You have been hired by the U.S. Agency for International Development to study the causes of...

 

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You have been hired by the U.S. Agency for International Development to study the causes of poverty in the Republic of Typica, a low-income country in Asia. You are asked to focus on the cotton and cloth industry (you know that cotton is an input used in the production of cloth). Currently, about half of all raw cotton grown in this country is exported, while about half of all manufactured cloth is imported. Politicians in Typica have argued that this "dependence" on foreign cloth production is why the country is poor, and that the government must try to "keep the cotton in the country" and "create more high-paying jobs" in cloth manufacturing. Because of these arguments, government restricts trade with tariffs on cloth imports and taxes on cotton exports. To analyze the impact of the government's policy, you begin with the following estimates of current prices and quantities, with the import tariff & export tax in place: Cloth Cotton Domestic price (Pd) Qty, supplied (Qs) Qty. demanded (Qd) Qty. traded (M or X) 1.30 $/yd 6.5 million yards 7.0 million yards 0.5 million yards (Imports) Then, to estimate the effects of the import tariff & export tax, you must estimate what conditions would be like without them. For this you need to estimate slopes of the supply and demand curves, the tariff/tax levels and world prices, which you find to be as follows: Cloth Cotton 30 S/bale 100 S/bale 5 (5/1) -10 (-10/1) Import tariff or export tax (1) World price (Pw) Slope of sup. curve Slope of dem. curve 70 $/bale 16 million bales. 12 million bales 4 million bales (Exports) 0.30 S/yd 1.00 S/yd 0.2 (1/5) -0.1 (-1/10) Price Cloth 1.5 s/yd 1.4 1.3 1.2 1.1 1 0.9 0.8 0 (1) You use this information to draw supply-demand diagrams for each market on the graphs below. 1) Draw two lines (1 with & 1 without tariff/tax) from the price axis to the S&D curves already drawn for each market. 2) Draw circles around the points on each supply and demand curve which you now observe, and 3) then draw squares around the points you would observe without the government's tariff or tax. The Market for Cloth in Typica 2 345 7 8 Qty. of Cloth (million yards) 9 10 11 Price Cto S/yd 110 100 90 80 70 60 50 02 The Market for Cotton in Typica 46 8 10 12 14 16 18 20 22 24 Qty. of Cotton (million bales) You have been hired by the U.S. Agency for International Development to study the causes of poverty in the Republic of Typica, a low-income country in Asia. You are asked to focus on the cotton and cloth industry (you know that cotton is an input used in the production of cloth). Currently, about half of all raw cotton grown in this country is exported, while about half of all manufactured cloth is imported. Politicians in Typica have argued that this "dependence" on foreign cloth production is why the country is poor, and that the government must try to "keep the cotton in the country" and "create more high-paying jobs" in cloth manufacturing. Because of these arguments, government restricts trade with tariffs on cloth imports and taxes on cotton exports. To analyze the impact of the government's policy, you begin with the following estimates of current prices and quantities, with the import tariff & export tax in place: Cloth Cotton Domestic price (Pd) Qty, supplied (Qs) Qty. demanded (Qd) Qty. traded (M or X) 1.30 $/yd 6.5 million yards 7.0 million yards 0.5 million yards (Imports) Then, to estimate the effects of the import tariff & export tax, you must estimate what conditions would be like without them. For this you need to estimate slopes of the supply and demand curves, the tariff/tax levels and world prices, which you find to be as follows: Cloth Cotton 30 S/bale 100 S/bale 5 (5/1) -10 (-10/1) Import tariff or export tax (1) World price (Pw) Slope of sup. curve Slope of dem. curve 70 $/bale 16 million bales. 12 million bales 4 million bales (Exports) 0.30 S/yd 1.00 S/yd 0.2 (1/5) -0.1 (-1/10) Price Cloth 1.5 s/yd 1.4 1.3 1.2 1.1 1 0.9 0.8 0 (1) You use this information to draw supply-demand diagrams for each market on the graphs below. 1) Draw two lines (1 with & 1 without tariff/tax) from the price axis to the S&D curves already drawn for each market. 2) Draw circles around the points on each supply and demand curve which you now observe, and 3) then draw squares around the points you would observe without the government's tariff or tax. The Market for Cloth in Typica 2 345 7 8 Qty. of Cloth (million yards) 9 10 11 Price Cto S/yd 110 100 90 80 70 60 50 02 The Market for Cotton in Typica 46 8 10 12 14 16 18 20 22 24 Qty. of Cotton (million bales)

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The Market for Cloth in Typica Price Cloth 15 Syd 14 13 12 11 1 09 80 08 2 3 4 5 6 Qty of Cloth million yards 8 9 10 Without the tarifftax the equilibrium price of cloth would be 080yd and the equilib... View the full answer