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Assuming you are the economic adviser of a government, whose president is convinced that increasing the...

Assuming you are the economic adviser of a government, whose president is convinced that increasing the tariffs, then the terms of trade will be affected causing the country’s economy to enjoy more well-being. Keep in mind we are talking about a small country. Does this proposal make sense in theoretical terms? Explain why it does or does not using the theory.

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Answer #1

Answer) The imposition of a tariff could be used to safeguard domestic industries. This move would definitely enhance the level of producer surplus in the market. But the consumer is likely to suffer to due to higher price.

From the point of view of international trade, the imposition of tariff would improve the terms of trade of Nation in the short run only. As the nation is a small Nation and it cannot dictate the level of world prices. The benefits enjoyed by the nation would exist only for a very short duration.

If the tariff prevails perpetually then the nation could lose on the trade share. As it would ultimately reduce to a no trading situation for the small economy.

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