The Underclever Economist

Am I being dumb here?

Let’s say they’re bicycles. Effect on domestic consumers is 0.6m of them paying $30 extra for an imported bicycle = $18m loss

Domestic producers get to sell an additional 0.2m bicycles @ $300 each = $60m gain

Government takes in $30 on 0.6m imported bicycles = $18m gain

Overall effect = $60m + $18m – $18m = $60m gain

The exercise is supposed to show tariffs damage the overall economy, so what am I missing?

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41 thoughts on “The Underclever Economist

  1. Won’t the internal producers ramp up their prices to 330 as well? Leaving the consumers out of pocket?

  2. @Graeme: you’re right, but this only increases the positive impact on GDP as the additional domestic bikes are sold at 330 each rather than 300.

    Consumers are out of pocket either way which is perhaps what the question is getting at when it asks about ‘national wellbeing’ rather than ‘the economy’

  3. Consumers are out of pocket either way which is perhaps what the question is getting at when it asks about ‘national wellbeing’ rather than ‘the economy’

    I’m not sure, I think it’s supposed to show deadweight costs somewhere.

  4. Also, 200,000 consumers are losing out by not being able to buy bicycles which they would have otherwise done had there not been a tariff.

    I’d count the govt tariff take as a net loss, too 😛

  5. Won’t the internal producers ramp up their prices to 330 as well?

    I thought about that, but it doesn’t change the overall picture much.

  6. Plug the numbers in to this diagram.

    Ah, that’s the diagram I’ve been working off. This example of yours is much better as it uses real numbers, thanks.

  7. Also, over time, the quality of domestic bikes produced starts to diminish. With the loss of competition from other areas, complacency sets in and quality is reduced
    Those that do buy a domestic bike, eventually buy a poorer quality bike

  8. I am not an economist but surely in the case of bike tariff as opposed to tariffs on cotton, wouldn’t it also increase bike crime as they would cost more?
    Which of course would be another cost to the economy.

  9. The tariff raises the price of all bikes domestically. So the loss is to all consumers paying that now higher price.

  10. The tariff raises the price of all bikes domestically.

    I don’t think so – domestic production increases by 200,000 after the introduction of tarriffs which suggests that the domestic production is price competetive and demand has gone up.

  11. The implication is that the imported product is of higher value than the domestic as it is preferred by consumers 8:3 when the price is the same. (e.g. Volkswagen vs Morris?) The tariff corrects the price/value as the poorer domestic product is now cheaper.

    The domestic producers would be stupid raise their price to match the import as their product is of lower value, so it would be back to square one for the ratio of import vs. domestic sales but now at a lower volume because of the higher price.

  12. That’s the point – consumption has reduced from 1.6m to 1.4m. Even if the local bikes are not at the new price, internal makers either cannot produce enough or sell enough (possibly for reasons of perceived quality) to satisfy the old level of demand. Without any imports, the supply and demand curves come into balance at a higher price level still but also at a lower volume level than before tariffs. There is no point in setting a tariff above the equilibrium level.

  13. Domestic producers gain 0.2m bicycles @$300 each but domestic consumers lose 0.2m bicycles @ $300 each as there are fewer domestic consumers with bikes (which they value at $300).

  14. Mal, that would only hold true if the domestic suppliers had a supply curve that said they would not increase volume at a higher price. If imported goods are now 330, then most suppliers would be willing to produce more, ceteris paribus… The higher the price, the more you supply. If they cap their price at 300, then they will continue to produce what they are willing to at 300. Why would they increase supply unless their profit function has changed?

  15. But for those of us who are not cyclists, well-being has been improved by taking 0.2m lycra-clad hazards off the roads and pavements.

  16. It assumes that importers won’t swallow some of the tariff so must be hypothetical.

  17. BiND, what real difference would that make? You are just fiddling with the relative amounts consumers lose and vendors gain

  18. Graeme called ceteris parabus and so wins the thread. Unless he loses it as it might be like being the first person to mention Hitler.

  19. This is the crap they teach in MBA classes? And you pay good money for this? You probably know as much from your business experience combined with drinking beer with at least ONE person who runs his own business, makes payroll, whatever. And if you don’t have one of those people in your life, take the money you’re paying for an MBA and buy such a person (ok, a couple people…they can each be rather myopic and possibly rent seekers themselves) dinner on a regular basis…but I digress….

    Money, as a distinct value, is a distraction to most, if not all, economic analysis. These instructors (philosophers) want to force you to think about a problem that came out of their heads in their terms, limited to the limitations of their own understanding and/or imagination. Yes, there is an objective answer, but in only in the context of their terms and/or understanding.

    Assuming these numbers, the only thing that really matters is that 200,000 people who would have bought bikes did not. What they spent that money on and who benefited as a result is a complete unknown. What the unemployed bike manufacturers did instead of making bikes is also a complete unknown. What is known is that an unreasonable price hike was introduced, thus cutting demand for bikes. To what degree itself depends upon the elasticity of both supply and demand curves, but whole other can of worms. The tariff, putting aside the reality that a government does need to get its money from somewhere, is a burden that has a negative “net effect on national well-being”…whatever the f’ that is supposed to be.

  20. wtp, that’s a good, concise critique of the blinkered, mono_dimensional thinking behind most tariff discussions.

    There is much more unseen than seen in an economy, but you wouldn’t guess that from listening to economists.

  21. I’ve fed these questions into my Grauniad-endorsed Murphomatic Opinion Calculator, with the following results:

    1) Domestic Manufacturing is boosted
    2) Manufacturing becomes more local
    3) Unemployment benefit payments are reduced
    4) More tax to spend on our NHS

    Wins in every direction, and while 2nd and 3rd order effects are missing from the calculation, it’s 1st Order effects that matter. No one remembers who came second.

    Clearly the tariff should be set higher, and other tariffs should be applied, though neoliberals and others on the far-right will dispute this for their own selfish ends.

    This should not be seen as an endorsement of Trump’s trade policies, or nations seeking to leave the EU Customs Union. Those things are very different. Very, very different.
    .

  22. Ten ton trucker,
    BiND, what real difference would that make? You are just fiddling with the relative amounts consumers lose and vendors gain

    My comment was aimed at William of Ockham who’d asked if the figures given are real observed data?

  23. Thanks everyone. As my original post might have implied, there’s actually a calculated answer to this. Graeme pointed me to the website where you can plug the numbers in, but one reader emailed me with the answer.

    This is the crap they teach in MBA classes?

    I’d be surprised if there is a global economics course which doesn’t teach the quantified effects of a simple tariff.

    You probably know as much from your business experience combined with drinking beer with at least ONE person who runs his own business, makes payroll, whatever.

    True, but I’ve generally found mastery of a subject is a combination of knowing the theory and knowledge of practical application.

  24. “What the unemployed bike manufacturers did instead of making bikes is also a complete unknown. ”

    That’s external to our domestic market. What is also not shown is that domestic bike manufacturers have increased production by a third, so will presumably be attracting more labour/materials etc, thereby raising commodity prices for all other sectors at the margin.

  25. Answer (with thanks to K, who provided it):

    All existing UK producers benefit from $30 increase = 30 x 0.6 = 18
    New UK producers benefit by = 30x 0.2 /2 (right angle triangle) = 3

    Domestic consumers who disappear = 0.2 x 30 /2= -3
    UK domestic consumers who pay higher price 1.4 x 30 = -42

    Gains from tariff = 0.6 x 30 = 18

    Net: 39-45=-6

  26. True, but I’ve generally found mastery of a subject is a combination of knowing the theory and knowledge of practical application.

    Generally true, but there’s a lot of bollocks in economic theories. And it’s theory that is itself the problem. Where, aside from amongst the economically ignorant, who can only see one side of such issues, and the economically “educated” elite, who seek status telling the ignorant what they want to hear, does one even begin to consider that adding 10% to the cost of something benefit society as a whole? This tariff could just as easily be a minimum wage law or a convoluted tax scheme. It’s similar to the story about the hotel room, the bellboy, and the missing dollar.
    http://puzzles.nigelcoldwell.co.uk/twentyeight.htm

    I’d like to get back to this on a couple other points but that would require coffee and some time in my schedule today…which isn’t likely.

  27. Where, aside from amongst the economically ignorant, who can only see one side of such issues, and the economically “educated” elite, who seek status telling the ignorant what they want to hear, does one even begin to consider that adding 10% to the cost of something benefit society as a whole?

    I agree with your general thrust, but this particular example was a demonstration of how tariffs *harm* society as a whole.

  28. Thanks. I am glad I got the same answer. What is interesting is that your first thoughts got you 3 effects and yet you ended up considering 5 effects of a simple alteration to a system. It is also amusing that the “University of life” people were unable to get very close to an answer

  29. Since it’s certain that tariffs make the citizens of nation poorer, it’s surprising that no country enriches its citizens by removing all tariffs.

    You’d think somebody would be smart enough to do that.

  30. Not quite Graeme.

    The “University of Life” people came up with the right answer immediately.

    The “correct” answer, calculated using some pretty suspicious looking assumptions, took rather longer.

    I’d like to see this string of numbers and letters tested in real life:

    “New UK producers benefit by = 30x 0.2 /2 (right angle triangle) = 3”

  31. I agree with your general thrust, but this particular example was a demonstration of how tariffs *harm* society as a whole.

    Understand. Not to sound like (or be?) a jerk by beating a dead horse but as I indicated above, such a thing should be self-evident. The only reason it isn’t is because some academics muddy up the issue. They’re getting like lawyers. If it weren’t for academics, we wouldn’t need most of them. Also, not sure if Lorenzo is being facetious or not. Can’t tell with these things anymore.

    While this is about more than tariffs, speaking just to that subject it would be wrong to say that they are ALWAYS bad, just as it is definitely wrong to say that in the abstract they are a good thing. They are quite the political football and in an ideal world would be completely unnecessary. However if one country chooses to harm its citizens by taxing them to subsidize what it considers a critical and/or strategic industry, thus allowing it to dump goods in another country with the purpose of putting the target country’s related industry out of business, the target country would be foolish not to put up a tariff to bring those subsidized widgets back in line with whatever the perceived market costs would be (economics opens cans of worms all over the place). We recently had a cross-the-pond feud here in this regard in reference to subsidies re Boeing vs. Airbus. IIRC, I pretty much stayed out of it as I wasn’t sure who started it. Though of course Airbus, by its very nature as a quasi-government corporation did start it…but Boeing has huge defense contracts that do the same thing…but Airbus…but Boeing…but but but.

    Also, what Jack C said. The University of Life is the only real testing ground. If academics, especially the economic ones, were required to work 20 years or so before retiring to universities to teach I think we would all be better off. The academics included.

  32. Not to sound like (or be?) a jerk by beating a dead horse but as I indicated above, such a thing should be self-evident. The only reason it isn’t is because some academics muddy up the issue.

    I’m pretty sure it’s not just academics who endorse tariffs, nor are they the source of all economic stupidity.

    The University of Life is the only real testing ground. If academics, especially the economic ones, were required to work 20 years or so before retiring to universities to teach I think we would all be better off.

    I agree, and a few academics spring to mind. But I’ve also come across plenty of useless and rather dim people who bang on about The University of Life and The School of Hard Knocks and when asked if they have any qualifications they wave their hands in the air and say “these are my qualifications”. You can do a lot with practice and no theory, but it will only take you so far. True, there are some genuine masters of their craft who can probably bypass all theory just by being brilliant, but they’re rare beasts indeed. What you generally need is a good grounding in the theory followed by a tonne of real-world experience. For that reason I have no problem learning theories, regardless of how daft or unnecessary they appear.

  33. You are using the change in economic surplus (including tax revenue) as a proxy for the change in national well-being. In doing so, you’re assuming the aggregate demand and supply curves are linear. Else, the extra producer surplus wouldn’t be a triangle and the lost consumer surplus wouldn’t be exactly a trapezoid, so the one-half rule wouldn’t work. Still, you wouldn’t be able to get rid of the deadweight loss altogether.

    I’m pretty sure it’s the approach they expect you to take because you’ve been given all the numbers you need and nothing besides, and they fit nicely into the formulas.

    It’s demonstrably true that, under the standard assumptions, import tariffs reduce economic (aka social) surplus. But is it a sensible measure of national well-being? This framework treats all monetary gains and losses equally for the sake of national welfare. For any two economic actors A and B, when A gains or loses X monetary units, the impact on the overall well-being is the same as when B gains or loses X units. Also for any A and B, A’s losing X cancels out B’s gaining X so the net welfare impact is zero. An oil major losing $100K has the same impact as an employee getting poorer by $100K. A rich guy gaining $100K cancels out a middle-income guy losing $100K.

    Also, adding up the impact on corporations and individuals is a questionable idea.

  34. You are using the change in economic surplus (including tax revenue) as a proxy for the change in national well-being. In doing so, you’re assuming the aggregate demand and supply curves are linear.

    Sure, it’s a theoretical model subject to infinite real-world flaws. In this regard it’s not much different to engineering (hence we apply large factors of safety).

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