Partial equilibrium analysis under import tariff conditions for a large economy
A large country, unlike a small one, varying the volume of its imports, can have some influence on the level of world prices (in order to improve its terms of trade). In particular, an economically significant country, introducing an appropriate tariff on imported products, can reduce the volume of imports, and therefore, the aggregate demand for this product, as a result of which the world price for these products will decrease.
If the prices for the products exported by a large country remain unchanged, it can thereby improve the conditions for its foreign trade. At the same time, however, one can not ignore the negative effect that always takes place when the country introduces an import tariff. Therefore, in order to determine the general effect of the import tariff on the economy of a large country, it is necessary to make a comparative analysis of the large country's gain from improving the terms of trade and the corresponding negative consequences of introducing a customs duty. About -
Fig. 10.3. The equilibrium model of a large country in terms of the import tariff: D d - the domestic demand line of a large country; Sd - the domestic supply line of a large country; Sw + d - line of external and internal supply in free trade; S w + d + r is the aggregate supply line under tariff conditions T
We carry out this analysis with the help of the graphical model shown in Fig. 10.3.Equity of supply and demand in free trade is achieved at point C, where the volume of demand for goods is Q5, while the volume of domestic supply is only Qa. The missing quantity of Q1Q5 is imported at the world price P w, which is lower than the internal autarkic price for the same commodity P d.
Suppose that the government of a large country introduces an import tariff of T den in order to improve its trading conditions. units, which shifts the aggregate supply function upward to the position S w + d + T. The equilibrium point of the analyzed economic system moves to the position F, as a result of this:
- increases to the level P w + T internal price of the product;
- domestic production increases by Q1Q5;
- internal consumption decreases by Q4Q5;
- country imports are reduced to Q2Q4;
- the level of the world price of goods falls to P'w.
Analyzing the model under consideration, it is easy to see that its main difference from the corresponding model of a small country consists in estimating the income, which in the case of a large country is represented by segments (3 + 5). Part of the state income in this case is a surplus of domestic consumers redistributed in favor of the state, the so-called "internal income" corresponding to segment 3. The second part of the revenues to the state budget of a large country is formed at the expense of foreign suppliers, a large country with an import tariff, reduce the price of its products.
Segment 5, thus, illustrates the redistribution of income from foreign producers (exporters) of products to the state budget of a large country as a result of improved conditions for its trade, due to the introduction of tariffs. If 5 & gt; (2 + 4), a large country receives a net benefit from the introduction of an import duty (at the expense of countries exporting the corresponding product). If 5 & lt; (2 + 4), when the effect of improving the terms of trade is less than the amount of losses caused by the introduction of the tariff, a large country bears net losses.
The tariff providing the maximum difference [5 - (2 + 4) 1, is called the optimal tariff. Its value shows the share of the tariff paid by the foreign supplier and is equal to the inverse elasticity of the import offer. The lower the elasticity of imports, the more opportunities to apply the optimal tariff, and vice versa, the higher the elasticity of imports, the more suppliers have the opportunity to keep the world price, reducing the optimal tariff and driving the entire tariff to the domestic price of the importing country. It should be noted that the optimal tariff, being advantageous for the host country, is detrimental to the world economy, since the total amount of damage to foreign suppliers exceeds the size of the country's winning rate that introduces the optimal tariff. In the practice of regulating international trade, the use of an optimal tariff under current conditions is limited.
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