[International Trade] WEEK8(2)

Summary

Key Points

• Without trade the autarky price would be $60 with domestic quantity of 400 units. 2:19
• Under free trade at the world price of $40 domestic production is 200 units, consumption 600 units, and imports 400 units. 2:46
• A binding import quota of 200 units produces the same market outcomes as the $10 tariff: price $50, production 300, consumption 500, and imports 200. 12:13
• The key difference is that the tariff yields revenue for the government, whereas the quota creates rent for the import‑license holder unless the licenses are auctioned. 15:18
• A specific tariff of $10 raises the domestic price to $50, increasing production to 300 units, reducing consumption to 500 units, cutting imports to 200 units, and generating $2,000 in tariff revenue. 25:04
• Tariffs generate dead‑weight loss composed of a production distortion loss (higher‑cost domestic output) and a consumption distortion loss (lost consumer surplus). 26:37
• The change in imports equals the increase in domestic production plus the decrease in domestic consumption, illustrating the mechanics of trade policy in a small country. 29:32
• An import quota is binding only when it is set below the free‑trade import level, which forces the domestic price upward. 29:59
• Raising a tariff does not always increase revenue; revenue rises initially, peaks, then falls as imports shrink, becoming zero at a prohibitive tariff level. 31:00