The effects of a tariff(numerical example)

Nikola SpustováMonika Tibenská

A tariff: • raises the price of a good in the importing

country lowers it in the exporting country

Consumers:lose in the importing country gain in the exporting country

Producers:gain in the importing countrylose in the exporting country

Trade in COTTON

Home country: D=150-30PS=30+10P

Foreign country: D*=100-40P*S*=20+40P*

Problem 1

Derive and graph Home’s import demand schedule.

What would the price of cotton be in the absence of trade?

Problem 2Derive and graph Foreign’s export supply

curve

What price of cotton that would prevail in Foreign in the absence of trade?

Suppose that Foreign and Home trade with each other, at zero transportation cost.

Find and graph the equilibrium under free trade. What is the world price and the volume of trade?

Problem 3

Home imposes a specific tariff of 0.5 on cotton imports.

Determine and graph the effects of the tariff on the following:

a) the price of cotton in each countryb) the quantity of cotton supplied and

demanded in each countryc) the volume of trade.

Problem 4

Show graphically and calculate:

a) the terms of trade gain b) the efficiency lossc) the total effect on welfare of the tariff.

Thank you for attention!