Monday, April 2, 2018

Tariffs and Marginal Analysis--what economists care about.

A big issue this week is the Trump administrations levying of tariffs on imported steel and aluminum.  Just yesterday China announced that it would levy counter-tariffs on a whole host of US goods it imports.  Blah! A potential trade war coming down the road?
I am not sure, but I wanted to show you all how economists, for the most part, view policy changes like this. This applies not only to tariffs but to all other policies, from taxes, regulations to the minimum wage.  I see two aspects:
(1) The "Big Picture" is what economist call "Thinking at the Margins" (you learned this in Chapter 1). They are not so concerned about how the stronger participants in a market behave in reaction to changes in policy, but how it affects the smaller, less obvious participants.
The "marginal players", if you will.  Perhaps unseen, but not unaffected.  This is where the action lies for economists. It has the potential for making the most impact on buyers and sellers, therefore employment and production.
(2) Relative Elasticity (learned in an earlier lesson!). Elasticity is an underappreciated concept and is rarely discussed as a larger part of any policy debate. It underlies any/all decisions made by producers and/or consumers. When government imposes a policy that changes prices it will affect participants buying and selling behavior---some more than others but affect it indeed.
I quickly put together a couple of slides to give you a visual.  Going forward, always try to think "at the margins"  and relative elasticity as to how policy (any policy, not just tariffs) affects people. I think it puts issues more in focus and helps to narrow the debate.
I hope this is helpful! I welcome comments!

Class 1

Margin Folder 1
View My Stats