Exemplary Writers

# Homework (Ch 04)

## 1. Identifying types of tariffs

For each hypothetical scenario, complete the first column in the following table by indicating whether the tariff described is more likely a protective tariff or a revenue tariff.
Scenario
Protective or Revenue
Tariff Type
A. In response to concerns from business leaders, a legislator has designed a new tariff on raw materials used by many manufacturing firms. The legislator felt the new tariff was necessary based on input from the private sector that new discoveries of natural resources abroad would threaten to put domestic producers of raw materials out of business. To meet this goal, this tariff will charge $1,500 on every crate of the imported goods plus an additional 5% of the total value of the imported goods. Protective Compound B. A member of Congress introduced legislation to create a new tariff. He wants to use the revenue collected from it to help pay down the national deficit. To meet this goal, this tariff will charge$1,500 on every ton that is imported. Revenue    Specific
Points:
1 / 1
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Explanation:
Economists classify tariffs as either a protective tariff or a revenue tariff, depending on the goal. Protective tariffs are designed to limit the amount of a good that is imported into a country, thus giving domestic producers of the same good an advantage in the domestic market because their goods do not face a cost that the imported ones do. Because the goal of the tariff presented in scenario A is to protect the domestic raw materials industry from increased competition (by making imported raw materials more expensive), this is an example of a protective tariff.
Revenue tariffs can be placed on imported or exported goods. Although they will reduce the amount of the good that is traded, the primary intent of this kind of tariff is to generate tax revenue for the government that imposes the tariff. Because the goal of the tariff presented in scenario B is to increase revenue (that would be used to reduce the deficit), this is an example of a revenue tariff.
For each hypothetical scenario, complete the second column in the previous table by determining if the fees charged represent an ad valorem, compound, or specific tariff.
Close Explanation
Explanation:
You can calculate the amount of money an importer pays as a tariff in three different ways:
 • Ad valorem tariffs are calculated based on the total value of the imported goods. Regardless of the number of units imported, the size of an ad valorem tariff is based on a percentage of the total value of all the goods imported. • Specific tariffs charge a set fee per unit. So, for every unit imported, the government charges a specific amount of money. • Compound tariffs are a combination of a specific and an ad valorem tariff. They charge both a per-unit fee and a percentage of the total value of the goods.
In this case, scenario A represents a compound tariff, because the amount of the tariff depends on both how many units are imported and the total value of those units; and scenario B represents a specific tariff, because the amount of the tariff is based on only the number of tons imported and does not depend on the total value of the imports.

CompuGlobal is an American firm producing computers. CompuGlobal imports computer components from Taiwan and assembles them domestically. Suppose that in the United States, a computer sells for $300 and that 80% of the computer’s value comes from the value of the imported components. The United States imposes a 30% tariff on computers and a 10% tariff on the computer’s components. Assume that costs of producing components are the same in the United States and Taiwan and that transit costs are nonexistent. Based on the information provided, the effective rate of protection that CompuGlobal receives from the tariff is110% . Points: 1 / 1 Close Explanation Explanation: When a company imports components for a finished good but assembles them domestically, it may face an effective tariff rate that differs from the nominal tariff rate (the tariff rate on the finished good that is published in the domestic country’s tariff schedule). In this case, the nominal tariff rate is the one that the United States imposes on computers, which is 30%. The effective tariff rate that CompuGlobal faces is a measure of how protected a product’s market is, based on the tariffs on both final goods and imported components. The effective rate of protection, ee, is calculated using the following formula:  ee = = n−ab1−an−ab1−a In this equation, nn stands for nominal tariff on the final good, bb is nominal tariff on the imported components, and aa denotes the ratio of the value of the imported components to the value of the final good. The effective rate of protection, therefore, is as follows:  ee = = n−ab1−an−ab1−a = = 0.3−0.8×0.11−0.80.3−0.8×0.11−0.8 = = 1.1, or 110%1.1, or 110% Note that the effective rate can be higher or lower than the nominal rate (and even negative). If the effective rate on a good is lower than the nominal rate, the government’s policy does more to protect domestic producers of components than final goods. Similarly, if the effective rate is higher than the nominal rate, then the government’s policy favors domestic producers of finished goods over domestic suppliers of raw materials. It is more common to see an effective rate that is higher than the nominal rate. Such a policy is known as tariff escalation. ## 3. Winners and losers from tariff reductions Suppose that Canada imports pearl necklaces from India. The free market price is$80.00 per necklace.
If the tariff on imports in Canada is initially 8%, Canadians pay

$86.40 per necklace. Points: 1 / 1 Close Explanation Explanation: With the 8% tariff, you can calculate the price Canadians pay for Indian pearl necklaces in the following way:  Price for Canadian ConsumersPrice for Canadian Consumers = = Free Trade Price+(Tariff×Free Trade Price)Free Trade Price+Tariff×Free Trade Price = = Free Trade Price×(1+Tariff)Free Trade Price×1+Tariff = =$80.00 per necklace×(1+0.08)$80.00 per necklace×1+0.08 = =$86.40 per necklace$86.40 per necklace One of the accomplishments of the Uruguay Round that took place between 1986 and 1993 was significant across-the-board tariff cuts for industrial countries, as well as many developing countries. Suppose that as a result of the Uruguay Round, Canada reduces its import tariffs to 4%. Assuming the price of pearl necklaces is still$80.00 per necklace, consumers now pay the price of

$83.20 per necklace. Points: 1 / 1 Close Explanation Explanation: With the 4% tariff, you can calculate the price Canadians pay for Indian pearl necklaces in the following way:  Price for Canadian ConsumersPrice for Canadian Consumers = = Free Trade Price+(Tariff×Free Trade Price)Free Trade Price+Tariff×Free Trade Price = = Free Trade Price×(1+Tariff)Free Trade Price×1+Tariff = =$80.00 per necklace×(1+0.04)$80.00 per necklace×1+0.04 = =$83.20 per necklace$83.20 per necklace Based on the calculations and the scenarios presented, the Uruguay Round most likelyhurts producers in Canada andbenefits producers in India. Points: 1 / 1 Close Explanation Explanation: The reduction of the import tariff in Canada to 4% benefits Canadian consumers, as the price of imports falls from$86.40 to $83.20 per necklace. However, the lower tariff hurts Canadian producers as they face a stronger competition with foreign producers. At the same time, producers in India also benefit from the lower tariffs because they can more easily export their product by selling at a lower price. ## 4. Tariff effects: An overview Consider two hypothetical countries, Borzia and Ardon. Both countries produce iDevices, and the price of iDevices is higher in Borzia than in Ardon. If Borzia and Ardon open to trade, producers inBorzia would be more likely to lobby their government for an import tariff on iDevices in order to protect themselves from foreign competition. Points: 1 / 1 Close Explanation Explanation: Since the price of iDevices in Borzia is higher than in Ardon, producers in Borzia are unable to stay competitive under free trade, whereas producers in Ardon are able to stay competitive. Therefore, producers in Borzia are more likely to lobby for an import tariff on iDevices. Which of the following statements about the effects of the tariff compared to free trade are correct? Check all that apply. Points: 1 / 1 Close Explanation Explanation: The purpose of a tariff is to reduce the price differential between trading countries. As a result of the tariff, consumers in Borzia will pay more for their protected domestic iDevices. Producers are always willing to expand production if a tariff provides them with new protection because that tariff will drive up the domestic price. Although producers in Borzia will benefit from the tariff, some workers in retail and shipping companies that import iDevices will lose their jobs. ## 5. Effects of a tariff on international trade The following graph shows the domestic supply of and demand for wheat in Bolivia. Bolivia is open to international trade of wheat without any restrictions. The world price (PWPW) of wheat is$245 per bushel and is represented by the horizontal black line. Throughout this problem, assume that the amount demanded by any one country does not affect the world price of wheat and that there are no transportation or transaction costs associated with international trade in wheat. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.
Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.
Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.
Graph Input Tool
Market for Wheat in Bolivia
Price
(Dollars per bushel)
Domestic Demand
(Thousands of bushels of wheat)
Domestic Supply
(Thousands of bushels of wheat)
If Bolivia is open to international trade of wheat without any restrictions, it will import

360,000

bushels of wheat. (Note: Be sure to enter the full value for your answer, accounting for the horizontal axis units.)

Points:
0 / 1
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Explanation:
At the current world price of $245 per bushel, Bolivia’s domestic demand for wheat is 360,000 bushels, but it will domestically produce only 40,000 bushels of wheat. Bolivia will import the difference of 320,000 bushels of wheat. Suppose the Bolivian government wants to reduce imports to exactly 160,000 bushels of wheat to help domestic producers. A tariff of$40

per bushel will achieve this.

Points:
1 / 1
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Explanation:
To reduce imports to 160,000 bushels of wheat, the government must set a tariff that will raise the price of wheat to the point where domestic demand exceeds domestic supply by exactly 160,000 bushels of wheat.
A $40-per-bushel tariff on wheat would raise the domestic price of wheat to$285 ($40 per bushel higher than the world price of$245). At a price of $285 per bushel, domestic demand will be 280,000 bushels, and domestic supply will be 120,000 bushels of wheat. Bolivia will import the difference of 160,000 bushels of wheat. A tariff set at this level would raise$6,400,000

in revenue for the Bolivian government.

Points:
1 / 1
Close Explanation
Explanation:
A $40-per-bushel tariff on wheat would cause Bolivia to import 160,000 bushels of wheat. Therefore, you can compute the amount of tax revenue this tariff will generate in the following way:  Tax RevenueTax Revenue = = Specific Tariff×Quantity ImportedSpecific Tariff×Quantity Imported = =$40 per bushel×160,000bushels$40 per bushel×160,000 bushels = =$6,400,000$6,400,000 ## 6. Effects of a tariff in a small nation Suppose Sudan is open to free trade in the world market for maize. Because of Sudan’s small size, the demand for and supply of maize in Sudan do not affect the world price. The following graph shows the domestic maize market in Sudan. The world price of maize is PW=$350PW=$350 per ton. Throughout this problem, assume that changes in trade policies in other nations do not significantly affect the world market for maize and that there are no transportation or transaction costs associated with international trade in maize. Also assume that domestic supplies will satisfy domestic demand as much as possible before any exporting or importing takes place. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing domestic producer surplus (PS). Points: 1 / 1 Close Explanation Explanation: Consumer surplus is the difference between a buyer’s willingness to pay and the price the buyer actually pays. Graphically, consumer surplus is the area above the world price of$350 per ton, below the domestic demand curve, and to the left of the quantity of maize demanded at a price of $350. Producer surplus is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item. Graphically, domestic producer surplus is the area below the world price of$350 per ton, above the domestic supply curve, and to the left of the quantity of maize supplied by domestic producers at a price of $350. If Sudan allows international trade in the market for maize, it will import 24,000 tons of maize. (Note: Be sure to enter the full value for your answer, accounting for the horizontal axis units.) Points: 1 / 1 Close Explanation Explanation: With international trade, the price of maize in Sudan will equal the world price of$350 per ton. At this price, 27,000 tons of maize will be demanded in Sudan, but domestic producers will supply only 3,000 tons at the world price. The difference of 24,000 tons is the quantity of maize Sudan will import.
You can also derive this result graphically:
Now suppose the Sudanese government decides to impose a tariff of $40 on each imported ton of maize. After the tariff, the domestic price of a ton of maize will be$390

, and Sudan will import

18,000

tons of maize.

Points:
1 / 1
Close Explanation
Explanation:
Since Sudan’s economy is not large enough to affect the world market for maize, the tariff does not affect the world price of maize. Therefore, a tariff of $40 raises the price Sudanese consumers pay for each imported ton of maize from$350 to $390. This means that domestic suppliers can also sell their maize for$390 per ton. Therefore, the price of a ton of maize in Sudan, either imported or domestically produced, rises to $390. At a price of$390, domestic demand will be 24,000 tons of maize, and domestic supply will be 6,000 tons. The difference, 18,000 tons, is the quantity of maize Sudan will import when a tariff of $40 is imposed. Show the effects of the$40 tariff on the following graph.
Use the grey line (star symbol) to indicate the world price plus the tariff. Then, use the green triangle (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the domestic producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan triangles (dash symbols) to shade the areas representing the net loss or deadweight loss (DWL) caused by the tariff.
Points:
1 / 1
Close Explanation
Explanation:
With the tariff, the domestic price of a ton of maize is $390, and 18,000 tons of maize are imported into Sudan. The following graph summarizes the welfare effects of the tariff: Graphically, with a tariff of$40, consumer surplus is the area above the price of $390 per ton, below the domestic demand curve, and to the left of the quantity of maize demanded at a price of$390. This is represented by area A on the accompanying graph. Because consumer surplus with no trade restrictions was the area above the world price of $350 per ton, below the demand curve, and to the left of the quantity of maize demanded at a price of$350 (areas A, B, C, D, and E), the tariff reduces consumer surplus by the area between $350 per ton and$390 per ton and below the demand curve (areas B, C, D, and E).
Graphically, with a tariff of $40, domestic producer surplus is the area below the domestic price of$390, above the domestic supply curve, and to the left of the quantity of maize supplied by domestic producers at a price of $390. This is represented by areas B and F. Because domestic producer surplus with no trade restrictions was the area below the world price of$350 per ton, above the supply curve, and to the left of the quantity of maize supplied at a price of $350 (area F), the tariff increases domestic producer surplus by the area between$350 per ton and $390 per ton and above the supply curve (area B). This transfer of the consumer surplus in monetary terms to the domestic producers of maize is known as the tariff’s redistributive effect. The government collects$40 on every ton of imported maize; this is known as the tariff’s revenue effect. Because 18,000 tons of maize are imported once the tariff is imposed, the government receives a revenue of $40 per ton×18,000 tons of maize=$720,000$40 per ton×18,000 tons of maize=$720,000. This corresponds to area D.
With free trade, consumer surplus was equal to areas A+B+C+D+EA+B+C+D+E, producer surplus was equal to area F, and government revenue was zero. Thus, total surplus was equal to areas A+B+C+D+E+FA+B+C+D+E+F. With the tariff, consumer surplus is equal to area A, producer surplus is equal to areas B+FB+F, and government revenue is equal to area D. With the tariff, nobody receives the welfare associated with areas C and E, so those are considered the net loss or deadweight loss. More specifically, the protective effect (area C) illustrates the loss to Sudan resulting from wasted resources used to produce maize at a higher cost, and the consumption effect (area E) is the result of the decrease in consumption caused by the tariff artificially increasing the price of maize.
Complete the following table to summarize your results from the previous two graphs.
Under a Tariff
(Dollars)
(Dollars)
Consumer surplus
760,000
360,000
Producer surplus
40,000
1,600,000
Government revenue 0
720,000
Points:
0.2 / 1
Based on your analysis, as a result of the tariff, Sudan’s consumer surplusdecreases   by

$13,000,000 , and producer surplusincreases by$700,000

. Taking into account how much revenue the tariff generates for the government, the net welfare effect is aloss   of

$200,000 . Points: 0.5 / 1 Close Explanation Explanation: By plugging in the values of each of the areas, you obtain the welfare effects of the tariff in the following dollar amounts: Store Free Trade Tariff Difference (Dollars) (Dollars) (Dollars) Consumer surplus 4,860,000 3,840,000 –1,020,000 Producer surplus 60,000 240,000 +180,000 Government revenue 0 720,000 +720,000 Total surplus 4,920,000 4,800,000 –120,000 Consumer surplus decreases by$1.02 million, producer surplus increases by $180,000, and the government collects$720,000 in revenue because of the $40-per-ton tariff. Therefore, the net welfare effect is a loss of$120,000, which is equal to the area of the two deadweight loss triangles.

## 7. Effects of a tariff in a large nation

The following graph shows the domestic market for oil in the United States, where SDSD is the domestic supply curve, and DDDD is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of oil. Under free trade, the United States faced a total supply schedule of SD+WSD+W, which shows the quantity of oil that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $350 per barrel of oil and a quantity of 16 million barrels. At this price, the United States imports 12 million barrels of oil. Suppose the U.S. government imposes a$125-per-barrel tariff on oil imports.
On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+W+TSD+W+T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff.
Points:
0.8 / 1
Close Explanation
Explanation:
When the United States imposes the tariff, the cost to foreign producers of supplying the United States with oil increases by $125 per barrel. As a result, the total supply schedule (SD+WSD+W) shifts up by$125 at each quantity of oil. Because the United States is large enough to influence the world price of oil, the market equilibrium with the tariff occurs at the intersection of the SD+W+TSD+W+T and DDDD curves, or $450 and 12 million barrels of oil, in this case. With the tariff, U.S. imports of oil fall to 4 million barrels. Although the price of oil in the United States (including the tariff) rises from$350 to $450 per barrel, exporters only receive the net-of-tariff price, or$450 per ton$125 per ton=$325 per ton$450 per ton−$125 per ton=$325 per ton. The tarrif’s revenue effect (the import tariff multiplied by the quantity of oil imported) can be broken into two components:  • Domestic revenue effect • Terms-of-trade effect On the previous graph, use the green rectangle (triangle symbols) to indicate the domestic revenue effect of the tariff. Then use the purple rectangle (diamond symbols) to indicate the terms-of-trade effect. Close Explanation Explanation: The domestic revenue effect is the amount of the tariff revenue shifted from domestic consumers to the U.S. government. This amount equals the level of imports multiplied by the portion of the import tariff that falls on consumers:  Domestic Revenue EffectDomestic Revenue Effect = = Imports with Tariff×(Domestic Price with Tariff−Free Trade Price)Imports with Tariff×Domestic Price with Tariff−Free Trade Price = = 4 million barrels×($450 per barrel−$350 per barrel)4 million barrels×$450 per barrel−$350 per barrel = =$400 million$400 million Graphically, it is the rectangular area with a width equal to the level of imports (4 million barrels) and a height equal to the portion of the import tariff that falls on consumers ($100 per barrel).
The terms-of-trade effect is the amount of the tariff revenue extracted from foreign producers in the form of a lower supply price. Graphically, it is the rectangular area with a width equal to the level of imports (4 million barrels) and a height equal to the portion of the import tariff that falls on foreign producers ($350 per barrel$325 per barrel=$25 per barrel$350 per barrel−$325 per barrel=$25 per barrel).
Together, the domestic revenue effect and the terms-of-trade effect equal the tariff’s revenue effect.
Now consider the effect of the tariff on welfare in the United States. On the previous graph, use the black triangles (plus symbols) to indicate the deadweight loss caused by the tariff.
True or False: National welfare in the United States increases as a result of a $125-per-barrel tariff on oil imports. Points: 1 / 1 Close Explanation Explanation: Deadweight loss arises in the United States for two reasons:  1 The protective effect: Oil is produced in the United States at increasing unit costs. Graphically, this is the triangular area below the domestic supply curve, above the free-trade price for oil, and between 4 and 8 million barrels of oil (which formerly was imported without the tariff). 2 The consumption effect: Consumers purchase less oil because they have to pay more for it. Graphically, this is the triangular area below the domestic demand curve, above the free-trade price for oil, and between 12 and 16 million barrels of oil (which is no longer consumed). In order to determine if the United States experiences a welfare gain or loss as a result of the tariff, you must compare the impact of the deadweight loss with the terms-of-trade effect. In this case, the deadweight loss areas ($400) are larger than the terms-of-trade effect (\$100), so national welfare decreases as a result of the tariff. Therefore, the statement is false.

## 8. The arguments for restricting trade

Suppose there is a policy debate over whether the United States should impose trade restrictions on imported semiconductors:
Domestic producers of semiconductors send a lobbyist to the U.S. government to request that the government impose trade restrictions on imports of semiconductors. The lobbyist claims that producers in other countries receive subsidies to export semiconductors and that domestic suppliers can’t compete in the international marketplace.
Which of the following justifications is the lobbyist using to argue for the trade restriction on semiconductors?
Points:
0 / 1
Close Explanation
Explanation:
The lobbyist is using the fairness in trade argument to justify trade restrictions on semiconductors. The lobbyist claims that firms in other countries are subject to different laws and regulations in the semiconductor industry and that it is unfair to expect domestic firms to compete in the unrestricted international marketplace.

## 8. The arguments for restricting trade

Suppose there is a policy debate over whether the United States should impose trade restrictions on imported ball bearings:
A political pundit argues that the government should impose a tariff on ball bearings because they are a necessary input into the production of various weapons. Free trade would make the United States overly dependent on foreign countries for the supply of ball bearings. In case of a war, the United States might not be able to make or purchase enough ball bearings and, therefore, would not be able to make enough weapons to defend itself.
Which of the following justifications is the pundit using to argue for the trade restriction on ball bearings?
Points:
0 / 1
Close Explanation
Explanation:
The pundit is claiming that the ball-bearing industry is vital for national security because ball bearings are needed to produce weapons. By imposing trade restrictions, such as a tariff, the United States will be increasing the capacity of domestic ball-bearing firms, ensuring its national security in case of a war. Domestic production increases to a more desirable level because a tariff increases the domestic price of ball bearings, giving domestic producers an incentive to produce more ball bearings.

## 8. The arguments for restricting trade

Suppose there is a policy debate over whether the United States should impose trade restrictions on imported steel rods:
The debate also focuses on the job outsourcing in the steel-rod industry. A member of Congress from a state with several steel-rod factories explains that it is necessary to impose restrictions against job outsourcing to protect workers in the domestic steel-rod industry. The congressperson claims that, without protection against job outsourcing, U.S. companies in the steel-rod industry have incentives to outsource their jobs to developing countries where the labor is cheaper. This would leave many U.S. workers in the steel-rod industry unemployed
Which of the following justifications is the congressperson using to argue for the trade restriction on steel rods?
Points:
0 / 1
Close Explanation
Explanation:
Without protection against job outsourcing, U.S. companies might be enticed to move their operations to foreign countries where labor is cheaper, thereby reducing employment in the U.S. steel-rod industry. A member of Congress from a state with several steel-rod factories is using the protection against cheap foreign labor argument for protectionism.