Question

5. We can consider the case where wine producers in Chile ask the government to tax imported wines from France with a tax. They consider that this tax would increase both the State's tax revenue and employment in the Chilean wine industry. What kind of economic argument is this in relation to international trade? Do you agree or not with the argument presented by wine producers in Chile? If the state government adopts this position, does it consider it to be good economic policy or not? Briefly explain your answers using the concepts of international trade discussed in your Textbook.

6) Recently, the government's economic advisers have favored the establishment of a food tax to increase its taxable income. This can occur since the demand for food consumption is inelastic. How does this approach show the trade-off between efficiency and equity that exists in a market economy? How can this type of tax be favored or not?

7) The Textilia nation does not allow imports of clothing. In this equilibrium without international trade, a T-shirt costs $ 20 dollars and the equilibrium amount is 3 million T-shirts. However, inspired by reading Adam Smith's classic economics book The Wealth of Nations, the president of Textilia decides to open the clothing market to the international market. Consequently, the market price of the shirt falls to the world price of S16 dollars and the number of shirts consumed in Textilia increases to 4 million while the number of domestically produced shirts decreases to 1 million.

a) Illustrate on a graph the situation described with the indicated numbers.

b) Calculate the change in consumer surplus, producer surplus, and total surplus resulting from the opening of the economy.

Answer 1

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Answer:-

5)

If the Chilean Government imposes taxes on wine imported from France (thus making French wine more expensive than Chilean/domestic wine), the domestic wine producers would benefit from such a policy as it woud make French wine less compentitive (because it'll cost more)and thus potentially increase domestic wine consumption.This would further lead to more employment opportunities in imported wine).Such a policy is inward looking i.e. a protectionist policy in terms of International trade where the Government is protecting the interests of the local wine producers by taxing imports.

If the Chilean wine industry is not very competitive in terms of cost,quality etc.and is still at a nascent stage then it is important to protect the domestic industry from international competition.

6)

The trade off between equity and efficiency can be explained by the Engel's law given by Ernst Engel.The law states that as the income increases,consumption expenditure in proportion to income falls.The reason for this is quite clear.The consumption expenditure is a fixed expenditure for everyone and hence there will not be much variation in food consumption because of income.Hence,it is unfair for the government to charge food tax as there will be no equity.Both the rich and the poor will be charged uniformly.Even through,this tax would be effcient as more tax would be collected since everybody consumes food.

This tax should not be favored if the government wants to have more equity in the system.However,since political parties in market economics usually overlook equity,it is possible that the political parties would prefer this policy as it will result in more money collected in forms of taxes and they can put this money to other constructive purposes.

7)

a) Before international trade was allowed,the domestic equilibrium was a price of $20 and a quantity level of 3 million.This equilibrium is shown as the intersection of domestic demand and domestic supply curves in figure.

After international trade is allowed the domestic price falls to $ 16 to match the world price.At this price,the domestic quantity demanded is 4 million,domestic quantity supplied is 1 million and quantity of imports is 3 million (=4 million - 1 million).

b)

Before the trade :

  

  

After the trade :

Change :

Calculate change in consumer surplus,producer surplus and total surplus as follows:

= [($20 - $16) x 3 million] + [ 1/2 x($20-$16)x(4 million - 3 million)]

= ( $4 x 3 million) +[1/2 x$4x1 million

= $ 12 million +$ 2 million

= $ 14 million

Consumer surplus increases by $ 14 million.

change in producer producer = area A

= (area A + area B) - area B

=[($20-$16) x 3 million] - [1/2 x($20-$16) x(3 million - 1 million)]

=$4 x 3 million - 1/2 x $4 x 2 million

= $12 million - $4 million

= -$8 million

producer surplus decreases by $8 million.

Change in total surplus = change in consumer surplus + change in producer surplus

= $ 14 million - $ 8 million

= $6 million

Total surplus increases by $6 million.