Lecture 6
TRADE POLICY I

1. Method of analysis

• Partial equilibrium vs General equilibrium

2. Partial eqbm analysis

• Supply, Demand and Trade in an industry

• Home import demand curve
  • Home demand "minus" Home supply at each price
  • M = D - Q
  • Negative slope

• Foreign export supply curve
  • Foreign supply "minus" Foreign demand at each price
  • X* = Q* - D*
  • Positive slope

3. World equilibrium

• Intersection of home import demand & foreign export supply curves

4. Effects of a (specific) tariff by Home Denote specific tariff by t: P = P* + t Domestic price is P, Foreign price is P* Tariff creates a wedge between Home and Foreign prices Difference between the two = Tariff Distinction between small and large countries A small country cannot affect world prices (see Fig to the right) If a large country imposes an import tariff, the world price of the good will fall (why?) 4.1 Welfare effects of the tariff Higher price leads to: Loss in consumer surplus Gain in producer surplus The government earns tariff revenue Result: For a small country, the costs of the tariff exceed its benefits.

5. Quotas

• Same effect as tariffs, except no revenues earned by the govt

6. Export subsidies

• Creates a wedge between Home and Foreign prices
• Welfare effects: Small-country case | Large-country case

6.1 Countervailing duties

• Duties imposed by foreign govts on subsidized Home exports