econ 420 final study guide - Question 1: a) offer curve (or...

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Question 1: a) offer curve (or reciprocal demand curve) In economics , and particularly in the theory of international trade an offer curve shows the quantity of one type of product that an agent will export ("offer") for each quantity of another type of product that it imports. The offer curve was first derived by English economists Edgeworth and Marshall to help explain international trade. Offer Curve Described The Offer Curve is derived from the country's PPF . We describe a Country named K which enjoys both goods Y and X . It is slightly better at producing good X , but wants to consume both goods. It wants to consume at point C or higher (above the PPF). Country K starts in Autarky at point C . At point C , country K can produce (and consume) 3 Y for 5 X. As trade begins with another country, and country K begins to specialize in producing good X . When it produces at point B , it can trade with the other country and consume at point S . We now look at our Offer curve and draw a ray at the level 5 Y for 7 X. When full specialization occurs, K then produces at point A , trades and then consumes at point T . The price has reduced to 1 Y for 1 X, and the economy is now at equilibrium b) trade diversion Trade Diversion
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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. c) consumer and producer surplus when a tariff is imposed Consumer and Producer Surplus when a tariff is imposed (and reduced) The impact of a tariff on producer surplus causes it to go up o However, if a producer is importing raw material, then he is hurt as well The impact of a tariff on consumer surplus causes it to go down The amount by which each gains or loses is determined by the elasticity of the demand curve The more elastic the curve, the smaller the increase in producer surplus and the smaller the elasticity, the greater the increase in producer surplus Similar for Consumer Surplus See GRAPH 1 d) transferring pricing Transfer pricing 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
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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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econ 420 final study guide - Question 1: a) offer curve (or...

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