Problem Set #3 Spring 2012 International Trade Dr. Norrbin 1.

Assume that Barbados wants to encourage the export of rum. Assume that presently the price of rum is $5, and that the government decides to subsidize producers by paying for their research and development costs equivalent to $1 of the cost of production of each unit. Illustrate and briefly explain the gains and losses to consumers, producers, government and the net effect to the country. 2. Assume that President Obama wants to subsidize exports of rice to Thailand with a payment of $5.00 to the producer per unit exported (and a zero quota on imports). Assume the world price of rice is $50.00 per unit. Assume that the U.S. and Thailand are large countries in rice. (Hint: make sure that when you report the net effect it is expressed in the simplest form possible where all areas that cancel out have been eliminated. Use a three-part graph) a) Show and briefly discuss the effects on the U.S. Show the exact areas of gains/losses to producers, consumers, the government, and the net effect for the country. b) Show and briefly discuss the effects on Thailand. Show the exact areas of gains/losses to producers, consumers, the government, and the net effect for the country. 3. a) Four types of trade blocs were discussed in class. What type of trade bloc best describes the European Union? Explain your answer. b) Three EU countries decided not to adopt the Euro, but remain in the European Union. Name the three countries. 4. Assume that Bahamas imports rum, and that the international price of rum is $10 from the Grand Caymans and $12 from Barbados. Bahamas has a 50% tariff on rum to begin with, and is thinking of joining Barbados in a trade bloc. Illustrate and briefly explain what the gains and losses are for the consumers, producers, the government of Bahamas, and the net effect to the Bahamas. 5. In selecting a country to embargo, what are the two most important conditions to consider when determining whether to embargo a country or not?