Country X imports wheat and exports oil. The world price of wheat is US\$5 per tonne and that of oil is US\$60 per barrel. The exchange rate is $1\ \text{US\$}=\text{₦}380$. Wheat imports are subject to a 20 % ad valorem tariff. In addition, a transport cost of US\$0.5 per tonne is added to the wheat price before the tariff is applied. The government gives a subsidy of $\text{₦}2{,}000$ for each barrel of oil exported.

If Country X imports $200{,}000$ tonnes of wheat and exports $50{,}000$ barrels of oil, calculate:
(a) the total expenditure on wheat in naira after the tariff,
(b) the total revenue from oil exports after the subsidy,
(c) the net trade balance (exports revenue minus imports expenditure).

Does the trade policy improve the trade balance?

Question

Country X imports wheat and exports oil. The world price of wheat is US\$5 per tonne and that of oil is US\$60 per barrel. The exchange rate is $1\ \text{US\$}=\text{₦}380$. Wheat imports are subject to a 20 % ad valorem tariff. In addition, a transport cost of US\$0.5 per tonne is added to the wheat price before the tariff is applied. The government gives a subsidy of $\text{₦}2{,}000$ for each barrel of oil exported.

If Country X imports $200{,}000$ tonnes of wheat and exports $50{,}000$ barrels of oil, calculate:
(a) the total expenditure on wheat in naira after the tariff,
(b) the total revenue from oil exports after the subsidy,
(c) the net trade balance (exports revenue minus imports expenditure).

Does the trade policy improve the trade balance?

Accepted Answer

(a) ₦501,600,000; (b) ₦1,240,000,000; (c) ₦738,400,000 surplus; therefore the policy improves the trade balance.

Neco 2021 Economics Question 19

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