CU-MBA-SEM III-International Trade

Domestic utilization tariffs are regularly utilized as a wellspring of government income. In the United States, the most well-known sort of advertisement valorem utilization tariff is the business tariff exacted by state governments. The most widely recognized explicit utilization tariffs incorporate fuel, liquor, and cigarette tariffs. The last two are in some cases alluded to as \"wrongdoing\" tariffs since they are additionally intended to diminish utilization of possibly hurtful substances. In this way now and then utilization tariffs are utilized to debilitate particular kinds of utilization. We will break down the worldwide trade impacts of a domestic utilization tariff utilizing a partial balance investigation. We will expect that the market being referred to is totally serious and that the nation is \"little.\" We will likewise disregard any advantages the approach may produce, for example, making a really satisfying circulation of pay or creating important outside impacts. All things being equal, we will zero in totally on the maker, buyer, and government income impacts of every approach. Then, we consider the impacts of a utilization tariff under two separate situations. In the principal case, the tariff is carried out in a country that isn't exchanging with the remainder of the world. This case is utilized to show how a domestic arrangement can cause worldwide trade. The subsequent case considers the cost and welfare impacts of a utilization tariff carried out by a country that is at first importing the great from the remainder of the world. Consumption Taxes as a Reason for Trade This part will show how a utilization tax can cause trade for a little, entirely serious, open economy. At the end of the day, regardless of whether nations were indistinguishable concerning their asset gifts, their innovation, and their inclinations and regardless of whether there were no economies of scale or incompletely serious business sectors, an absolutely domestic approach, for example, a consumption tax can instigate trade between nations. Think about a little open economy with a completely serious industry. Leave the domestic market alone addressed by the organic market bends in Figure 14.21 \"Instigating Exports with a Domestic Consumption Subsidy\". Assume at first that streamlined commerce is permitted with the remainder of the world, however unintentionally (really by presumption), let the deregulation cost be actually equivalent to the autarky cost for the great. This is appeared as the value, PFT. At that cost, both organic market equivalent Q1, and accordingly no imports or fares happen, despite the fact that there is free trade. CU IDOL SELF LEARNING MATERIAL (SLM) 251

Figure 14.21 Inducing Exports with a Domestic Consumption Subsidy Then, assume that the public authority of this nation forces a particular (per unit) utilization tariff on this item. Allow the tariff to rate be set at \"t.\" This implies the public authority will gather \"t\" dollars for each unit of the great sold in the domestic market, whether or not the item is created locally or imported. The tariff will raise the domestic shopper cost of the great by everything of the tariff to PC and diminish domestic interest to Q2. Domestic producers won't be influenced by the utilization tariff since proceeded with rivalry in deregulation with firms in the remainder of the world will permit them to keep on charging the world cost of PFT. Note that in a shut economy, the producers would retain a portion of the tariff trouble by bringing their cost so as down to keep up the benefit greatest. Notwithstanding, being available to trade suggests that the nation can buy however much it enjoys at the world cost. This implies that the maker value PP will stay equivalent to the deregulation value PFT, and the full weight of the tariff falls on buyers. In this way PC = PFT + t and PP = PFT. Since the tax has no impact on the maker cost except for raises the purchaser value, domestic interest tumbles to Q2 while domestic inventory stays at Q1? The distinction, Q1 − Q2 (the length of the red line), addresses the sum traded to the remainder of the world. This suggests that the utilization tariff will incite fares of the great. Subsequently this is a model wherein a domestic strategy (a utilization tariff) can cause trade (i.e., sends out) to happen. Consumption Tax Effects in a Small Importing Country CU IDOL SELF LEARNING MATERIAL (SLM) 252

Domestic approaches can influence trade an industry for a country that is either an exporter or an import-contender at first. In this model, we think about the value, production, and welfare impacts of a utilization tariff when the tariffed item is at first imported in the country. We portray the underlying equilibrium in Figure 14.22 \"A Domestic Consumption tariff in a Small Importing Country\". The deregulation cost is given by PFT. The domestic stockpile is S1, and domestic interest is D1, which decides imports in streamlined commerce as D1 − S1 (the length of the red line). Figure 14.22 A Domestic Consumption Tax in a Small Importing Country When a selected consumption tax “t” is obligatory, the buyer value can rise by the quantity of the tax to laptop. The upper value paid by customers can scale back their demand to D2. The producer value can stay at the trade value indicated at PP = PFT, and thence domestic provide can stay at S1. The tax can scale back imports from (D1 − S1) to (D2 − S1). The welfare effects of the consumption tax square measure shown in Table 14.11 \"Static Welfare Effects of a Consumption Tax\". Importing Country Consumer Surplus -(a+b+c) Producer Surplus 0 Govt. Revenue +(a+b) National Welfare -c Table 14.11 Static Welfare Effects of a Consumption Tax CU IDOL SELF LEARNING MATERIAL (SLM) 253

Purchasers endure a misfortune in surplus on the grounds that the value they pay ascends by the measure of the utilization tariff. Makers experience no adjustment in surplus since the maker cost (i.e., the cost got by producers) stays at the streamlined commerce level. Note that despite the fact that imports fall, this abatement has no constructive outcome on producers in the present circumstance. At long last, the public authority gets tariff income from the utilization tariff. The income is determined as the tariff, t (given by PC − PP), increased by the amount burned- through, D2. Since the expense to purchasers surpasses the advantages gathering to the public authority, the net public welfare impact of the utilization tariff is negative. Albeit a few portions of the populace advantage, there stays a utilization effectiveness misfortune, given by region c. In the remainder of the world, the little country supposition suggests that this domestic strategy (the utilization tariff) would have no observable impacts. Unfamiliar costs would stay unaltered, and despite the fact that their fares to this nation would fall, these adjustments in trade volumes are too little to possibly be seen in the remainder of the world. In this way the welfare impacts on the remainder of the world are supposed to be non-existent, or zero. Equivalence of an Import Tariff with a Domestic We begin by demonstrating the effects of a consumption tax and a production subsidy applied simultaneously by a small importing country. Then we will show why the net effects are identical to an import tariff applied in the same setting and at the same rate. In Figure 14.23 \"A Domestic Production Subsidy and Consumption Tax in a Small Importing Country\", the free trade price is given by PFT. The domestic supply is S1, and domestic demand is D1, which determines imports in free trade as D1 − S1 (the red line). CU IDOL SELF LEARNING MATERIAL (SLM) 254

Figure 14.23 A Domestic Production Subsidy and Consumption Tax in a Small Importing Country When a specific consumption tax “t” is implemented, the consumer price increases by the amount of the tax to PC. Because free trade is maintained, the producer’s price would remain at PFT. The increase in the consumer price reduces domestic demand to D2. When a specific production subsidy “s” is implemented, the producer price will rise by the amount of the tax to PP, but it will not affect the consumer price. As long as the production subsidy and the consumption tax are set at the same value (i.e., t = s), which we will assume, the new producer price will equal the new consumer price (i.e., PC = PP). The effect of the production subsidy and the consumption tax together is to lower imports from D1 − S1 to D2 − S2. The combined welfare effects of the production subsidy and consumption tax are shown in Table 14.12 \"Static Welfare Effects of a Production Subsidy plus Consumption Tax\". Consumer Surplus Importing Country Producer Surplus -(a+b+c+d) Net Govt. Revenue +a +c CU IDOL SELF LEARNING MATERIAL (SLM) 255

Tax Revenue + (a + b + c) Subsidy Cost − (a + b) National Welfare − (b + d) Table 14.12 Static Welfare Effects of a Production Subsidy plus Consumption Tax Buyers endure a misfortune in surplus in light of the fact that the value they pay ascends by the measure of the utilization tariff. Makers acquire regarding producer surplus. The production appropriation raises the cost producers get by the measure of the sponsorship, which thusly invigorates an increment in yield. The public authority gets tariff income from the utilization tariff yet should pay for the production appropriation. Notwithstanding, since the appropriation and tariff rates are thought to be indistinguishable and since utilization surpasses production (on the grounds that the nation is a shipper of the item), the income inflow surpasses the surge. Consequently, the net impact is an addition in income for the public authority. Eventually, the expense to buyers surpasses the amount of the advantages gathering to producers and the public authority; in this way the net public welfare impact of the two strategies is negative. Notice that these impacts are indistinguishable from the impacts of a tariff applied by a little importing country if the tariff is set at a similar rate as the production appropriation and the utilization tariff. On the off chance that a particular tariff, \"t,\" of a similar size as the endowment and tariff were applied, the domestic cost would ascend to PT = PFT + t. Domestic producers, who are not charged the tariff, would encounter an increment in their cost to PT. The shopper cost would likewise ascend to PT. This implies that the maker and buyer welfare impacts would be indistinguishable from the situation of a production sponsorship and a utilization tariff. The public authority would just gather a tariff on the imported items, which infers tariff income given by (c). This is by and large equivalent to the net income gathered by the public authority from the production sponsorship and utilization tariff consolidated. The net public welfare misfortunes to the economy in the two cases are addressed by the amount of the production proficiency shortfall (b) and the utilization effectiveness deficit (d). This comparability is significant in light of what may occur after a nation changes trade. Numerous nations have been exhorted by financial specialists to diminish their tariff boundaries to appreciate the effectiveness benefits that will accompany open business sectors. In any case, any little nation thinking about trade progression is probably going to be confronted with two quandaries. CU IDOL SELF LEARNING MATERIAL (SLM) 256

To begin with, tariff decreases will very probably lessen tariff income. For some agricultural nations today, tariff income makes up a generous segment of the public authority's all out income, some of the time as much as 20% to 30 percent. This is like the beginning of at present created nations. During the 1800s, tariff income made up as much as 50% of the U.S. national government's income. In 1790, at the hour of the establishing of the country, the U.S. government procured around 90% of its income from tariff assortments. The fundamental explanation tariff income makes up an enormous part of an agricultural nation's complete government income is that tariff are an officially basic approach to gather income. It is a lot simpler than a pay tariff or benefit tariff, since those require cautious bookkeeping and observing. With tariff, you just need to stop a few gatekeepers at the ports and lines and gather cash as products run over. The subsequent issue brought about by profession advancement is that the tariff decreases will harm domestic firms and laborers. Tariff decreases will make domestic costs for imported merchandise fall, lessening domestic production and producer surplus and conceivably prompting cutbacks of laborers in the import-contending enterprises. Trade changing nations may jump at the chance to keep a portion of these negative impacts from happening. This part at that point gives a potential arrangement. To compensate for the lost tariff income, a nation could basically execute a utilization tariff. Utilization tariffs are famous types of tariffication around the planet. To alleviate the injury to its domestic firms, the nation could execute production sponsorships, which could prevent the negative effect brought about in terms of professional career progression and could be paid for with additional income gathered with the utilization tariff. This part exhibits that if the utilization tariff and production endowment turned out to be determined to an imported item at equivalent qualities and at a similar rate as the tariff decrease, at that point the two domestic arrangements would join to completely copy the tariff's belongings. For this situation, trade progression would have no impact. The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) arrangements have consistently been mindful of this specific chance. The first content says that if after trade progression a nation makes domestic moves invalidating the advantage that should accumulate to the unfamiliar fare firms, at that point a nation would be disregarding its GATT (or now WTO) responsibilities. All in all, it is a GATT/WTO infringement to straightforwardly substitute domestic arrangements that copy the first impacts of the tariff. Regardless, despite the fact that a strategy reaction like a production sponsorship/utilization tariff blend set uniquely on trade changed items is impossible, nations will in any case feel the impacts CU IDOL SELF LEARNING MATERIAL (SLM) 257

of lost income and injury to import-contending producers. Accordingly, nations will search for approaches to make up for the lost income and maybe help out hard-hit ventures. This part shows that to the degree those reactions influence imported items, they can to some degree counterbalance the impacts of trade advancement. Subsequently it is well worth realizing that these equivalencies among domestic and trade strategies are a chance. 14.8 RETALIATION AND TRADE WARS The investigation of tariff in a completely serious market shows that if an enormous nation forces a generally little tariff, or assuming it forces an ideal tariff, domestic public welfare will rise however outside public welfare will fall. The incomplete balance examination shows further that public welfare misfortunes to the exporting country surpass the public welfare gains to the importing country. The explanation is that any tariff set by an enormous nation additionally decreases world welfare. On the off chance that we accept that countries are worried about the public welfare impacts of trade arrangements, at that point the tariff examination gives reasoning to protectionism with respect to huge importing countries. Nonetheless, if huge importing countries set ideal tariff on all or a considerable lot of their imported products, the impact universally will be to lessen the public welfare of its exchanging accomplices. Assuming the trade accomplices are likewise worried about their own public welfare, they would almost certainly track down the ideal tariffs frightful and would search for approaches to relieve the negative impacts. One successful approach to alleviate the misfortune in public welfare, if the trade accomplices are likewise huge nations, is to fight back with ideal tariffs on your own imported merchandise. Subsequently if country an imports wine, cheese, and wheat from country B, and A spots ideal tariffs on imports of these items, at that point country B could fight back by forcing ideal tariff on its imports of, say, timber, TVs, and machine instruments from country A. Thusly, country B could counterbalance its public welfare misfortunes in a single bunch of business sectors with public welfare gains in another set. CU IDOL SELF LEARNING MATERIAL (SLM) 258

Figure 14.24 A Trade Policy Game We analyse the impacts of ideal tariff and counter more officially by utilizing a straightforward game theory arrangement. Assume the major parts in the game are the legislatures of two huge nations, the United States and Brazil. Assume the United States imports a bunch of items (A, B, C, and so on) from Brazil, while Brazil imports an alternate arrangement of items (X, Y, Z, and so forth) from the United States. We envision that every country's administration should pick between two unmistakable trade arrangements, streamlined commerce and ideal tariff. Every approach decision addresses a game system. In the event that the United States picks deregulation, it forces no tariff on imports of merchandise A, B, C, etc. On the off chance that the United States picks ideal tariff, it decides the ideal tariff in each import market and sets the tariff as needs be. Brazil is expected to have similar arrangement of strategy decisions accessible. In Figure 14.24 \"A Trade Policy Game\", U.S. techniques are addressed by the two sections; Brazilian methodologies compare to the two columns. The numbers address the adjustments to the nations, estimated as the degree of public welfare acknowledged in every country in every one of the four potential situations. For instance, if the United States picks a streamlined commerce strategy and Brazil decides to force ideal tariffs, at that point the settlements are appeared in the lower left-hand box. The Brazilian result is underneath the inclining, while the U.S. result is over the inclining. Hence Brazil gets 120 units of welfare, while the United States gets 70 units. CU IDOL SELF LEARNING MATERIAL (SLM) 259

Note that the size of the numbers utilized in the model is insignificant, yet how they identify with the numbers in substitute boxes isn't. We will utilize the outcomes from the tariff examination area to advise us about the connection between the numbers. To start, how about we accept that every nation gets 100 units of public welfare when both the United States and Brazil pick streamlined commerce. On the off chance that Brazil chooses to force ideal tariff on the entirety of its imports and the United States keeps up its streamlined commerce position, at that point a fractional balance welfare investigation recommends the accompanying:  Brazilian welfare will rise (we’ll assume from 100 to 120 units).  U.S. welfare will fall (we’ll assume from 100 to 70 units).  World welfare will fall (thus the sum of the U.S. and Brazilian welfare initially is 200 units but falls to 120 + 70 = 190 afterward). Likewise, if the United States forces ideal tariff on the entirety of its imports while Brazil keeps up deregulation, at that point the nations will understand the adjustments in the upper right-hand box. The United States would get 120 units of welfare, while Brazil would get 70. To keep the model basic, we are expecting that the impacts of tariffs are symmetric. At the end of the day, the impact of U.S. ideal tariff on the two nations is of similar extent as the impacts of Brazilian tariffs. At long last, assuming the two nations set ideal tariffs against one another, we can basically summarize the absolute impacts. Since every nation's activities raise its own welfare by 20 units and lower its trade accomplice's welfare by 30 units, when the two nations force tariffs, public welfare tumbles to 90 units in every country. To figure out which procedure the two governments would pick in this game, we need to distinguish the goals of the players and the level of collaboration. At first, we will accept that every administration is keen on augmenting its own public welfare and that the legislatures don't help out one another. A short time later, we will consider the result when the legislatures do participate. The Non-cooperative Solution (Nash Equilibrium) A non-cooperative solution is a bunch of systems to such an extent that every nation expands its own public welfare subject to the technique picked by the other country. In this way, all in all, if the U.S. procedure (r) boosts U.S. welfare , when Brazil picks its procedure (s) and if Brazil's methodology (s) expands Brazil's welfare when the United States picks system (r), at that point the technique set (r,s) is a non-helpful answer for the game. A non-helpful arrangement is likewise ordinarily known as a Nash equilibrium. CU IDOL SELF LEARNING MATERIAL (SLM) 260

How to Find a Nash Equilibrium One can determine a Nash equilibrium in a simple two-player, two-strategy game by choosing a strategy for one of the players and answering the following series of questions:  Given the policy choice of the first player, what is the optimal policy of the second player?  Given the policy choice of the second player (from step one), what is the first player’s optimal policy choice?  Given player one’s optimal policy choice (from step two), what is the second player’s optimal policy choice? Proceed with this arrangement of inquiries until neither one of the player’s switches its methodology. At that point, this arrangement of procedures is a Nash equilibrium. In the trade strategy game, the Nash equilibrium or non-helpful arrangement is the arrangement of methodologies (ideal tariffs, ideal tariffs). That is, both the United States and Brazil would decide to carry out ideal tariffs. Why? In the first place, assume the United States picks the deregulation system. Brazil's ideal strategy, given the U.S. decision, is to execute ideal tariffs. This is on the grounds that 120 units of public welfare are more noteworthy than 100 units. Second, in the event that Brazil picks ideal tariffs, the ideal arrangement of the United States is ideal tariffs, since 90 units of welfare are more noteworthy than 70 units. At last, on the off chance that the United States picks ideal tariffs, Brazil's most ideal decision is ideal tariffs since 90 is more prominent than 70. The Cooperative Solution A cooperative solution to a game is a bunch of systems that would augment the aggregate of the advantages gathering to the players. In certain occasions, a helpful result may require the trade of merchandise or cash between players to guarantee that every player is improved off than under elective technique decisions. In this game, such a trade isn't needed, in any case. The agreeable arrangement in the trade strategy game is the arrangement of techniques (deregulation, streamlined commerce). At this result, all out world welfare is at a limit of 200 units. Implications and Interpretations Most importantly, notice that in the non-helpful game, every nation is acting in its own wellbeing, yet the result is one that is obviously sub-par for the two nations comparative with the agreeable technique set (free trade, free trade). At the point when the two nations set ideal tariff, every nation acknowledges 90 units of welfare, while if the two nations sought after CU IDOL SELF LEARNING MATERIAL (SLM) 261

deregulation, every nation would acknowledge 100 units of welfare. This sort of result is regularly alluded to as a detainee's difficulty result. The situation is that quest for personal circumstance prompts a second-rate result for the two members. Nonetheless, without collaboration, it could be hard for the two nations to understand the predominant deregulation result. In the event that the two nations start in deregulation, every nation has an individual impetus to go amiss and carry out ideal tariff. Also, in the event that either country digresses, the other would either endure the welfare brought about by the other nation's limitations or fight back with tariff increments of its own to recover a portion of the misfortunes. This situation wherein one nation fights back because of another's trade strategy could be considered as a trade war. This story intently compares with occasions after the Smoot-Hawley Tariff Act was passed in the United States in 1930. The Smoot-Hawley Tariff Act raised tariffs to a normal pace of 60% on numerous items brought into the United States. In spite of the fact that it is impossible that the U.S. government set ideal tariffs, the tariff in any case diminished unfamiliar fares to the United States and harmed unfamiliar firms. In light of the U.S. tariff, around sixty unfamiliar countries fought back and raised their tariffs on imports from the United States. The net impact was a generous decrease in world trade, which probably added to the length and seriousness of the Great Depression. After World War II, the United States and other unified countries accepted that high limitations on trade were hindering to development on the planet economy. The General Agreement on Tariffs and Trade (GATT) was started to advance trade progression among its part nations. The strategy for GATT was to hold multilateral tariff decrease \"adjusts.\" At each round, nations would consent to bring down tariff on imports by a specific normal rate in return for a decrease in tariffs by different nations by an equivalent rate. Despite the fact that GATT arrangements never accomplished a development to streamlined commerce by all part nations, they do address developments toward that path. As it were, at that point, the GATT addresses a global helpful understanding that encourages development toward the streamlined commerce technique set for all nations. In the event that a GATT part country won't diminish its tariffs, different individuals will not lower theirs. On the off chance that a GATT part raises its tariffs on some item over the level to which it had recently concurred, at that point the other part countries are permitted, under the arrangement, to fight back with expansions in their own tariff. Thusly, countries have a more noteworthy impetus to move toward deregulation and a disincentive to exploit others by singularly raising their tariffs. The basic detainee's issue trade strategy game along these lines offers a straightforward clarification of the requirement for global associations like the GATT or the World Trade CU IDOL SELF LEARNING MATERIAL (SLM) 262

Organization (WTO). These arrangements may address techniques to accomplish agreeable arrangements between exchanging nations. 14.9 SUMMARY  Consumer surplus is characterized as the distinction between the aggregate sum that shoppers are willing and ready to pay for a decent or administration (showed by the interest curve) and the aggregate sum that they really pay (for example the market cost).  The ideal tariff theory contends that a country that is an enormous merchant of a specific item can move the financial burden of an import tariff from domestic customers to unfamiliar providers if the nation has monopsony power on the lookout—the nation is an essential purchaser from many contending providers. This monopsony power brings about an inventory that is moderately inelastic or harsh toward cost changes, which powers exporters to bring down their pre-tariff costs when confronting a tariff expansion to keep up a similar stock level and permits importing nations to catch income that exporters recently got.  A voluntary export restraint (VER) is a trade limitation on the amount of a decent that an exporting nation is permitted to fare to another country. This breaking point is self- inflicted by the exporting country.  Export subsidies comprise of all sponsorships on products and ventures that become payable to inhabitant producers when the merchandise leave the monetary region or when the administrations are conveyed to non-occupant units; they remember direct appropriations for sends out, misfortunes of government exchanging endeavours regard of trade with non-occupants, and appropriations coming about because of numerous trade rates.  Export subsidies are subsidies given to brokers to cover the distinction between inside market costs and world market costs, for example, through the EU trade discounts and the US Export Enhancement Program.  A trade war is a contention between two nations set apart by rising tariffs and other comparative protectionist activities. Trade wars are generally an aftereffect of protectionism. Trade wars can at first positively affect a country's economy by ensuring domestic enterprises and occupations. 14.10 KEYWORDS Competitive Market: A competitive market is one where there are numerous producers that compete with one another in hopes to provide goods and services us, as consumers, want and need. In other words, not one single producer can dictate the market CU IDOL SELF LEARNING MATERIAL (SLM) 263

Research and Development (R&D): Includes activities that companies undertake to innovate and introduce new products and services. It is often the first stage in the development process. The goal is typically to take new products and services to market and add to the company's bottom line Zero Tariff / No Tariff: A non-tariff barrier is any measure, other than a customs tariff, that acts as a barrier to international trade. These include regulations: Any rules which dictate how a product can be manufactured, handled, or advertised: Rules of origin: Rules which require proof of which country goods were produced in. Consumer Surplus: Is defined as the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e., the market price). Producer Surplus: Producer surplus is the difference between how much a person would be willing to accept for given quantity of a good versus how much they can receive by selling the good at the market price. The difference or surplus amount is the benefit the producer receives for selling the good in the market 14.11 LEARNING ACTIVITY 1. Using the concepts of consumer and producer surplus evaluate the likely economic effect of a subsidy on school uniform producers. …………………………………………………………………………………………………. …………………………………………………………………………………………………. 2. Identify different quota’s provided by Indian government for import of solar energy equipment. …………………………………………………………………………………………………. …………………………………………………………………………………………………. 14.12 UNIT END QUESTIONS 264 A. Descriptive Short Questions 1. Explain trade policy effects in competitive market? CU IDOL SELF LEARNING MATERIAL (SLM)

2. Explain partial equilibrium? 3. Explain basic assumptions of partial equilibrium? 4. Describe large versus small country assumption. 5. Summarize large and small country cases. Long Questions 1. Explain Mexico and U.S trade using large and small country cases? 2. Elaborate the impact of trade policy in competitive market? 3. Explain U.S. Wheat market autarky equilibrium. 4. Explain Mexican wheat market: autarky equilibrium. 5. Explain free trade equilibrium: large country case. B. Multiple Choice Questions 1. The main difference between a tariff and a quota is a) A quota reduces the quantity of imports more than a tariff. b) A quota does not harm domestic consumers. c) A tariff does not harm foreign producers. d) A tariff generates government revenue, while a quota, unless it is sold, does not. 2. A government procurement regulation or practice constitutes a nontariff barrier when ___________. a) Government agencies are required to purchase from the lowest bidder. b) Government shows a preference for domestic sellers over foreign sellers. c) Government purchases are financed by tax receipts. d) Government-owned enterprises are not required to make a profit on inputs that they purchase at home or abroad. 3. Import quotas are most commonly administered_____________________. a) By permitting all imports until the quota is filled for the year, then none after that. b) By taxing imports. c) By auctioning import licenses to the highest bidder. d) By granting import rights to foreign firms or governments. 4. Which of the following will cause the tariff equivalent of a quota to increase in a small country? a) A decrease in domestic demand (the demand curving shifting left). b) A decrease in domestic supply (the supply curving shifting left). c) A rise in the quantity of imports permitted by the quota. d) Nothing: the tariff equivalent of a quota is fixed by law. 5. What happens if a quota has been keeping the domestic price above the world price, but then the world price rises above what has been the domestic price? CU IDOL SELF LEARNING MATERIAL (SLM) 265

a) The country begins to export the good. b) The tariff-equivalent of the quota becomes negative. c) The government must subsidize imports to keep them from falling below the quota. d) Quota rents become zero. Answers: 1-(d), 2-(b), 3-(d), 4-(b), 5-(d) 14.13 REFERENCES Textbooks  Grubel H., P.J. Lloyd (1975). Intra-industry trade. Willey, New York. Reference Books  Applebaum E., E. Katz (1986). Measures of Risk Aversion and Comparative Statics of Industry Equilibrium. American Economic Review.  Brander J.A. (1981). Intra-Industry Trade in Identical Commodities. Journal of International Economics.  Hwang H.-S., C. Schulman (1992). Strategic non-intervention and the choice of trade policy for international oligopoly, Journal of International Economics.  Krugman P. (1979). Increasing returns, monopolistic competition and international trade. Journal of International Economics.  Krugman P. (1980). Scale Economies, Product Differentiation, and the Pattern of Trade. American Economic Review.  Leland H.E. (1972). Theory of the Firm Facing Uncertain Demand. America Economic Review. Websites  https://howtoexportimport.com/  https://www.managementstudyguide.com/  https://www.economicsdiscussion.net/ CU IDOL SELF LEARNING MATERIAL (SLM) 266