Economia Integrarii Europene - Radu Nechita 2

© R.Baldwin & C.Wyplosz Teaching/Studying Presentation Baldwin & Wyplosz The Economics of European Integration •Chapter 4: Basic Economics of Preferential Liberalisation “A careful presentation of the Open Economy Supply and Demand Diagram (Figures 4-1 to 4-3 Chapter 4)” To view this, start the slide show (‘view show’ command under the Slide Show pull-down menu) and use either the arrow keys or click the mouse to proceed © R.Baldwin & C. Wyplosz The MS-MD Diagram: The International Market euros •The •The Theimport import demand equilibrium supply curvecurve price of shows shows thethe imports volume volume and quantityof imports of imports thatthat of imports Home will are be demands indicated offered by at at any the anypoint given price. “A”. ForThe For example: price (called the market clearing price) is pFT. The corresponding given • if price. the price is example: p’”, then Home •The would import like to supply import m’”. (MS) and import • if the price is p’, then corresponding foreign quantity firms would of imports is m like FT . to export m’ to Home. • if the • if the price Theprice is p””, is p”, then equilibrium then Home foreign price would demand is pFTnations like becausewould to (MD) at this import like price, m””amount todiagram export the m” has price foreign firms wish • The • The toMSMD sell tocurve curveHomeis isisdownward upwardjust equal slopedsloped tosince since (measured the amount higher a higher prices that pricewants in euros) Home make makes on thetoHome foreign firms buy. want want to vertical to import sell moreless. to Home. axis p’” •And the quantity of importsMS on the p”” A axis horizontal pp” FT p’ Import supply curve MD Import demand Imports curve mFT m’ m”’ m”” m” imports © R.Baldwin & C. Wyplosz The MS-MD Diagram: The International Market euros MS pFT Import supply curve MD Import demand Imports curve mFT imports © R.Baldwin & C. Wyplosz Open Economy Supply & Demand Analysis: The Home Market The price pFT euros Sdom indicates the price This At pFTis, the Homesupply consumers atimport which curve ofbuy foreignHome a When the price of imports is pFT as Without trade barriers, the price fixes the Home firms. It is quantity ofupward goods equal sloped to since C. firms shown here, Home firms supply a market price; because when firms are the importwilling price is pto wish to sell more when prices are FT, the quantity of goods equal to Z. total supply curve in the Home market is the kinked high. supply imports. line shown. The first Z units of supply are made by Home firms. The rest is imported. Demand and supply thus meet at point B. The level of imports equals the difference B pFT pFT between Home This is the demand curve of Home consumption and consumers. It is downward sloped Home production. since consumers wish to buy more when prices are low. Ddom Imports Z C quantity © R.Baldwin & C. Wyplosz Open Economy Supply & Demand Analysis: The Home Market euros Sdom pFT Ddom Imports Z C quantity © R.Baldwin & C. Wyplosz Putting together the diagrams The level of imports can be seen directly For in the instance left-hand if the world panel, price or euros Here indirectly in we the put the two panel right-hand diagrams The reason is that the horizontal were p’, Home There would are a fewwish to features euros of this difference between Ddom and as the together. This horizontal is very useful when difference import m’. Click diagram 5that timesyoutoshould see know. dom Sdom at anySworld dom price always between studying D dom the and S effects dom . that the indicated import level is of changing a D trade barrier. We first see how the equals the level of imports the same in both panels. indicated by the MD curve (this change alters the border and domestic prices in the left panel and then use the is how the MD curve was right panel to see the impact of the constructed). price changes on the MS Home market. p’ pFT pFT m’ m’ m’ m’ m’ MD mFT imports quantity mFT Z C © R.Baldwin & C. Wyplosz Chapter 4:Figure 3 Border price, Domestic price, euros euros Ddom Sdom MS pFT pFT MD mFT imports quantity mFT Z C © R.Baldwin & C. Wyplosz Teaching/Studying Presentation Baldwin & Wyplosz The Economics of European Integration •Chapter 4: Basic Economics of Preferential Liberalisation “A careful presentation of the Positive Effects of an MFN Tariff in the MS-MD diagram” !!! This is not in the book, but it will help you understand the MS-MD diagram To view this, start the slide show (‘view show’ command under the Slide Show pull-down menu) and use either the arrow keys or click the mouse to proceed © R.Baldwin & C. Wyplosz Positive Effects of an MFN Tariff Border price, Domestic price, euros 1.We now use the diagrams to study the positive euros effects) of a tariff effects (i.e. price and quantity Sdom 2.We start by supposing that initially no tariff is imposed. MS PFT With no tariff, the equilibrium price is PFT and MD the equilibrium imports is mFT. Ddom imports quantity mFT Z C © R.Baldwin & C. Wyplosz Positive Effects of an MFN Tariff Border price,1. Now we impose Domestic price, euros a tariff equal to “T” euros 2. Imposition of a tariff by Sdom Home drives a “wedge” between the price in the Home market and the price received by foreign firms exporting to Home. T This is to say … MS PFT MD Ddom imports quantity mFT Z C © R.Baldwin & C. Wyplosz Positive Effects of an MFN Tariff Border price, 1. Due to the tariff wedge Domestic price, euros T, the Home price (also euros called the domestic price) Sdom is higher than the price foreign firms receive (also called the ‘border’ price); the difference is exactly T. T MS PFT MD Ddom imports quantity mFT Z C © R.Baldwin & C. Wyplosz Positive Effects of an MFN Tariff Border price, 2. To make this clear, Domestic price,we euros call theeuros domestic price P’ and the border price P’-T. Sdom P’ MS PFT P’-T MD Ddom imports quantity mFT Z C © R.Baldwin & C. Wyplosz Positive Effects of an MFN Tariff 1. We know Border price,that P’ and P’-T are the Domestic price, equilibrium prices since the market for euros euros imports clears at these prices. Sdom More precisely, at P’ Home wishes to import m’ and at P’-T foreigners want to sell m’ to Home. m’ P’ MS PFT P’-T MD Ddom m’ mFT imports Z C quantity © R.Baldwin & C. Wyplosz Positive Effects of an MFN Tariff 1. The Border price, Notice tariff thatraises the the Domestic price, euros domestic price and .. border euros price move in opposite Sdom directions. 2.That but is lowers to saythe... border price P’ MS PFT P’-T MD Ddom m’ mFT imports Z C quantity © R.Baldwin & C. Wyplosz Positive Effects of an MFN Tariff 1. Now consider the impact of the Border price, Domestic price, domestic price rise on Home euros euros production and consumption. Sdom 2. The rise in the Home P’ price from PFT to P’ causes Home firms to expand production to Z’ and MS Home consumers to PFT P’-T reduce consumption to C’. MD Ddom m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Chapter 4 Border price, Domestic price, euros euros Sdom P’ T MS PFT P’-T MD Ddom m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Teaching/Studying Presentation Baldwin & Wyplosz The Economics of European Integration •Chapter 4: Basic Economics of Preferential Liberalisation “A careful presentation of the Welfare Effects of an MFN Tariff in the MS-MD diagram” NB: This analysis does not exactly follow the book, but it explains the results in diagram 4-5 To view this, start the slide show (‘view show’ command under the Slide Show pull-down menu) and use either the arrow keys or click the mouse to proceed © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff NB: Mouse click or use arrow keys to advance 1. Next we consider the “welfare” or “normative” effects of T, i.e., we see who gains and who loses from T. 2. We start with the effects on Home. 3. Intuitively, it is easy to believe that the domestic price increase (i) hurts consumers, (ii) helps producers, and (iii) raises government revenue. 4. More specifically ... © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff Border 1. The greyprice, area is the loss of consumerDomestic surplus due price, euros to the FT to P’. tariff-induced price rise from P euros Sdom 2. Consumers lose for 2 reasons. 3. (i) They pay a higher price for the goods they continue to buy P’ (this loss equals the blue rectangle P’ defined by the price hike times MS E A F G consumption C’). PFT P’-T 4. (ii) Consumers also lose MD because they consume less. This Ddom part of the loss corresponds to the green triangle. m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff 5. The grey area, E, is the Border price, Domestic price, gain in producer surplus euros euros due to the tariff-induced price rise from PFT to P’. Sdom 6. Home producers gain for 2 reasons. (i) they get a higher price P’ for the quantity of goods they P’ used to sell (this gain equals the MS blue rectangle defined by the PFT P’-T price hike times Z). 7. (ii) they also gain because they MD sell more. This part of the gain Ddom corresponds to the green triangle. m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff 8.Border The grey area is the increase in price, Domestic price, government euros revenue, i.e. the tariff euros revenue. It equals the level of Sdom imports C’-Z’ times the tariff T. 9. The tariff revenue can be viewed as being paid partly by Home consumers P’ by foreigners. and partly P’ MS A 10. (i) The part paid by Home B PFT P’-T is shown by the blue consumers P’-T rectangle. The area equals the level of imports consumed times the domestic price rise (PFT to P’). MD Ddom 11. (ii) The part paid by foreigners is the green rectangle. It equals imports (i.e. the level of exports) times the decrease in the border price (PFT to P’-T). m’ m FT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff Border 1. price, Next we look at the net gain or lossDomestic to home, price, i.e. we want to know if the losers lose eurosthan the winners win. more euros Sdom 2. Consumers lose 8. Note that if B-F-G is positive, it is due to E+F+A+G, but ... exploitation of foreigners. That is, the amount of tariff 3. … part of this is offset by the revenue paid by foreigners (B) exceeds the producers’ domestic distortion loss (F+G). P’ gain of E, and ... P’ MS EE AA F G 4. … more is offset by the part of the B PFT P’-T gain of corresponding to A. government’s P’-T 5. To this, we add the other part 7. We call the area “B” the ‘terms of trade’ of the government’s gain, namely MD gain, or “border price” effect. Ddom B. We call the triangles F and G, the The net Home welfare ‘domestic distortion’ loss, or the “trade effect is thus +B-F-G. volume” effect (since they are related to This may be positive or the change in import volume. negative. m’ m FT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff 1. Now we look at the Border price, 2. price, The foreign nation definitely loses from the Domestic euros welfare effect on the euros Home nation’s impositiondomof a tariff since it foreign nation. S exports less. receives a lower price and 3. The loss consists of 2 parts. 4. (i) The loss B due to the lower border price and … P’ P’ A C MS A B D B PFT P’-T P’-T 5. (ii) … the loss D (green triangle) due to MD the reduction in foreign sales to Home. D dom Note that the area B in the left panel and in the right panel are the same since both are exports times the fall in the border price. The area A is the same in both panels for a m’ mFT imports similar reason. Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff 1. Here we see the net global welfare effect. Home’s change is +E-F-G Border price, Domestic price, euros and Foreign’s change is -E-D. Adding these leaves a loss of the three euros triangles -(D+F+G). Sdom P’ P’ MS F G B D B PFT P’-T P’-T MD Ddom m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff 1. The book claims that the net global welfare effect also equals C+D in the left-panel. Here we shall Border price,show that this is true, i.e.Domestic C=F+G price, euros euros 2. The first thing to note is that the sum of the bases of the triangles F and G equals the Sdom base of the triangle C (since both measure the change in imports). P’ P’ C MS F G E D PFT P’-T MD Ddom m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff Border price, Domestic price, euros euros 3. Now we move G over to C. Click 5 times to do this. Sdom P’ P’ C MS F G E D PFT P’-T MD Ddom m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff Border price, Domestic price, euros euros Sdom 4. Now we move F over to C. Click 5 times to do this. P’ P’ C MS F G E D PFT P’-T MD Ddom m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Normative Effects of an MFN Tariff Border price, Domestic price, euros 6. So this is what we wanted to show. The net euros global welfare change from Home’s S MFN dom tariff is the sum of the triangles C+D. P’ P’ C MS F G E D PFT P’-T 5. Finally, we have to change the shapeMDof F to fit into C. Remember that the area of a triangle depends only on its Ddom height and base. Changing the shape holding these constant does not change the area. Click 2 times to change the shape. m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz Border price, Domestic price, euros euros Sdom P’ P’ A MS E A C F G E D PFT P’-T MD Ddom m’ mFT imports Z Z’ C’ C quantity © R.Baldwin & C. Wyplosz