1. What is the diference between free-trade areas and customs unions?

Short Answer
2. How do consumer and producer surplus add to a country’s welfare?
3. De?ne deadweight loss.
4. What is a terms-of-trade gain?
5. De?ne quota rents.

Problem Solving
1. Aoslia is a small country that takes the world price of corn as given. Its domestic supply anddemand for corn is given by the following:
D = 45 ? 3P
S = 3P ? 9
(a) Assume initially that Aoslia does not open to trade. What is the autarky equilibriumprice and quantity?
(b) Suppose Aoslia decides to engage in trade. Determine the quantity demanded, quantitysupplied, and import given the world price of $6 per bushel of corn.
(c) If the Aoslia government imposes a tari? in the amount of $1 (i. e. , t = $1), what is thenew domestic price? What is the amount imported?
(d) Determine the e?ect of the tari? on the Aoslian consumers, producers, and the government.
(e) Calculate the terms-of-trade gain. What is the net e?ect of the tari? on Aoslia’s welfare?Explain
2. Refer to the above problem. Suppose the Aoslian government applies an import quota thatlimits imports to 12 bushels of corn.
(a) Determine the quantity demanded, quantity supplied, and the new domestic price withthe quota.
(b) Calculate the quota rent.
(c) Assuming that the quota licenses are allocated to domestic producers, what is the nete?ect of the quota on Aoslia’s welfare?
(d) Assuming that the quota rents are earned by foreign exporters, what is the net e?ect ofthe quota on Aoslia’s welfare?

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PS 02A (Trade Policy Instruments)—Page 1 of 3
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Econ-4040-001 14SS
International Economics
Problem Set 02A (Trade Policy Instruments)

(a) Assume that the world price is P W = $5. Determine the consumer and producer surplusunder free trade.
(b) Suppose the Home government imposes a tari? in the amount of $4 (i.e., t = $4). Whatis the new Home price? What is the price received by the foreign exporters?
(c) Determine the terms of trade for Home with the tari?.
(d) Does Home welfare increase or decrease due to the tari?? Explain.
4. Refer to the problem above. At what amount would the tari? be considered prohibitive?Explain

Web Links
1. In September 2009, in a move intended to assist the domestic tire industry, President Obamaimposed tari?s on tires imported from China. The positions of supporters and opponents ofthe measure are available in the Washington Post article “U.S. to Impose Tari? on Tires FromChina,” Sept. 12, 2009 athttp://www.washingtonpost.com/wp-dyn/content/article/2009/09/11/AR2009091103957.html.
According to the article, how many jobs were lost from 2004 to 2009 in the U.S. tire industry?
2. Further information on the Multi?bre Arrangement can be found at http://www.wto.org/english/tratop e/texti e/texintro e.htm#MFA. Note that textiles were to be brought into conformance with WTO rules by 2005 (10 years after 1995). The question is whether developed countries still impose trade restrictions on textile imports. To answer this, go back to http://www.usitc.gov/. Under “Tari? A?airs” click the link to the Tari? Search Tool. Type“cotton textiles” into the search box at the top of the page, then click the Search button. Selecta major grouping in the left frame (for example, 4202.92.60).
Are tari?s being imposed on products in that group?

PS 02A (Trade Policy Instruments)—Page 2 of 3

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3. Suppose Home is a large country whose supply and demand curves are given in the left panelof the following ?gure.

Text Problems
1. Ch. 7, #3 (use text graphs for part b.)
2. Ch. 7, #6
3. Ch. 7, #7

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4. Ch. 7, #9

PS 02A (Trade Policy Instruments)—Page 3 of 3