International Trade and Open Economy Macroeconomics

International Trade and Open Economy Microeconomics

Why there is free trade between states in the United States but not necessary between countries

Trade between states in the United States is not restricted as this may hurt the entire wider American economy. United States in a way restricts free trade between it and other countries for a number of reasons. To start us off, the United States government uses tools like tariffs and quotas to enhance better allocation of resources. Tariffs and quotas other than helping the government generate revenue and discouraging imports into the United States, help in protecting smaller and more vulnerable companies and industries (Worth Publishers, 2010). Quotas basically limit the amount of specific goods that can be imported into the United States. The most common trade restrictions that are normally used in trade between USA and other countries are tariffs and quotas. Apart from generating revenues, tariffs drive a wedge between a product's domestic price and its price in the world market. This benefits indigenous American producers increasing their sales and the prices they charge. The tariff revenue generated can be used in initiating development activities in different states.

Question 11

Beneficiaries from large U.S. tariff on French and German wine. Who stands to lose?

When U.S. imposes tax on imported French and German wine, it drives a wedge between the wine's domestic price and its price on the world market. France and Germany have absolute advantage over United States in production of wine. These two countries therefore stand to benefit from trading with United States in this particular product. The three countries can gain from this kind of trade if one has comparative advantage over the other in production of one good while the other country has comparative advantage in production of another good. France, Germany and the United States can benefit from trade between them if they specialize in product in which they have comparative advantage and trade with each other (Worth Publishers, 2010). American consumers are likely to gain because of the increased supply of wine will make the wine prices to fall. Because wine is never produced in large scale in the United States and most of it is imported, the losers will be other importers of wine from other destinations different from France and Germany. Domestic consumers of wine back in Germany and France are likely to be hurt if a lot of focus is put in exporting wine to the United States. The price of wine in these two countries is likely to rise from P1 to PE to meet the American demand. The United States government will benefit from the revenue generated from the tariffs it imposed on French and German wine. Imposition of tariffs on French and German wines will make the price of the wine to shoot up. This will benefit domestic producers who increase their sales and the price they can charge (Worth Publishers, 2010). Domestic consumers are likely to be hurt by increased prices of imported wine. The government of the United States and California winemakers is more likely to gain from these tariffs.

Chapter 26

The difference between fixed and flexible exchange rates

Fixed exchange rate system can be used to guard against day-to-day fluctuations characteristic of flexible rates. Fluctuations come about as a result of the specialization in production and flow of international trade and investments. Fixed exchange rates impose some element of price discipline on a nation that may not be practicable under flexible exchange rate systems. This makes nations with higher rates of inflations to be entangled in never ending deficits in balance of payment and loss of reserves (Salvatore, 1996). Because deficits and reserve losses cannot persist forever, a nation must restrain its inflation. This is where the element of price discipline comes in. There is no such thing as price discipline under a flexible exchange rate system. In flexible exchange rate system it is assumed that balance of payment disequilibria are corrected by the changes in the exchange rates.