Question

Econ 335: Assignment 4

Due: April 20^th by 11:59 PM

1.     To protect American jobs, the US government may decide to cut US imports of bulldozers by 60%. It could do so by either:

-Imposing a tariff high enough to cut bulldozer imports by 60%

-Persuading Komatsu and other foreign bulldozer makers to set up a voluntary export restraint arrangement to cut their exports of bulldozers to the US by 60%.

a. Which of these two policies would be less damaging to the United States as a whole? Please explain. (6 points)

b. Which of these two policies would be less damaging to foreign bulldozer manufacturers? Please explain. (6 points)

c. Which of these two policies would be most beneficial for the United States’ government? Please explain. (6 points)

2. A small country imports sugar. With free trade, the world price of sugar is $0.20 per pound. The country’s national market for sugar with free trade is:

-Domestic production: 120 million pounds/year

-Domestic consumption: 420 million pounds/year

-Imports: 300 million pounds/year

The country’s government now decides to impose a quota that limits sugar imports to 240 million pounds per year. With the import quota in effect, the domestic price rises to $0.24 per pound, and domestic production rises to 160 million pounds/year. The government auctions the import licenses for the 240 million pounds of imports.

a.     Please calculate how much domestic producers gain or lose from the quota. (9 points)

b.     Please calculate how much domestic consumers gain or lose from the quota. (9 points)

c.     Please calculate how much the government receives for the auction for the import licenses. (9 points)

d.     Please calculate the net national gain or loss in surplus in the small country from the quota. (9 points)

3. With the election of Donald Trump as President of the United States, his pledge to renegotiate or discard the North American Free Trade Agreement (NAFTA) may be a key element of his economic policy. Some of the states where he performed better than expected, including Pennsylvania, Michigan, and Ohio, are termed “Rust Belt” states. These states have seen their manufacturing sectors shrink significantly since the 1980s, which some economists blame in part on NAFTA and trade with other countries.

a. If NAFTA is discarded, and tariffs are increased on products from Mexico, Canada, and other countries, what would be the effect on producers in the United States that competed with foreign competition? In your response, consider the effect of tariffs on prices and producer surplus. (6 points)

b. Can increasing tariffs actually help the US economy overall? Explain. (6 points)

c. Will discarding NAFTA necessarily hurt the US economy? Explain. (5 points)

Answer 1

1. a) The exporting manufacturers are capable to sell their product at a higher price while taking the gains from importing goods by employing voluntary export restraint on the other hand the advantages/gains will be taken by the importing government (in this case it is USA) by way of tariff revenue if the tariff is imposed. So, a tariff is better than a VER as the US makes the gains from importing goods and thus is less damaging to the United States.

b) Imposing a tariff high enough to cut bulldozer imports by 60% would have the same effects on total surplus for the foreign bulldozer manufacturers as a voluntary export restraint arrangement to cut exports of bulldozers to the US by 60%. But If the tariff is adjusted quite a few times in order to bring trade down by 60%, then in that case the tariff will possibly cause more damage for the period of the adjustment, then VER will be less damaging to foreign bulldozer manufacturers.

   c) As the tariff creates tax revenue for the government, which is not in case of voluntary export restraint,                thus tariff would be most beneficial for the United States’ government .