Economics

Question 1 Suppose a domestically produced motorcycle sells at a world price of $5,000 under unrestricted trade. The domestic producer uses $3,000 worth of imported in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">inputs, (VA*). The $2,000 difference between the world price of the fin" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">inal motorcycle and the cost of the imported components represents domestic value added (VA). Domestic value-added in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">includes the payments made to domestic labour and capital in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">inputs. Under restricted trade, domestic value-added cannot exceed $2,000, or the price of the domestically produced motorcycle will exceed that of imported ones and the domestic ones will not sell. Suppose a 10 percent ad valorem (on the value) tariff is imposed on the imported motorcycle. [20 marks] (a) Calculate the domestic price of the motorcycle. [1 mark] (b) What is the possible price of the domestically produced motorcycle? [2 marks] (c) Calculate the domestic value-added of the imported motorcycle. [1 mark] (d) Calculate the effective rate of protection (ERP). [3 marks] (e) Is this an effective rate of protection? Why or why not? [3 marks] Suppose now that the 10 percent tariff on fin" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">inished motorcycles is accompanied by a 5 percent tariff on imported components used in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in the domestic production of motorcycles. Answer the next three questions based on this proposition. (f) Calculate the price that domestic producers pay on the imported components that they use as in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">inputs. [1 mark] (g) What is the amount of the new domestic value-added after the tariff? (Note: the new value-added is the difference between the tariffed price of imported motorcycles and the tariffed price of imported in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">inputs used in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in domestic production.) [3 marks] (h) Calculate the value of the new ERP. [3 marks] (i) Suppose that the government decided to tax the imported in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">inputs by the same rate (10 percent) as the fin" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">inished imported good. What is the ERP under this condition. [3 marks] Question 2 “For a small country like the Philippin" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">ines, a move to free trade would have huge advantages. It would let consumers and producers make their choices based on the real costs of goods, not on artificial prices determin" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">ined by government policy; it would allow escape from the confin" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">ines of a narrow domestic market; it would open new horizons for entrepreneurship; and, most important, it would help to clean up domestic politics.” Separate out and identify the 5 arguments for free trade in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in" rel="nofollow">in this statement.