Question

Countries often implement various trade restrictions in international markets to protect their domestic economies. Suppose a trading partner of the United States imposes a tariff on our goods. What would we expect to happen in the market to measures like prices, quantities of goods exchanged, exchange rates, employment and/or welfare? Can you suggest an alternative policy that might improve the foreign country’s economy without resorting to a tariff?

Answer 1

the market to measures like prices, quantities of goods exchanged, exchange rates, employment and/or welfare ...The motivation for investment, whether domestic or foreign, is to earn a return. If rates of return in a country look relatively high, then that country will tend to attract funds from abroad. Conversely, if rates of return in a country look relatively low, then funds will tend to flee to other economies. Changes in the expected rate of return will shift demand and supply for a currency. For example, imagine that interest rates rise in the United States as compared with Mexico. Thus, financial investments in the United States promise a higher return than they previously did. As a result, more investors will demand U.S. dollars so that they can buy interest-bearing assets and fewer investors will be willing to supply U.S. dollars to foreign exchange markets. Demand for the U.S. dollar will shift to the right, from D0 to D1, and supply will shift to the left, from S0 to S1,. The new equilibrium (E1), will occur at an exchange rate of nine pesos/dollar and the same quantity of $8.5 billion. Thus, a higher interest rate or rate of return relative to other countries leads a nation’s currency to appreciate or strengthen, and a lower interest rate relative to other countries leads a nation’s currency to depreciate or weaken. Since a nation’s central bank can use monetary policy to affect its interest rates, a central bank can also cause changes in exchange rates—a connection that will be discussed in more detail later in this chapter.

Exchange Rate Market for U.S. Dollars Reacts to Higher Interest Rates. A higher rate of return for U.S. dollars makes holding dollars more attractive. Thus, the demand for dollars in the foreign exchange market shifts to the right, from D0 to D1, while the supply of dollars shifts to the left, from S0 to S1. The new equilibrium (E1) has a stronger exchange rate than the original equilibrium (E0), but in this example, the equilibrium quantity traded does not change.

• Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency.

• One way to compare different countries' GDPs is with an exchange rate, the price of one country’s currency in terms of another.

• GDP per capita is GDP divided by population.

It is common to use GDP as a measure of economic welfare or standard of living in a nation. When comparing the GDP of different nations for this purpose, two issues immediately arise.

First, the GDP of a country is measured in its own currency—the United States uses the US dollar; most countries of Western Europe use the euro; Japan uses the yen; and Mexico uses the peso. Because of this, comparing GDP between two countries requires converting to a common currency.

A second issue is that countries have very different numbers of people. For instance, the United States has a much larger economy than Mexico or Canada, but it also has roughly three times as many people as Mexico and nine times as many people as Canada. So, if we are trying to compare standards of living across countries, we need to divide GDP by population.

alternative policy that might improve the foreign country’s economy without resorting to a tariff....

There will be no further extension of the retaliatory tariffs,” said an official aware of the development, adding that the commerce department and external affairs ministry are on the same page on the decision.

Trump has repeatedly called out India for its high tariffs, even though the two countries have developed close political and security ties, often citing levies on Harley Davidson motorcycles. India had in fact cut customs duty on motorcycles to 50% from 100% in 2018 after Trump

While officials and experts have ruled out the move as signalling the start of a trade row with the US, they said it may lead to Washington seeking to persuade Delhi to sign a bilateral trade pact, which is in line with the Trump administration’s doctrine. The US may also seek other concessions.

“This is not a trade war but it seems the US wants to make India sign a trade pact. It also wants to extract concessions on ecommerce,” said the official cited above.

Commerce and industry minister Piyush Goyal has said that the US ending the GSP was not “a matter of life and death” for exporters, though some of them may have been hit. The Department of Revenue is expected to soon notify the tariffs before the deadline ends. Experts said the move is good signalling from India but urged caution in responding to increased pressure from the US.