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Explain.
To resolve the Leontief paradox, Linder proposed a demand-side theory of international trade, suggesting that nations with similar demand patterns develop similar industries, and this is how an international marketplace with differentiated goods develops. Consumers with similar levels of income have similar tastes, and the more affluent the nation, the smaller the proportion of income consumers spend that income on primary (agricultural) goods (Bonham & Nilsson 2006, p.1)
Question
Describe a specific tariff, ad valorem tariff and a compound tariff. What are the advantage and disadvantages of each?
A specific tariff is levied upon an item as determined on a per unit basis, such as weight, number, length, volume or another unit of measurement. They are usually levied on foods, raw materials, and other input goods but can become prohibitively high and start a trade war if prices fall, making it highly unprofitable for a nation to export its goods (Tariff barriers, 2000, Secrets of International Trading). In contrast, an ad valoreum tariff is calculated as a percentage of the monetary value of the imported goods "for example, 10, 25 or 35 per cent" and has the advantage of the tariff being able to keep pace with the rate of inflation (Tariff barriers, 2000, Secrets of International Trading).
A compound tariff is when an ad valorem tariff plus another specified rate is levied, and is also called mixed tariff (Compound tariff, 2009, Business dictionary). A compound tariff is "imposed on manufactured goods that contain raw materials that are themselves...
The specific part of the compound duty (called compensatory duty) is levied as protection for the local raw material industry" (Tariff barriers, 2000, Secrets of International Trading). These types of 'double tariffs' can be particularly apt to start trade wars because they can be prohibitively high, although they do 'protect' raw material industries as well as make it more advantageous for consumers to purchase domestic goods.
Works Cited
Ad valorum tariff. (2009). Business Dictionary. Retrieved March 5, 2009 at http://www.businessdictionary.com/definition/ad-valorem-tariff.html
Bohman, Helena & Desiree Nilsson. (2006). Introducing income distribution to the Linder hypothesis. Retrieved March 5, 2009 at http://www.etsg.org/ETSG2006/papers/DNilsson.pdf
Compound tariff. (2009). Business Dictionary. Retrieved March 5, 2009 at http://www.businessdictionary.com/definition/compound-tariff.html
Leontief paradox. (2009). Econ 355: Lecture Notes. Iowa State. Retrieved March 5, 2009 at http://www.econ.iastate.edu/classes/econ355/choi/leo.htm
Leontief paradox. (2009). Economy Professor. Retrieved March 5, 2009 at http://www.economyprofessor.com/economictheories/leontief-paradox.php
Suranovic, Steven M. (2006, July 31). The Heckscher-Ohlin (factor proportions) model.
Retrieved March 5, 2009 at http://internationalecon.com/Trade/Tch60/T60-0.php
Tariff barriers. (2000). Secrets of International Trading. Retrieved March 5, 2009 at http://www.malaysiaexports.com/inex17.1.barriers.htm
Works Cited
Ad valorum tariff. (2009). Business Dictionary. Retrieved March 5, 2009 at http://www.businessdictionary.com/definition/ad-valorem-tariff.html
Bohman, Helena & Desiree Nilsson. (2006). Introducing income distribution to the Linder hypothesis. Retrieved March 5, 2009 at http://www.etsg.org/ETSG2006/papers/DNilsson.pdf
Compound tariff. (2009). Business Dictionary. Retrieved March 5, 2009 at http://www.businessdictionary.com/definition/compound-tariff.html
Leontief paradox. (2009). Econ 355: Lecture Notes. Iowa State. Retrieved March 5, 2009 at http://www.econ.iastate.edu/classes/econ355/choi/leo.htm
Leontief paradox. (2009). Economy Professor. Retrieved March 5, 2009 at http://www.economyprofessor.com/economictheories/leontief-paradox.php
Retrieved March 5, 2009 at http://internationalecon.com/Trade/Tch60/T60-0.php
Tariff barriers. (2000). Secrets of International Trading. Retrieved March 5, 2009 at http://www.malaysiaexports.com/inex17.1.barriers.htm
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