Beo 3368 International Economics and Finance

BEO3368 INTERNATIONAL ECONOMICS AND FINANCE

SEMESTER 2, 2008

ASSIGNMENT 1- I.D 3723708

PART A

Using appropriate diagrams illustrate how the (static) efficiency gains from the gradual removal of a general tariff become smaller. Does this provide an argument against the total removal of the general tariff

The static efficiency gains or dead weight loss in the market does indeed become smaller with the gradual removal of a tariff

When there is a tarrif imposed on a domestic market there is a portion of the consumer surplus since no one else in the economy gains. The imposition of an industry tarrif results in an economist call a static (deadweight loss). It is equal to the lost consumer surplus that is not transferred to the domestic firms as producer's surplus or to government as increased tax revenues.

The dead weight loss is equal to the sum of the area of the two small triangles in figure 1.1 b & d

There is thus a net national loss on the total welfare from the imposition of the industry tariff when compared to the free trade situation.

With the tariff and the higher price on imports domestics producers are able to increase able to increase their level of production.

As a consequence to the domestic consumers the producers receive additional producers surplus which is measured by area a in figure 1.2

So it is evident in fig 1.3

with the introduction of free trade the static efficiency gains or dead weight loss becomes smaller.

What the can be the justification for a industry tarrif exept as a

means to increase tariff revenues or to augment the producers

surplus of local firms? Consumers are evidently worse off having to pay higher prices for the same product. How can such tariffs be defensible and does this provide a reason to support the rentention of tariffs?

Remember the motivating purpose of an industry tariff is to assist domestic firms and allowing them to overcome their transitional inefficiencies when compared to their larger offshore competitors.

If these firms in this market succeed in becoming more efficient over time, then the domestic supply curve will shift downward and outwards to SD2. If the domestic industry becomes internationall competitive the supply curve will shift all the way to SD2.fig 1.3

In other words curve will move outward downward to SD2.

The reason why the demand supply curve would shift in this fashion would be because firstly, and increase in the number of domestic producers who would be able to emerge and succeed behind the protective wall provided by the tariff and would thus shift the curve outward.

Secondly, the domestic supply curve would ideally be shifted outward due to , increased efficiency in domestic entripses and and the more effective application of what ever skill or techonolgy is in use.

What are two other factors to consider that strengthen the case for a total removal of the general tariff. Discuss.

This does provide and argue against the complete removal of the general tariff,

Heckscher Theorim

Heckscher Theorim argues in favour of tarrif removal and complete specifity in the utilization of the economies resources. The theory is summarized as economies removing resources from inefficient parts of the economy and specifying and exporting products that use the nation's abundant resources intensively and importing products that use its scarce or ineffective resource intensively.

An example to support that Heckscher Theorem which the negative macroeconomic impacts tariffs had of the textile industry in Zealand's remaining