Solution Manual for Global Economics 13th Edition by Carbaugh ISBN 9787040333688
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CHAPTER 5
NONTARIFF TRADE BARRIERS
CHAPTER OVERVIEW
This chapter considers policies otherthan tariffswhichrestrict the volume of international trade Suchpolicies are known as nontariff barriers to trade
The first nontariff barrier considered is the importquota. A quota can be administered on a globalbasis or on a selectivebasis Special attentionis given to the revenueeffect of an import quota which may be captured by domestic importers, foreign exporters, or the domestic government Also considered is a tariff-rate quota and a voluntary export quota
The subsidization of domestic producers is another topic investigated in the chapter Emphasis is placed on the differences between a subsidy granted to import-competing producers and a subsidy granted to exporters. It is noted that a subsidy granted to import-competing producers results in a deadweight welfare lossto the economy of only a protection effect,not a consumption effect
Finally, the chapterdiscusses the nature and operation of international dumping The reasons for dumping are examined and also the impact of dumping on a firm’s revenue and profit.
After completing this chapter, students should be able to:
• Identify the majornontariff barriers to trade
• Compare and contrast the effects of import quotas, voluntary export quotas, and tariff-rate quotas.
• Differentiate between an import subsidy and an export subsidy
• Explain how local content requirements affect a firm’s ability to share production with other nations
© 2011 Cengage Learning All Rights Reserved. This edition is intended for use outside of the U.S only, with content that may be different from the U.S Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning All Rights Reserved. This edition is intended for use outside of the U.S only, with content that may be different from the U.S Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
BRIEF ANSWERS TO STUDY QUESTIONS
1 Domestic subsidies avoid the deadweight losses due to the consumption effect
2. Subsidies are not free goods since they are financed by taxpayer dollars. In return for granting subsidies, governments often pressure management and labor to adopt measures to lower costs of production so as to become more competitive
3 The import quota tends to permit domestic firmsand workers to enjoy higher sales, profits, and employment levels. Consumers tend to face higher prices and expenditure levels. The economy as a whole faces deadweight losses in production and consumption
4 The sugar import quota was viewed as a method of increasing thedomestic price of sugar, so as to offset the adverse effects of falling pricesfor U S sugarproducers
5. Under an import quota, the distribution of the revenue effect is indeterminate, depending on the relative bargaining power of foreign producers and domestic buyers. Because voluntary export quotas are typically administered from the supply sideof the market, the largest share of the revenue effect tends to be captured by foreign exporters
6 Same general answer as Question 5 The distribution of the revenue effect tends to accrue to foreign auto-makers.
7. Bycontributing to a scarcity of steel in the domestic market, quotas leadto higher steel prices andproduction costsfor domestic steel-using firms. Such cost increases detract from their international competitiveness
8 According to the priced-based definition,dumpingoccurs whenever a foreign firm sells a product in the importing country’s market at a price below that for which the product is sold in the firm's home market According to the cost-based definition, dumping occurswhen foreign merchandise is sold in the domestic market at "less than fair value" (i.e., price is less than average total cost)
© 2011 Cengage Learning All Rights Reserved. This edition is intended for use outside of the U.S only, with content that may be different from the U.S Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning All Rights Reserved. This edition is intended for use outside of the U.S only, with content that may be different from the U.S Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
9. a. Qs = 100, Qd = 800, Imports = 700. Consumer surplus = $160,000, producer surplus = $2500.
b Price rises by $100 and consumer surplus falls by $70,000 Redistribution effect = $20,000, consumption effect = $10,000, protective effect = $10,000, revenue effect = $30,000 Overall welfare loss = $50,000
c Priceremains at the free tradelevel Qs = 300, Qd = 800, imports = 500 Totalcost of subsidy = $30,000 of which $20,000 is absorbedby producersurplus and $10,000 is absorbed by higher domestic production costs Overall welfare loss = $10,000
10. Nontariff trade barriers include import quotas, voluntary export agreements, subsidies, buy-national policies, product and safetystandards, and content requirements
11 Therevenue effect of a tariff is captured by the government, while a quota's revenue tends to be captured by domestic or foreign firms
12 Subsidies include domestic subsidies and export subsidies Methods used to subsidize producers include tax concessions, low interest rate loans, and loan guarantees.
13. Voluntary export restraints aremarket-sharing agreements negotiated byproducing andconsuming countries. Because voluntary exportquotas are typically administered from the supplyside of the market, the foreign exporter tendsto capture the largest shareof the quota revenue
14 While antidumping laws are typicallydefined in terms of full cost, it may be rationalfor a firm to sell its product overseas at losses, provided that pricesare sufficiently high to covermarginal cost.
15 Since import quotas directly limit the number of goods that can enter the home nation, theytendto be more restrictive than import tariffs which maybe circumvented by foreign producers absorbing the tariffas a lower selling price During periodsof rising domestic demand, quotas hold down importsmore effectively than tariffs.
16. Sporadic dumping firms with temporary inventories selltheir products overseas at lower prices than at home. Predatory dumping firms cut pricesoverseas to eliminate competitors Persistent dumping inan effortto maximize profits, firms continuously sell abroad at lowerpricesthan at home
© 2011 Cengage Learning All Rights Reserved. This edition is intended for use outside of the U.S only, with content that may be different from the U.S Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning All Rights Reserved. This edition is intended for use outside of the U.S only, with content that may be different from the U.S Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
17.
a.
b.
Ecuador imports 80 computers from HongKong Price rises by $400 and consumer surplus fallsby $30,000 Redistribution effect = $6000, protective effect = $4000, consumption effect = $4000, revenue effect = $16,000. Overall welfare loss = $24,000
c.
d.
Overall welfare loss = $14,000; of this amount, the revenue effect= $12,000, consumption effect= $1000, protection effect= $1000
Smaller by $10,000
18.
a.
b. Output = 9, price = $5, profit = $18. Profits on U.K.sales = $14 while profits on Canadian sales = $4. Price = $7 and profits = $20 Price = $4 and profit = $4 With dumping, total profits rise by $6
19 A tariff-rate quota attempts to minimize theconsumer costs of protectionism byapplying a modest within-quota tariff rate; it also shields homeproducers from severe import competition with a stiffer over-quota tariff rate Of a tariff quota's revenue effect, a portion accrues to the domesticgovernment while the remainder is captured by domestic importers or foreign exporters as windfall profits
© 2011 Cengage Learning All Rights Reserved. This edition is intended for use outside of the U.S only, with content that may be different from the U.S Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning All Rights Reserved. This edition is intended for use outside of the U.S only, with content that may be different from the U.S Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
