Trade Problem Set 90 2-3

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

	I Export Subsidy by a Large Country	II Export Tax by a Small Country initially in Free Trade
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

 

International Trade Theory and Policy - Chapter 90: Last Updated on 1/06/08