Exercise 1: Trade Policies
| Price of a washing machine ($) | Quantity Demanded | Quantity Supplied |
| 500 | 0 | 50 |
| 400 | 10 | 40 |
| 300 | 20 | 30 |
| 200 | 30 | 20 |
| 100 | 40 | 10 |
| 0 | 50 | 0 |
- A graph of demand and supply
Based on the graph above, the equilibrium price is $250, and the equilibrium quantity of 25 units.
- At a price of $100, the quantity produced is 40 units, the quantity consumed is 10 units, and the quantity imported is 30 units.
- Imposing a tariff of $100 will increase the prices of washing machines by the same amount. The equation determines the new prices.
Qd = a – bP
10 = a – 400b
a = 10 + 400b…………………………………………………………………….(i)
40= a – 100b
a = 40 + 100b………………………………………………………………………(ii)
Therefore; i = ii
10 + 400b = 40 + 100b
300b = 30
b = 30 / 300
b = 0.1
a = 40 + 100(0.1)
a = 50
The new equation will be: Qd = 50 – 0.1P
Tariff will increase P to $350
Therefore Qd = 50 – 0.1(350)
= 50 -35
=15 units
| Price of a washing machine ($) | Quantity Demanded | Quantity Supplied |
| 600 | -10 | 50 |
| 500 | 0 | 40 |
| 400 | 10 | 30 |
| 300 | 20 | 20 |
| 200 | 30 | 10 |
| 0 | 50 | 0 |
The equilibrium price for washing machines will be $350, the quantity produced will be 15 units, the quantity supplied 5 units, and imports will be 10 units. Imposing tariffs would increase domestic prices by $100, and decrease the quantity demanded by 10 units. This is because when a good becomes expensive, the number of consumers decreases.
Qd = 50 – 0.1P
An increase of $100 tariff would lead to a decrease in imports by 10 units.
- Impacts of tariffs on consumers, producers, government, and the economy
Tariffs would increase the prices of imported goods. Qd moves right because when the price increase, more domestic companies will be willing to produce the good XX. On the other hand, Qw shifts left. Tariffs also force producers to reduce their prices due to increased competition, which leads to paying higher prices by consumers. The impact of the tariff on government is increasing in revenue because imports enter the domestic market. Therefore, the overall impact of the tariff on the economy is increased domestic production, reduction in imports, and higher consumer prices.
Exercise 2: Balance of payments
| ITEM | Billions of US Dollars |
| Imports of goods from Brazil | 185 |
| Imports of services from Brazil | 120 |
| Foreign direct investment by Brazil to the USA | 14 |
| Exports of goods to Brazil | 238 |
| Exports of services to Brazil | 155 |
| US investment to Brazil | 110 |
| Income received from Brazilians | 12 |
| Income paid to Brazilians | 6 |
| Net unilateral transfers between USA and Brazil | 5 |
| Balancing item | -3 |
- Trade balance = country’s exports – the country’s imports
US trade balance = (238+155) – (185+120)
= 393 – 305
= $ 88 billion
- US current account balance = (X-M) + NI + NT
NI = net income from abroad
NT = net current transfers
= (393 – 305) + 6 + 5
= $ 99 billion
- US financial account balance = 14 -110
= $96 billion deficit
- Balance = 88 + 99 – 96
= $91 billion
The US was a net lender because the sum of total current and capital accounts’ balances in the Balance of Payment is positive. According to XX, a positive value shows that a country is making resources available to the rest of the world; hence, it is a net lender.
- The depreciation of the US Dollar would make imports become cheaper; therefore, locals would buy more imported goods. This will make imports more and exports fewer, hence decreasing the trade surplus. Also, since exports would become more expensive, the US will experience a fall in exports and an increase in imports, which in turn causes a bigger deficit in the current account. Lastly, the dollar appreciation would influence financial account balance; more investors would be attracted to the US, which would reduce the deficit in the financial account balance.
Exercise 3
- Switzerland banned agricultural because of two main reasons. One of them is to protect domestic agricultural producers. Switzerland believed that importing agricultural products could harm domestic agriculture; hence, leading to the ban. Another reason is that Switzerland’s agricultural sector was vulnerable to foreign competition. Banning agricultural imports prevented more efficient foreign producers from competing with local agricultural producers in Switzerland. This trade policy approach leads to a decline in the quantity demanded due to a rise in domestic products.
- A subsidy would increase Switzerland’s agricultural industry to increase its output. This would lower the equilibrium price in the market because the supply curve would shift to the right. The subsidy, thus, would encourage consumers to consume more because the price of agricultural products would be lower. Additionally, the subsidy would encourage producers to increase agricultural output because funds would be available to them. On the other hand, the subsidy would cost the government money. The total subsidy expenditure would be equal to subsidy per unit multiplied by the number of units traded in the market. Generally, the subsidy would increase the supply of agriculture products in the economy.
When it comes to exports, the subsidy will raise the number of goods exported. According to XX, a subsidy raises domestic products, which in turn reduces the foreign price. Therefore, a subsidy would increase the quantity of goods exported. Since the subsidy shifts the supply curve to the right, it encourages the production of goods. Lastly, the subsidy would lead to an increase in demand, hence an increase in the consumption of agricultural products.
- The side of WTO and EU would not welcome the decision by Switzerland to give subsidy to agricultural producers. This is because doing so would create unfair advantages between producers in Switzerland and those in other countries. The exports of Switzerland would increase while exports of those countries would decrease. Therefore, they will not accept such a policy.
Exercise 4
- High inflation shifts the equilibrium exchange rate upwards because purchasing power increases relative to foreign currencies. The upward shift leads to an increase in prices of goods and services, which in turn causes a rise in interest rates XX. Therefore, a high inflation rate leads to the depreciation of a country’s currency.
- A decrease in productivity due to a pandemic is harmful to the economy. This is because lower productivity leads to higher unit costs. The costs are passed on to the consumer in higher prices; thus, encouraging low demand, little output, and increase in employment. This is harmful to economic growth because the national output would fall. It is, therefore, advisable for economies to ensure that they come up with ways of ensuring high productivity when there is a pandemic.
- The reduction in trade barriers would be favorable to both economies. As a result, the productivity of the two nations would increase. As a result, the demanded quantity of US dollar assets would increase due to the increase in exports. Additionally, the US would be a ‘safe haven’ for investors to invest in; thus, leading to an increase in the demand quantity of US dollar assets. It is, thus, advisable for the USA to sign the agreement.
- An increase in interest rate would be favorable to the European economy. This is because the rise would attract foreign investment into the country; thus, increasing the value of the Euro. Therefore, the value of the Euro to Dollar would be higher, meaning that the value of would include depreciation. As a result, the relative return on the US Dollar assets would decline.
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