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Homework answers / question archive / Represent and explain the following trade policies: 1
Represent and explain the following trade policies:
1.) import tariff
2.) Voluntary Export Restraint (VER)
3.) export subsidy
in a general-equilibrium setting. Consider both the cases of small and large economies.
1. Import Tariff: An import tariff is a tax imposed on foreign goods by the country receiving the product. This fee is levied on importers and usually passed on to consumers. Import tariffs increase the price of goods, therefore, lowering demand. Import tariffs may be used to increase revenue to the government and/or to subsidize the domestic production of competing goods. Import tariffs effect supply and demand equilibrium by decreasing demand for products with an increase in price.
2. Voluntary Export Restraint: Voluntary export restraint occurs when a country limits the number of goods it will ship as exports to foreign countries. This will reduce the supply available in those countries likely to increase the price at which the products can be sold. The exact effect on price will depend on competitive production capacity and demand. This will also increase the availability of goods available for domestic purchase increasing local supply. Local prices for these goods will likely decrease in response to the restraint. Overall, domestic equilibrium is effected with higher supply and foreign equilibrium is effected with lower supply.
3. Export Subsidy: An export subsidy aims to bolster foreign sales of goods while decreasing domestic supply. These subsidies will provide economic benefit to organizations shipping goods to foreign markets and/or levy taxes and fees on organizations selling the goods domestically. Equilibrium is shifted with an increase in foreign supply and a decrease in domestic supply. Foreigners will likely pay lower prices for these goods while domestic customers will pay higher costs.