1
Lectures 9 & 10 AHEED Course “International
Agricultural Trade and Policy”
Taught by Alex F. McCalla, Professor Emeritus,
UC Davis.
April 2 & 5 , 2010, University of Tirana, Albania

2
s
Increasing
Labor used in food production L
F
O
F
T
C
F
O
C
Labor used in cloth production
Increasing
L
C
C
T
F

3
Relationship between Gen. Equilb. & Partial Equilb.
Model, deriving the supply curve
Slope of PPF is cloth’s opp. cost (mrt)
Cloth, yards
Supply
Cloth , yards

4
 Cloth, yards

 D
Cloth
I
-P c
/P f

5
S
Cloth, yards
D
Cloth

6
Comparative advantage under increasing opportunity cost
Home
Foreign
S
Home
Cloth, yards
Cloth, yards
Cloth, yards
S
For
Cloth, yards

7
S
Producer surplus = quasi rent, or excess of gross receipts over TVC.
R= TR- TVC
Defined as the area above the supply curve
& below the price line
PS
Q

8
Consumer utility is not observable, so economists try to compute a money-based measure of welfare effects.
CS gives the change in what the consumer is willing to pay over that which is actually paid.
P
0
1
P
Demand
Q q
0 q
1

9
Generating Excess Supply & Excess Demand
Functions in World Market
Home International Market Foreign
S
P
T
D
Q
ES
ED
Q
T
Q
D
Q
S

10

11
Elasticity of excess supply (ES) & excess demand (ED) functions are derived from domestic supply Sd and domestic demand Dd functions.
ED = Dh – Sh; and ES = Sf – Df
Thus the slopes of ED & ES are derived from Dh, Sh & Sf ,Df dED = dDh – dSh dES = dSf - dDf dp dp dp dp dp dp
And Therefore so are the elasticities of ED & ES derived from elasticities of the domestic functions. Let E =elasticity
Recall elasticity of Dh = Ehd = dq * p dp q
As shown in McCalla and Josling pp41 & 42
EED = E Dh * Home Con/Imports – E Sh* Home Sup/Imports
E ES = E Sf * For Sup/Exports – E Df * For Con/ Exports.

Elasticity of Import Demand (Excess Supply)
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Let us give a numerical example;
Suppose a country imports 25 % of its wheat consumption
Let S = share of imports in domestic demand IM/Dh; and 1-s is share of consumption supplied domestically
So Home con/imports = 1/s; Home sup/ imports = 1-s & if EDh = -.2 and E Sh = .2
The elasticity of Excess Demand EED = (1/.25 *-.2) - .2 * .75/.25
Which =(4 X -.2) = -.8 + - .6 (.2 X 3) = -1.4
What is obvious is that even though both domestic supply and demand are highly inelastic, import demand is elastic.
In general can say Import Demand is more elastic; a. the more elastic domestic demand; b. the more elastic domestic supply; c. the smaller the market share of imports.

13
Foreign
Home International Market
S
S
ES
ED
D
Q Q
D
Q

14
Country B
Experiences a short crop-
Shifts Sb to Sb’ which shifts Ed out to Ed’
Raising world price to P’w and expands trade to 08
Note both countries adjust

15
Imposition of a unit tariff –same impact as introducing a transport cost.
The imposition of a tariff t by country B shifts Ed to E’d;
Price in exporter A falls from Pw to P’w & exports contract;
Price importer B rises to P’b aand imports contract;
B collects tariff revenue of (P’b –P’w) X Q’

16
Impact on excess supply of exporter fixed-price policies.
Suppose Ex A fixes producer prices at P, thus domestic supply becomes S’a and excess supply becomes E’s; if also fixes P to consumers excess supply becomes perfectly inelastic -E”s.
If P is floor price for both producers and consumers excess supply becomes E”s below P and Es above P Lesson – Domestic price intervention reduces the elasticity of Es

17
Impact on excess demand of importer fixed-price policies
Is mirror image from exporter case- if Im B fixes producer price at Pp excess demand rotates to E’d, fixing Pp also to consumers makews excess demand perfectly inelastic
E”d.
The lesson for world markets is the more rigid domestic intervention the inelastic world S
& D functions will be = more price instability in world markets

18 World Market Impacts of Guaranteed Producer Prices.
Put together, guaranteed producer prices in both exporters and importers rotates Es to E’s and Ed to
E’d, world trade contracts from Q to Q’ and world price falls from Pw to P’w.
Note that because intervention decreased the elasticities of both excess functions, the change in price is greater than the change in quantity, i.e. domestic intervention increases price instability in World
Markets

19
Distribution of the effects of supply shocks in both countries
In (a) the short harvest in Im. B reduces supply in Im.B by AB , the adjustment in the world market can be decomposed: -BC is reduced import demand due to price increase and AC is increased export supply in response to the price increase

P
World Market
S
• Why is MR below ED?
• How do we measure social return from additional exports?
P*= P(1+ τ )
P
F
P
ED
MR
Q

World Market
P
MO
• Why is Marginal Outlay above S?
• What is the true cost of an additional unit of imports?
S
P= P*(1+ τ )
P*
ED
Q

22
Tariff v Quota Equivalence: large country
P
Home S
P
World Market
ES
P
F
ED
D
| |
Q
For quotas, welfare effects depend crucially on how import licenses are distributed. e.g., a) Auction quotas (Australia); b) Assign Import rights to home firms (Japan, Indonesia; Canada) c) Give licenses to foreigners (USA).
Q

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P
Domestic Market
Unlike with a tariff, Monopolist is now free to  prices
Imports
S
P q
Quota shifts D left by amount of quota
P
F
MR q
D q
Q
D

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Tariff v Quota that leads to same level of imports
Domestic Market
P
Quota shifts D left by amount of quota
P q
P
F
+ τ
P
F
0
S
Unlike with a tariff, Monopolist is now free to
 prices
D
|
Q q
MR
|
Q t
Q
F
Imports
D q
Q Quota creates more monopoly power than tariff

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D
Source: David Skully

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140
120
100
80
60
40
Average agricultural bound tariff (63 percent)
20
0
Non-EU W.
Europe
South Asia Sub-Saharan
Africa
Carribbean
Islands
North Africa Middle East Central
America
Source:www.ers.usda.gov/db/Wto/WTOTariff_database/
Eastern
Europe
South
America
Southern
Africa
European
Union-15
NorthAmerica

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180
160
140
120
100
80
60
40
20
0
Average bound agricultural tariff (63 percent)
Source:www.ers.usda.gov/db/Wto/WTOTariff_database/

G
S
T
S
Price D
Value added = Final value of good - value of imported inputs. v = p  p, where  is share of imported inputs in final value.
P* b
= $1,600
ERP = (v’ -v)/v
P beef
= $1,000
(foreign supply)
0
P corn
= $500
(foreign supply)
Qcorn,beef
Nominal rate of protection = ST/OS = 60%
Effective rate of protection = ST/GS = 120%


Higher import duties on semi-processed & finished products than on raw materials.
 e.g., Cocoa enters US duty free but there is a relatively high tariff on the processed product chocolate.

Instant coffee v coffee beans is another example.
US
EU
Japan
Canada
Average tariff on processed products as multiple of raw product
1.25
2.75
3.75
3.00
Source: Oxfam