Econ 460 Midterm 2

HO Model

2 countries (home and foreign) and K and L factors of production

in the HO model (abundance)

home is K abundant and foreign is L abundant; (K/L)>(K*/L*) *=foreign

import tariff small country: home/importer change in CS

-(a+b+c+d)

import tariff small country: change in PS

+a

import tariff small country: tax revenue collected by government

+c

import tariff small country: DWL

DWL=NWE; -(b+d)

import tariff large country: home country change in CS

-(a+b+c+d)

import tariff large country: home country change in PS

+a

import tariff large country: home country tax revenues

c+e

import tariff large country: welfare gain from foreign country

e

import tariff large country: home country DWL

-(b+d)

import tariff large country: home country NWE

e-(b+d)

import tariff large country: total welfare loss in exporting country

-e-f; also the change in PS

import tariff large country: TOT loss in exporting country

-e

import tariff large country: DWL in exporting country

-f

import tariff large country: welfare effect in the world

-(b+d)-f

optimal tariff rate

1/E where E=elasticity of export supply, at this rate e-(b+d) is maximum

export subsidy small country: change in CS

-(a+b)

export subsidy small country: change in PS

a+b+c

export subsidy small country: subsidy cost

-(b+c+d)

export subsidy small country: NWE

also DWL; -(b+d)

export subsidy large country: home/exporter change in CS

-(a+b)

export subsidy large country: home/exporter change in PS

a+b+c

export subsidy large country: home/exporter subsidy

-(b+c+d)-(e’+f); note e=e’+f

export subsidy large country: home/exporter welfare transfer to foreign

-(e’+f) AKA -e

export subsidy large country: home/exporter DWL

-(b+d)

export subsidy large country: home/exporter NWE

-(b+d)-(e’+f); note e=e’+f

export subsidy large country: importing country welfare gain from exporter

e’+f AKA +e

export subsidy large country: importing country change in CS

e’

export subsidy large country: importing country DWL

-f

export subsidy large country: importing country NWE

e’

export subsidy large country: world NWE

-(b+d)-f

production subsidy small country: change in CS

0

production subsidy small country: subsidy

-(a+b+c+d)

production subsidy small country: change in PS

a+b+c

production subsidy small country: DWL

-d

consumption in terms of production and exports

consumption = production - exports

consumption in terms of production and imports

consumption = production + imports

stolper samuelson theorem

when relative price of x (Px/Py) increases, return of Kx or Lx (whichever it is more intensive for x) increases; if a K-intensive good relative price increases then R/W increases and if an L-intensive good relative price increases then W/R increases

import quota in small country graph note

same as import tariff graph, but instead of c being tax revenues, c is the quota rent

Article VI of the GATT

Anti-Dumping (countries export shirts to US for cheap, good for US consumer but bad for US producer as they can’t compete) and Countervailing (foreign countries give their producer subsidies allowing product to sell cheaper in US, good for US consumers but US producers can’t compete) duties; tariff on goods that are subsidized in the exporting country

US Trade Law Section 201

Section 201 of Trade Act of 1974: Safeguard tariff- allows temporary duties and other trade measures if the US International Trade Commission determines that a surge in imports would harm the US industry

US Trade Law Section 232

Section 232 of Trade Expansion Act of 1962: National security- allows the adjustment of imports via tariffs or quotas if the Department of Commerce finds that certain products being imported would threaten national security

US Trade Law Section 301

Section 301 of Trade Act of 1974: Trade agreements- allows suspension of trade agreements or imposition of import restrictions if a US trading partner violates trade agreements or engages in discriminatory or unreasonable practices that restrict US commerce

Leontief’s Paradox

Assumption/Hypothesis: that the US (1947, post WW2) was capital abundant so it would export K-intensive goods and import L-intensive goods; Findings: K/L ratio for imports in the US was higher than K/L ratio for exports, contradicting the HO model; aka US exports were less K-intensive than US imports aka importing K-intensive goods while exporting L-intensive goods

import tariff small country (tax revenue, CS, PS, DWL)

tax revenue= c; change CS= -(a+b+c+d); change PS= a; DWL=NWE= -(b+d)

Import tariff large country- effects in home country (CS, PS, tax revenue, welfare TOT gain from foreign, DWL, NWE)

change CS= -(a+b+c+d); change PS= a; tax revenue= c+e; welfare TOT gain from foreign= e; DWL= -(b+d); NWE= e-(b+d)

Import tariff large country- effects in exporting country (total welfare loss, TOT loss, DWL)

Total welfare loss= -e-f; TOT loss= -e; DWL= -f

Import tariff large country- effects in world (NWE)

NWE= -(b+d)-f

export subsidy small country (CS, PS, subsidy, DWL)

Change CS= -(a+b); change PS= a+b+c; subsidy= -(b+c+d); DWL= -(b+d)

Export subsidy large country- home welfare effects (CS, PS, subsidy, welfare transfer to foreign, DWL, NWE)

e=e’+f; change CS= -(a+b); change PS= a+b+c; subsidy= -(b+c+d)-(e’+f); welfare transfer to foreign= -(e’+f); DWL= -(b+d); NWE= -(b+d)-e

Export subsidy large country- importing country welfare effects (welfare gains from exporter; CS, DWL, NWE)

Welfare gains from exporter= e’+f; change CS= e’; DWL= -f; NWE= e’

Export subsidy large country= world welfare effects (NWE)

NWE= -(b+d)-f

Production subsidy small country- welfare effects (CS, subsidy, PS, DWL)

Change CS= 0; subsidy= -(a+b+c+d); change PS= a+b+c; DWL= -d