• Less developed nations sometimes argue that the industrialized nations’ tariff structures discourage the less-developed nations from undergoing industrialization. How?
To understand the tariff structure of industrialized nations, it is important explain a nominal and an effective tariff rates. The nominal tariff rate is applied to the value of a finished product that is imported into a country. The nominal tariff rate is published in the country’s tariff schedule. The effective tariff is the nominal tariff of a finished product plus the nominal tariff applied to the raw materials or intermediate goods that are used to produce the finished product (113).
An industrialized nation’s low tariffs on primary commodities encourage the less developed nation to expand their operations in that sector. Industrialized nations have a high tariff on manufactured goods. Tariff reductions on raw materials add to the discrepancy between nominal and effective tariffs of the industrialized nation. This worsens the competitive position in the manufacturing and processing sectors and poses an entry barrier for the less developed nation discouraging diversification as they can’t compete in that commodity sector (115-116).
Industrialized nations operate using a tariff structure referred to as tariff escalation. This is characterized by rising rates that give greater protection to intermediate and finished products than to primary commodities. Raw materials may be imported at a low tariff rate but both the nominal and effective tariff rates increase at every stage of production. Tariffs often rise with the level of processing in industrial countries. To the developing nation, it must seem it is better off not industrializing (116).
• Distinguish between consumer surplus and producer surplus. How do these concepts relate to a country’s economic welfare?
To analyze the effect of trade policies on national welfare, it is useful to separate the effects on consumers from those on producers. A measure of welfare is needed for each side and they are known as consumer surplus and producer surplus.
Consumer surplus refers to the difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay. An example: an item is priced at $1.00, but you really want it and will actually pay $2.00. The result is $2.00 - $1.00 = $1.00 which equals the consumer surplus. Consumer surplus is the sum of the surplus for each unit (121).
The other side of the market is the producer. The producer surplus is the revenue received over and above the minimum amount required to induce them to supply the good. This minimum amount has to cover the producer’s total variable costs and that total variable cost equals the sum of the marginal cost of producing each successive unit of output (122).
The size of consumer surplus is affected by the market price. A decrease in the market price will lead to an increase in the quantity...