International Economics: Car Tariff Analysis

Question 1

The supply (S) and demand (D) for electric cars in country X are given as: QD = 80,000 – 0.5P

QS = 25,000 + 0.5P

where P is the price of electric car in $/unit, and Q is the quantity in units.

Country Y sells the electric car at $28,000/unit and country Z sells the electric car at

$32,000/unit. (Assume country X, Y and Z are small countries)

• Calculate country X autarky equilibrium price and quantity. In an open economy, if country X imposes a 20% import duty on all its electric cars imports, calculate country X’s welfare effects between the free trade and tariff scenarios using an appropriate diagram.

(30 marks)

• Using the European Union–China electric car tariff dispute as an example, evaluate the risks of retaliatory trade measures and the long-term implications for international trade relations if Country X imposes a tariff on electric car imports. (Word limit: 300 words)

(10 marks)

• Suppose Country X and Country Z form a customs union. Examine the changes and implications of trade creation and diversion and the welfare changes, compared to the tariff scenario without a customs union, with an appropriate diagram. (Note: for this part of the question, students do not need to calculate mathematically the changes in the welfare effects) (Word limit: 300 words)

(15 marks)

Question 2

• Retrieve Singapore’s annual Balance of Payments (BoP) for year 2024.

• Interpret the structure of Singapore’s annual BoP for year 2024

(11 marks)

• Discuss the components of the current account, capital and financial account, and evaluate the implications of Singapore’s current account position.

(Word limit: 400 words)

(10 marks)

• Discuss the role of official reserves in Singapore’s BoP.

(Word limit: 400 words)

(9 marks)

• Assume that the foreign exchange market is entirely determined by the market forces. Suppose there are only two countries trading with each other, Brazil and Singapore.

Assuming Brazil is experiencing an economic recession and Singapore’s economy is in an expansionary phase. Using the demand and supply for Singapore Dollars (SGD) in one diagram and Brazilian Real (R$) in another diagram, discuss the likely effects on the foreign exchange market between their two currencies.

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Expert Answers on Above International Economics Questions

Autarky Equilibrium and Welfare Effects

Calculation of Autarky equilibrium
At equilibrium, quantity demanded is equal to quantity supply which means 80000-0.5P = 25000+0.5P
P=55000
Autarky price is $55000 and Autarky Quantity is QS = 25000+0.5(55000) and it is 52500 Units
Free trade situation
The lowest price is $28000 in country Y which implies that it is the world price. Demand at 28000$ is QD=80000-0.5(28000) = 66000
Supply at $28000 is Qs=25000+14000=39000
Imports = 66000-39000 = 27000
With 20% tariff it will be 5600.
So the new price is $33600

Welfare effects

With the decline in consumer surplus, the consumers are required to pay higher prices, and with producer surplus increases, the benefit is directly availed by domestic producers.
Government revenue is tariff * imports = 5600*21400 = 119840000
Deadweight loss- economic inefficiency is the loss of total welfare.
Eu-China tariff dispute and retaliation risks
The risk of retaliation is the possibility of China imposing tariffs in return and the direct impact would be in terms of reduction in exports and it also contributes towards trade war. The economic consequences are in the form of reduced global trade, higher prices and reduced efficiency. The political consequences are damaged trade relations and reduced cooperation. The long term implications are global trade fragmentation, reduced economic growth and disruptions in the supply chain process.

Customs Union – trade creation and diversion

Trade creation takes place when cheaper imports replace expensive domestic production. It ultimately benefits consumers and improves welfare. Trade diversion occurs when there is a shift in the import from cheap country to highest cost country. It results in inefficiency and reduces overall welfare. The welfare impact is directly dependent on the trade creation and trade diversion.

Singapore Balance of payments 2024

The structure of balance of payment indicates that it comprises current account, financial account, capital account and official reserves. In respect to Singapore, the country has surplus in its current account and the financial includes are also very strong. The current account comprises export, imports, services, income etc and the strong exports by Singapore contribute towards the surplus of its current account. The financial account comprises of foreign investment and portfolio investment, and with respect to Singapore, the country attracts strong foreign investment. Capital account includes capital transfers and it is usually small. A strong surplus level implies stronger economy, competitive exports and strong currency as evident in the case of Singapore.

Role of official reserves

The official reserves comprises of foreign currencies which helps in stabilizing the currency level, protecting economy, maintaining stability in the exchange rate, and finally help in building investor confidence. It ultimately increases the demand for Singapore dollar, and with respect to other currencies like Brazilian Real, its demand decreases and value also depreciates.

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