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Unformatted text preview: Trade Restrictions: Tariffs
Chapter 8 ANHUI UNIVERSITY OF FINANCE & ECONOMICS 1/21 1 Introduction The partial equilibrium effects and general
equilibrium effects of a tariff in a small and large
country; The effective rate of protection and the
optimum tariff; The theory of tariff structure. ANHUI UNIVERSITY OF FINANCE & ECONOMICS 2/21 Key Terms
• Ad valorem tariff
ANHUI UNIVERSITY OF FINANCE & ECONOMICS 3/21 2 Tariff and Its Effects
A tariff is a tax or duty levied on the traded
commodities as they cross national boundaries.
An import tariff is a duty on imported
commodities, while an export tariff is a duty on
We levy tariff according to the price, the quantity
or both. The first is called ad valorem tariff, the
second one is called specific tariff and the last
one is called a compound tariff. ANHUI UNIVERSITY OF FINANCE & ECONOMICS 4/21 2.1 Effects of a Tariff in a Small Nation
Consumption effect: the reduction in domestic
Production effect: expansion of domestic
production resulting from the tariff;
Trade effect: the decline in imports;
Revenue effect: the revenue collected by the
But the effect of tariff in a small nation is
totally different from the effect of a tariff in a
ANHUI UNIVERSITY OF FINANCE & ECONOMICS 5/21 2.2 Partial Equilibrium Effects of a Tariff in a Small Nation ANHUI UNIVERSITY OF FINANCE & ECONOMICS 6/21 2.3 Consumer and Producer Surplus in a Small Nation What is consumer surplus?
What is producer surplus? ANHUI UNIVERSITY OF FINANCE & ECONOMICS 7/21 2.4 Partial Equilibrium Costs and Benefits of a Tariff in a Small Nation What is a, b, c, and d ?
ANHUI UNIVERSITY OF FINANCE & ECONOMICS 8/21 2.5 General Equilibrium Analysis of a Tariff in a Small Nation
When a small nation imposes a tariff, it will
not affect world prices. However the domestic
price of the importable commodity will rise by the
amount of the tariff for producers and consumers
in the small nation. But for the whole nation, the
price remains the same since the small nation
itself collects the tariff.
THIS POINT IS EXTREMELY IMPORTANT!
THIS ANHUI UNIVERSITY OF FINANCE & ECONOMICS 9/21 2.6 General Equilibrium Effects of a Tariff in a Small Nation ANHUI UNIVERSITY OF FINANCE & ECONOMICS 10/21 3 The StolperSamuelson Theorem
It postulates that an increase in the relative
price of a commodity raises the return or
earnings of the factor used intensively in the
production of the commodity. For example, when
nation 2 imposes an import tariff on X, Px/Py
rises for domestic producers and consumers and
it will raise the real wage of labor because X is
The Stolper-Samuelson theorem is always true
for small nations and is usually true for large
nations as well.
nations ANHUI UNIVERSITY OF FINANCE & ECONOMICS 11/21 4 General Equilibrium Analysis of a Tariff in a Large Nation
When a large nation imposes a tariff, its offer curve
shifts or rotates toward the axis measuring its importable
commodity by the amount of the import tariff. The reason
is that for any amount of the export commodity, importers
now want sufficiently more of the import commodity to
also cover (i.e., pay for) the tariff.
Under these circumstances, imposition of a tariff by a
large nation reduces the volume of trade but improves the
nation's terms of trade. The reduction in the volume of
trade, by itself, tends to reduce the nation's welfare, while
the improvement in its terms of trade tends to increase
the nation's welfare. Whether the nation's welfare actually
rises or falls depends on the net effect of these two
ANHUI UNIVERSITY OF FINANCE & ECONOMICS 12/21 4.1 Partial Equilibrium Effects of a Tariff in a Large Nation ANHUI UNIVERSITY OF FINANCE & ECONOMICS 13/21 4.2 General Equilibrium Analysis of a Tariff in a Large Nation ANHUI UNIVERSITY OF FINANCE & ECONOMICS 14/21 5 Optimum Tariff and Retaliation Px/ Py=0.625,
Py/Px=1/ 0.625=1.6 ANHUI UNIVERSITY OF FINANCE & ECONOMICS 15/21 6 Effective Rate of Protection
We have norminal tariff & effective rate of Protection.
Nominal tariff: it is calculated on the value of the
final commodity. It is important to consumers
because it indicates the increased price.
Effective rate of protection: it is calculated on the
domestic value added that takes place in the
nation. It is important to the producers because it
indicates how much protection is actually
provided to the domestic processing and importcompeting commodity. ANHUI UNIVERSITY OF FINANCE & ECONOMICS 16/21 6.1 Example of ERP
Suppose that $80 of imported wool goes into the
domestic production of a suit and the free trade price
of the suit is $100 but the nation imposes a 10%
nominal tariff on each imported suit. The price of suits
to domestic consumers would then be $110. Of this,
$80 represents imported wool, $20 is domestic value
added, and $10 is the tariff.
The $10 tariff collected on each imported suit
represents a 10 percent nominal tariff rate since the
nominal tariff is calculated on the price of the final
commodity (i.e., $10/$100 = 10%) but corresponds to a
50% effective tariff rate because the effective tariff is
calculated on the value added domestically to the suit
(i.e., $10/$20 = 50%).
(i.e., ANHUI UNIVERSITY OF FINANCE & ECONOMICS 17/21 6.2 Measurement of the ERP
For one input: For many inputs: V '−V
g= t −a t
i i i g=the effective rate of protection
t=the nominal rate on final commodity
ai= the ratio of the cost of the imported input to the
price of the final commodity in the absence of tariffs
ti=the nominal tariff rate on the imported input ANHUI UNIVERSITY OF FINANCE & ECONOMICS 18/21 6.3 Conclusion
A tariff on imported inputs is
a tax on domestic producers
that increases their costs of
production, reduces the rate of
effective protection on the final
domestically, and therefore
production. ANHUI UNIVERSITY OF FINANCE & ECONOMICS 19/21 7 Cascading Tariff Structure
Nominal tariff is very low on the raw materials,
and it is getting higher and higher with the
greater degree of processing. ANHUI UNIVERSITY OF FINANCE & ECONOMICS 20/21 8 Questions for Discussion
• What are the different forms of tariff? What
are the different effects?
• What is the difference between nominal tariff
and effective rate of protection?
• What are the differences what a large nation
and small nation levy a tariff?
• What is the tariff structure of different
nations? ANHUI UNIVERSITY OF FINANCE & ECONOMICS 21/21 THANK YOU! ANHUI UNIVERSITY OF FINANCE & ECONOMICS 22/21 ...
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- Fall '09