Question

Question 1: While the U.S. both imports and exports computers, we import a much larger amount than we export. For this question, assume that the U.S. either imports completely or exports completely and that the trade balance reflects something fundamental about our resources and production costs relative to the rest of the world. Use a detailed diagram to show supply and demand in the market for computers in U.S. Label all areas in the graph in order to answer the next question.

Question 2: Use a welfare table to show the consumer, producer, and total surplus in the U.S. without trade and with trade in the computer market. Discuss who gains and who loses. Do the gains exceed the losses?

Question 3: The border adjustment tax that the House has floated is different from a tariff; however, one component of it would include an import tax on goods that American companies manufacture abroad and bring to the U.S. In a detailed supply and demand diagram, illustrate the U.S. market for electric machinery (one of the top import products) with a tariff. Label all areas so that you can use the diagram to answer the next question.

Question 4: Use a welfare table to show gains and losses to consumers, producers, government, and society after the tariff is imposed. Discuss who gains and who loses. Do the gains exceed the losses?

Question 5: Briefly discuss one argument in support of trade restrictions. (Approximately 100- 200 words.)

Answer 1

a. The U.S. import contracts are written in foreign currency and the U.S. export contracts are written in dollar. (Imports increase, exports constant, trade deficit increases)

b. The U.S. import contracts are written in dollar and the U.S. export contracts are written in foreign currency. (Exports increase, imports constant, trade deficit improves. So this option is correct)

c. Both of the U.S. import and export contracts are written in dollar. (Unchanged)

d. Both of the U.S. import and export contracts are written in foreign currency. (Both exports and imports increase but as the trade deficit is there, it will increase the deficit.)

Correct option is b.