Question

When studying the effects of trade restrictions, what is the defining characteristic of a “small nation” relative to a “large nation”?

1. A small nation has lower per capita income than a large nation.
2. A small nation has less land mass than a large nation.
3. The trade policies of a small nation cannot influence the world prices of its imports and exports while the trade policies of a large nation can.
4. all of the above

When a large nation imposes an import tariff, the world price of the commodity will _____, while the domestic price of the commodity will ______.

1. Remain unchanged, increase
2. Decrease, decrease
3. Decrease, remain unchanged
4. Decrease, increase

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 ________.

1. Get better off, get better off
2. Get better off, get worse off
3. Get worse off, get better off
4. Get worse off, get worse off

8. Which of the following statements about tariffs is false?

1. Export tariffs are prohibited by the U.S. Constitution.
2. On average, tariffs on industrial products are lower in developed countries than in developing countries.
3. Most industrial countries impose lower tariffs on imports of raw materials than imports of final products.
4. Few developing countries have adopted a ‘cascading’ tariff structure.

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. (2 points) nation A’s pre-trade level of price, production and consumption
2. (2 points) nation A’s price, production, consumption and imports of commodity X under free trade
3. (4 points) nation A’s price, production, consumption and imports of commodity X after the imposition of the tariff
4. (2 points) consumption, production, trade and revenue effects of the import tariff
5. (4 points) dollar value of the consumer surplus and producer surplus before and after the imposition of the tariff
6. (2 points) dollar value of the deadweight loss of the import tariff

Answer 1

Question: 1

Solution:

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.