When studying the effects of trade restrictions, what is the defining characteristic of a “small nation” relative to a “large nation”?
When a large nation imposes an import tariff, the world price of the commodity will _____, while the domestic price of the commodity will ______.
7. When an import tariff is imposed on an intermediate good, producers of this immediate good in the nation will ____________ while the producers that use the intermediate good as an input will ________.
8. Which of the following statements about tariffs is false?
Import Tariff in a Small Nation
Suppose that nation A is a small nation with demand and supply of commodity X given by Qd = 120 - 20P and Qs = 20P, respectively. Assume that the free trade price of commodity X is $1, and nation A imposes a 150% import tariff on commodity X. Draw a figure similar to Figure 8.1 in Salvatore and compute the following:
1 The correct option is C. The trade policies of the small nations cannot influence prices of the import and export, whereas the policies of large nations can effect the world prices.
2 The correct option is D. The prices for the exporting countries will fall and the importing country will increase.
3 The correct option is B. The producers will be better off, by import tariffs while the producers that use such goods will be worse off by because they have no choice either to by intermediate goods from domestic suppliers at a higher price or not to purchase it.
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