Kwame Nkrumah University of

Science & Technology, Kumasi, Ghana

ABM 351-AGRICULTURAL TRADE AND POLICIES

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 WHAT IS A TRADE POLICY?
A statement of intended action by a government in
order to address trade issues connected with the welfare
of the citizens of a country

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INSTITUTE OF DISTANCE LEARNING, KNUST 2

WHAT IS A POLICY?

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 GENERAL TYPES OF TRADE POLICY
Price-type: import tariffs, export taxes and
subsidies

Quantity-type: quotas, “voluntary” restraint and

“orderly” marketing arrangements

Other: licensing, product regulation,

administrative
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 POLICY INSTRUMENTS
Commercial Policy
Instruments

Trade Trade
Contraction Expansion

Price Quantity Price Quantity

Tariff Export Import Quota

tax Import subsidy Voluntary Import
Voluntary Export Export subsidy Expansion (VIE)
Restraint (VER)
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 SMALL COUNTRY VERSUS LARGE COUNTRY

Terms of trade: The price of the good a country exports divided by

the price of the good it imports.
A small country is a country that cannot affect its terms of trade no
matter how much it trades with the rest of the world

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 TRADE BARRIERS

A trade barrier is a general term that describes any government policy or regulation
that restricts international trade. The barriers can take many forms, including:
• Import duties
• Import licenses
• Export licenses
• Import quotas
• Tariffs
• Subsidies
• Non-tariff barriers to trade
• Voluntary Export Restraints

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 TRADE BARRIERS

If two or more nations repeatedly use trade

barriers against each other, then a trade war
results!

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 TARIFFS
• In general terms, a tariff is any tax or fee collected by a
government on internationally traded goods.
• Tariffs may be levied in two main ways: specific tariffs and
ad valorem tariffs.
• A specific tariff is levied as a fixed charge per unit of
imports.
• An ad valorem (in proportion to the value) tariff is levied as
a fixed percentage of the value of the commodity imported

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 TARIFFS

Tariffs
• are imposed to protect selected national industries from
foreign competition.
• directly affect producers’ surplus, which tend to increase due
to the imposition of a tariff that raises prices
• may or may not benefit an importing country.

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INSTITUTE OF DISTANCE LEARNING, KNUST 10

 Cost-benefit Analysis of a Tariff

The way a tariff is operated can trigger the following:

• By virtue of raising prices in the importing country, it affects
consumers negatively, as they need to pay the new, higher price.
• Producers in the importing country on the other hand can charge a
higher price than in the case of free trade.
• The government of the country using protectionist measures will
increase its revenue, by the value of the total tariff it charges.
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 CONSUMER SURPLUS

The consumer surplus measures the amount a

consumer gains from a purchase by the
difference between the price he actually pays
and the price he would have been willing to
pay.

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 CONSUMER SURPLUS
Price, P

P1
b
P 2

Q1 Q2 Quantity, Q

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 CONSUMER SURPLUS

• If the price of this product is at a level P1, the consumer surplus is represented by the
area below the demand curve, D, and above the price P1. That is the triangle a
• However, if the price of a product is to be lowered, from P1 to P2, the consumer
surplus will become greater, and will be the triangle given by area a plus b
• area b is the difference, or the increase in consumer welfare as a result of a drop in
price. We can say that the lower price raised the consumer surplus

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 PRODUCER SURPLUS

The amount a producer gains from a sale and is

represented by the difference between the price actually
received and the price at which the producer would have
been willing to sell.

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 PRODUCER SURPLUS
Price, P

P2

d
P 1

Q1 Q2 Quantity, Q

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 PRODUCER SURPLUS

• If the price of this product is at a level P1, the producer surplus is represented by the
area above the supply curve, S, and below the price P1, which is the triangle c.
• If the price of a product is increased, from P1 to P2, the producer surplus will become
greater, and will be the triangle given by area c plus d.
• Thus, area d is the increase in producer welfare which can be obtained as a result of a
rise in prices, or the extra producer surplus.

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INSTITUTE OF DISTANCE LEARNING, KNUST 17

DERIVATION OF THE IMPORT DEMAND CURVE

The narrative accompanying

this slide has been dictated
Price
D S to the class. Please refer to

Price
that.
I
E

50
A G 20
B a’ b’
30
C D F
c’ d’
20
H
(a) 30 (b)
0 15 20 30 40 45 Quantity 0 20 30 Quantity

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CONSUMER SURPLUS, PRODUCER SURPLUS

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EFFECTS OF DIFFERENT TRADE POLICIES

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