ACJC H2 Prelim 2024 P2 EQ6 Solutions

Q6.“Nowadays,onecountrycannotgoalone.Thisisaglobalvillage.Someproblemsmayremain,butitcanbesolvedamicablyandbilaterally,throughdiscussion.”Source:Bangladesh’sPrimeMinisterSheikhHasina,WorldEconomicForum,2019 (a)Explainhowtheimpositionoftariffsmightreduceoneformofunemploymentwhileincreasinganother.[10] IntroductionTariffsisatypeoftradeprotectionmeasure,whichisataxonimportedgoodorservicetorestrictimports.Theimpositionoftariffsmayaffectunemploymentrate–andunemploymentreferstoasituationwherepeopleofworkingagewhoareseekingforworkbutcannotfindone(i.e.,withoutajob)R1: Toexplainhowtheimpositionof tariffsmight reducestructural unemploymentConsiderthesteelmarketinUS,withfreetrade,theworldsupply,Swdeterminestheworldprice,Pw.AtPw,thedomesticquantitysuppliedofsteelwasatQ1whilethedomesticquantitydemandedofsteelwasatQ2.TheamountofsteelimportswasQ2–Q1.Diagram1 In2018,theUSgovernmentaccusedsomecountrieslikeChinaandMexicoforunfairtradepracticeswhichhavehurttheirdomesticproducers.TheUSgovernmentimposedtariffsonsomegoodslikesteelimports.Withthetariffs,theworldsupplyofsteeldecreasefromSwtoSw+t.ThisincreasesthedomesticquantitysuppliedfromQ1toQ3,whilethedomesticquantitydemandeddecreasesfromQ2toQ4.Theamountofsteelimportsdecreasesfrom(Q2–Q1)to(Q4–Q3).

Sincethedomesticquantitysuppliedofsteelincreases,thesteelproducingfirmsinUSincreasedemandforfactorsofproductionsuchaslabour.ThiscreatesmorejobsforthesteelworkersinUS,hencereducingstructuralunemployment,aspreviouslytheinfluxofcheapimportsmayhavereducedthedomesticproductionofsteelinUS,whichresultedinlayoffsandthesteelworkerswerenotabletofindjobsinothersectorsduetoamismatchofskills.Hencetheimpositionoftariffsonsteelimportsmayhelpreducestructuralunemployment.R2: toexplainhowtheimpositionof tariffsmayincreasedemanddeficientunemployment duetobeggar-thy-neighbour effect or retaliationbytradingpartnersTheimpositionoftariffsmaycausedemanddeficientunemploymentasADmayfallinthelongterm.Thismightbeduetobeggar-thy-neighboureffectorretaliationbytradingpartners.WhenUSimposestariffsonimportedgoodsandalleviatesitsowneconomicproblem,itworsenstheeconomicproblemsofitstradingpartners.ThetradingpartnersofUSwillexperienceadeclineinexportsalesandhenceexportrevenue(X),andespeciallyifUSisakeyexportmarket.Assumingimportexpenditure(M)isconstant,netexports(X-M)ofUStradingpartnersmaydecreasesignificantly,reducingAD.ThismaycauseaslowdownorcontractionoftheeconomiesofUS’tradingpartners.Withthefallingincomesofforeignhouseholds,thedemandforUSexportsfall,assumingUS’exportsarenormalgoods.Xdecreases.Furthermore,shouldtradingpartnersstarttoretaliateandimposeretaliatorytariffsonUSgoods,US’XfallsfurtherAssumingMconstant,(X-M)decreases.US’ADdecreases,asillustratedbyaleftwardshiftofADcurvefromAD0toAD1.Diagram2: ThefallinADwillcausefirms’inventoriestorise,sofirmsreduceproductionofgoodsandservicesinthenextproductioncycle.RealGDPdecreasesfromY0toY1.Asfirmsdemandforlessfactorsofproductionsuchaslabour,unemploymentrateincreases.Theeconomyoperatesawayfromfullemploymentlevel