Lecture 2

• firms are assumed to be Perfectly Competitve, so they take prices as given, believe they have no impact on prices so they can sell as much as they want at market prices
• tariff analysis assumes there are no scale economies, so the per unit cost doesnt fall as firms produce more units- there are no big fixed costs
• tariff analysis assumes firms are perfectly competitive, and that there are no scale economies
• perfect competition means that the domestic price of the good = foreign price
• the boarder price effect is the loss from a higher price of imported units
• the import volume effect is the loss from a drop in imports
• the export supply curve (XS) of a country is also the import supply curve (MS) of the other country
• the MFN is the mostly preferred nation tariff, and is non-discriminatory between partners
• X means export, M means import
• an increase in domestic price means that the boarder price decreases
• the domestic government of a country imposing a tariff gets a revenue of C+E
• the overall welfare impact of a tariff on the domestic country is E-B-D, and can be positive or negative depending on the size of the tariff
• when a tariff is introduced, home producers increase their welfare by A, and home consumers reduce their welfare by A+B+C+D
• when a tarriff is introduced, the boarder price decreases
• a tariff always has a negative welfare change on the foreign country
• a tariff means the foreign country lowers their price, resulting in customer welfare increasing by F, and producer welfare reducing by F+G+H+I
• Tariffs as a tax on foreigners means that retaliation must be considered
• if a foreign country imposes a retaliatory symmetrical tariff on the domestic country, neither will recieve a gain, and there will be a net loss of -k-m to both nations
• income inequality has risen since 1980 in English-speaking countries, but less in Continental countries, so inequality is unlikely to be due to integration
• income inequality is not an inevitable outcome if European Economic Integration
• GVCs are Global Value Chains. they are supply chains that cross boarders, so some parts of a final product are imported instead of being made locally
• if a tariff is removed, a country may become an exporter, when they were an importer when there was a tariff
• DCR are domestically captured rents (Domestic gvt gets the profit)
• DCRs are tariffs, import licenses
• FCR are foreign captured rents (foreign government gets the profit)
• FCRs include price undertakings, export taxes, and quotas
• Frictional trade barriers do not involve the collection of rents or income, but create costs to importing and exporting through regulations and red-tape
• the Cassis de Dijon case is that Germany limited import of the Cassis de Dijon drink because they said that it was misleading and a health concern (it wasnt), but is the reason alcohol content must be displayed on labels
• comparative advanages are where a country can produce a good at a lower cost than another country
• if a country has higher wages, higher labour efficiency may not compensate for the higher labour costs, so a less efficient country may have the comparative advantage