basic economics-tariff analysis

TARIFF ANALYSIS

Presented by:-Parth Pratim

BOSTON TEA PARTY

16 December , 1773

A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers.

WHY TRADE HAPPENS……………?

WE NEED TO KNOW……………..

MARKET PRICE

PRODUCER SURPLUS

CONSUMER SURPLUS

The current price at which an asset or service can be bought or sold. Economic theory contends that the market price converges at a point where the forces of supply and demand meet. Shocks to either the supply side or demand side can cause the market price for a good or service to be re-evaluated.

MARKET PRICE

CONSUMER’S SURPLUS:-

Consumers always like to feel like they are getting a good deal on the goods and services they buy and consumer surplus is simply an economic measure of this satisfaction.

--::EXAMPLE::--Assume a consumer goes out shopping for a CD player and he or she is willing to spend $250.

When this individual finds that the player is on sale for $150, economists would say that this person has a consumer surplus of $100.

PRODUCER’S SURPLUS:-

An economic measure of the difference between the amount that a producer of a good receives and the minimum amount that he or she would be willing to accept for the good. The difference, or surplus amount, is the benefit that the producer receives for selling the good in the market.

-::EXAMPLE::-

Say a producer is willing to sell 500 widgets at $5 apiece and consumers are willing to purchase these widgets for $8 per widget. If the producer sells all of the widgets to consumers for $8, it will receive $4,000. To calculate the producer surplus, you subtract the amount the producer received by the amount it was willing to accept, (in this case $2,500), and you find a producer surplus of $1,500 ($4,000 - $2,500).

SUPPLY

DEMAND

PRICE

QUANTITY

CONSUMER’SSURPLUS

PRODUCER’S SURPLUS

GRAPHICAL REPRESENTATION :-

SUPPLY

DEMAND

PRICE

QUANTITY

WORLD PRICE

A B

CONSUMER’SSURPLUS

PRODUCER’

S SURPLUS

EXPORT

LOCALSALE

TOTALSALE

SUPPLY

DEMAND

PRICE

QUANTITY

A B

CONSUMER’SSURPLUS

PRODU

CER’

S SURP

LUS

WORLD PRICE

IMPORT

LLOCAL PURCHASE

TOTAL PURCHASE

SUPPLY

DEMAND

PRICE

QUANTITY

APPLICATION OF TARIFF:-

300

270

a b

X

YZ

importWorld price

SUPPLY

DEMAND

PRICE

QUANTITY

APPLICATION OF TARIFF:-

300

290

270a b

c d

IMPORT

WORLD PRICE +TARIFF

X

YZ

Tariff

Export Tariff Import Tariff Transit Tariff

Export Tariff :- Are the taxes that are levied on goods when they leave the country.

Import Tariff:- Are the taxes on the goods which are imported.

Transit Tariff:- Are the taxes which are imposed on the goods as they pass through one country bound for another.

Non tariff

“ Any government regulation, policy, or procedure other than a

tariff that has a

effect of restricting international trade or effecting overseas

investment

becomes a non tariff barrier.”

Non Tariff

Quotas

Subsidies

Embargo

Currency

Controls

Local Conten

t Requirement

s

Product &

Testing

Standards

Quotas refers to numerical limits on the quantity of goods that

may imported or exported by the country.

A Subsidy is a government payment to a domestic producer.

Subsidies take several forms such as , cash grants , low-

interests rates, tax breaks, and government equity

participation in local firms. By lowering the costs, subsidies

help domestic producers in two ways:- they help them

compete low-cost foreign imports and gain access to export

markets.

EMBARGO refers to a complete ban on trade (import or export)

in one or more products with a particular country. It may be

placed on one or more goods or completely ban trade in all

goods. It is the most restrictive non-tariff trade barrier.(it can

also be termed as absolute quota)

Currency control:- refers to restrictions on the

convertibility of currency into other currencies.

Local Content Requirements:- refers to the legal stipulation that a specified

amount of a good or service be supplied by producers in a domestic market.

PRODUCT & TESTING STANDARDS This non-tariff barrier requires that foreign

goods meet a country’s domestic product or testing standards before they can be offered for sale in that country.

TARIFF ACCORDING TAXATION

Ad Valorem TariffSpecific TariffCompound Tariff

JUSTIFICATION OF TARIFF

To protect domestic jobs. If consumers buy less-expensive foreign goods, workers who produce that good domestically might lose their jobs.

To protect infant industries. If a country wants to develop its own industry producing a particular good, it will use tariffs to make it more expensive for consumers to purchase the foreign version of that good. The hope is that they will buy the domestic version instead and help that industry grow. Contd….

To retaliate against a trading partner. If one country doesn’t play by the trade rules both countries previously agreed on, the country that feels jilted might impose tariffs on its partner’s goods as a punishment. The higher price caused by the tariff should cause purchases to fall.To protect consumers. If a government thinks a foreign good might be harmful, it might implement a tariff to discourage consumers from buying it.

Analysis of a tariff in a "small" economy

General Equilibrium Analysis

Analysis of a tariff in a "large" economy

Analysis of a quantitative restriction-import

quota- in a small economy.

GATT & WTO

GATT stands for General Agreement on Tariffs and Trade.

GATT was signed in 1947, took effect in 1948, and lasted until 1994 and it was replaced by the World Trade Organization in 1995.

Its purpose was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.

WTO

World trade organisation. GATT was a set of rules agreed upon by

nations while WTO is an institutional body. WTO acts as:1. Conductor2. Tribunal3. Monitor4. Trainer

Case Study

Breathing room.Political Tool.Overcapacity.Cautionary notes.