SOLVING QUESTIONS 1 Essay Example

Solving Questions

May 15, 2014

Question One.

In a small nation, any change in the domestic market does not affect the international prices of the good or services.

Solving question

The
Pworld in the
diagram
depicts
the
world
price level of commodities. It is the
equilibrium
price. At Pworld, Qc1 depicts the domestic demand, the
domestic
supply is Qs1 and
the imports are indicated by the
difference between Qc1 and Qs1. An imposition of the
tariff
causes a rise in the
domestic
prices. Thus, the
price level shifts to Ptariff. At Ptariff, the
domestic
demand is Qc2 and
the
domestic
supply is Qs2. Thus, the
quantity

of imports is Qc2-Qs2.The
result of the
tariff
affects
the
welfare of the
consumers
and
producers. The
consumers of the
small
country are worse
off because of the
tariff. The
imposition of the
tariff
results to an increase in price of imported
goods. In addition, the
prices of substitutes
increase
resulting to a reduction of the
consumer
surplus in the
market. On the
other
hand, the
producers are made
better off by tariff
imposition. There is an increase in the
producer
surplus. In addition, the
output of the
local
industries
increases. The overall effect
results to an increase in employment
and
profit levels of the
local
industries

.The overall result of the
tariff
imposition is welfare
loss. The
higher
the
tariff, the
higher
the
loss of national
welfare. Tariff alters redistribution of income. The
consumers
lose
and
the
recipient of government
expenditure
and
producers
gain. The overall welfare
effect is negative.

Question Two

In a large nation, a change in the domestic market affect the international prices. Its effect is different from that of a small country. A reduction in import demand results to a fall in international prices

Solving question 1

The
imposition of the
tariff
leads to an increase in the
price of imported
goods in the
country
imposing
the
tariff. However, the
quantity of purchased
goods is high than those of small
countries. Therefore, the
international
world
prices are also
affected. The
price of the
domestic
goods
fall
and
those of imported
one’s
increases
.

The
consumers of a large
country are made
better off on the
imposition of the
tariff. The
consumer
surplus in the
market
increases. On the
other
hand, the
producers are made
worse
off. The
producer
surplus
decreases. The overall effect
results to a loss in employment level and
loss of profit by the
producers. In overall, there is welfare
gain since most
consumers are better
off. The overall welfare
effect is positive.

Question Three

Domestic price of wheat under free trade

Price to Switzerland

When tariff on wheat is 60%

Price to Switzerland when tariff on wheat is 25%

Switzerland

European Union

Question 3a.

Canada. The wheat is sold at 65. Under free trade, Canada can export wheat to Switzerland at a lower price.

Question 3bIt will buy from the
local
producers. The
imposition of the
tariff
makes
the
price of imports expensive
relative to local
producers. The
local
producers
sell
the
wheat
at 100.

Switzerland will
Question 3c.change
buying
the
wheat from domestic
producers to importing from Canada. The 25% tariff
does not increase
the
price of imported
wheat
relative to the
price of the
domestic
producers. The
price of imported
wheat is cheap at 81.25 while
that of local
producers is 100.

Question 3d.

The Switzerland will buy
wheat from the
domestic
producers. The
domestic
producers are more
efficient in compared to those of EU. It will buy
wheat at 100 instead of 112 offered by EU. The
shift in purchase is due to increase in efficiency of production by domestic
producers.

Question 3e.

Trade
creation. The Switzerland shifts to domestic
producers to buy
wheat. The Switzerland shifts
trade from a less
efficient to a more
efficient
one. EU is a less
efficient
producer
compared to Switzerland.

Question 3f.Trade
diversion. The Switzerland will buy
wheat from EU. Canada is a more
efficient exporter compared to EU. There is a diversion of trade from Canada to EU.

Question 4.

Question 4a.

Disagree. The
currency will instead
appreciate. This is because
the
exchange
rate
adjustments
restrict
countries with high
inflation
rate to trade
well with those with low
inflation
rates. The
goods from the
country with low
inflation
rate is expensive
while
those
for
the
trading
partners are relatively
cheap

Question 4b.

Agree. The
reduction in interest
rates
makes
capital
and
financial assets become
less
attractive
due to the
low
rate of returns. The
foreigners
thus
reduce their investments in the
domestic
financial
market. A
decrease in the
domestic
investments
reduces
the
demand
for
the
domestic
currency. The
demand
for
foreign
currency
increases. Thus, the
nation’s currency
depreciates.

Question 4c.

Agree. An increase in the
rate of economic
growth
leads to an increase in productivity. Thus, the
country will export
more
goods
and
services. The
effect
increases
the
demand of the
local
currency. Thus, the
currency
appreciates.

Question 5.

Explain why exchange-rate quotations stated in different financial centres tend to be consistent with one another?

The
consistency of exchange
rate
quotations is brought by elimination of arbitrage effects in the
money
market. The
number of currency
traders in different
financial centers also
increases. In addition, there is monitoring of the
currency quote in different
financial
market by use of sophisticated
information technology. Thus, eliminating
the
effect of unscrupulous
traders in the
market. The technology ensures
that
minimal
deviations will only
arise from transactional costs.

Question 6.

a). A Credit.

b). A Credit.

c). A Debit.

d). A Credit.

e). A Debit.