Economic: Free Trade and Trade Liberalization

Suppose that US market demand and supply for cloth are given, respectively, by the following algebraic equations: P = 8 – WHQL and P = 2 + WHQL (P is given in dollars and Q in tons). A) Plot the demand and supply schedule for clothe and determine the equilibrium price and quantity for cloth in the US in the absence of [international] trade. 16 14 12 10 20 24 Economic: Free Trade and Trade Liberalizing By cuff no transportation costs, how much cloth will the US consume, produce and import with free trade? When the price is 2,

The cloth will be consumed 12 tons, and produced O tons. So the U. S. Market is shortage and should import (12-0) 12 tons. C) Now assume the US imposes a tariff of 50% on the world price, how much cloth will the US consume, produce and import with tariff? When the tariff is 50%, the total price of cloth in the U. S. Market is (2+2*50%)=3, The cloth will be consumed 10 tons, and produced 4 tons. So the U. S. Market is shortage and should import (10-4) 6 tons. D) How much tax revenues will the US government collect with trade restrictions?

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The tax revenue equals the area of Ponchos much is the consumer loss as a result of the tariff? The consumer loss equals the area of The area of FIJI f) How much are the producer’s gains and the society loss (deadweight loss) as a result of the tariff? The producer’s gains equal the area of ILL The area of FEM. The society loss equals the area of HEN + FIX The area of HEN IS 2 and the area of FM is 1, so the society loss is (2+1) 3. International Trade. Why do they do that? Discuss. The Benefits of Trade

Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth. The evidence on this is clear. No country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world. In contrast, trade opening (along with opening to foreign direct investment) has been an important element in the economic success of East Asia, where the average import tariff has fallen from 30 percent to 10 percent over the past 20 years.

Opening up their economies to the global economy has been essential in enabling many developing countries to develop competitive advantages in the manufacture of certain products. In these countries, defined by the World Bank as the “new globalizes,” the number of people in absolute poverty declined by over 120 million (14 percent) between 1993 and 1998. 1 There is considerable evidence that more outward-oriented countries tend consistently to grow faster than ones that are inward-looking. 2 Indeed, one finding is that the benefits of trade liberalizing can exceed the costs by more than a factor of 10. Countries that have opened their economies in recent years, including India, Vietnam, and Uganda, have experienced faster growth and more poverty reduction. 4 On average, those developing countries that lowered tariffs sharply in the asses grew more quickly in the asses than those that did not. 5 Freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large implicit subsidies, often channeled to narrow privileged interests, that trade protection provides.

Moreover, the increased growth that results from freer trade itself tends to increase the incomes of the poor in roughly the same proportion as those of the population as a whole. 6 New Jobs are created for unskilled workers, raising them into the middle class. Overall, inequality among countries has been on the decline since 1990, reflecting more rapid economic growth in developing countries, in part the result of trade liberalizing. 7 The potential gains from eliminating remaining trade barriers are considerable.

Estimates of the gains from eliminating all barriers to merchandise trade range from SIS$250 billion to SIS$680 billion per year. About two-thirds of these gains would accrue to industrial countries. But the amount accruing to developing countries would still be more than twice the level of aid they currently receive. Moreover, developing countries would gain more from global trade liberalizing as a percentage of their GAP than industrial countries, because their economies are more highly protected and because they face higher barriers.

Although there are benefits from improved access to other countries’ markets, countries benefit most from liberalizing their own markets. The main benefits for industrial countries would come from the liberalizing of their agricultural markets. Developing countries would gain about equally from liberalizing of manufacturing and agriculture. The group of low- income countries, however, would gain most from agricultural liberalizing in industrial countries because of the greater relative importance of agriculture in their economies.