Question

1. Definitions / Explanations

1. (define the following terms/concepts)

1. Terms of trade and relationship to the large country tariff case
2. Customs union versus a common market
3. Economies of scale and relevance to trade theory

Answer 1

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Below are the answer to your question

Introduction

A) Terms of trade and relationship to the large country tariff case

Introduction

There are several different types of term of trade and each type effects the tariff rates of each country, so it is very necessary to understand the concept of term of trade Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. The effect of tariffs and trade barriers on businesses, consumers and the government shifts over time. In the short run, higher prices for goods can reduce consumption by individual consumers and by businesses

Definition

The terms of trade is the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods.

Types of Trade

1) Net barter or commodity terms of trade.

2) Gross barter terms of trade.

3) Income terms of trade.

4) Single factorial terms of trade.

Relationship to the large country tariff

An import tariff will raise the domestic price and, in the case of a large country, lower the foreign price. An import tariff will reduce the quantity of imports. An import tariff will raise the price of the “untaxed” domestic import-competing good.

The average consumer may not recognize this rather obvious point. For example, suppose the United States places a tariff on imported automobiles. Consumers of U.S.-made automobiles may fail to realize that they are likely to be affected. After all, they might reason, the tax is placed only on imported automobiles.

An export tax lowers producer surplus in the export market and raises it in the import country market. National welfare may rise or fall when a large country implements an export tax. For any country that is large in an export product, there is a positive optimal export tax.

B) Customs union versus a common market

Customs union. The EU is not only a single market - it is also a customs union. The countries club together and agree to apply the same tariffs to goods from outside the union. Once goods have cleared customs in one country, they can be shipped to others in the union without further tariffs being imposed

When those goods move across the internal borders of the customs union there are not treated like imports.

A common/single market eliminates tariffs/quotas/import rules between the participating countries, but doesn't affect imports from outside (although there is usually a customs union as well).

C) Economies of scale and relevance to trade theory

Economies of scale. means that production at a larger scale (more output) can be achieved at a lower cost (i.e., with economies or savings). ... Economies of scale can provide an answer for this type of trade

The broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. The concept of economies of scale, as introduced in Cost and Industry Structure, means that as the scale of output goes up, average costs of production decline—at least up to a point

Economies of scale are an important concept for any business in any industry and represent the cost-savings and competitive advantages larger businesses have over smaller ones. Larger companies are able to produce more by spreading the cost of production over a larger amount of goods and it is obviously have perfect relevance to trade theory

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