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ECON 335

Section A

Answer the following in 250 words or less.

1. How effective was the “$12 Billion Program to Help Farmers Stung by Trump’s Trade War” according to the assigned article?

This program was meant to pay farmers for the loss of international markets in China for US farm products caused by retaliatory tariffs by China in response to US imposed ones.

Problems with the handout had to mainly do with red tape and bureaucracy but also most farmers feel “payments have not come close to making up for the damage for the tariffs”. The article talks about how the farmers prefer free enterprise to government handouts.

A pitfall with all tariffs and protectionist policies in general, is the system being misused. For example, city residents who own shares in farms but are not farmers themselves, so probably have other jobs and incomes, and relatives of farmers, have been taking advantage of the bailouts. The article provides the example of the dad-son duo of the Iowa firm as a case in point. The article also talks about overproduction as a problem stemming from such programs as has happened in the past (state examples from the article).

2.  Why is it difficult to determine whether a country is dumping? Explain fully.

According to the WTO rules, dumping occurs when an exporter sells a product at a

price below what it charges in its home market. It is not always possible to compare the home

market and foreign market prices, however, and wholesalers, transportation costs, and other price add-ons may limit the comparison's usefulness. Two other measures may be used. Comparisons

can be made between the price in the import market and either the price charged in third-country

markets, or to an estimate of the cost of production. Comparison to prices in third-country

markets is similar to that between prices in the exporter's home market and the importer's market,

and it may be uninformative for the same reasons. A comparison of the import price and the

estimated cost of production, including a normal rate of return on invested capital, assumes that

production costs in an exporting country can be measured with accuracy. Thus it is difficult to

determine when a country is dumping, and many elements of this determination are somewhat

subjective.

3. How can regional concentration of firms in an industry lead to external economies of scale?

Give examples of these types of industrial clusters in the United States. Are they always

beneficial?

Answer: When an industry is highly concentrated in a specific location, this leads to a decrease

in costs for firms that are located there regardless of their individual size. Close physical

proximity enhances knowledge spillovers that keep all firms abreast of the latest technology and

newest developments. Information can be exchanged through both formal and informal

networks, and this is particularly important in frontier industries undergoing rapid technological

change. Labor markets deepen for highly specialized skills, which reduces search costs and gives

firms a choice of workers with the best skills. Dense networks of highly specialized input

suppliers can also develop. All of these function to enhance production and to reduce costs.

Hollywood, Silicon Valley, Nashville, and many other examples of industrial concentration exist

in the United States. A potential problem for world trade is that an industrial cluster may develop

and prevent potentially more efficient foreign producers from entering a market. These regional

concentrations become self-reinforcing. Small initial differences in costs lead to feedback

mechanisms that create large differences in costs based on production location. Hypothetically, a

region could get an early advantage, form an agglomeration, and the cost advantages may

prevent the development of the industry in another location that could have been more efficient.

Production is thus concentrated with the less efficient producer because the more efficient

producer never has the chance to get off the ground.

4. The assigned article by Mastel, “Keep Anti-Dumping Laws Intact,” identifies several practices in exporting countries that, he says, justify the use of anti-dumping duties. What are some of these practices, what countries does he identify as using them, and in what sectors?

Ans: Practices: industrial policies, market collusion, government pricing, and sanctuary markets

Countries: Japan, Korea, and Brazil

Sectors: steel, semiconductors and automobile

 

Section B

Question 1

 

The figure shows hypothetical supply and demand curves for wine in Belgium, which is assumed here to be a small country. In the initial situation (ignore the dashed line D’ until the next page), the world price of wine is Pw1, the Belgian demand curve is the solid line labelled D, and Belgium has free trade in wine. Use the labels in the figure, or your choice of the highlighted words as appropriate, to answer the questions below:

a. At the initial world price Pw1:

How much wine does Belgium export and import respectively? Ans: 0 and Q4–Q1

Does Belgium as a whole gain or lose from trading wine (compared to autarky), or can’t you tell?  Ans: gain

b. Suppose now that Belgium uses a tariff of size t that raises the price in Belgium to the level Pw1+t shown. (Indicate + or − along with the amount, where appropriate.)

Is t ad valorem or specific? Ans: specific because it is an absolute amount charged per unit of the good.

How much wine does Belgium now import? Ans: Q3–Q2

How much do Belgian wine suppliers gain or lose from this tariff? Ans: +b

How much revenue does the Belgian government collect? Ans: +d

How much does Belgium as a whole gain or lose? Ans: – (c+e)

 

c. Suppose now that the Belgian taste for wine improves, shifting the demand curve to the

right to position D’ as shown (parallel to D). In the continued presence of the tariff, t, record below the change due to this shift in each of the following. (Indicate + or − along with the amount, where appropriate.)

Change in Belgian imports of wine: Ans: + Q4–Q3(=Q5–Q4)

Change in welfare of Belgian wine suppliers Ans: 0

Change in the budget of the Belgian government (the

tariff revenue)  Ans: +(e+i)

d. How has the shift in demand in part (c) changed the dead weight loss due to the tariff? Has it caused the dead weight loss to increase, decrease, or remain unchanged?

Ans: Unchanged

1. If politicians decide to proceed with protection, why might economists prefer tariffs to

quotas? Explain at least three reasons.

Answer:

• The greater welfare loss from quotas since quota permits are not generally sold

• The inability of quotas to respond to increases in domestic demand except through higher

prices and increased producer surplus. With tariffs, the volume of imports simply adjusts to

changing market conditions and market prices are less volatile.

• Tariffs are more transparent and probably less costly to administer.

• Tariffs favor the most efficient foreign producers. They don't arbitrarily limit entry or

discourage innovation by foreign firms (but they do for domestic firms, meaning we are creating

a situation that rewards foreigners for being innovative and efficient.

Question 1

Discuss the advantages and disadvantages of agricultural subsidies in high income countries using appropriate diagrams.

Answer:  Answers should relate the comparative advantage of developing economies in the farm sector to trade and discuss why developed countries choose to protect these sectors.

Subsidies given by high-income countries to support their farmers lead to cheaper world food prices, all other factors being equal. This benefits some countries where there is a large urban working class. For example, many young Chinese farmers have migrated to the cities where they work in factories. Given that the productivity of these individuals in agriculture is very low, the country as a whole gains when they become city dwellers and factory workers, while cheaper food makes life easier and raises living standards. As a result, agricultural subsidies in high-income countries benefit China and some other developing countries. Also, countries often have cultural reasons to protect agriculture, including its role in the history of the country and worries about self-sufficiency.

Disadvantages include the effect on competing exporter economies. Using examples (like the cotton subsidy example in week 11) and diagrams (the standard subsidy diagram seen in slides in class) students should explain the main disadvantages to net exporting nations of these subsidies.

Better answers will discuss the implications for multilateral negotiations and the role of trade in development.