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# PROBLEM SET 3

## 1. 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?

WP= 200
WPB= 100

=100 =300

= 300-100
= 200

## Effective rate of protection

= (Vt-Vw/Vw) * 100

= (200-100)/100 * 100
=100%

2. The nation of Haiti is “small” and unable to affect world prices. It imports
peanuts at the price of \$10 per-bag.

## The demand curve is D = 400 - 10P. The supply curve is S = 50 + 5P.

3. Determine the free trade equilibrium. Then calculate and graph the
following effects of an import quota that limits imports to 50 bags.

D=S

400-10P= 50+5P

15P= 350

P= 23,33 Q= 166,6

350-15P

= 350- 15 (10)

Q= 200 P= 10

## 1. The increase in the domestic price.

D = S + Quota

400-10P = (50+5P)+50

15P=300

P= 300/15

P= 20 Q= 200

= (20-10) * 50

= 500\$

=500

## 4. The production distortion loss.

PDL= 1/2 * 50 * 10=

= 250

IMPORTS

PDL= b

CDL= d

## Nuestros puntos nuevos en el gráfico son los P y Q obtenidos en equilibrio, asumiendo

que no teníamos un P ya otorgado.

4. If tariffs, quotas, and subsidies each cause net welfare losses, why are they
so common, especially in agriculture, among the industrialized countries
such as the United States and the members of the European Union?

Well, how we have seen in the class, these ones can produce benefits, since they
generate income for the state and in addition, often to protect national companies
and encourage them to grow.

In addition, we have seen how these barriers can also improve the terms of trade,
since it could cause global prices to decrease. Of course, this would happen if it
were a large country with power in the market, such as the United States and the
European Union.

## In addition, agriculture is very beneficial for a country, since it generates large

positive income in the trade balance. So, the countries would do anything to
protect this sector.
5. Suppose that 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?

Well, as we have seen in class, workers in this case will prefer to work in sectors
that are more productive and that generate more value to them.

If this is applied, we can say that it will have a positive effect on real income
distribution since this would cause workers' wages to increase. In addition, as the
wages of workers in this sector grow, the real income of the other sectors could
decrease due to the substantial tariff, so that the relative prices of manufactured
products are now relatively higher than others.

## If substantial tariff Is levied on manufactured goods, wages in the manufacturing

sector will Increase. This will decrease the real Income of others in the economy.
This happens only when the wages in manufacturing sector Is less than that of
other sectors. So, tariffs Improves real Income distribution within the economy in
case of wage discrepancy.

## The Political Economy of Trade

6. Which of the following are potentially valid arguments for tariffs or export
7. “The more oil the United States imports, the higher the price of oil will go in
the next world shortage.”

This could be a valid argument since the United States has great power in the
market, so it could easily affect or influence the price of a good globally. So, the
decisions that the United States takes on this resource will influence the other
countries. For example, if you use a tariff on this resource, this will cause prices
to rise, domestic prices, that is, domestic prices will rise, which would benefit
domestic producers, since their relative prices will be higher. This increase will
also generate more production and therefore increase the supply of oil. The United
States could implement these tariffs in case prices rise too much, since it would
limit its consumption. A consequence of this can be that since they limit the
consume of this resource, USA will accumulate a lot of oil, minimizing a possibly
impact in the future.

8. “The growing exports of off-season fruit from Chile, which now accounts for
80 percent of the U.S. supply of such produce as winter grapes, are
contributing to sharply falling prices of these former luxury goods.”

## Normally, off season fruits market can become non-competitive in certain

seasons. In addition, if there is a very high decrease in prices, this will generate
an increase in domestic consumption, since it becomes relatively cheaper and
accessible to them.
Thus, any trade policy like tariff offsets the benefits of the domestic consumers as
tariff Increases the domestic price of the fruits. In this case only government will
gain as It earns revenue.

The reduction In prices generally generates get higher the welfare of a country If
they consume that good. So, for these reasons, I think this argument has no
validation.

a) “U.S. farm exports don’t just mean higher incomes for farmers—they
mean higher income for everyone who sells goods and services to the
U.S. farm sector.”

This argument does not seem valid to me, since if a subsidy is applied in
exports, by theory, this would imply that the costs increase in the domestic
market. So, to say that it generates benefits for all suppliers in this market,
is not valid.

## Although a subsidy will increase the income of US Farmers and therefore

that of their suppliers since before a subsidy, it becomes more beneficial
to export so that production could be increased and therefore more inputs
from suppliers would be needed and this is where they earn, but this also
causes the welfare of local consumers to be negatively affected, since it
generates more costs.

So, the benefits do not cover these costs of consumers, so I think that is
not a valid argument because it does not cover the whole story of what
would happen when implementing the subsidy.

## b) “The real price of timber has fallen 40 percent, and thousands of

timber workers have been forced to look for other jobs.”

## This is incompletely true, I mean. The workers themselves would benefit

from this reduction, since this would benefit domestic consumption,
increasing the welfare of the country, since they would be consumers in
the same way, and now this has become relatively cheaper. So, these
policies would not be the most appropriate for this case. So, I think that
this argument is not valid.