Problem Set 3

Problem Set 3 - UNIVERSITY OF SOUTHERN CALIFORNIA Marshall...

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Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA Marshall School of Business FBE 462 – International Trade & Commercial Policy Problem Set #3 1) Canada currently imports all of its domestic consumption of decorative ceramic tiles (used in bathrooms, kitchens, and so forth). A leading Canadian politician has proposed a tariff of 30 percent on decorative ceramic tiles imported into the Canada. He argues that decorative ceramic tile is an infant industry in Canada, and the tariff will permit the industry to be established in Canada. You have been hired to write a report analyzing this proposal. a) What are the effects in Canada during the first few years after the tariff is imposed (the time when the Canadian industry is an infant)? Show graphically and explain the effects of the imposition of this tariff on price, quantities, surpluses, and government revenues. During this time period what are the benefits or costs to Canadian national well-being? b) Explain why protection of an infant industry may be economically justified. What questions would you try to answer before accepting this reason for protecting the Canadian industry? 2) The United States government has convinced foreign producers of clothespins to reduce their level of exports to the United States through a VER. Assume that the supply of imports into the United States under free trade is infinitely elastic at the going world price. This means that the foreigners are willing to sell any quantity of imports at the world price. a) Show graphically and explain the effects of this VER on the U.S. market for clothespins. b) U.S. market demand for clothespins is expected to decline over the next few years, due to growing consumer acceptance of substitutes. Show graphically and explain the effects of this shift in demand, if the VER quantity is left unchanged. c) How would your answer to part B differ, if the United States uses a tariff (instead of a VER) to reduce the level of imports of clothespins? Explain. 3) Assume that all imports of socks into the United States come from the developing countries. The United States has decided that it must maintain a domestic production level of socks higher than now exists. You represent the developing countries in sock negotiations with the U.S. The U.S. is willing to consider two methods of assuring its minimum domestic production level: a) A quota on imports; or b) The imposition by the exporting countries of a voluntary export restraint. Discuss each of these alternatives from your point of view as a representative of the developing countries, and compare their effects on the interests of the developing countries FBE 462 Problem Set #3 as exporters. Assume that the world price of socks is unaffected by U.S. demand for sock imports. 4) True, false, or uncertain, and explain why. a) Persistent dumping indicates that foreign firms are not trying to earn high profits on current sales. b) From the importing country's point of view, a clear economic case exists for the importing country to impose a countervailing duty on a good whose export is subsidized by a foreign country. c) For a large country that imports leather, the optimal tariff on leather is a tariff rate that results in almost no imports of leather. 5) Which one of the following cannot be the argument for using the export tariff? a) The export tariff will cause deadweight loss to a nation. b) The export tariff will reduce the domestic price of the good that is to be exported and thus encourage the development of the domestic processing industries. c) The export tariff is an important revenue source for some countries. d) The export tariff will ensure that the domestic price is lower so that the product is affordable to people. 6) The optimal tariff rate of a large country is a) zero. b) negative. c) a positive number. d) the same as the effective rate of protection. 7) An export duty will a) increase the export. b) increase the domestic production of the exportable goods. c) decrease the domestic consumption of the exportable goods. d) decrease the export. 2 FBE 462 Problem Set #3 8) Which of the following is an argument for trade protection? a) Free trade will lead to efficiency gains to a nation. b) Industries in a development country need time to gain efficiency to compete in the future. c) With trade protection, the market gets smaller. d) There will be less technological transfer with trade protection. 9) Which one of the following correctly describes the “Dutch Disease”? a) It is a disease that destroys the elm trees. The consequence of this disease is to lower national income and thus result in social instability. b) When the Dutch discovered the natural gas in the North Sea, its natural gas related industry expands resulting in the depreciation of its currency, and thus leading to the increased competitiveness of its traditional industries. c) When the Dutch discovered the natural gas in the North Sea, its natural gas related industry shrinks resulting the appreciation of its currency, and thus leading to the decreased competitiveness of its traditional industries. d) When the Dutch discovered the natural gas in the North Sea, its natural gas related industry expands resulting in the appreciation of its currency, and thus leading to the decreased competitiveness of its traditional industries. 3 ...
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This note was uploaded on 02/15/2011 for the course FBE 462 at USC.

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