Question

In a two country and a two commodity world, an imposition of home country's import tariff increases its terms of trade and export subsidy reduces its terms of trade. Explain with relevant diagrams.

Answer 1

1. Home Country's import tariff increases its term of trade:

If a country retreat to the imposition of tariff while the foreign country does not respond two types of effects can follow. Firstly, there is an improvement in the terms of trade of the tariff-imposing country. Secondly, the tariffs outcome in the conflict in the volume of trade. These two effects of tariff can be shown in the diagram.

Diagram-1

2. Export subsidy reduces its terms of trade:-

An export subsidy will raise the domestic price and in the matter of a large country, reduce the foreign prices. With the export subsidy-in-place in a two country model export supply at the higher domestic price will balance import demand at the lower power foreign.

Diagram

YN A AO T- umbon P. 1 h Cloth