1. Examine the various effects of an export subsidy for a small exporting nation.
2. Examine the various effects of an import quota for a small importing nation.
3. Now add Foreign, which has a demand curve D= 80- 20P and a supply curve. S=40+20P.
Derive and graph foreign's export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade.
Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equliibrium under free trade. What is the world price.what is the volume of trade?
Another - Return to the example of problem 2. Starting from free trade, assume that Foreign offers exporters a subside of 0.5 per unit.
Calculate the effects on the price in each country and on welfare, both of individual groups and of the economy as a whole, in both countries. The nation of Acrema is small and unable to affect world prices. It imports peanuts at the price of $10 per bag. The demand curve is D=400-10P. The supply curve is S=50+5P. Determine the free trade equilibrium. Then calculate and graph the following effects of an import quota that limits imports to 50 bags. The increase in the domestic price. The quota rents. The consumption distortion loss. The production distortion loss.
Outside Text Materials:
4. What is meant by currency devaluation by a country? Explain how a country's currency devaluation could improve its balance of trade.
5. What is Marshall-Learner condition for successful devaluation? Prove that a country can improve its trade balance by devaluing its currency if the Marshall-Lerner condition is satisfied and fails to do it if it is not.