Will Geist

International Trade
Exam 2, Part 1
10/30/13

1. See graph 2
a. In the absence of international dumping, ABC Inc. maximizes profits by selling 27
calculators at a price of $5, resulting in a total profit of 135.
b. Of this quantity, ABC Inc. sells 21 calculators in Canada and realizes revenues totaling
105 and sells 6 calculators in France and realizes revenues totaling 30
c. With international dumping, ABC Inc. sells 15 calculators to Canadian buyers at a price
of 7, and 12 calculators to France at a price of 4.
d. Compared with the total revenue and total profit that ABC Inc. realizes in the absence of
dumping, with dumping the firm attains a rise in revenue of 18, from 135 to 153, and a
rise in profit of 18
e. I think that dumping is a practice that has both positive and negative implications. On
the negative side, dumping can be anticompetitive, with firms aiming to gain a
monopoly by selling their product at cutthroat prices to prevent entry of potential
competitors and starve import-competing producers, then raising the prices to offset
any losses that are incurred during cutthroat pricing. This can be combated by placing
antidumping regulations. However, these regulations, while leveling the playing field by
offsetting artificial sources of competitive advantage, they can be seen as unfair because
they punish firms that are acting in a manner typical in competitive markets, where
firms price their goods at average variable cost.
2. A higher tariff is imposed on cheap goods, as opposed to luxuries. This inflicts the most severe
costs on the low income segments. Tariffs also place a burden on domestic exports. Although
importers have to pay duties to the government, they shift the cost the cost to buyers in the
form of a price increase. This places a burden on domestic exporters. This increases the costs of
inputs, resulting in higher prices and reduced exports. It also increases the cost of living,
resulting in in higher costs for wages and production, reducing international competitiveness.
There are also international repercussions, such as a foreign nation placing a retaliatory tariff,
reducing domestic exports.
3. The idea of tariffs saving domestic jobs is that by placing a tariff on imported goods, you make
domestic producers more competitive because the importers place the cost of the tariff onto
the consumer by raising the price. By making the imported goods more expensive, you increase
the overall cost consumers pay, which decreased overall consumption, but raises the number of
domestically produced items. However, there are a few things you need to take into
consideration before you can say that tariffs are an effective way of saving jobs. One thing you
need to consider is the cost associated with saving each job. Protectionism comes with
deadweight loss, which is a loss in overall welfare that nobody benefits from. Another argument
against protectionism like tariffs is that the repercussions might have international implications,
like a country placing a retaliatory tariff, resulting in a reduction of domestic exports.
4. The argument of tariffs protecting against cheap foreign labor is that because the a country like
the US has higher wages, it is harder for domestic producers to compete with the cheap labor in
places such as China. This price difference makes domestic producers uncompetitive on the
foreign market, resulting in decreased exports and increased imports. One critical thing that is
often forgotten in this argument is labor efficiency. Even if one labor hour might be expensive in
the US, it can produce a much larger output, increasing competitiveness of domestic exports.
Another thing to think about with this argument is that low wage nations more often have an
advantage in goods that require higher labor costs, with cheaper inputs. Total cost is what
matters in the end, not just the cost of labor.
5. The ideas of domestic content requirements are to provide pressure to domestic and foreign
firms to use domestic inputs in the content of their products. The intent is to prevent the
downward pressure on the wages of domestic producers that occurs when a producer
outsources the components of production, such as labor, in the name of lower costs. However,
by setting domestic content requirements, producers argue that they are not allowed to obtain
inputs at their lowest cost, raising their overall cost, resulting in higher prices and loss of
competitiveness. On an international level, this can result in reduced exports due to higher cost
of production and foreign prices.
6. The conventional trade theory assumes perfect markets while the theory of multinational
enterprises assumes imperfects markets. The biggest thing that changes when you look at the
theory of multinational enterprises is that it accounts for factor mobility, which is not
considered in conventional trade theory. With multinational enterprises, overall welfare of
source and host countries are improved. In companies that are integrated vertically, you can see
a lot of intra-firm sales. With multinational enterprises, you can silence the critics of imported
goods that criticize a good for not being manufactured domestically. You also can gain access to
new markets that are unsaturated, reduce the cost of transportation, increase total production
capacity, avoid import barriers, and provide a hedge against fluctuations in international
exchange rates.
7. Tariffs and quotas are both intended improve the number of domestically produced items. A
tariff accomplishes this by making importers pay a tax on the goods they import. The cost
ultimately falls not only on the importer, but onto the consumer in the form of raised prices. A
quota places limits on the total amount that can be imported, and the burden of cost falls
mostly on the companies that are importing products, although overall cost of the product rises,
and consumption falls, but the amount of domestic production rises and the ratio of domestic
products to imports increases. Although they often have similar effects, they are achieved with
costs being placed on different people. Tariffs are often frowned upon by exporting producers,
while quotas are a more tactful way of controlling mass imports.
8. See graph 2
a. Venezuela imports 20 calculators, produces 4 domestically, and consumes 24 in total
b. After the subsidy, consumption remains at 24, but domestic production goes up to 8,
while imports drop to 16.
c. Total cost to the government is 32.
d. Producer surplus rises from 8 to 32, an increase of 24.
e. Total welfare loss of 16.