of production can be traded. If
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This note was uploaded on 06/13/2011 for the course ECON 420 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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420 final itouch - Offer curves how they are used, how you...

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