Economic: Free Trade and Trade Liberalization
2. Suppose that US market demand and supply for cloth are given, respectively, by the following algebraic equations: P = 8 – ½Q and P = 2 + ¼Q (P is given in dollars and Q in tons).
a) Plot the demand and supply schedule for clothe and determine the equilibrium price and quantity for cloth in the US in the absence of [international] trade.
P
0
1
2
3
4
5
6
7
8
QD
16
14
12
10
8
6
4
2
0
QS
--
--
0
4
8
12
16
20
24
b) If the US now allows free trade and P=$2.00 on the world market and we assume no transportation costs, how much cloth will the US consume, produce and import with free trade? When the price is 2, The cloth will be consumed 12 tons, and produced 0 tons.
So the U.S. market is shortage and should import (12-0) 12 tons. c) Now assume the US imposes a tariff of 50% on the world price, how much cloth will the US consume, produce and import with tariff? When the tariff is 50%, the total price of cloth in the U.S. market is (2+2*50%)=3,
The cloth will be consumed 10 tons, and produced 4 tons.
So the U.S. market is shortage and should import (10-4) 6 tons.
d) How much tax revenues will the US government collect with trade restrictions? The tax revenue equals the area of FMNH The area of FMNH is HN (1) *HF (10-4) = 1*6=6.
e) How much is the consumer loss as a result of the tariff? The consumer loss equals the area of The area of IFJL is (IF+LJ)*IL/2= (10+12)*1/2=11
f) How much are the producer’s gains and the society loss (deadweight loss) as a result of the tariff? The producer’s gains equal the area of IHL The area of FMNH is HI*IL/2=2 The society loss equals the area of HNL + FJM
The area of HNL IS 2 and the area of FMJ is 1, so the society loss is (2+1) 3.
g) The benefits of trade liberalization are assumed to be great. Yet, Nations restrict International Trade. Why
a) Plot the demand and supply schedule for clothe and determine the equilibrium price and quantity for cloth in the US in the absence of [international] trade.
P
0
1
2
3
4
5
6
7
8
QD
16
14
12
10
8
6
4
2
0
QS
--
--
0
4
8
12
16
20
24
b) If the US now allows free trade and P=$2.00 on the world market and we assume no transportation costs, how much cloth will the US consume, produce and import with free trade? When the price is 2, The cloth will be consumed 12 tons, and produced 0 tons.
So the U.S. market is shortage and should import (12-0) 12 tons. c) Now assume the US imposes a tariff of 50% on the world price, how much cloth will the US consume, produce and import with tariff? When the tariff is 50%, the total price of cloth in the U.S. market is (2+2*50%)=3,
The cloth will be consumed 10 tons, and produced 4 tons.
So the U.S. market is shortage and should import (10-4) 6 tons.
d) How much tax revenues will the US government collect with trade restrictions? The tax revenue equals the area of FMNH The area of FMNH is HN (1) *HF (10-4) = 1*6=6.
e) How much is the consumer loss as a result of the tariff? The consumer loss equals the area of The area of IFJL is (IF+LJ)*IL/2= (10+12)*1/2=11
f) How much are the producer’s gains and the society loss (deadweight loss) as a result of the tariff? The producer’s gains equal the area of IHL The area of FMNH is HI*IL/2=2 The society loss equals the area of HNL + FJM
The area of HNL IS 2 and the area of FMJ is 1, so the society loss is (2+1) 3.
g) The benefits of trade liberalization are assumed to be great. Yet, Nations restrict International Trade. Why