Lecture 7 – Tariffs / Chapter 4 Exam Review

These flashcards cover key concepts, formulas, and the implications of tariffs discussed in Lecture 7, providing a concise study tool for exam preparation.

What is a tariff?

A tax imposed on goods when they cross a national boundary.

What are the two main types of tariffs?

Import tariffs (tax on goods coming in) and export tariffs (tax on goods going out).

Define effective rate of protection (ERP).

The percentage change in domestic value added due to a country’s entire tariff structure.

When can ERP be negative?

When the nominal tariff on the final good is lower than the tariff on imported inputs, causing domestic processors to be penalized.

What is tariff escalation?

A tariff structure where rates increase at each stage of processing, with raw materials facing the lowest tariffs and finished goods the highest.

How do tariffs affect consumer and producer surplus in a small country?

Consumers lose surplus due to higher prices, while producers gain surplus due to increased prices and quantities sold.

What are the welfare effects of a tariff in a small country?

A tariff results in net welfare loss equal to the sum of the protective effect and consumption effect.

What is the terms-of-trade (TOT) effect?

The impact on a country's welfare from changes in the international price ratio as a result of implementing a tariff.

What is a bonded warehouse?

A storage facility where imported goods can be stored without paying duties until they enter the domestic market.

What are some arguments for free trade?

Specialization leads to efficiency, dynamic gains through competition, economies of scale, and less rent-seeking behavior.

What is the role of government in tariff imposition?

Governments use tariffs to protect domestic industries and generate revenue.

Define protective tariff.

A tariff designed primarily to shield domestic producers from foreign competition by making imported goods more expensive.

What is the redistributive effect of a tariff?

The effect of tariffs that transfers some consumer surplus to domestic producers through higher prices.

What can high tariffs on essential goods like food lead to?

Increased poverty and regressivity since poorer households spend a larger share of their income on these goods.

What does the term 'FOB' stand for, and how does it relate to tariffs?

Free on Board; it's a valuation basis used to determine the point at which ownership of goods transfers, affecting tariff calculations.

What kind of tariffs do developing countries typically depend on for revenue?

Revenue tariffs, as they often lack comprehensive income or sales tax systems.

What is the infant industry argument?

The rationale that new industries may require temporary protection to develop competitive advantages.

Why is it difficult for developing countries to process raw materials?

Due to tariff escalation, they face higher tariffs on finished goods than on raw materials in rich countries.

What are some common non-tariff trade restrictions?

Voluntary export restraints, import licensing, technical standards, local content requirements, and government procurement rules.

How can tariffs impact exporters?

By raising the costs of imported inputs, tariffs can diminish competitiveness and reduce export levels.

What do high effective rates of protection (ERPs) for processed goods indicate for a country's processors?

They suggest that domestic processors are enjoying high protection due to high tariff rates on processed goods compared to lower rates on raw materials.