Bài tập tính toán thuế (English ver)

International Trade Policy Phan Thu Thuy - 2013150048 Economic analysis (cost-benefit analysis) of tariff Question 1. Home’s demand curve for wheat is D = 100 − 20P. Its supply curve is S = 20 + 20P. Derive and graph Home’s import demand schedule. What would the price of wheat be in the absence of trade? Answer: The equation of import demand is: MD(P) = D(P) − S(P) = (100 - 20P) - (20 + 20P) = 80 − 40P The absence of trade means that import demand is zero, which happens at P = 80/40 = 2. We have the graph of trade market for wheat as follows: Question 2. Now add Foreign, which has a demand curve ∗ D = 80 − 20P, and a supply curve International Trade Policy Phan Thu Thuy - 2013150048 ∗ S = 40 + 20P. a. Derive and graph Foreign’s export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade. b. Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equilibrium under free trade. What is the world price? What is the volume of trade? Answer: a. Foreign’s export supply curve is given by: ∗ ∗ ∗ XS (P) = S (P)− D (P) = −40 + 40P. ∗ The absence of trade means that export supply equals zero, which occurs at P = 1. b. When Foreign and Home are allowed to trade, there is no distortion in prices so we w ∗ have a common world price of P = P = P . To find the equilibrium, we set import demand equal to export supply giving: ∗ MD(P) = XS (P∗) w w ⇒ 80 − 40P = −40 + 40P w ⇒ P = 1.5 ∗ At this common price, we have MD(1.5) = XS (1.5) = 20. International Trade Policy Phan Thu Thuy - 2013150048 Question 3. Home imposes a specific tariff of 0.5 on wheat imports. a. Determine and graph the effects of the tariff on the following: (1) the price of wheat in each country; (2) the quantity of wheat supplied and demanded in each country; (3) the volume of trade. b. Determine the effect of the tariff on the welfare of each of the following groups: (1) Home import-competing producers; (2) Home consumers; (3) the Home government. c. Show graphically and calculate the terms of trade gain, the efficiency loss, and the total effect on welfare of the tariff. Answer: a. A wedge to be placed between prices seen between the two countries is resulted from the tariff, thus we have: ∗ P = P + 5. We set export supply equal to import demand: ∗ MD(P∗ + 5) = XS (P∗) ∗ ∗ ⇒ 80 − 40(P + 0.5) = −40 + 40P ∗ ⇒ P = 1.25 ⇒ P = 1.75 At these prices, we have quantity of wheat supplied and demanded in each country as follows: Home (P = 1.75) ∗ Foreign (P = 1.25) Supply Demand 55 65 65 55 The volume of trade is: ∗ MD(1.75) = XS (1.25) = 10 International Trade Policy Phan Thu Thuy - 2013150048 The effects on the trade market: b. (1) Home import-competing producers: better off as they have less foreign competition, which means both price and quantity of good produced domestically increases. (2) Home consumers: worse off as they now have to pay a higher price. (3) The Home government: benefits given that they now have additional tariff revenue. c. Terms of trade gain and efficiency loss for large country with tariff is illustrated as follows: International Trade Policy Phan Thu Thuy - 2013150048 We can see from the figure that the areas that were referred to in the answer. Producers gain area a, consumers lose areas a, b, c, d, and the government receives tax revenue c and e. Before the tariff, total trade was 20 bushels of wheat, but now it is 10. The height of both triangles b and d is 0.25. Therefore, we have: b + d = 1/2 × (20 − 10) × 0.25 = 1.25 e = 10 × 0.25 = 2.5 ⇒ e − b − d = 1.25 Therefore, the overall welfare effect is positive. These numbers also demonstrate the efficiency loss and the terms of trade gain. Efficiency loss is defined as the loss caused by the tariff in the market, or triangles b + d = 1.25. The terms of trade gain is defined as the additional gain created by the distortion on the market, or rectangle e = 2.5. Question 4. Suppose that Foreign had been a much larger country, with domestic demand ∗ ∗ D = 800 − 200P, S = 400 + 200P. (Notice that this implies that the Foreign price of wheat in the absence of trade would have been the same as in problem 2.) Recalculate the free trade equilibrium and the effects of a 0.5 specific tariff by Home. Relate the difference in results to the discussion of the small country case in the text. Answer: Export supply of the larger foreign country is: ∗ XS (P) = −400 + 400P ⇒ The free trade equilibrium is: MD(Pw) = XS(Pw) w w ⇒ 80 − 40P = −400 + 400P