International Trade Theory and Policy
by Steven M. Suranovic

Trade 95

Trade 95

Trade Problem Set 95 3-2

1. Consider the following domestic policy actions listed along the top row of the following Table. In the empty boxes, use the following notation to indicate the effect of each policy on the variables listed in the first column. Use a partial equilibrium model to determine the answers and assume that the shapes of the supply and demand curves are "normal". Assume that none of the policies begin with, or result in, prohibitive policies. Also assume that none of the policies correct for market imperfections or distortions. Use the following notation:

+   the variable increases
-   the variable decreases
0   the variable does not change
A   the variable change is ambiguous (i.e. it may rise, it may fall)

For example, a production subsidy applied by a large country to an import-competing industry will lower the domestic market price of the import good, therefore a - is placed in the first box of the table.



Production subsidy to an import industry by a large country


Consumption tax increase on an exported good by a small country

Domestic Market Price



Domestic Industry Employment


Domestic Consumer Welfare


Domestic Producer Welfare


Domestic Government Revenue


Domestic National Welfare


Foreign Price


Foreign Consumer Welfare


Foreign Producer Welfare


Foreign National Welfare



International Trade Theory and Policy - Chapter 95: Last Updated on 1/07/08