1. Construct a graph like the lower half of figure 13.1 in the textbook. Suppose at the world price of $13 10,500 units are produced domestically, and 16,700 units are consumed. When a tariff of $2 per unit causes the price to rise to $15, domestic production rises to 12,000 units, and domestic consumption falls to 14,500 units.
   1. Which area on your graph represents tariff revenue?

      See shaded area on graph below.

   2. What is the value of tariff revenue in this example?

      Revenue is (2)*(2,500) = 5,000

      

2. Using the figures in question #1 above, calculate the nominal rate of protection.

   t = (15 – 13)/13 = 0.154 = 15.4%

3. Suppose that a unit of chicken-fried steak sells for $9. Suppose that chicken-fried steak is made from two components: steak and gloppy gravy. Suppose that in the absence of tariffs a unit of steak costs $3 and a unit of gloppy gravy costs $2. In an effort to protect domestic chicken-fried steak producers from foreign competition, the government levies a 15% tariff against imported chicken-fried steak. Finally, suppose that there are also tariffs on steak and gloppy gravy: 10% and 20%, respectively. What is the effective rate of protection of chicken-fried steak? Is the government's policy actually protecting domestic producers of chicken-fried steak? Explain.

   First, value added under free trade is VA^FT = $9 – $3 – $2 = $4. To calculate value added with tariffs in place, we must first calculate tariff-inclusive prices:

   P^t_CFS = (1 + 0.15)*$9 = $10.35
   P^t_S = (1 + 1.10)*$3 = $3.30
   P^t_GG = (1 + 1.20)*$2 = $2.40
   VA^t = $10.35 – $3.30 – $2.40 = $4.65

   The effective rate of protection is ERP = ($4.65 – $4)/$4 = 0.1625 = 16.25%.

4. Suppose that the supply of and demand for foreign exchange can be expressed by the following equations:

   Demand: P = 400 – 0.05Q
   Supply: P = 10 + 0.028Q

   where P is the number of baht per dollar, and Q is the quantity of baht available in Thailand (in millions).

   1. Calculate the free market exchange rate.

      Setting supply equal to demand and solving for Q yields Q* = 5,000. Plugging this into either the supply or demand equation yields the equilibrium price: P* = 150.

   2. Suppose the Thai government decides to fix the exchange rate at 100 baht per dollar. What will be the difference between the quantity demanded of foreign exchange and the quantity supplied?

      At an exchange rate of 100, quantity demanded will be 6,000, and quantity supplied will be 3,214. The foreign exchange shortage will be the difference, 2,286.

5. The Common Market of Eastern and Southern Africa comprises 19 African countries. Consider the following data regarding exports from COMESA countries. The first column represents the value of exports from COMESA countries that are sent to other COMESA countries. Calculate the proportion of total COMESA exports that are Intra-COMESA for each year. How has this share changed over time?

   
   Source: http://www.comesa.int/

   

   The graph demonstrates that the percentage of COMESA exports going to other COMESA countries, though still small, has been steadily increasing.

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