Figure: Changes in exports to the US and China of tariff-affected products *Source-World Bank

❏ The tariff imposed on US and Chinese products made them more expensive.

❏ And for this reason, the rest of the world is being affected.
World market and third
country effects
Group 3
Muntaha Masud Tanha (2022-1-88-
009)
Md. Tawhidul Islam (2021-3-88-
007)
Sajid Bin Kamal
(2021-1-88-008)
When Countries Are in Autarky Equilibrium

Here the examples of

two countries in
autarky situation are
given. The USA has a
lower price during
autarky situation and
Mexico has a higher
price.
Deriving the Export Supply Curve

 Here the export supply

curve of USA is given
where at autarky price
the demand and supply
curve intersects and
equilibrium condition
arises.

 However, with the

increase in price, the
quantity demanded is
less and hence, with
price increase, excess
supply is seen.
Deriving the Import Demand Curve

Conversely, in the
Mexican import demand
curve, the autarky price
remains high at
equilibrium. So, with the
decreased world market
price, the quantity
demanded is higher than
the domestic supply
resulting in increased
import demand.
Depicting a Free Trade Equilibrium

In free trade, the import

demand and export supply
are at equilibrium at pw
price.
Protectionist Price policy Impact on the world market price

Country Considered World Market

S ➢ In free trade, world
P P
s, d P w

market remains at Pw
ES ➢ For simplicity, let,
country considered is
the only importer
➢ The importer country
Pw Pw pays less than market
ID
price because of free
D
trade
➢ Results in larger CS
Protectionist Price policy Impact on the world market price

Country Considered World Market ➢ When tariff is imposed

P P
s, d S P w
in the country
considered, price of the
ES
products goes up, thus
reducing quantity
P demanded for that
Pw Pw
product.
➢ Results in social welfare
D ID loss/deadweight
loss( colored portion)
Protectionist Price policy Impact on the world market price

➢ Due to the high

Country Considered World Market
S price, the import
Ps, Pd Pw
demand will be
ES inelastic.
➢ It will result in lower
world market prices
P P
Pw
because in the
Pw
exporting country
Pw’
D ID there will be excess
supply. Which will
drive the price down
to Pw’
World Market Clearing Condition
• Excess supply in large country + excess supply in world market = 0

• When protection is imposed, the quantity supplied and demanded will

depend on the amount of tariff or subsidy imposed in a large country
• s = producer subsidy, r = protection rate (tariff), v = consumer subsidy

• In the case of free trade, a large country adopts the world price
 Question (a): What is the World Market
Price at Free Trade?
Solver: Country Considered World Market
Objective cell – welfare at Ps, Pd S Pw
large country (cell K4)
Changing variable cell – world ES
market price (cell C12)
Constraint – sum of excess
supply in large country and
excess supply in world Market 11.4 11.4
= 0 (cell H16 = 0)
D ID
Result - led to increase in the
world market price of 14.4
percent compared to base 73.76 111.4 qs, 37.68 qim, qes
situation qd
Protectionist Price policy Impact on the world market price

As a consequence of
this policy, the
world market price
declines to pw’
Question (b): How the World Market Price Changes with a Gradual
Increase of the Country’s Protection Rate to 50 %? Show Graphically .
r Pw
Pw
0.00 11.44
0.05 11.25
0.10 11.08
0.15 10.92
0.20 10.76
0.25 10.62
0.30 10.48
0.35 10.35
0.40 10.23
0.45 10.11
r
0.50 10
Protectionist Price policy Impact

Importing Exporting
Country Country

Consumer -(A+B+C+D) +e
surplus

Producer +A -(e+f+g+h)
Surplus

Govt. +(C+G) 0
Revenue

National +G-(B+D) -(f+g+h)

Welfare
Impact on Protectionist Price policy

The impact of the

protectionist price policy is
also huge on the world
market. It is because, when a
country imposes a
protectionist price policy, the
rest of the world loses.
Here due to the protectionist
price policy price in an export
country decreasing from Pw
to Pw’, it results in loss of
producer surplus, welfare
loss, and loss of foreign
exchange.
Question (c): How Welfare, Foreign Exchange and Producer Surplus
in the Rest of the World Change at the Same Gradual Increase of the
Country’s Protection Rate? Show Graphically.
1. Welfare:
r Welfare
0.00 6459.92
0.05 6452.92
0.10 6447.06
0.15 6441.85
0.20 6436.96
0.25 6432.93
0.30 6429.14
0.35 6425.84
0.40 6422.99
0.45 6420.32
0.50 6418.04
Question (c):
2) Foreign Exchange

Foreign
r Exchange
0.00 431.15
0.05 399.12
0.10 371.00
0.15 344.83
0.20 318.94
0.25 296.53
0.30 274.34
0.35 253.93
0.40 235.28
0.45 216.79
0.50 200.00
Question (c):
3) Producer’s Surplus
r PS
0.00 1832.78
0.05 1793.02
0.10 1757.88
0.15 1724.95
0.20 1692.16
0.25 1663.60
0.30 1635.15
0.35 1608.83
0.40 1584.62
0.45 1560.50
0.50 1538.46 r
Optimal Tariff Argument

Optimal tariff is when marginal

loss of welfare is equal to
marginal gain of the welfare
from improved terms of trade.

Here welfare gain is area “e”

from terms of trade.

And welfare loss is area “a”

and “b”
Question (d): Determine the Optimal Tariff for the
Considered Country.
Solver:
Objective cell – welfare at Country Considered World Market
large Country (Cell K4) Ps, Pd S Pw
Changing variable cell –
world market price (cell C15) ES
and protection rate (Cell A12)
Constraint – sum of excess
supply in large country and 13.0
excess supply in world market 11.4 11.4
= 0 (cell H16 = 0)
10.7
D ID
Result – optimal tariff rate is
22%, which raises the world
price to 10.70 76.7 105.7 qs, qd 28.9 qim, qes
Question (e): Compare the Optimal Tariff, Calculated Under (d), with the
Optimal Tariff at ε s = 0.5 and ε d = −0.7 As Well As with the Optimal Tariff at
ε s r =0.5 and ε d r= −0.7

New elasticity(large country) Country Considered World Market

εs = 0.5 and εd = -0.7 Ps, Pd S Pw

Result – when supply and ES

demand are more elastic in
large country, the decline in
import demand is much 13.5
stronger. which leads to larger 11.4 11.4
decline in world market price.
resulting in a comparably
higher optimal tariff (24%) D 10.9 ID

75.9 107.4 qs, qd 31.5 qim, qes

Question (e): Compare the Optimal Tariff, Calculated Under (d), with the
Optimal Tariff at ε s = 0.5 and ε d = −0.7 As Well As with the Optimal Tariff at
ε s r =0.5 and ε d r= −0.7

New elasticity (rest of the Country Considered World Market

world) Ps, Pd S Pw
εsr = 0.5 and εdr = -0.7
ES
Result – when supply and
demand are more elastic in
rest of the world , the decline 12.2
in import demand is lower. 11.4 11.4
which leads to less decline in
world market price. Resulting 10.6
D ID
in a comparably lower optimal
tariff (15%)
75.2 108.6 qs, qd 33.42 qim, qes
Thank You