Running head: ACTIVITY 1 ACTIVITY 2 BUS 731 GLOBAL ECONOMICS & BUSINESS INITIATIVES Professor: Omar Amreen Nikon Patel March 22, 2021 ACTIVITY 2 A In absence f tariff, wheat price is 1.5 in both foreign and home and given data is Home’s demand curve for wheat is D = 100-20P Supply curve of Home for wheat is S = 20+20P Foreign demand curve for wheat is D = 80-20P Supply curve of wheat in foreign is S = 40+20P With imposition of tariff of 0.5 by Home country, shippers are unwilling to move wheat from foreign to Home unless price exceeds of Home by foreign by at least tariff rate is of 0.5. However excess demand for wheat in Home and it is also excess supply in foreign since there is no wheat shipping. So price in Home will increase when compared with foreign will decrease and price difference is 0.5. so tariff drives wedge across market prices and equation of new MD curve is 80 – 40(p+t) (Krugman et al., 2018). Where price is p = 1.5 and tariff rate is t = 0.5. so equation for new XS curve is -40+40P Now export supply curve by foreign country is unchanged and setting import demand MD equals export supply XS and it is used in solving P value as MD import demand = export supply XS 80 – 40(P+0.5) = -40+40P ACTIVITY 60-40P = -40+40P P = 1.25 So price of wheat in foreign country is 1.25 Now we will add new price with tariff rate offers us domestic price as Domestic price = wheat price in country + tariff rate = 1.25 + 0.5 So domestic price = 1.75 So price of wheat in world is 1.25 Home country wheat price = 1.75 Foreign country price is 1.25 Given Home’s demand curve for wheat is D = 100-20P Supply curve of Home for wheat is S = 20+20P (Edwards, Alves, 2006). By substituting calculating prices in equations for supply and demand to get supply and demand for home and foreign are So Quantity of wheat demanded in Home = 100 – (20*1.75) = 65 Quantity of wheat supplies in Home = 20+(20*1.75) = 55 Now calculating Quantity of wheat demanded in foreign = 80 – (20*1.25) = 55 Quantity of wheat supplied in foreign = 40 + (20*1.25) = 65 So calculating trade volume by equation for MD or XS Trade volume = 80 – 40(1.75) = 10 3 ACTIVITY 4 Tariff effect on market In this diagram, MD curve and XS curve are intersected and determining world price of wheat is 1.5 and imposition of tariff and MD curve shifts to MD1 Now home price is increased to 1.75 while foreign price is 1.25 and difference between them is equal to tariff amount so imports from Home will be fewer since producers supply more at greater price and less demand from consumers and less price in foreign will lead to decreased supply and enhanced demand so XS is less and trade volume of wheat is decreased from 20 to 10 (Edwards, Alves, 2006). B 1 Now Home import competing producers are better off since they have higher prices for goods they want to induce them to enhance wheat supply so they will have less competition from foreign producers 2 Consumers of Home are worse off since they have to pay at higher wheat price 3 ACTIVITY 5 Government benefits of Home since they are have additional revenue tariff (Khan, 1974). C Below diagram shows trade gain and efficiency loss and total effect on tariff welfare are shown Tariff effect on trade gain, efficiency loss and welfare Tariff costs and benefits for importing country are shown by 5 area as a, b, c, d, e and calculating these areas are Area a = 55 (1.75-1.50) – 0.5 (55-50)(1.75-1.50) = 13.125 Area b = 0.5 (55-50) – (1.75-1.50) = 0.625 Area c = (65-50) – (1.75-1.50) = 2.5 Area d = 0.5 (70-65) – (1.75-1.50) = 0.625 Area b = (65-55) – (1.75-1.50) = 2.50 Since tariff lowers foreign export price, gains on trade will rise and above diagram represents trade gain and it is given as 2.5 (Fanta, 2014). Here triangles b+d represent loss efficiency which arises since tariff distorts so efficiency loss = 1.25 Welfare effect of tariff on 3 players of economy are explained below ACTIVITY 6 Consumer surplus = consumer loss = - (a+b+c+d) = -16.875 Product surplus = area a = 13.125 Revenue gain of government = area (c+e) = 5 Reference Edwards, L., & Alves, P. (2006). SOUTH AFRICA'S EXPORT PERFORMANCE: DETERMINANTS OF EXPORT SUPPLY. South African Journal Of Economics, 74(3), 473-500. https://doi.org/10.1111/j.1813-6982.2006.00087.x Fanta, A. (2014). Export Trade Incentives and Export Growth Nexus: Evidence from Ethiopia. British Journal Of Economics, Management & Trade, 4(1), 111-128. https://doi.org/10.9734/bjemt/2014/5124 Khan, M. Import and Export Demand in Developing Countries. IMF Econ Rev 21, 678–693 (1974). https://doi.org/10.2307/3866553 Krugman, P. R., Obstfeld, M., & Melitz, M. (2018). International economics, Theory and policy (11th ed.) Pearson Print ISBN: 9780134519579, 0134519574
