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International trade : theory & policy

Paul R Krugman, Marc J Melitz, Maurice Obstfeld

Chapter 9

The Instruments of Trade Policy - all with Video Answers

Educators

Chapter Questions

02:11

Problem 1

Home's demand curve for books is
$$
D=50-10 P .
$$
Its supply curve is
$$
S=10+10 P .
$$
Derive and graph Home's import demand schedule. What would the price of books be in the absence of trade?

Breanna Ollech
Breanna Ollech
Numerade Educator
02:11

Problem 2

Now add Foreign, which has a demand curve
$$
D^*=60-10 P
$$
and a supply curve
$$
S^*=20+10 P .
$$
a. Derive and graph Foreign's export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade.
b. Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equilibrium under free trade. What is the world price? What is the volume of trade?

Breanna Ollech
Breanna Ollech
Numerade Educator
View

Problem 3

Home imposes a specific tariff of 1.5 on books imports.
a. Determine and graph the effects of the tariff on the following: (1) the price of books in each country; (2) the quantity of books supplied and demanded in each country; (3) the volume of trade.
b. Determine the effect of the tariff on the welfare of each of the following groups: (1) Home import-competing producers; (2) Home consumers; (3) the Home government.
c. Show graphically and calculate the terms of trade gain, the efficiency loss, and the total effect on welfare of the tariff.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:11

Problem 4

Suppose Foreign had been a much larger country, with domestic demand
$$
D^*=8-2 P, S^*=4+2 P .
$$
(Notice that this implies the Foreign price of wheat in the absence of trade would have been the same as in problem 2.)

Recalculate the free trade equilibrium and the effects of a 1.5 specific tariff by Home. Relate the difference in results to the discussion of the small-country case in the text.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
01:17

Problem 5

What would be the effective rate of protection on bicycles in China if China places a 50 percent tariff on bicycles, which have a world price of $$\$ 200$$, and no tariff on bike components, which together have a world price of $$\$ 100$$ ?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
03:13

Problem 6

For a company that produces candy canes, sugar constitutes 70 percent of its ingredient costs. The United States limits the import of sugar to protect cane farmers, which has led to an increase in the price of sugar by about 25 percent relative to what it would be otherwise. Suppose your country, however, allows free trade in candy canes, which are made with sugar that accounts for approximately 65 percent of its cost. What is the effective rate of protection on the process of turning sugar into candy canes?

Niamat Khuda
Niamat Khuda
Numerade Educator
05:32

Problem 7

Return to the example of problem 2. Starting from free trade, assume that Foreign offers exporters a subsidy of 1.5 per unit. Calculate the effects on the price in each country and on welfare, both of individual groups and of the economy as a whole, in both countries.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:31

Problem 8

Use your knowledge about trade policy to evaluate each of the following statements:
a. "Tariffs on imported goods will increase domestic price, leading to high unemployment."
b. "High tariffs and quotas can result in trade wars between nations."
c. "Smartphone manufacturing jobs are heading back to United States because wages started to rise in China. As a result, we should implement tariffs on smartphones equal to the difference between U.S. and China's wage rates."

Jennifer Stoner
Jennifer Stoner
Numerade Educator
09:13

Problem 9

The nation of Cologne is "large" but unable to affect world prices. It imports chocolates at the price of $$\$ 20$$ per box. The demand curve is
$$
D=700-10 P .
$$
The supply curve is
$$
S=200+5 P .
$$
Determine the free trade equilibrium. Then calculate and graph the following effects of an import quota that limits imports to 50 boxes.
a. The increase in the domestic price.
b. The quota rents.
c. The consumption distortion loss.
d. The production distortion loss.

Sinisa Stura
Sinisa Stura
Numerade Educator
01:26

Problem 10

If tariffs are already in place as a trade policy, why might a country choose to apply also nontariff barriers as another way to control the amount of trade that they conduct with other countries?

Srikar Katta
Srikar Katta
Numerade Educator
00:26

Problem 11

Suppose workers involved in manufacturing are paid less than all other workers in the economy. What would be the effect on the real income distribution within the economy if there were a substantial tariff levied on manufactured goods?

Jennifer Stoner
Jennifer Stoner
Numerade Educator