Wk7: Tues., 2/24/2015
Today
•Analysis of Tariffs
– Small country vs. large country
– Terms of trade effect

Thursday
•NTBs: Nontariff Barriers
– Diversity of instruments and effects
– Quotas
– Quota Revenue

Outline
•
•

Definition of Tariffs
Use: Revenue or Protection?

•

‘Small’ vs. ‘Large’ Country in World Trade

•

Graphical Analysis of Tariff
–
–

Small country case
Large country case

What is a Tariff?
• Tax on traded products
–

Tax on imported good; tax on exported good

• Specific (amount per unit)
–

ts = amount per unit ($.50 per gallon)

–

P + ts

• Ad Valorem (percent of value)
–

ta = percent of value (5 % of value)

–

P + ta P = (1+ta) P

Importance as Revenue Source

United States
1789-1850
1900
1990s

Tariff Revenue as %
Of Total Revenue
90-95%
50%
1-2%

Tariff Revenue as % Of Total Revenue
Various countries, Circa 1994

•
•
•
•
•
•

United States
Japan
1.24
Sweden
Norway
Denmark
United Kingdom

1.55
.84
.51
.05
.08

•
•
•

China
25.37
India
20.74
Pakistan

•
•
•
•
•

Lesotho
51.75
Belize
47.96
Guinea
Dominican Republic
Gambia
42.04

23.28

47.43
43.68

Effects of Tariff
Positive Analysis
– Impact on Pd, Qd, Qs and M
– Revenue consequences for government
– Possible impact on Pw

Normative Analysis
– Impact on the well-being of Consumers,
Producers, the Nation as a whole

Defining ‘Small’ and ‘Large’ Country in
International Trade

Large Country in Trade
AUTARKY

Price

Sd

Price

foreign
Sf

Pd
Dd
Q large nation

P*
Df
Q rest of world

Small Country in Trade
AUTARKY

Price
Pd

Price

S

Sf

D

P*
Q
small nation

Df
Q
foreign or rest of world

Tariff Analysis
Small Country Importing Freely

Small Nation: Free Trade
Price
$540

Sd

Pd=$300
210

P*
Dd
0.6

1.6

omit

Q (mill. bikes)

Small Nation Sets t = 10%
P
$540

Sd

Pd’=$330
Pd =$300
210

$300+$30
P*

Dd
0.6

1.6

Q

Domestic Output Expands
P
$540

Sd

$330
$300
210

$300+$30
P*

Dd
QS QS’

QD

Q

Domestic Consumption Falls
P
$540

Sd

$330
$300
210

$300+$30
P*

Dd
QS QS’ QD’ QD

Q

Imports Shrink to M’
P
$540

Sd

$330
300
210

$300+$30
P*

Dd
QS QS’ QD’ QD
M’

Q

Tariff Revenue Increases
P
$540
$330
300
210

govt collects $30 on each foreign bike
Sd
c

$300+$30
P*

Dd
QS QS’ QD’ QD
M’

Q

Tariff Revenue Collected
P

Area c is $30 x iMports

$540
$330
300
210

Sd c $300+$30
P*

Dd
QS QS’ QD’ QD
M’

Q

Positive Effects of Tariff
SMALL COUNTRY CASE
• Increases Pd
• Increases QS
• Lowers QD
• Lowers iMports
• Raises Tariff Revenue

Normative Effects of Tariff
Focus on impact on three groups: consumers producers nation Consumer Surplus Before Tariff
P
$540

Sd

Pd=$300
210

P*
Dd
recall

0.6

1.6

Q (mill. Bikes)

Consumer Surplus After Tariff
Area Has Shrunk to Smaller Triangle
$540

Sd

Pd’=$330
Pd =$300
210

$300+$30

Dd
0.6

1.6

P*

Q (mill. Bikes)

Consumer Surplus After Tariff
P

Lost Amount is a+b+c+d

$540
Pd’=$330
Pd =$300
210

Sd a b

c

$300+$30

d

P*

Dd
QS QS’ QD’ QD

Q (mill. Bikes)

Producer Surplus Before Tariff
P
$540

Sd
$300+$30

Pd =$300
210

P*

Dd
0.6

1.6

Q (mill. Bikes)

Producer Surplus After Tariff
Area Has Increased to Larger Triangle
$540

Sd

Pd’=$330
Pd =$300
210

$300+$30

Dd
0.6

1.6

P*

Q (mill. Bikes)

Producer Surplus After Tariff
Amount of increase is area a
$540
Pd’=$330
Pd =$300
210

Sd a b

c

d

$300+$30
P*

Dd
QS QS’ QD’ QD

Q (mill. Bikes)

Normative Effects of Tariff
SMALL COUNTRY CASE
• Consumers Loss
• Producers Gain
• Govt Revenue
NATION

Area - (a + b + c + d)
Area + a
Area
+c
Area
-b
-d

TARIFFS FOR SMALL NATIONS UNAMBIGOUSLY
HARMFUL TO LIVING STANDARDS

Source of Losses
‘Deadweight’ Losses
• Triangle d – consumption efficiency loss
• Consumer surplus lost/self-imposed loss

• Triangle b – production efficiency loss
• Value of domestic resources wasted in production of extra units of domestic output; this loss is
Cost of extra
Initial cost of the domestic output replaced imports

-

If time remaining:

Tariff