Graph the effects of world trade on a good or service. Graph the market supply a
ID: 1208789 • Letter: G
Question
Graph the effects of world trade on a good or service.
Graph the market supply and market demand curves for a good or service without world trade.
Identify the new price and quantity when the good or service is introduced to the world market.
( I DON'T NEED THE GRAPH, ONLY THE ANSWERS TO THE QUESTIONS BELOW)
Step 2 Write a paper.
In a one-page (250-word) paper and using a graph of the supply and demand for U.S. dollars, address the following:
Using a world market without tariffs or quotas, identify the new market equilibrium when these restrictions are imposed, using the same graph as Step 1.
Identify who gains and who loses from the tariff.
How would you justify international trade restrictions?
What role do markets play within global trade to create net gains for the economy?
Analyze the exchange rate for the U.S. dollar.
Estimate the change in the dollar exchange rate when expected inflation and economic growth in the U.S. change relative to that in the EU.
Analyze the intervention required by a central bank to maintain a desired exchange rate using the same supply and demand graph for U.S. dollars.
Explanation / Answer
Who gains and loses from Tariff: Imposition of a tariff by a large nation reduces the volume of trade but improves the nation's terms of trade. The reduction in the volume of trade, by itself, tends to reduce the nation's welfare while the improvement in its terms of trade tends to increase the nation's welfare. Whether the nation's welfare actually rises or falls depends on the net effect of these two opposing foces. This is to be contrasted to the case of a small country imposing a tariff, where the volume of trade declines but the terms of trade remain unchanged so that the small nation's welfae always declines. When a nation imposes a tariff then its volume of trade is less than under free trade. However, the terms of trade improves for the particular nation.
Intervention by the central `bank: The central banks intervene to affect exchange rates for several reasons. Th emain reason is that the belief that many capital flows represent merely unstable expectations and that the induced movements in exchange rates cause unnecessary changes in domestic output. The second reason for intervention is a central bank's attempt to move the real exchange rate in order to affect trade flows. The third reason arises from the effects of the exchange rate on domestic inflation. Central banks sometimes intervene in the exchange market to prevent the exchange rate from depreciating, with the aim of preventing import prices from rising and thereby helping to slow inflation.
The basic argument for intervention (dirty floating) is that the central bank can intervene to smooth out fluctuations in exchange rates. The only and overwhelming objection to this argument is that there is no simple way of telling an erratic movement from a trend movement. There is one circumstance under which central bank intervention might be desirable. It is clear from our earlier analysis that one of the key determinants of exchange rate behavior is expectations of economic policy. It may sometimes be possible to make it clear that there has been a change in policy only by intervening in the foreign exchange market. This is a case of putting your money whee your mouth is.
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