Fall 2003

ECONOMICS 3347

J.G. Gonzalez

 

 

 

 

Problem Set # 2

 

 

            This problem set is due Thursday, November 6th, at the beginning of the class period.  All text answers must be typed.  Unstapled problem sets will not be accepted.  Late problem sets are unacceptable also.

 

I.  You are asked to estimate the welfare cost of a tariff imposed by Thailand on imported notebook computers.  You are told that imports were B 1,400 million before the tariff and B 800 million (valued at world prices, in other words, without including the tariff revenue) after it was imposed; the tariff rate is 27 percent (prices are in Bahts, Thailand’s’ currency).  You can assume that Thailand is a small country in the notebook computer market, and that the domestic elasticities of demand and supply are the same.  Estimate the approximate loss in national welfare due to the tariff.

 

 

 

II.  South Korea uses 800 W worth of imported cabbage and 300 W worth of imported brine to produce a kilogram of kimchi whose world price is 1500 W (prices are in Won, South Korea’s currency).

1.  What is the value added by South Korea’s kimchi industry?

2.  Suppose that South Korea imposes a 20 percent ad-valorem tariff on imports of kimchi.  What happens to the value added by South Korea’s kimchi industry?  What is the effective rate of protection provided to South Korea’s kimchi producers?

 

3.  Suppose that in addition to the tariff on kimchi imports, South Korea imposes tariffs of 15 and 12 percent on imports of cabbage and brine, respectively.  Calculate the new effective rate of protection.

 

4.  Recalculate the effective rate of protection, assuming that the nominal tariff rates on cabbage and brine are 40 and 36 percent, respectively.

 

 

 

III.  Concentrate on the market for Jellabas (full-length cotton garments).  Assume that there are only two countries in the world, Morocco and Egypt (assume that both countries are large nations in trade), that a jellaba is a homogeneous good, and that it is produced under perfect competition.

 

1.  Assume that the Morocco has a comparative advantage in jellaba production.  In order to protect its domestic producers, Egypt uses a quota that limits the amount of jellabas that can come into the country.  Show the international trade equilibrium under the quota using the supply and demand for each country, as well as the export supply and import demand (Hint:  You need to draw three diagrams). 

 

2.  It was recently reported in Al-Ahram that the “Egyptian Consumers Syndicate” is concerned with the effects of a recent increase in the demand for jellabas in Morocco.  Use diagrams to show the effects of this increase in Morocco’s demand (assume that the quota is binding even after the changes in demand).  What are the effects of this change on the price of jellabas in Egypt, the price of jellabas in Morocco, and the revenue going to the holders of the import quotas in Egypt?  Make sure that you include a diagram in your answer.

 

3.  Al-Ahram also reported that the “Egyptian Consumers Syndicate” is concerned about a decline in the Egyptian domestic supply of jellabas.  Use diagrams to show the combined effects of this decline in the Egyptian domestic supply and the increase in the Moroccan demand discussed in part 2 (assume that the quota is binding even after the changes in both supply curves).  What are the effects of this change on the price of jellabas in Egypt, the price of jellabas in Morocco, and the revenue going to the holders of the import quotas in Egypt?  (Please make all comparisons with respect to the equilibrium found in part 2).  Make sure that you include a diagram in your answer.

 

4.  According to Al-Ahram, the Egyptian government responded to these changes by increasing the amount of jellabas that are allowed to enter Egypt (i.e., increasing the size of the quota).  Use diagrams to show the effects of this increase in the jellaba quota (assume that the new quota is still binding).  What are the effects of this change on the price of jellabas in Egypt, the price of jellabas in Morocco, and the revenue going to the holders of the import quotas in Egypt?  (Please make all comparisons with respect to the equilibrium found in part 3).  Make sure that you include a diagram in your answer.

 

 

 

IV.  Assume that there are only two countries in the world:  China and the US (in other words, assume that both countries are large).

 

1.  China’s demand curve for shrimp is:

                                                                                                            Qd = 95 -  5P

                        Its supply curve is:

                                                                                                            Qs = 50 + 10P

 

                        where: Qd = Quantity Demanded; Qs = Quantity Supplied; and P = Price

                        (Note:  Quantity is given in pounds of shrimp per hour, while price is given in U.S. dollars per pound).

 

            Derive and graph China’s export supply schedule.  What would the price of shrimp be in the absence of trade?

 

2.  Now add the US, which has a demand curve:

                                                                                                            Qd =  155 - 2P

                        and a supply curve:

                                                                                                            Qs = -50 + 8P

 

A) Derive and graph the US import demand curve, and find the price of shrimp that would prevail in the US in autarky.

 

B) Now allow China and the US to trade with each other.  Find and graph the equilibrium under free trade.  What is the world price?  What is the volume of trade?

 

3.  The “China Aquatic Products Processing and Marketing Association” convinces the Chinese government to provide the shrimp industry with an export subsidy.  The government agrees to give a subsidy of $5 per pound of shrimp exported (Note:  All answers to this section should compare the free trade equilibrium to the subsidy equilibrium).

 

A)  Determine and show graphically the effects of the subsidy on the following:  (a) The price of shrimp in each country; (b) the quantity of shrimp supplied and demanded in each country; (c) the volume of trade.

 

B) Show graphically and calculate numerically the effects of the subsidy on the welfare of each of the following groups: (a) US import-competing producers; (b) US consumers; and (c) the nation of the US.

 

C) Show graphically and calculate numerically the effects of the subsidy on the welfare of each of the following groups: (a) China’s producers; (b) China’s consumers; (c) China’s government; and (d) the nation of China.

 

D) Show graphically and calculate numerically the net change in world welfare that resulted from the granting of the export subsidy by the Chinese government.

 

4.  The Southern Shrimp Alliance (an eight state shrimp industry group in the US) convinces the US government to impose countervailing duties (CVDs) on the subsidized imports from China.  The government agrees to impose a CVD of $5 per pound of shrimp imported (Note:  All answers to this section should compare the subsidy equilibrium to the CVD equilibrium).

 

A)  Determine and show graphically the effects of the CVD on the following:  (a) The price of shrimp in each country; (b) the quantity of shrimp supplied and demanded in each country; (c) the volume of trade..

 

B) Show graphically and calculate numerically the effects of the CVD on the welfare of each of the following groups: (a) US import-competing producers; (b) US consumers; and (c) the nation of the US.

 

C) Show graphically and calculate numerically the effects of the CVD on the welfare of each of the following groups: (a) China’s producers; (b) China’s consumers; (c) China’s government; and (d) the nation of China.

 

D) Show graphically and calculate numerically the net change in world welfare that resulted from the imposition of the CVD by the US government.

 

 

5.  A) Which is better for China:  Free Trade or the Subsidy-CVD combination?  Why?

 

B) Which is better for the US:  Free Trade or the Subsidy-CVD combination?  Why?

 

C) Which is better for the World as a whole:  Free Trade or the Subsidy-CVD combination?  Why?

 

 

 

V.  France and Japan trade two commodities:  cement (C) and fiber optic cable (F).  Their offer curves are given by the following equations (Note:  Both cement and fiber optic cable are measured in tons per day):

 

                                    C =  2F2 + 120F                                  (Japan’s offer curve)

                                    C = -5F2 + 400F                                  (France offer curve)

 

a)  Determine the free trade equilibrium international price and each country's exports and imports.  Illustrate your results graphically.

 

b)  As a result of lobbying activities by the Groupement des Industries de Telecommunications et d'Electronique Professionnelle (GITEP) (the French Telecommunications Trade Association), the French Prime Minister, Jean-Pierre Raffarin, imposes a quota of 20 tons of fiber optic cable per day.  Determine the quota equilibrium international price, the domestic price in France, the domestic price in Japan, and each country's exports and imports.  Illustrate your results in a new diagram.

 

c)  Is Japan better off or worse off as a result of the imposition of the fiber optic cable quota?  Why?  Is France better off or worse off as a result of the imposition of the fiber optic cable quota?  Why?

 

d)  After months of negotiations, France decides to eliminate its import quota in exchange for the imposition of a VER by Japan.  Junichiro Koizumi, the Japanese Prime Minister, agrees to restrict Japan’s exports of fiber optic cable to 20 tons per day.  Determine the VER equilibrium international price, the domestic price in France, the domestic price in Japan, and each country's exports and imports.  Illustrate your results in a new diagram.

 

e)  Is France better off or worse off as a result of the imposition of the fiber optic cable VER?  Why?  Is Japan better off or worse off as a result of the imposition of the fiber optic cable VER?  Why?  (For both nations, please compare the VER equilibrium to the free trade equilibrium)

 

f)  Which policy does France prefer, an import quota or a VER?  Why?  Which policy does Japan prefer, an import quota or a VER?  Why?