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International trade and payments - Essay Example

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Also it takes into account effects on the French economy when government places tariff on the imports. But, before that it discusses about the comparative advantages of the…
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International trade and payments
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International trade and payments

Download file to see previous pages... It illustrates on the point of China’s growth on the rest of the world economy.
It is assumed that France is importing grapes from the world market. The supply and demand curve of the country and the world market are given by the lines D and S respectively. The world trade price is set at PW and PA is the equilibrium price of the importing price, i.e. France in this case. At price level Pw, the demand for grapes is OQ1 and the supply of grapes is OQ2. Q1Q2 accounts for the amount of shortage of grapes in the domestic market. The amount of imports is also the same for France. As the world price of grapes is lower than the French price, this implies a better off effect for the consumers as lower priced goods are available to them now. But there is a negative effect for the domestic producers. Now, they would have to produce at a lower price in order to compete with the global price. Some of them would be even compelled to leave the market.
The above figure depicts how imposition of tariff affects the economy. The French government imposes tariff on imports of grapes. The world price of grapes is at Pw and on implementing tariff the price rises to Pw+t. Initially, Q1 and Q2 were the supply and demand for grapes in the world market, respectively. After tariff, Q3 and Q4 becomes the supply and demand respectively. Thus, imports shrink from Q1Q2 to Q3Q4. Imposing tariff has two beneficial effects. Firstly it adds to the revenue of the government. Secondly, it acts as a protection for the domestic producers, so that they can produce more.
Effect on Consumers: Consumers in the importing country, in this case France, suffer a reduction in well being as a result of the tariff. Increase in the domestic prices of goods and services imported reduce the amount of consumer surplus in the market.
Effect on Producers: Producers in France experience in well being as a result of the tariff. Increase in prices of their product in the domestic market increase their ...Download file to see next pagesRead More
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