13 The Standard Trade Model, Part 3

13 The Standard Trade Model, Part 3 - Standard Trade Model,...

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1 1 Standard Trade Model, Part 3 5. Tariffs and Export Subsidies a. Introduction b. Effects of a Tariff c. Effects of an Export Subsidy d. Terms of Trade Effects and Economic Welfare e. The Distribution of Income 2 Introduction •A tariff is a tax on imports. – The direct effect is to make imported goods more expensive inside a country than they are outside. •An export subsidy is a payment to a producer who exports. – The direct effect is typically to make it more profitable to sell abroad than at home. 3 Introduction • Tariffs and export subsidies drive a wedge between the prices at which goods are traded internationally (i.e., external prices ) and the prices at which they are traded within a country (i.e., internal prices ). •Th e terms of trade measure the price ratio at which countries exchange goods. – They correspond to external , not internal, prices. 4 Effects of a Tariff • Relative Demand and Supply: – Suppose Home imposes a 20% tariff on the value
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2 5 Effects of a Tariff • Relative Demand and Supply: – At any given world relative price of manufactures , Home producers will face a lower relative manufactures price and therefore will produce less manufactures and more food. – At the same time, Home consumers will shift their demand toward manufactures and away from food. 6 Effects of a Tariff P M / P F Q M + Q* M Q F + Q* F RS W RD W (P M /P F ) W 7 Effects of a Tariff • Relative Demand and Supply: – A tariff by Home will: decrease the world relative supply
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13 The Standard Trade Model, Part 3 - Standard Trade Model,...

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