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Import Tax Impact on Trade Models

The document contains three exercises about production costs and import taxes of goods between countries. Exercise 1 discusses car tire production in Finland, Russia, and Poland and the effects of import taxes. Exercise 2 discusses wine production and import taxes in countries A, B, C, and D and the effects of forming free trade areas and customs unions. Exercise 3 discusses steel production costs in countries 1, 2, and 3 and the domestic prices and effects of changing import taxes and forming a customs union.

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166 views2 pages

Import Tax Impact on Trade Models

The document contains three exercises about production costs and import taxes of goods between countries. Exercise 1 discusses car tire production in Finland, Russia, and Poland and the effects of import taxes. Exercise 2 discusses wine production and import taxes in countries A, B, C, and D and the effects of forming free trade areas and customs unions. Exercise 3 discusses steel production costs in countries 1, 2, and 3 and the domestic prices and effects of changing import taxes and forming a customs union.

Uploaded by

My Lộc Hà
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Exercise 1: The production cost of car tires in Finland is $100; in Russia - $80;

in Poland - $60. Finland is a small country compared to Russia and Poland.


a) If Finland imposes a 60% import tax, does the country import car tires or not?
If it imports, from which country?
b) If Finland reduces the import duty to 50%, what effect might occur: Creation
of trade or redirection of trade?
c) If Finland and Russia establish a customs union with a 50% import tax on
outsiders, what effect might occur: Creation of trade or redirection of trade?
What type of customs union is it?
d) After 1 year, if the customs union reduces the import tax from outsiders to
40%, what effect occurs?
e) After 3 years, if the customs union reduces the import tax from outsiders to
25%, what effect occurs?
Exercise 2: Assume the cost for each bottle of wine is $1.5 in A; $2.0 in B; $2.5
in C; $2.6 in D. Import taxes on wine are currently 25% in A; 30% in B; 100%
in C; and 60% in D.
a) Which country imports wine?
b) Which country exports wine?
c) C and D form a free trade area. These countries abolish all import taxes on
trade between them but maintain tariffs on imports from other countries. What is
the wine trade model now? Does the formation of a free trade area create trade
or redirect trade? Is trade redirection possible?
d) C and D transform the free trade area into a customs union by implementing a
common tariff of 50% on outsiders. What is the new wine trade model? Does
the formation of a customs union create trade or redirect trade?
e) If B joins this union, what is the new trade model, and what is the impact of
the union expansion on trade?
Exercise 3: The cost of steel production in country 1 is $1800; in country 2 is
$1200; in country 3 is $1400. Country 1 is smaller than country 2 and country 3.
Country 1 applies an import tax of 76.3%, regardless of origin.
a) Calculate the domestic price in country 1.
b) If country 1 reduces the import tax to 42.3%, calculate the domestic price in
country 1.
c) When country 1 reduces the import tax as above, what effect occurs in
country 1?
d) Country 1 and country 3 form a customs union with a 32.1% import tax on
outsiders. Calculate the domestic price in country 1.
e) What effect occurs in country 1 after country 1 and country 3 form a customs
union?
f) After 1 year, if the customs union reduces the import tax from outsiders to
23.0%, calculate the domestic price in country 1.
g) What effect occurs in country 1 after 1 year when the customs union reduces
the import tax from outsiders?
h) After 2 years, if the customs union reduces the import tax from outsiders to
15.9%, calculate the domestic price in country 1.
i) What effect occurs in country 1 after 2 years when the customs union reduces
the import tax from outsiders?
j) After 3 years, if the customs union increases the import tax from outsiders to
24.0%, calculate the domestic price in country 1.
k) What effect occurs in country 1 after the customs union increases the import
tax from outsiders?
l) Country 2 joins the customs union with country 1 and country 3. The customs
union applies a 30.2% import tax on outsiders. Calculate the domestic price in
country 1.
m) What effect occurs in country 1 after country 2 joins the customs union?

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