International Economic Problems

2. Explain in detail why tariffs create deadweight losses.

Tariffs reduce domestic consumption and increase domestic production. This means that some consumers that value this good more than its cost are not able to purchase it, which reduces consumer surplus without benefitting anyone. Likewise, domestic producers increase their production, but their costs are higher than world costs. Thus that additional cost of production does not benefit the producers; it is simply a waste of resources.

3. Describe how the imposition of a tariff is different for a large country (that can affect the world price) than a small country.

For a small country, imposition of a tariff unambiguously reduces total benefits to the country. For a large country, the effect is less clear. Since a large country can have an impact on the world price, the reduction in domestic demand due to the tariff may be sufficiently large to cause the world price to fall or to encourage foreign producers to reduce their prices to avoid losing market share. In this case, while domestic producers still gain and domestic consumers still lose, the overall benefits to the country may or may not fall. If the fall in the world price is sufficient, foreign producers are essentially paying for much of the tariff in the form of lower prices, and this gain may exceed the deadweight losses.

4 Give an example of a nontariff measure that could reduce the quantity of imports or exports. Explain.

Special fees imposed on importers, burdensome and unnecessary customs procedures, unreasonable technical standards, phony health and safety standards, state trading companies, anticompetitive practices, restrictive government procurement rules, corruption

5 If politicians decide to proceed with protectionist measures, why might economists prefer tariffs to quotas? Explain at least three reasons.

• The greater welfare loss from quotas since quota permits are not generally sold

• The inability of quotas to respond to increases in domestic demand except through higher prices and increased producer surplus. With tariffs, the volume of imports simply adjusts to changing market conditions and market prices are less volatile.

• Tariffs are more transparent and probably less costly to administer.

• Tariffs favor the most efficient foreign producers. They don't arbitrarily limit entry or discourage innovation by foreign firms (but they do for domestic firms, meaning we are creating a situation that rewards foreigners for being innovative and efficient, something not in the long run best interests of domestic firms).

6．Describe intellectual property rights. What agreements have been reached regarding their protection? What are the benefits and the costs of protecting intellectual property rights?

Intellectual property rights included copyright and related rights for literary and artistic work as well as industrial property rights such as trademarks and patents. TRIPS is an international agreement specifying the rules for respecting intellectual property rights as they relate to trade and was reached as part of the Uruguay Round. If intellectual property rights are not protected, it restricts trade flows. Exporters are reluctant to sell into a market if they know their ideas or brand will be stolen or copied by local firms. Research and innovation are more likely because protecting intellectual property gives financial incentives to firms and individuals to do research and continue to innovate. But protecting intellectual property rights means that high costs for enforcement are imposed on developing countries; it is not well established empirically that the benefits of innovation outweigh the costs of access, especially for developing countries that find access to new technology curtailed by having to pay royalties and fees

7. Why do both developed and less-developed countries protect clothing and textiles heavily?

For developed countries, comparative advantage has been lost in these labor-intensive industries. For less-developed countries, these are major export sectors that also have a significant domestic market share, and so it is desirable to protect domestic markets while exporting these goods (in which they have a comparative advantage).

8. Explain the concept of infant industry and explain the difficulties for implementing that argument for protection.

The infant industry argument for protectionism is that small domestic industries need to be temporarily nurtured and protected from foreign competition for a time so that they can grow into strong competitors. In some cases, notably in East Asia, this approach has worked. Often, however, the infant industries never grow up. On the other hand, arguments against dumping (which is setting prices below the cost of production to drive competitors out of the market), often simply seem to be a convenient excuse for imposing protectionism. The protection makes firms less likely to be efficient and encourages devoting resources to rent seeking.

9 What are the arguments that countries generally use to justify protection for a particular industry? Describe the arguments and any inherent problems with them. Are the arguments primarily economic or are there some noneconomic arguments?

Labor argument and the National Security argument as one of the arguments countries generally use to justify protection for a particular industry.

Labor argument : In this argument it is stated that international trade which claims that foreign competition based on low wages harms the domestic economy . This argument is used to protect domestic industries from cheaper imports .

National Security argument : This is the most common arguments supporting protection , also called the national defense argument. This argument suggests that it is necessary to protect certain industries with a tariff, to assure continued domestic production in the event of a war .

10. Are economic sanctions usually effective in achieving policy goals? Explain.

Economic sanctions are successful in achieving policy goals in, at best, only perhaps half of the time. While economic sanctions can seriously harm the economy of a country on which they are imposed, that alone may not be sufficient to achieve the policy goal, especially if that goal is difficult, such as regime change or major policy changes.

11. Describe the four legal procedures available to U.S. firms to seek protection from foreign competition. What circumstances would warrant a request under each? How frequently is each used? What would be the result if the firm won?

Countervailing duties are granted in response to foreign subsidies.

Anti-dumping duties are granted in response to imports being sold at "unfair" prices or dumping.

Escape clause relief is granted as a temporary protection against a sudden surge in imports.

Section 301 retaliation is used to unilaterally punish a nation for "unfair" trade.

Generally, tariffs are imposed if a firm is successful in its appeal for subsidies, dumping, or escape clause relief. Section 301 is likely to be a broader response to a country's practices. Anti-dumping duties are the most common today.

12. Explain the difference between primary and secondary income.

Earned income paid abroad and received from abroad is called primary income. This includes income on investments and compensation of employees. Secondary income is payments made abroad or received from abroad, such as payments made that are not in exchange for a good or service, like foreign aid, gifts, or the remittances (the transfer of wages earned in one country to residents of another country) of immigrants temporarily residing in another country.

13．Explain what are the components of the current account and what were some of the consequences of the large current account deficits that the U.S. ran from the 1990s to 2007?

The housing boom of the 2000s and the consumption spree and low savings rates of many Americans; housing finance became awash with funds, consumer credit was easy to get, and American lifestyles were indirectly financed by their access to savings from abroad. Because the current account deficits persisted for so long, they encouraged the gradual accumulation of problems that eventually became extremely severe. Financial market regulators were not prepared for the large inflows of foreign capital and did not recognition the danger of these inflows. Firms receiving funds felt pressure to make loans to increase earnings to make interest payments. Interest rates were depressed and encouraged borrowing. Easy access to home loans increased housing demand and home prices, which encouraged even more borrowing and building, adding to the housing bubble.

14. What are official reserve assets, and why are they important to countries?

Reserve assets are mainly the currencies of the largest and most stable economies in the world: U.S. dollars, European Union (EU) euros, British pounds, the Japanese yen, and recently the Chinese yuan, as well as monetary gold and SDRs. All forms of international debts can be settled with reserve assets. When a country runs low on reserve assets, it signals that potentially serious problems are arising. In particular, the country may not be able to pay international debts, and it may harm import businesses if the central bank cannot provide a key currency required for payment of import goods.

15. A：16 percent of GNP.

B：+2 percent of GNP.

16． It is unclear whether the free flow of capital is beneficial to all countries. Explain the benefits and costs of allowing capital to move freely.

On the one hand, foreign capital inflows are beneficial because they enable countries to increase their investments in factories, ports, and other physical assets that help raise living standards and incomes. On the other hand, the sudden outward flight of foreign financial capital can generate a debt crisis and throw a country into deep depression. Extreme volatility in some financial markets and the severe damage it has caused to many countries has revived interest in regulations to limit the damage caused by unexpectedly large financial outflows.

17. On the positive side, a current account deficit enables more investment than would be possible otherwise, and since higher investment is correlated with higher living standards, the current account deficit might be interpreted as beneficial. In addition, the capital inflows associated with current account deficits are an implicit vote of confidence by foreigners. On the negative side, capital inflows that occur with a current account deficit increase the stock of foreign-owned assets inside the home country, raising the possibility that a change in investor expectations about the economy's future can lead to a sudden surge in capital outflows. In the worst case scenario, capital flight is followed by a depletion of international reserves and a financial crisis.