) Suppose a small open economy cannot produce consumption goods or output that the government can use. Firms in this economy can only produce investment goods. Suppose initially that there are no trade restrictions, but then the rest of the world reduces its proportional tariff t by half on exports to the rest of the world from the small open economy. Suppose that the government in the small open economy responds to the tariff by reducing a tax s by half on each unit of investment by domestic firms, where s = t. Determine the macroeconomic effects of the reduced tariff, combined with the reduced tax on investment.

) Suppose a small open economy cannot produce consumption goods or output that the government can use. Firms in this economy can only produce investment goods. Suppose initially that there are no trade restrictions, but then the rest of the world reduces its proportional tariff t by half on exports to the rest of the world from the small open economy. Suppose that the government in the small open economy responds to the tariff by reducing a tax s by half on each unit of investment by domestic firms, where s = t. Determine the macroeconomic effects of the reduced tariff, combined with the reduced tax on investment.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter17: International Trade

Section: Chapter Questions

Problem 2.6P

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Similar questions

Consider a small country that exports steel. Supposethat a “pro-trade” government decides to subsidizethe export of steel by paying a certain amount foreach ton sold abroad. How does this export subsidyaffect the domestic price of steel, the quantity ofsteel produced, the quantity of steel consumed, andthe quantity of steel exported? How does it affectconsumer surplus, producer surplus, governmentrevenue, and total surplus? Is it a good policy fromthe standpoint of economic efficiency? (Hint: Theanalysis of an export subsidy is similar to the analysisof a tariff.)
Consider a small country that exports steel. Supposethat a ''pro--trade'' government decides to subsidizethe <:xport of s teel by paying a certain amount for eachton sold abroad. How docs this export subsidy affectthe domestic price of steel, the quantity of steel produced,the quantity of steel consunuxS, and the quantityof steel exported? How docs it affect consumersurplus, producer surplus, g·ovemment revenue, andtolal surplus? Is it a good policy from the standpointof oconomic efficiency? (Hint: The analysis of anexport subsidy is similar to the analysis of a tariff.)
Use the specific factor model to analyze a simplified version of a liberalization of trade betweenBrazil and Japan. Assume that there are two goods that people want to buy: coffee and cars. Assumethat there are three production factors: land, capital and labor. Land is specific to coffee, capital isspecific to cars and workers can work in both industries. Assume that, under autarky, coffee is cheaper in Brazil than in Japan. How does the price of coffeein Brazil change when Brazil opens up to international trade? Explain your answer
Suppose that Congress imposes a tariff on importedautomobiles to protect the U.S. auto industry fromforeign competition. Assuming that the United Statesis a price taker in the world auto market, show thefollowing on a diagram: the change in the quantityof imports, the loss to U.S. consumers, the gainto U.S. manufacturers, government revenue, andthe deadweight loss associated with the tariff. Theloss to consumers can be decomposed into threepieces: a gain to domestic producers, revenue forthe government, and a deadweight loss. Use yourdiagram to identify these three pieces.
Are the following statemen ts true or false? Explain ineach case.a. ''1Wo countries can achieve gains from trade evenif one of the countries has an absolute advantagein the production of all goods."b. "Certain talented people have a comparativeadvantage in everything they do."c. ''U a certain trade is good for one person, it can'tbe good for the other one.''d. ''U a certain trade is good for one person, it isa lways good for the other o ne.''c . "U trade is good for a country, it must be goodfor everyone in the country.''
Givenw: (1) two nations (1 and 2) which have the sametechnology but different factor endowments and tastes, (2)two commodities (X and Y) produced under increasingcosts conditions and (3) no transportation costs, tariffs orother obstructions to trade.Prove geometrically that mutually advantageous tradebetween the two nations is possible.Note: Your answer should show the autarky (no-trade) andfree-trade points of production and consumption for eachnation, show gains from trade of each nation and expressthe equilibrium condition that should prevail when trade Stop equilibrum
Consider the arguments for restricting trade.a. Imagine that you are a lobbyist for timber, anestablished industry suffering from low-pricedforeign competition, and you are trying to getCongress to pass trade restrictions. Which twoor three of the five arguments discussed in thechapter do you think would be most persuasiveto the average member of Congress? Explain yourreasoning.b. Now assume you are an astute student ofeconomics (not a hard assumption, we hope).Although all the arguments for restricting tradehave their shortcomings, name the two or threearguments that seem to make the most economicsense to you. For each, describe the economicrationale for and against these arguments for traderestrictions.
a) Suppose the two countries engage in international trade, and that the international relativeprice of good (T) is 3 tons of good (D). Can there be mutually beneficial international tradebetween the two countries? If so, which are the patterns of comparative advantage, ofproduction and consumption, of exports and imports between the two countries? What arethe gains from trade for each country? b)
Suppose the U.S. imposes a trade embargo onNorth Korea in order to exert political pressureon the government. Consider how the embargowill affect U.S. producers. Under what conditionswould they support the embargo? Why mightthey oppose it?
Suppose Egypt wants to open its trade borders tothe world market for natural gas. What will determine whether Egypt becomes a net-exporter ornet-importer of natural gas? If Egypt becomes anet-exporter, will domestic supply be equal to, lessthan, or greater than domestic demand?
Suppose that in a year an American worker canproduce 100 shirts or 20 computers and a Chineseworker can produce 100 shirts or 10 computers.a. For each country, graph the productionpossibilities frontier. Suppose that without tradethe workers in each country spend half their timeproducing each good. Identify this point in yourgraphs.b. If these countries were open to trade, whichcountry would export shirts? Give a specificnumerical example and show it on your graphs.Which country would benefit from trade?Explain.c. Explain at what price of computers (in terms ofshirts) the two countries might trade.d. Suppose that China catches up with Americanproductivity so that a Chinese worker canproduce 100 shirts or 20 computers in a year. Whatpattern of trade would you predict now? Howdoes this advance in Chinese productivity affectthe economic well-being of the two countries’citizens?
If a nation lhat does not allow international trade insteel has a domestic price of steel lower than I heworld price, then~ the nation has a comparative a dvan ta~e in oroduc·ing steel and would become a steel exporter if ilopened up trade.h. the nation has a comparative a dvan ta~e in oroduc·ing steel and would become a steel importer if ilopened up trade.c. the nation does not have a comparative advantagein producing steel and would become a steelexporter if it opened up trade.rl. the nation does not have a comparative advantagein producing steel and would become a steelimporter if it opened up trade.