Handbook theory of international economics - MyAssignmenthelp.com

Questions: 1. Suppose that the government decides to subsidise exports of beef by paying a certain amount for each kg sold overseas. How does this export subsidy affect the domestic price of beef, the quantity of beef produced, the quantity of beef demanded, and the quantity of beef exported? 2. How does it affect consumer surplus, producer surplus, total surplus and government revenue? Illustrate your answer with a supply and demand diagram. 3. Suppose Canada imposed an import quota on Australian beef. Draw a graph and explain how this quota would influence the consumer prices of beef in Canada, consumer surplus (CS) and producer surplus (PS), benefits of beef importers, and the amount of deadweight loss in Canada. 4. State and discuss two arguments that could be advanced in support of trade protection. Answers: Answer 1 Government provides export subsidy to promote export in the country. The following figure explain the effect of a subsidy on beef exported from Australia to Canada. Figure 1: Effect of export subsidy in Australia (Source: as created by Author) In the above DD and SS are the domestic demand and domestic supply curve of beef. The world price is set at PW. At this price, domestic demand of beef equals D0 and domestic supply is S0. At the world price the Australia exported (D0 S0) amount of beef. Suppose that, government provides a subsidy of s. The subsidy raises price received by the domestic exporter to PWS. The domestic consumers now faced a high price. The high price received by the domestic beef producers now encourage them to produce more (Gopinath, G., Helpman, E. and Rogoff, K. eds., 2014). At the price PWS, the domestic supply now increases to S1 while domestic demand reduces to D1. The increased supply and reduced demand in the domestic market increase the volume of export. The quantity of beef exported now become (S1 D1) Answer 2 After the export subsidy, welfare of the consumers in Australia is reduced. The increase in domestic price reduces the consumer surplus previously received by them. The loss in consumer surplus is given by the area (a + b). Beef producers in Australia now receives a high price and therefore experiences a higher surplus. The improved welfare of the producers are given by (a + b + c + d + e). Consumers in Canada now face a lower import price given as PWM. The difference between prices received by Australian producers and Canadian consumers is the amount of subsidy. Government pays the subsidy out of its total revenue (Hazari 2016). The loss in government revenue is the area (b + c + d + e + f + h + i + j + k + l). There are two negative impact on total welfare one from reduced consumer surplus and one from reduced government revenue and only one positive impact in the form of increased consumer surplus. The net impact of total welfare is negative. National welfare reduced by (b + f + h + i + j + k +l). Answer 3 An import quota places a restriction on the quantity of good imported. The figure below shows the impact of import quota on beef in Canada. Figure 2: Effect of import quota in Canada (Source: as created by Author) PW is the world price of beef. At the world price, Q1D amount of beef is demanded while domestic supply is only up to Q1S. The excess demand of beef over its supply is imported from Australia. The imported amount of beef is (Q1D Q1S). Now suppose, Canada restricted import to (Q2D Q2S). The proposed import quota raises price to Canadian consumer to PQ. With import quota there is a loss in consumer surplus given by area (C + D + E + E + F). With an increase in domestic price, the surplus to domestic producers increase from G to G + C (Booth and Erskine 2016). The quota rent is given the area E+E. Importers in Canada benefitted from importing Australian beef and selling them at a high price. The import quota leads to a welfare loss of (D+F). Answer 4 The two arguments in favor of trade protection policy are infant industry argument and Diversification of Industry argument. The infant industry argument supports protectionist policy on the ground that industries that are not completely developed need protection from foreign competitors. This holds true particularly for countries that are in their initial stage of industrialization. The industries are protected from foreign competition by imposing an import tariff or import quota (Ricardo 2017). Trade protection is supported with the argument of industry diversification. Excessive specialization results in an unbalanced economy by increasing countrys dependence on other countries. This is dangerous both economically and politically. In order to encourage diversified industries within the country, policymakers often restricts free trade among nations. References Booth, K. and Erskine, T. eds., 2016.International relations theory today. John Wiley Sons. Gopinath, G., Helpman, E. and Rogoff, K. eds., 2014.Handbook of international economics(Vol. 4). Elsevier. Hazari, B., 2016.The pure theory of international trade and distortions. Routledge. Ricardo, D., 2017. On foreign trade. In200 Years of Ricardian Trade Theory(pp. 233-268). Springer, Cham.