Economia Integrarii Europene - Radu Nechita 2

© R.Baldwin & C.
Wyplosz
Teaching/Studying Presentation
Baldwin & Wyplosz
The Economics of European
Integration
•Chapter 4: Basic Economics of Preferential Liberalisation
“A careful presentation of the Open

Economy Supply and Demand Diagram
(Figures 4-1 to 4-3 Chapter 4)”
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Slide Show pull-down menu) and use either the arrow keys or
click the mouse to proceed
© R.Baldwin & C. Wyplosz
The MS-MD Diagram: The International Market

euros •The
•The Theimport
import demand
equilibrium
supply curvecurve
price of shows
shows thethe
imports volume
volume
and quantityof imports
of imports thatthat
of imports Home
will
are be demands
indicated
offered by at
at any
the
anypoint
given price.
“A”.
ForThe For example: price (called the market clearing price) is pFT. The
corresponding
given
• if
price.
the price is
example:
p’”, then Home •The
would import
like to supply
import m’”. (MS) and import
• if the price is p’, then
corresponding foreign
quantity firms would
of imports is m like
FT . to export m’ to Home.
• if the
• if the price
Theprice is p””,
is p”, then
equilibrium then Home
foreign
price would
demand
is pFTnations like
becausewould to
(MD)
at this import
like
price, m””amount
todiagram
export
the m” has price
foreign firms wish
• The
• The toMSMD
sell tocurve
curveHomeis isisdownward
upwardjust equal
slopedsloped
tosince since
(measured
the amount
higher a higher
prices
that pricewants
in euros)
Home
make makes
on thetoHome
foreign firms
buy. want
want to
vertical to
import
sell moreless.
to Home. axis
p’” •And the quantity of importsMS
on the
p”” A axis
horizontal
pp”
FT
p’ Import
supply curve
MD
Import demand
Imports curve
mFT
m’ m”’ m”” m” imports
The MS-MD Diagram: The International Market

euros
MS
pFT
Import
supply curve
MD
Import demand
Imports curve
mFT imports
Open Economy Supply & Demand Analysis: The Home Market

The price pFT
euros Sdom indicates the price
This
At pFTis, the
Homesupply
consumers
atimport
which curve ofbuy
foreignHome
a
When the price of imports is pFT as Without trade barriers, the price fixes the Home
firms. It is
quantity ofupward
goods equal
sloped
to since
C. firms
shown here, Home firms supply a market price; because when firms are
the importwilling
price is pto
wish to sell more when prices are
FT, the
quantity of goods equal to Z. total supply curve in the Home market is the kinked
high. supply imports.
line shown. The first Z units of supply are made by
Home firms. The rest is imported.
Demand and supply thus meet at point B.
The level of imports
equals the difference B
pFT
pFT between Home
This is the demand curve of Home
consumption and
consumers. It is downward sloped
Home production.
since consumers wish to buy more
when prices are low. Ddom
Imports
Z C quantity
Open Economy Supply & Demand Analysis: The Home Market

euros Sdom
pFT
Ddom
Imports
Z C quantity
Putting together the diagrams

The level of imports can be seen
directly
For in the
instance left-hand
if the world panel,
price or
euros Here
indirectly in we
the put the two panel
right-hand diagrams The reason is that the horizontal
were p’, Home
There would
are a fewwish to
features euros
of this difference between Ddom and
as the together. This
horizontal is very useful when
difference
import m’. Click
diagram 5that
timesyoutoshould
see know. dom Sdom at anySworld
dom price always
between studying
D dom the
and S effects
dom .
that the indicated import level is
of changing a D
trade barrier. We first see how the equals the level of imports
the same in both panels. indicated by the MD curve (this
change alters the border and domestic
prices in the left panel and then use the is how the MD curve was
right panel to see the impact of the constructed).
price changes on the MS Home market.
p’
pFT pFT
m’ m’ m’ m’ m’
MD
mFT
imports quantity
mFT Z C
Chapter 4:Figure 3
Border price, Domestic price,
euros euros
Ddom Sdom
MS
pFT pFT
MD
mFT
imports quantity
mFT Z C
Baldwin & Wyplosz
Integration
“A careful presentation of the Positive
Effects of an MFN Tariff in the MS-MD
diagram”
!!! This is not in the book, but it will help
you understand the MS-MD diagram
Positive Effects of an MFN Tariff

euros 1.We now use the diagrams to study the positive
euros effects) of a tariff
effects (i.e. price and quantity Sdom
2.We start by supposing
that initially no tariff is
imposed.
MS
PFT
With no tariff, the

equilibrium price is PFT and
MD the equilibrium imports is
mFT. Ddom
imports quantity
mFT Z C

Border price,1. Now we impose Domestic price,
euros a tariff equal to “T” euros
2. Imposition of a tariff by Sdom
Home drives a “wedge”
between the price in the
Home market and the
price received by foreign
firms exporting to Home.
T This is to say …
MS
PFT
MD
Ddom
imports quantity
mFT Z C

Border price, 1. Due to the tariff wedge
Domestic price,
euros T, the Home price (also
euros
called the domestic price) Sdom
is higher than the price
foreign firms receive (also
called the ‘border’ price);
the difference is exactly T.
T
MS
PFT
MD
Ddom
imports quantity
mFT Z C

Border price, 2. To make this clear,
Domestic price,we
euros call theeuros
domestic price P’
and the border price P’-T. Sdom
P’
MS
PFT
P’-T
MD
Ddom
imports quantity
mFT Z C

1. We know
Border price,that P’ and P’-T are the Domestic price,
equilibrium prices since the market for
euros euros
imports clears at these prices. Sdom
More precisely, at P’ Home wishes
to import m’ and at P’-T foreigners want to
sell m’ to Home.
m’
P’
MS
PFT
P’-T
MD
Ddom
m’ mFT
imports
Z C
quantity

1. The
Border price, Notice
tariff
thatraises
the the
Domestic price,
euros domestic price and
.. border
euros
price move in opposite Sdom
directions.
2.That
but is
lowers
to saythe... border
price
P’
MS
PFT
P’-T
MD
Ddom
m’ mFT
imports
Z C
quantity

1. Now consider the impact of the
domestic price rise on Home
euros euros
production and consumption.
Sdom
2. The rise in the Home

P’ price from PFT to P’ causes
Home firms to expand
production to Z’ and
MS
Home consumers to
PFT
P’-T reduce consumption to C’.
MD
Ddom
m’ mFT
imports
Z Z’ C’ C
quantity
Chapter 4
euros euros
Sdom
P’
T MS
PFT
P’-T
MD
Ddom
m’ mFT
imports
Z Z’ C’ C
quantity
Baldwin & Wyplosz
Integration
“A careful presentation of the Welfare
Effects of an MFN Tariff in the MS-MD
diagram”
NB: This analysis does not exactly follow
the book, but it explains the results in
diagram 4-5
Normative Effects of an MFN Tariff

NB: Mouse click or use arrow keys to advance
1. Next we consider the “welfare” or “normative” effects of T, i.e., we see who
gains and who loses from T.
2. We start with the effects on Home.
3. Intuitively, it is easy to believe that the domestic price increase
(i) hurts consumers,
(ii) helps producers, and
(iii) raises government revenue.
4. More specifically ...

Border
1. The greyprice,
area is the loss of consumerDomestic
surplus due
price,
euros
to the FT to P’.
tariff-induced price rise from P euros
Sdom
2. Consumers lose for 2 reasons.
3. (i) They pay a higher price for

the goods they continue to buy
P’
(this loss equals the blue rectangle P’
defined by the price hike times MS
E A
F G
consumption C’). PFT
P’-T
4. (ii) Consumers also lose MD

because they consume less. This Ddom
part of the loss corresponds to the
green triangle.
m’ mFT
imports
Z Z’ C’ C
quantity

5. The grey area, E, is the
gain in producer surplus
euros euros
due to the tariff-induced
price rise from PFT to P’.
Sdom
6. Home producers gain for 2

reasons. (i) they get a higher price
P’
for the quantity of goods they P’
used to sell (this gain equals the MS
blue rectangle defined by the PFT
P’-T
price hike times Z).
7. (ii) they also gain because they MD

sell more. This part of the gain Ddom
corresponds to the green triangle.
m’ mFT
imports
Z Z’ C’ C
quantity

8.Border
The grey area is the increase in
price, Domestic price,
government
euros revenue, i.e. the tariff euros
revenue. It equals the level of Sdom
imports C’-Z’ times the tariff T.
9. The tariff revenue can be viewed as

being paid partly by Home consumers
P’ by foreigners.
and partly P’
MS A
10. (i) The part paid by Home
B
PFT
P’-T is shown by the blue
consumers P’-T
rectangle. The area equals the level of
imports consumed times the domestic
price rise (PFT to P’). MD
Ddom
11. (ii) The part paid by foreigners is the
green rectangle. It equals imports (i.e. the
level of exports) times the decrease in the
border price (PFT to P’-T).
m’ m FT
imports
Z Z’ C’ C
quantity

Border
1. price,
Next we look at the net gain or lossDomestic
to home, price,
i.e. we want to know if the losers lose
eurosthan the winners win.
more euros
Sdom
2. Consumers lose 8. Note that if B-F-G is positive, it is due to
E+F+A+G, but ... exploitation of foreigners.
That is, the amount of tariff
3. … part of this is offset by the revenue paid by foreigners (B) exceeds the
producers’ domestic distortion loss (F+G).
P’ gain of E, and ... P’
MS EE AA
F G
4. … more is offset by the part of the B
PFT
P’-T gain of corresponding to A.
government’s P’-T
5. To this, we add the other part 7. We call the area “B” the ‘terms of trade’
of the government’s gain, namely
MD
gain, or “border price” effect. Ddom
B. We call the triangles F and G, the
The net Home welfare ‘domestic distortion’ loss, or the “trade
effect is thus +B-F-G. volume” effect (since they are related to
This may be positive or the change in import volume.
negative. m’ m FT
imports
Z Z’ C’ C
quantity

1. Now we look at the
Border price, 2. price,
The foreign nation definitely loses from the
Domestic
euros welfare effect on the
euros Home nation’s impositiondomof a tariff since it
foreign nation. S exports less.
receives a lower price and
3. The loss consists of 2 parts.

4. (i) The loss B due to the lower
border price and …
P’ P’
A C MS A
B D B
PFT
P’-T P’-T
5. (ii) … the loss D (green triangle) due to
MD the reduction in foreign sales to Home.
D dom
Note that the area B in the left panel and in the right
panel are the same since both are exports times the fall in
the border price.
The area A is the same in both panels for a
m’ mFT
imports
similar reason.
Z Z’ C’ C
quantity

1. Here we see the net global welfare effect. Home’s change is +E-F-G
euros and Foreign’s change is -E-D. Adding these leaves a loss of the three
euros
triangles -(D+F+G). Sdom
P’ P’
MS
F G
B D B
PFT
P’-T P’-T
MD
Ddom
m’ mFT
imports
Z Z’ C’ C
quantity

1. The book claims that the net global welfare effect also equals C+D in the left-panel.
Here we shall
Border price,show that this is true, i.e.Domestic
C=F+G price,
euros euros
2. The first thing to note is that the sum of the bases of the triangles F and G equals the
Sdom
base of the triangle C (since both measure the change in imports).
P’ P’
C MS
F G
E D
PFT
P’-T
MD
Ddom
m’ mFT
imports
Z Z’ C’ C
quantity

euros euros
3. Now we move G over to C. Click 5 times to do this. Sdom
P’ P’
C MS
F G
E D
PFT
P’-T
MD
Ddom
m’ mFT
imports
Z Z’ C’ C
quantity

euros euros
Sdom
4. Now we move F over to C. Click 5 times to do this.
P’ P’
C MS
F G
E D
PFT
P’-T
MD
Ddom
m’ mFT
imports
Z Z’ C’ C
quantity

euros 6. So this is what we wanted to show. The net
euros
global welfare change from Home’s S MFN
dom
tariff is the sum of the triangles C+D.
P’ P’
C MS
F G
E D
PFT
P’-T
5. Finally, we have to change the shapeMDof F to fit into C.

Remember that the area of a triangle depends only on its Ddom
height and base. Changing the shape holding these constant
does not change the area.
Click 2 times to change the shape.
m’ mFT
imports
Z Z’ C’ C
quantity

euros euros
Sdom
P’ P’
A MS E A
C F G
E D
PFT
P’-T
MD
Ddom
m’ mFT imports
Z Z’ C’ C
quantity

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© R.Baldwin & C.

“A careful presentation of the Open

The MS-MD Diagram: The International Market

The MS-MD Diagram: The International Market

Open Economy Supply & Demand Analysis: The Home Market

Open Economy Supply & Demand Analysis: The Home Market

Putting together the diagrams

Positive Effects of an MFN Tariff

With no tariff, the

Positive Effects of an MFN Tariff

Positive Effects of an MFN Tariff

Positive Effects of an MFN Tariff

Positive Effects of an MFN Tariff

Positive Effects of an MFN Tariff

Positive Effects of an MFN Tariff

2. The rise in the Home

Normative Effects of an MFN Tariff

Normative Effects of an MFN Tariff

3. (i) They pay a higher price for

4. (ii) Consumers also lose MD

Normative Effects of an MFN Tariff

6. Home producers gain for 2

7. (ii) they also gain because they MD

Normative Effects of an MFN Tariff

9. The tariff revenue can be viewed as

Normative Effects of an MFN Tariff

Normative Effects of an MFN Tariff

3. The loss consists of 2 parts.

Normative Effects of an MFN Tariff

Normative Effects of an MFN Tariff

Normative Effects of an MFN Tariff

Normative Effects of an MFN Tariff

Normative Effects of an MFN Tariff

5. Finally, we have to change the shapeMDof F to fit into C.

Border price, Domestic price,

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