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Sem 5 Prep
← Intl TradeTariffs: types and partial equilibrium effects

Formulas for this chapter

Imports identity

Imports = domestic consumption - domestic production

The first line of every tariff problem, applied twice: once at the free trade price and once at the tariff-inclusive price. Every one of the four effects is a difference between those two rows.

Consumption
Quantity demanded at the prevailing domestic price
Production
Quantity supplied domestically at that same price

Domestic price under an ad valorem tariff

New domestic price = world price x (1 + t)

For a small nation only. Because the foreign supply curve is infinitely elastic, the full duty lands on the domestic price. A large nation would depress the world price instead, so the rise would be less than the duty.

t
Ad valorem tariff rate as a decimal, so 100 per cent is 1.00
World price
Price at which the rest of the world will supply any quantity

The four effects of a tariff

Consumption effect = consumption after - consumption before Production effect = production after - production before Trade effect = imports after - imports before Revenue effect = imports after x tariff per unit

Name all four, in this order, in any tariff answer. Check yourself: the trade effect equals the consumption effect plus the production effect in size.

Tariff per unit
New domestic price minus the world price
Imports after
Imports at the tariff-inclusive price, never the free trade figure

Compound duty

Duty = (ad valorem rate x value) + specific sum per unit

Whenever a question gives both a percentage and a fixed sum. Convert the total back into a percentage of value if the question asks which type protects more at a given price.

Ad valorem rate
Percentage of value, as a decimal
Value
Declared value of the imported unit
Specific sum
Fixed money amount per physical unit

Prohibitive tariff

Prohibitive t = (autarky price / world price) - 1

When a question asks what tariff makes the nation self-sufficient. Find the price at which domestic demand equals domestic supply, which is the no-trade point E, then express the required price rise as a percentage of the world price.

Autarky price
Price where domestic demand equals domestic supply, so imports are zero
World price
The free trade price
Step 2 of 26
The real wordsTheory

Why restrict trade at all

The deck opens with an admission. It is generally accepted that free trade maximises world output and benefits all nations. Practically all nations restrict trade anyway.

Trade policies, or commercial policiesThe restrictions and regulations a nation applies to its trade or commerce.

And the political line, which is worth quoting: while trade restrictions are invariably rationalised in terms of national welfare, in reality they are usually advocated by those special groups in the nation that stand to benefit from them.

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