Problem Set 90-3

Trade Problem Set 90 2-2

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1. Consider the following trade policy actions (each applied by the domestic country) listed along the top row of the following Table. In the empty boxes, use the following notation to indicate the effect of each policy on the variables listed in the first column. Use a partial equilibrium model to determine the answers and assume that the shapes of the supply and demand curves are "normal". Assume that none of the policies begin with, or result in, prohibitive trade policies. Also assume that none of the policies correct for market imperfections or distortions. Use the following notation:

+   the variable increases
-   the variable decreases
0   the variable does not change
A   the variable change is ambiguous
        (i.e. it may rise, it may fall)

For example, an import quota applied by a large country will cause an increase in the domestic price of the import good, therefore a + is placed in the first box of the table.

I
An Import Quota by a Large Country initially in free trade

II
Import Tariff Reduction by a Large Country

Domestic Market Price

+

Domestic Industry Employment

Domestic Consumer Welfare

Domestic Producer Welfare

Domestic Government Revenue

Domestic National Welfare

Foreign Price

Foreign Consumer Welfare

Foreign Producer Welfare

Foreign National Welfare

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