Econ 4431W – International Trade – Summer 2014
Homework #4
Quiz Date: 7/30/2014, 9:00 AM
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1) “The imposition of a tariff on a good will always have a negative welfare effect on a
country.” Agree? Disagree? Explain.
2) Demonstrate why economists argue that, from a country welfare perspective, a domestic
subsidy is preferable to a tariff for assisting a particular industry. Use either a partial or a
general equilibrium model to support your argument.
3) Explain, using offer curves, how a tariff affects a large country in the context of general
equilibrium. Can a tariff improve the welfare in the tariff-imposing country? Make a
graphical example
4) “While the imposition by a country’s government of an import tariff on a good clearly injures
the country’s domestic consumers of the good, the tariff helps domestic import-competing
producers and enhances overall country welfare (i.e., the “net welfare effect” is positive).
Similarly, the granting of an export subsidy by the country’s government to home producers
of a good also injures home consumers of the good, but the subsidy helps home producers
and enhances overall country welfare.”
Utilizing traditional supply/demand analysis, illustrate and explain the parts of the above
statement that are TRUE (if any) and the parts that are FALSE (if any). (You can use a
“small-country” case throughout your answer. Also, assume that there are barriers to the
import of the good into the country granting the export subsidy.)
5) How would you respond to an argument to impose a tariff on imports arriving from a
particular country in order to improve the balance of trade with that particular country? Do
the criticisms of the tariff to improve the overall trade balance with all partners apply in this
bilateral context? Why or why not? Are there additional considerations to be taken into
account? Explain.
6) Would it be possible for the infant industry argument to be applicable to a perfectlycompetitive industry? Why or why not?
7) Suppose that a relatively capital-abundant country is exporting the capital-intensive good and
importing the labor-intensive good, but that the “specific-factors” model of Chapter 8 applies
rather than the Heckscher-Ohlin model. Assess the effect on the return to labor of the
imposition of a tariff on the labor-intensive good.
8) Assume that there are only two firms in an industry – a home firm and a foreign
firm – and that the firms are competing in third-country markets. (You can have them competing
in each other’s domestic markets if you wish.) Explain a “reaction function diagram” for the two
firms, including the definition of a “reaction function” in this context and a brief discussion of
why the reaction functions slope as they do (although you do not need to derive the functions
formally). Then use a reaction function diagram (possibly along with other diagrams) to explain
how a “strategic trade policy” action by the home firm’s government can potentially enhance the
home firm’s market share in third-country markets.