Suppose that Country X subsidizes its exports and Country Y imposes a “countervailing” tariff that offsets...

Suppose that Country X subsidizes its exports and Country Y imposes a “countervailing” tariff that offsets the subsidy’s effect, so that in the end, relative prices in Country Y are unchanged. What happens to the terms of trade? What about welfare in the two countries? Suppose, on the other hand, that Country Y retaliates with an export subsidy of its own. Contrast the result.

Expert Solution

Suppose Country X subsidizes its exports and Country Y imposes a countervailing tariff which offsets the subsidy's effect. Since the prices of both the countries change by the same amount, the ratio of the prices, which is the terms of trade remains unaffected. However, the welfare of the countries falls since a cheaper good is expensive in country Y and despite providing subsidies, country X cannot gain the benefit of increased exports.

Now, if country Y retaliates, the terms of trade will remain the same but the volume of trade will fall significantly if both the countries are large countries. However, if X is a small country then the term of trade will move in favor of country Y.

The contrast to the result is that the first situation's outcomes are independent of the country being large or small. In the second case, what happens to terms of trade highly depends up on the size of the countries.

Rahul Sunny answered 1 year ago

Assume that country X subsidizes its exports and country Y imposes a countervailing tariff that offset...

Assume that country X subsidizes its exports and country Y imposes a countervailing tariff that offset the subsidy. Explain why the relative prices in country Y would be unchanged. Discuss the welfare effects in the two countries. What would be the effect if country Y retaliates with an export subsidy but without countervailing tariffs on the product?

A country imposes a tariff on imports from abroad. How does this action change the long-run...

A country imposes a tariff on imports from abroad. How does this action change the long-run real exchange rate between the home and foreign currencies? How is the long-run nominal exchange rate affected? Will this import restriction necessarily improve the home country’s trade balance in the long-run? Explain carefully.

Suppose we refused to sell goods to any country that reduced or halted its exports to...

Suppose we refused to sell goods to any country that reduced or halted its exports to us. Who would benefit and who would lose from such retaliation? Can you suggest alternative ways to ensure import supplies? Are there any particular imported commodities that you or your firm rely on? What has happened to the supply of these imports over the years?

Suppose that a large country experiences growth strongly biased towards its exports A. this will have...

Suppose that a large country experiences growth strongly biased towards its exports A. this will have no effect on the country's terms of trade. B. this will tend to improve the country's terms of trade. C. this will tend to improve the terms of trade of the country's trading partner. D. This will have no effect on the terms of trade for the country's trading partner.

Suppose that OPEC cartel imposes an embargo on oil exports to the US, which causes global...

Suppose that OPEC cartel imposes an embargo on oil exports to the US, which causes global oil prices to double that forces the domestic gas prices to rise to $5 per gallon. Thus, to make gasoline more affordable for American consumers the US Government decides to impose $3 price ceiling on it at the retail level. What would be the economic consequences of such government intervention in the market mechanism? What alternative rationing mechanisms will the market have to resort...

Suppose USA is a small country in sugar market. At present, there is no tariff on...

Suppose USA is a small country in sugar market. At present, there is no tariff on sugar import. However, beginning January 2015, the U.S. government starts levying 10 % tariff on sugar import. Using an appropriate graphs explain what happens in the U.S. sugar market? Who gains, who loses and what will be overall welfare effect?

8. Illustrate the following – Country A imports capital intensive good Y (Y axis) and exports...

8. Illustrate the following – Country A imports capital intensive good Y (Y axis) and exports labor intensive good X (X axis) since this country is labor abundant. Now there is a huge influx of cheap labor into this country making the production of the labor intensive good very efficient. Clearly show the Rybcynzki effect and the immiserizing impact of growth in this large supplier of good X ! 9. Given a small country, compare the impact of “balanced” (growth...

Suppose we have a large country that seeks to impose a tariff on products in the...

Suppose we have a large country that seeks to impose a tariff on products in the hopes of achieving a welfare gain as well as provide protection for its domestic industry. If the elasticity of export supply function is 0.04. First what is the optimal tariff that can be imposed that would provide for such welfare improvements? Second, in practice why might this country not find it optimal to implement this tariff?

Country X and country Y both produce bicycles and sweaters. In country X each worker in...

Country X and country Y both produce bicycles and sweaters. In country X each worker in a day can produce either 5 bicycles or 20 sweaters. In country Y each worker in a day can produce either 3 bicycles of 18 sweaters. Each country has constant opportunity cost of production and each has 100 workers. Enter whole numbers in each blank. In country X the opportunity cost of producing one bicycle is ____ sweaters and in country Y the opportunity...

Suppose Mexico imposes a tariff on imports. Import Prices increase from Pw to Pt= Pw+t Using...

Suppose Mexico imposes a tariff on imports. Import Prices increase from Pw to Pt= Pw+t Using a graph explain the following A)What are the effects of imposing a tariff on Consumer Surplus? B)What is the effect of imposing a tariff on Producer Surplus? C)What is the effect of imposing a tariff on Government Revenues? D)What is the overall effect of the tariff? E)Do you think imposing high tariffs is a good idea? Why?

Question