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1. Discuss the small-country case of tariffs, using partial equilibrium analysis.

2. Suppose the free trade market price of a car is $10,000. It contains $5000 worth of steel. The importing country imposes 25% tariff on car imports.

a. Calculate the effective rate of protection if there is no duty on steel imports.

b. Calculate the effective rate of protection if the importing country imposes a 20% tariff on steel imports.

c. Suppose it also takes $2000 worth of copper (besides $5000 worth of steel) to produce a car. Calculate the effective rate of protection if there is no import tariff on the imports of either steel or copper.

d. Suppose there is import duty of 20% and 15% on imports of steel and copper, respectively. Calculate the effective tariff rate.

3. Explain the difference between the price and the physical definitions of factor abundance. When could they give conflicting answers about which factor is the abundant factor?

4. Ignoring the mathematics, explain the operation of the Krugman model in economic terms and indicate its principal lessons.


Solution Preview

The response addresses the queries posted in 1402 words with references.

//In this paper, we are going to discuss the effects of Tariffs on Small Country's demand and supply. The Partial Equilibrium Analysis shows the changes in the price of the goods due to tariffs of a small country, but there is no change in world's price of goods. Such change of price increase the supply of goods within the country. This paper also has a discussion over effect of Tariffs on the rate of protection.//

Answer 1

Small-Country Case of Tariffs with the help of Partial Equilibrium Analysis:

The above diagram illustrates the supply by upward-sloping curve and demand by downward-sloping curve for a specific product in a country. PW represents the world price which is supposed to be less than that of the country's autarky price. Therefore, the country has excess demand at the world price and would therefore; import the goods if possible. The tariffs on imports would have no effect, if the case is not like that is illustrated above. In such a case, with the help of free trade, the country is in a position to supply and demand the goods respectively in the amounts SF and DF, as determined by the curves of supply and demand.

In case of the small country, when the prices in the world remains unchanged, the imports of a country are considered to be as too small subject to the world market. The demand for imports would reduce if the importing country is large, resulting a decrease in the world prices by a large amount. There is no change in the world price in the small-country case, so there should be rise in the domestic price by the full amount of the tariff. Besides the particular supply and demand curves, the domestic supply rises and the domestic demand falls due to increase in the price. The difference between demand and supply is the quantity of imports. Hence, both of these changes cause reduction of the imports.

Different areas of a diagram measure the effects on welfare inside the country. Increase in producer surplus measures the growth in price benefits suppliers, which is the part to the left of the supply curve amid the old and new prices. Decrease in consumer surplus measures the same price increase that offends the ...

Solution Summary

The response addresses the queries posted in 1402 words with references.