Transcript Partial Equib. Trade Model, Trade Elasticities & Gains

PARTIAL EQUILIBRIUM TRADE MODEL,
GAINS FROM TRADE, TRADE
ELASTICITIES & IMPACTS OF COUNTRY
INTERVENTIONS
Lectures 9 & 10 AHEED Course “International
Agricultural Trade and Policy”
Taught by Alex F. McCalla, Professor Emeritus,
UC Davis.
April 2 & 5 , 2010, University of Tirana, Albania
1
Edgeworth Box & Allocation of Resources
2
LF
C
TC
F
OC
OF
Labor used in cloth production
Increasing
LC
TF
Land used in food production
Land used in cloth production
Increasing
Labor used in food production
Relationship between Gen. Equilb. & Partial Equilb.
Model, deriving the supply curve
3
Wheat, bushels
Slope of PPF is cloth’s
opp. cost (mrt)
Cloth, yards
Bushels/yard
Supply
Cloth, yards
Deriving demand curves from indifference
curves
Wheat, bushels
4
I
Cloth, yards
Bushels/yard


 D
Cloth
-Pc/Pf
From General to Partial Equilibrium
Wheat, bushels
5
Cloth, yards
Bushels/yard
S
D
Cloth
Comparative advantage under increasing
opportunity cost
6
Home
Wheat, bushels
Wheat, bushels
Foreign
Cloth, yards
Cloth, yards
SFor
Bushels/yard
Bushels/yard
SHome
Cloth, yards
Cloth, yards
Review of Producer Surplus
7
PS
Producer surplus = quasi rent, or excess of
gross receipts over TVC.
R= TR- TVC
Defined as the area above the supply curve
& below the price line
S
Q
Review of Consumer Surplus
8
Consumer utility is not observable, so
economists try to compute a money-based
measure of welfare effects.
CS gives the change in what the consumer
is willing to pay over that which is
actually paid.
P0
P
1
Demand
q0
q1
Q
Generating Excess Supply & Excess Demand
Functions in World Market
9
International Market
Home
Foreign
S
S
ES
PT
ED
D
D
Q
QT
Q
Q
Gains from Trade
10
Elasticity of Import Demand -(Excess
Supply)
11
Elasticity of excess supply (ES) & excess demand (ED) functions are derived from domestic
supply Sd and domestic demand Dd functions.
ED = Dh – Sh; and ES = Sf – Df
Thus the slopes of ED & ES are derived from Dh, Sh & Sf ,Df
dED = dDh – dSh
dES = dSf - dDf
dp
dp
dp
dp
dp
dp
And Therefore so are the elasticities of ED & ES derived from elasticities of the domestic
functions. Let E =elasticity
Recall elasticity of Dh = Ehd = dq * p
dp q
As shown in McCalla and Josling pp41 & 42
EED = E Dh * Home Con/Imports – E Sh* Home Sup/Imports
E ES = E Sf * For Sup/Exports – E Df * For Con/ Exports.
Elasticity of Import Demand (Excess Supply)
12
Let us give a numerical example;
Suppose a country imports 25 % of its wheat consumption
Let S = share of imports in domestic demand IM/Dh;
and 1-s is share of consumption supplied domestically
So Home con/imports = 1/s; Home sup/ imports = 1-s & if EDh = -.2 and E Sh = .2
The elasticity of Excess Demand EED = (1/.25 *-.2) - .2 * .75/.25
Which =(4 X -.2) = -.8 + - .6 (.2 X 3) = -1.4
What is obvious is that even though both domestic supply and demand are highly inelastic,
import demand is elastic.
In general can say Import Demand is more elastic;
a. the more elastic domestic demand;
b. the more elastic domestic supply;
c. the smaller the market share of imports.
Lecture 10: Modeling Country Interventions
13
Foreign
International Market
Home
S
S
ES
ED
D
D
Q
Q
Q
Transmission of Shocks
14
Country B
Experiences a short
cropShifts Sb to Sb’
which shifts Ed out
to Ed’
Raising world price
to P’w
and expands trade
to 08
Note both countries
adjust
15
Imposition of a unit tariff –same impact as introducing a
transport cost.
The imposition of a tariff t by country B shifts Ed to E’d;
Price in exporter A falls from Pw to P’w & exports contract;
Price importer B rises to P’b aand imports contract;
B collects tariff revenue of (P’b –P’w) X Q’
16
Impact on excess supply of exporter fixed-price
policies.
Suppose Ex A fixes producer prices at P, thus domestic supply becomes S’a and excess supply
becomes E’s; if also fixes P to consumers excess supply becomes perfectly inelastic -E”s.
If P is floor price for both producers and consumers excess supply becomes E”s below P and Es
above P Lesson – Domestic price intervention reduces the elasticity of Es
17
Impact on excess demand of importer fixed-price
policies
Is mirror image from exporter case- if Im B fixes producer price at Pp excess demand
rotates to E’d, fixing Pp also to consumers makews excess demand perfectly inelastic
E”d.
The lesson for world markets is the more rigid domestic intervention the inelastic world S
& D functions will be = more price instability in world markets
18
World Market Impacts of Guaranteed Producer Prices.
Put together, guaranteed producer prices in both exporters and importers rotates Es to E’s and Ed to
E’d, world trade contracts from Q to Q’ and world price falls from Pw to P’w.
Note that because intervention decreased the elasticities of both excess functions, the change in price
is greater than the change in quantity, i.e. domestic intervention increases price instability in World
Markets
19
Distribution of the effects of supply shocks in both countries
In (a) the short harvest in Im. B reduces supply in Im.B by AB , the adjustment in the
world market can be decomposed: -BC is reduced import demand due to price
increase and AC is increased export supply in response to the price increase
Optimal Export Tariff
World Market
P
S
• Why is MR below ED?
• How do we measure social
return from additional exports?
P*= P(1+τ)
PF
P
MR
ED
Q
Optimal Import Tariff
World Market
P
MO
• Why is Marginal Outlay above S?
• What is the true cost of an additional
unit of imports?
S
P= P*(1+τ)
P*
ED
Q
Tariff v Quota Equivalence: large country
22
P
Home
P
S
World Market
ES
PF
ED
D
|
|
Q
For quotas, welfare effects depend crucially on how import licenses are
distributed. e.g., a) Auction quotas (Australia); b) Assign Import rights to
home firms (Japan, Indonesia; Canada) c) Give licenses to foreigners (USA).
Q
Import Quota & Domestic Monopolist
Unlike with a tariff, Monopolist
is now free to  prices
Domestic Market
P
Imports
S
Quota rent
}
23
Pq
Quota shifts D left by amount of quota
PF
MRq
D
Dq
Q
Tariff v Quota that leads to same level of imports
Domestic Market
24
P
Quota shifts D left by amount of quota
S
Pq
Unlike with a tariff, Monopolist
is now free to  prices
PF + τ
PF
D
MR
|
0
Qq
Dq
|
Qt
QF
}
Imports
Q
Quota creates more monopoly power
than tariff
25
D
Source: David Skully
World bound agricultural tariff averages,
by region
26
140
120
100
Average agricultural bound tariff (63 percent)
80
60
40
20
0
Non-EU W.
Europe
South Asia
Sub-Saharan
Africa
Carribbean
Islands
North Africa
Middle East
Central
America
Source:www.ers.usda.gov/db/Wto/WTOTariff_database/
Eastern
Europe
South
America
Southern
Africa
European
Union-15
NorthAmerica
World bound agricultural tariff
averages, by commodity group
27
180
160
140
Average bound agricultural tariff (63 percent)
120
100
80
60
40
20
Source:www.ers.usda.gov/db/Wto/WTOTariff_database/
Spices
Nuts
Coffee
cut flowers
Fats & oils
Oilseeds
Fruit: Frozen
Sugar cane
Feed
Fruit: Fresh
Vegetables: frozen
Sugar beet
Grains
Vegetables: fresh
Dairy
Meat
Sweeteners
Tobacco: unmanufactured
0
Tariff Escalation & Effective Rate of
Protection
Price
S
D
P*b = $1,600
T
Pbeef = $1,000
(foreign supply)
S
G
0
Value added = Final value of good - value
of imported inputs.
v = p - p, where  is share of imported
inputs in final value.
ERP = (v’ -v)/v
Pcorn = $500
(foreign supply)
Qcorn,beef
Nominal rate of protection = ST/OS = 60%
Effective rate of protection = ST/GS = 120%
Tariff Escalation
Higher import duties on semi-processed & finished products than on raw
materials.
 e.g., Cocoa enters US duty free but there is a relatively high tariff on the processed
product chocolate.
 Instant coffee v coffee beans is another example.

Average tariff on processed
products as multiple of raw
product
Source: Oxfam
US
1.25
EU
2.75
Japan
3.75
Canada
3.00