Econ 331: International Trade Homework 4

Econ 331: International Trade Homework 4

Subject: Economics    / Accounting
Question

Consider a world with two countries, H and F. H is the importer of a homogeneous good produced by perfectly competitive firms and F is the exporter (so
both countries are “large”).
1. Draw 3 graphs, one for H and one for F and one for the world market, that
illustrate the free trade equilibrium. Make sure that the graphs include
quantities demanded and supplied at the free trade price. Make clear how
much H imports and how much F exports.
2. Suppose that H imposes a tariff of size t on imports from F. Show on
one graph how this tariff affects consumer surplus, producer surplus and
government revenue in H. Draw the graph so that H is better off because
of the tariff and make clear why this is so. Show on a separate graph, how
the tariff affects welfare in F. Indicate how consumer surplus and producer
surplus in F has changed
3. Now suppose instead that F puts a tax on its exports to H (for every unit
sold abroad, the exporter has to pay a tax of T). How does the export tax
affect the price paid by consumers and producers in H? Explain.
4. How does the F’s export tax affect welfare in F? Show using a diagram
that makes clear what has happened to F’s exports, its consumer surplus,
its producer surplus, and government revenue.