Tariffs

Question 1

By 2010 Mythica was self sufficient in wheat, which is used to make bread, cake and pastries. During the mid 20th Century Mythica was at war with its closest neighbours, Utopia and Atlantis, for over 10 years. After this war Mythica invested large amounts in developing its own agricultural sector, along with other industries. By 2008 some 10% of the Mythican population worked on the land, and 5% worked in wheat production. In 2015 the domestic demand and supply schedule was:

PRICE PER TONNE ($) DOMESTIC DEMAND DOMESTIC SUPPLY
1000 400 100
2000 350 150
3000 300 200
4000 250 250
5000 200 300
6000 150 350
7000 100 400
8000 50 450

In 2006, Mythica joined with Utopia and Atlantis to form a ‘free trade’ area. Mythica started to import wheat from the other two countries, both of which have a comparative advantage in wheat production. During 2008 the free trade price of wheat from Utopia and Atlantis was $2,000 per tonne, irrespective of the quantity imported. This was clearly good for Mythican consumers. However, within 2 years imports of wheat rose and the domestic share of wheat sales fell.

By 2015 wheat farmers in Mythica had formed a union, opposed to wheat imports from Utopia and Atlantis. They argued that jobs were very closely related to the volume of sales –  for every 20m tonnes sold, 0.5m workers were employed.

The farmers went to the Mythican parliament to argue that tariffs should be imposed on all imports. Parliament agreed to implement a $1,000 per tonne tariff, after farmers threatened to go on strike.

Draw an accurate graph to show:

  1. The self-sufficient price of wheat.
  2. The free trade price of wheat, and the relative share of imports and domestic production.
  3. The price after the tariff, along with the (new) relative shares of imports and domestic production.
  4. The effect of the tariff on Mythica’s economic welfare.

Write a general conclusion advising the Mythican Parliament of the alternatives it faces, with a recommendation about its trade with Utopia and Atlantis.

Question 2

Data question

‘..Last year, it was a battle over bras. Now, it’s ‘shoe wars’, as the European Union imposes new tariffs on imported leather shoes from China and Vietnam, starting on Friday.

Retailers are warning that shoe prices in the UK