Forums → WEPR → Is Obama a good president?
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**** monkey in office D:
Funny. Cause Bush was the monkey.
This is probably one of the few situations that taxes can solve. Taxes should be raised on all imports so that they stay roughly the same price (Or higher) as all products made in the country so that the money is encouraged to stay in the country and not go out.
Protectionism in the form of tariffs is a horrible idea. It didn't work in the 1930s, and it won't work now.
D domestic represents the domestic demand for let's say, computers, and S domestic represents the domestic supply of computers. In the absence of trade, the domestic equilibrium price and quantity of computers is PE and QE respectively.
When the country is open to foreign trade, it faces a perfectly elastic world supply for computers S World. That is, any country can import as many computers as she wants at the prevailing world price, P1. Note that domestic producers cannot charge a price above P1 as consumers can easily switch to cheaper imports.
With free trade and at price P1, domestic consumers will demand OQ3 of computers, of which OQ1 is supplied by domestic producers and the remainder Q1Q3 imported from other countries.
Free trade thus lowers the domestic price of computers from PE to PW[Also known as P1 on the diagram]; consumers are better off as they are able to consume more at a lower price. Under free trade, domestic producers are selling fewer units (QE to Q1) at a lower price. Under free trade, domestic producers are adversely affected by foreign competition. Industry sales and profits fall and unemployment increases.
To protect the home industry, the government levies a specific tariff on computer imports, thus raising the supply curve from Sworld to S World +Tariff. [This is your plan, and that of so many other people who are afraid of foreign competition, because they cannot compete with it.]
The price now increases from P1 to PT. At PT, domestic production increases from 0Q1 to 0Q2; domestic buyers are buying fewer computers, from OQ2 to OQ4. The tariff has caused a fall in the amount of imports from Q1Q3 to Q2Q4. Since the price is higher after the tariff, consumers are worse off compared to having free trade as consumer surplus is reduced. [An economic measure of consumer satisfaction, which is calculated by analyzing the difference between what consumers are willing to pay for a good or service relative to its market price. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price. ]
Triangle X represents the effect arising from the decrease in consumption resulting from the decrease in consumption due to the high price brought on by tariff protection. It is a deadweight loss to society. [The costs to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.]
The consumers are the ones who lose the most, due to increased prices.
Tariffs are an incredibly moronic way of dealing with the current problem. Much of why America's companies are leaving to set up overseas is due to the inefficiency back home. Foreign countries have a comparative advantage due to their labour, which translates to lower costs of production, and hence lower prices (good for consumers like YOU), and increased profit (Good for producers). The fundamental problem is that America just isn't as competitive as before.
Furthermore, slapping on tariffs will just lead to other nations slapping on tariffs, and suddenly we're back in the dark years of the 1930s.
Furthermore, it's still worth it for producers to produce outside of America, where wages are sky high, since after all, you can't be that thick in thinking that only Americans consume such imports right? Producers sell their goods to other nations as well hence it still makes economic sense to keep production outside.