1) Suppose that under free trade a final good F has a price of $1,000 and that the prices of two inputs, A and B, used in the production of F are PA = $300 and PB = 500 and that one unit each of A and B is used in producing one unit of F. Suppose also that a tariff of 20 percent is placed on good F, while imported inputs had tariffs of 20 percent and 30 percent respectively. Calculate the effective rate of tariff protection for domestic indusrey producing good F and interpret the meaning of your result ( All steps must be shown to obtain full credit).
2) A country, Azania, has been experiencing instability in export and import flows and has its domestic budget tied to its export earnings. The following table reflects this export-import flows.
Year Px Pm Qx
2012 96 94 100
2013 92 95 196
a) Calculate Azania's net barter and income terms of trade for years 2012 and 2013.
b) Calculate the changes in net barter and incomes terms of trade for the years 2012 and 2013.
3) ) Explain what economists mean by price equalization theory. In your explanation it is important to discuss the implications for (a) income distribution between countries and (b) industrial structure in trade participating countries.