Question

Which of the following statements are correct for the terms-of-trade effect?

Select one or more:

a. If a large country imposes a tariff, there will be no terms-of-trade effect.

b. If a large country imposes a tariff, the terms-of-trade effect may offset the deadweight losses from the tariff on its economy.

c. If a large country imposes a tariff, the terms-of-trade effect can never outweigh the deadweight losses on its economy.

d. While a large importing nation can force the exporting nation to pay a substantial amount of the tariff, its terms-of-trade must deteriorate after the tariff is imposed.

e. Because a large importing nation can force the exporting nation to pay a substantial amount of the tariff, the tariff is likely to generate a terms of trade gain to the importer.

Answer 1

b. If a large country imposes a tariff, the terms-of-trade effect may offset the deadweight losses from the tariff on its economy.
e. Because a large importing nation can force the exporting nation to pay a substantial amount of the tariff, the tariff is likely to generate a terms of trade gain to the importer.

(If the country is large then it can gain from tariff as the terms of trade effect may offset the deadweight loss so that its welfare increases and it can force exporting country to pay major part of the tariff so there will be terms of trade gain to large importing nation.)