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China is a major producer of grains, such as wheat, corn, and rice. Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports. a. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions. b. How does an export tax affect domestic grain prices? c. How does it affect the welfare of domestic consumers, the welfare of domestic producers, and government revenue? d. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?
Principles of Macroeconomics (Mind...
Principles of Macroeconomics (Mind...
China is a major producer of grains, such as wheat, corn, and rice. Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports.
a. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions.
b. How does an export tax affect domestic grain prices?
c. How does it affect the welfare of domestic consumers, the welfare of domestic producers, and government revenue?
d. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?
Subpart (a):
Explanation of Solution
When the domestic price of the commodity is lower than the price in foreign countries, it denotes that the domestic country is able to produce the good at a lower opportunity cost than the foreign countries. The ability to produce the good at lower opportunity cost is known as the comparative advantage, and thus, when there is international trade opening in the country, the country will become the exporter of that commodity...
Subpart (b):
Subpart (c):
Subpart (d):
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