Flashcards

ECON302 after MID

toby riley English 65 cards

Cards in this deck (65)

1What is intra-industry trade?Trade of similar goods between similar countries, importing and exporting more or less the same good.
2What is krugmans theory on why consumers appreciate diversity?As consumers, we are constantly tempted by a growing number of brands, even though we might sense that a standard car, a standard pair of jeans or standard toothpaste would suffice. After our basic needs for food and housing have been satisfied, it seems as if we opt for diversity and variation in our consumption.
3What are the two key features of a monoplistic firm? and what does it mean?Increasing returns to scale and differentiated goods. It means that firms have some price control in that raising prices will not loose all business to competitors but cannot charge as high as true monopolists as there are other producers of the good.
4What are the properties of increasing returns to scale?The avregae costs for firms decrease the more output they are producing. Firms can lower their average costs by selling more in domestic market but can attain lower costs from selling more in foreign markets.
5What are the 4 assumptions about monoplistic competition?1. each firm produces a good that is similiar too but differentiated from eachother
2. There are many firms in the industry, if all firms charge same price then they have D/N share of industry.
3. Firms use technology with increasing returns to scale, so MC always lower than AC
4. In the long run profit is zero as firms can enter and exit freely, just like perfect com
6Where is monpolistic profit made?Profit made is when P is greater than AC.
7Graphically how does monoplistic firm make profit in short run?
8How in the long run does monoplistic profir become zero?In the long run more firms join the market to gain profit which causes the firms demand curve to shift to the left and become flatter, and now where mr = mc p=ac thus no profit.
9Show monopolistic competition with free trade for short run?Then as other firms lower price to p2 it shows on D/Na, where p
10Show monoplistic long run with trade equilibirum? and what are the gains from trade for consumersCome back insert IMG, as firms are forced to exit the industry it increase the demand for remaining firms and decrease available product variety. So D/N shifts to the right.
d3 also shifts out due to domestic firms exiting and become flatter due to greater total number of varieties with trade. Compared to without trade there is a lower price but higher sales. And shows the two gains from trade for conusmers as lower p and higher V.
11What has been the result of NAFTA for Canada, US and MEX in summary?For the United States, the long-run gains have consisted of an expansion of varieties, and a fall in consumer prices.
• For Canada and the United States, the long-run gains
considerably exceed the short-run costs.
• In Mexico, the gains have not translated into the growth of real wages for workers.
• However, the real earnings of higher-income workers in the maquiladora sector have risen. They have been the principal beneficiaries of NAFTA so far.
12What is premise behind the gravity equation?, the larger the two countries are, or the
closer they are, the greater the amount of trade
= B*(GDP1*GDP2)/dist^n
B is constant
13What does B represent in gravity equation?It can also be interpreted as summarising the effects of all
factors (other than size and distance) that influence the
amount of trade between two countries; such factors include
tariffs (which would lower the amount of trade and reduce
B).
14What is offshoring?The provision of a service or the production
of various parts of a good in different
countries that are then used or assembled into
a final good in another location.
15What are the two assumptions in offshoring?First assumption is that foreign wages are lower than home and relative wage of low skilled labour is lower in foreign. The costs of capital and trade apply uniformly
across all the activities in the value chain.
16Why does the relative demand skilled labour curve slope downward?If relative wage increases ie high skill wage increases firms will higher less high skilled labour ie hire highschool graduates instead of university.
17What happens when cost of capital and trade fall in the foreign country?It will increase offshoring and shift further up the value chain. It means the activities done in foreign are now higher skill intensive than before.
18How does an increase in offshoring affect home labour demand and wage?With increased offshoring it means that lower skilled labour now less demanded as done in foreign so relative H/L demand will shift out resulting in an increase in relative wage.
19What happens to relative D and W for foreign when offshoring increases?As the jobs being done in foreign are now higher skill intensive than before it shifts the relative demand out and will increase the relative wage.
20What does the isoquant represent? and what does the no offshoring equilibrium look like?it illustrates the
production of the firm; it is a curve along which the
output of the firm is constant despite changing
combinations of inputs. Equilibrium looks like ppf, relative price line and isoquant Y0 all being tangent at Point A on the ppf.
21Explain what happens on the PPF diagram when offshoring is allowed, assuming relative price of components is lower in foreign than home and how it shows gains from trade?At the world relative price Pc/Pr lower than home it causes price line to be tangent to the isoquant Y1 which is outside of the PPF, and allows it to produce y1 of final good larger than Yo. Shows home imports components and exports R&D. Shows that with the same amount (H+L)labour firm can produce more goods and at a lower price as costs decrease so consumers gain.
22What happens in case 1 with offshoring when foreign country improves it its productivity in the good it exports (components) so lowers price of this component?fall in price of components lowers the world relative price(makes it flatter) and causes it to now be tangent to the to PPF at a higher up the curve point and to a higher isoquant Y2. Increased import of components and export of R&D. Higher production and more gains from trade.
23What happens in case 2 when there is a fall in the price of R&D?Fall in price of R&D makes world price line steeper, this causes imports of components to decrease and home export of R&D to decrease. Price line is now tangent to a lower isoquant Y3. And B moves to a lower point along the curve B".
24How to show the trade and no trade welfare? and thus derive the import demand curve?Show that with trade price decreases to Pw showing an increase in CS and a decrease in PS. Thus when you draw the import demand graph with price/imports it shows a downward sloping import curve as price decreases, imports increase.
25What happens when a small country imposes a tarrif (ie one that doesnt change world price)?A tarrif causes the price to rise in the home market leading to lower imports. This causes a shift upwards of the import supply curve and thus lowers import demand. Export supply is horizontal and it means that that Home can import any
amount at the price PW without having an impact on that price.
26What effect does tarrif have on welfare? and how to interpret DWL?DWL: b is the production loss due to producing at MC above world price
d is the drop in cs from those that can no longer afford to consume the good.
27Why do small countries imposes tarrifs when they incurr a loss?One reason is that a developing country does not have many other forms of government revenue, tarriffs are easy to collect. Another reason is politics, tarrifs benefit home producers so if govt cares more about PS over CS then will decide to use the tarrif. The benefits to producers (and their workers) are typically more concentrated on specific firms and states than the costs to consumers, which are spread nationwide.
28What is the effect of a tarriff on a large country? when export supply upwards sloping how is it different from small?It differs from small home price for imports P* +t, rises by
less than the amount of the tariff t as compared
with the initial world price PW
29Why does the world price change when a big country imposes a tarrif?When a big country imposes a tarrif it reduces the amount of imports of that good and thus creates an excess supply which will cause price and in this case world price to decrease.
30What is the effect on welfare of a big country imposing tarrif? and what is the effect on world welfare?There is a loss of WDWL (b+d+f)
31What is the welfare effect of a quota on small country? and what is different to tarrif?Difference in the area c as it is now not collected by Govt but by those importing good, take advtange of the price difference. Quota rent
32What are the 4 ways to reallocate quota rents?Give quota to home firms, Rent seeking, Auctioning the quota, Voluntary export restraint
33Show the monoply no free trade equilibrium and free trade eq?
34What is the comparison between a monoplist in a small country and a perfect competition under free trade and not?Under free trade for a small country, then, a Home monopolist produces the same quantity and charges the same price as a perfectly competitive industry. The reason for this result is that free trade for a small country eliminates the monopolist’s control over price, that is, its market power. It faces a horizontal demand curve, equal to marginal revenue, at the world price of PW.
35What is the effect on a monoplist under free trade when a tarrif is imposed?The effect is similiar to the that of perfect competition except now the monoplist can charge Pw+t but no higher otherwise he would loose all his sales to imports. It still has limited control over its price. DWL is still the same as would be for perfect competition.
36What is the effect on a monoplist of a quota?
37What are the differencs between the quota and the tarrif on a monoplist?For the tarrif the monoplist still has limited price control as cannot raise price abvove Pw+t without loosing all sales to imports, but for the quota for the demand not fullflled by the quota the monoplist can then charge a profit maximising price as has unlmited price control on this remaing demand/quantity. Thus there is a lower Q under the quota even though imports is the same.
38What is the efect on DWL under quota on monoplosit as opposed to tarrif?The deadweight loss will always be
higher for a quota than for a tariff because the Home monopolist will always charge a higher price. That higher price benefits the monopolist but harms Home consumers and creates an extra deadweight loss because of the exercise of monopoly power. This also increases the quota rents, thus these are greater than GOVT revenue from the tarrif. This then adds to home losses if the quota rents are wasted.
39What is dumping?occurs when a foreign firm sells a product
abroad at a price that is either less than the price it
charges in its local market, or less than its average costs
to produce the product.
40How can dumping be profitable?Dumping can be profitable when if selling in foreign country the foreign price is higher than the marginal cost, even the price is lower than the average cost these units will still be producing profit.
41Show the effect of anti dumping duty/policy
42What is infant industry protection?a tariff applied to an industry that is
too young to withstand foreign competition, and so will suffer
losses when faced with world prices under free trade.
43What is the first scenario where infant industry protection is justified?First, protection may be justified if a tariff today leads to an increase in Home output that, in turn, helps the firm learn better production techniques and reduce costs in the future. Banks may be unwilling to lend to the firm because they are certain on whether they will paid back. Thus a tariff or quota in this scenario offsets an imperfection in the capital market.
44What is the second scenario where infant industry protection is justified?A second case in which import protection is potentially justified is when a tariff in one period leads to an increase in output and reductions in future costs for other firms in the industry, or even for firms in other industries. This occurs when firms learn from each others success. When one has technological breakthrough others benefit by being able to copy the knowledge.In this case, a tariff is needed to offset this externality by increasing production, allowing for these spillovers to occur among firms so that there are cost reductions.
45When trying to prevent a firm from shutting down by increasing output what should govt do?Should apply a tariff, the tarrif raises Pw to Pw+t which will increase output even for a monoplist, a quota on the other hand will potentially decrease output so can further raise price. Increasing output allows the firm to learn better production techniques so that its future costs are reduced. The decrease in output would lead to further DWL.
46What is the first condition for IFP to be successful and show graphically?If temporary tariff allows firm to operate in the future without tariff then has been success.
47What is the second condition to which IFP has been successful?Has been successful if the DWL (b+d) is less than the present value of the future producer surplus (e)
48What is an export subsidy and why is it used?Export subsidy is payment to firms for every unit of output produced. Governments give subsidies to encourage domestic firms to produce more in particular industries. Also many countries give subsidies to farmers regardless of whether the crop is exported or sold domestically
49What are some examples of agricultral assistance ?In Europe the CAP pays farmers up to 50
euros per ton harvested sugar beets, which is five times the world market price. As a result, the sugar beet subsidy makes Europe a leading supplier of sugar worldwide even though other parts of the world have a comparative advantage. US also does similar for cotton farmers to grow more and subsidises agribusiness' and manufacturers to buy it.
50Explain the effects of an export subsidy with a graph?As domestic sugar price rises to Pw+s greater than Pw to prevent domestic consumers from just importing sugar we assume govt imposes a tariff equal or higher than the subsidy.
51What are the welfare effects of the export subsidy?CS decrease by (a+b) due to higher price,
PS increases by (a+b+c) due to higher price and government has to pay (b+c+d) the amount of the subsidy this means a net DWL of (b+d). The triangle d is efficiency loss or production loss of the country. The triange b is the consumption loss for those who cant afford the higher price.
52What happens in an export subsidy when it is a large country, what are welfare effects and conclusion?The effect on welfare CS reduced by (a+b), PS increase (a+b+c), govt pays (b+c+d+e), so net effect is loss of (b+d+e). This extra loss of e is the terms of trade loss as home terms of trade are worse because foreign consumers gain from lower Pw. There is a world net loss of (b+d+f). Thus is an inefficient way of to transfer gains among countries.
53As export subsidies for large countries create net welfare loss for the world, what effect could removing such subsidies have?Export subsidies applied by a large country create a benefit for importing countries in the rest of the world, by lowering their import prices. Therefore, the removal of these subsidy programs has an adverse affect on those countries. In fact, many of the poorest countries are net food importers that will face higher prices as agricultural subsidies in the European Union and the United States are removed
54What are the effects of a production subsidy graphically and welfare effects?In this situation home recieves subsidy from both foreign and home consumers so charges the same price to both of Pw, hence DWL is smaller being only (c). PS increase by (a+b) while cost to Govt is (a+b+c).
55Compare and contrast an export subsidy and a production subsidy for small country?The production subsidy increases the quantity supplied by Home producers, just as an export subsidy does, but the production subsidy does so without raising the price for Home consumers.Our finding that the deadweight loss is lower for the
production subsidy makes it a better policy than the export subsidy to increase Home supply.
56What is the effect of an export tarrif on large country? and wefare effects?The lower price to home consumers so CS increase by (a), PS lower by (a+b+c+d) , govt gets (c+e) so net effect on welfare is (e-(b+d)). There is a terms of trade gain for home consumers (e) if this is greater than the DWL than exporting country gain overall.
57What is the effect of an export quota?
58Compare and contrast the differences between the export quota and the export tariff?the overall welfare effect of the export quota is the same as the export tariff, with the possibility of welfare gains if the terms-of-trade gain is greater than the loss of some of the producer’s surplus. The effects of the quota on Home firms and the government differ from those of an export tariff. Under the export tariff we learned that the Home government earns revenue, while under the export quota this revenue goes to Home firms as rents.
59Why do govt's provide subsidies to their high tech industries?because governments believe that these subsidies can create a strategic advantage for their firms on international markets. Because these industries often have only a few global competitors, we use game theory (the study of strategic interactions) to determine how firms make their decisions under imperfect competition.
60What is nash equilibrium? and what happens with multiple equilibria?The idea of a Nash equilibrium is that each firm must make its own best decision, taking as given each possible
action of the rival firm. With multible equilibria the outcome can
depend on an external factor, such as the ability of one player to make the first move.
61When is a subsidy worthwhile in nash equilbirum?If a subsidy increases the profits to a firm by more than the subsidy cost, then it is
worthwhile for a government to undertake the subsidy. As we have seen, though,
subsidies are not always worthwhile unless they can induce the competing firm to exit
the market altogether, which may not occur
62Explain how for an foreign monoplist, the importing country is better off with a tariff as opposed to a quota?With the quota the monopolist receives p2 the new profit max price, while under the tarrif he receives p2-t which is lower than p1 what he received before. Thus the increase in import price is lower than the price of the tariff so there is a terms of trade gain for the home country.
63Compare and contrast a customs union a free trade area and regional trade agreement?RFTA is when tariffs are dropped between countries within the region, free trade area is when members take tariffs away on each-other but maintain tariffs on non members. A customs union enforces that members must all hold common tariffs against the rest of the world whilst also eliminating tariffs on each-other eg EU
64What are the benefits of the customs union versus the free trade area?Customs union dont need to worry about rules of origin as all tariffs on non-members are equal, while for free trade area could export to country with lowest tariff then move freely in the area. However customs union does't allow for unequal tariffs can be bad as for political reasons targeted tariffs can be useful.
65What is the prisoners dilemma?When both parties acting in their own self interest yields a result that is not optimal.