Name: ECO 6333: Trade Policy Spring 2018 Thomas Osang Second Midterm Exam - Practice Exam Part I: Import Tariff and Import Quota with a Home Monopoly: Assume that the home country is a small open economy with a single domestic firm (home monopolist) operating with a linear, upward sloping MC curve. With free trade, the home country can buy (or sell) goods at the free trade price p T which is below the HC s autarky price. 1. Draw a graph that depicts the HC s economy with free trade. Carefully label the axis and identify domestic consumption, production, price and trade under free trade. 1
2. Assume now that the HC s government imposes an ad-valorem tariff t on imports from the ROTW. Depict the tariff equilibrium in the previous graph. Identify the changes to domestic consumption, production, price and trade as a result of the import tariff. 3. Assume now that instead of the ad-valorem tariff, the HC s government imposes an import quota q on imports from the ROTW. Assume further that the quantity imported with the quota is the same as with the tariff. Depict the quota equilibrium in the previous graph. Identify the changes to domestic consumption, production and price as a result of the import quota. 4. Analyze the country s welfare with free trade, with the tariff and with the quota. In particular, identify consumer surplus, producer surplus, tariff revenue, quota rent and DWL in each of the three regimes, using letters in the previous graph. Present your findings in a table format. 2
Part II Export Subsidy (2 Countries): Consider two (large) economies, HC and FC, trading a single good. By assumption, the HC is the exporting nation, while the FC imports. The following equations describe demand and supply conditions in each country. HC demand: HC supply: FC demand: FC supply: P = 4 2Q P = Q P = 8 4Q P = 4Q 1. Derive the HC s export supply equation and FC s import demand equation. 2. Determine the free trade price and the quantity exported/imported. 3. Calculate free trade welfare in both countries. 4. Now assume that the HC s government introduces an 0.9 (90cent) export subsidy per unit exported. Find the domestic subsidy price, p s d, the foreign subsidy price p s, and the quantity exported/imported with the export subsidy. 5. Determine the cost of the subsidy, the domestic DWL, the foreign DWL, the terms-of-trade transfer, the domestic change in welfare and the foreign change in welfare. 6. Explain (i.e., decompose) the change in welfare in each country as a result of the home country s export subsidy. 3
Part III: Export Subsidy in a SOE - General Equilibrium Analysis Consider a small open economy which in free trade is importing food and exporting clothing. 1. Show the free trade equilibrium of the country in a diagram, placing clothing on horizontal axis and food on the vertical axis. Carefully label the PPF (assumed to be concave toward the origin), free trade price line, indifference curve, consumption and production points, incomeconsumption path, and trade triangle. 2. Now suppose the government introduces an ad valorem export subsidy s on clothing exports. Show the export subsidy equilibrium in the diagram. Carefully label the post subsidy domestic price line, post subsidy indifference curve, post subsidy consumption and production points, post subsidy income-consumption path, and post subsidy trade triangle. 4
Part IV: Export Tax in a LOE Suppose that Germany is a large exporter of cars to the world market. 1. Draw two graphs that depict the free trade equilibrium in Germany and the international market for cars. Label your graphs carefully. 2. What is the impact of a German export tax on quantities and prices in both the German and the international market for cars? Depict the export tax equilibrium in the previous graph. 5
3. Analyze Germany s welfare with free trade and with the export tax. In particular, identify domestic consumer surplus, domestic producer surplus, government revenues, home DWL, foreign DWL, terms-of-trade transfers, and change in Germany s welfare in each of the two regimes, using letters to represent areas in the graph for Germany and numbers to represent areas in the IM graph. Present your findings in table format. 4. Who are the winners from the export tax? 5. Who are the losers of the export tax? 6