Tariff- Trade Protectionism Flashcards
(16 cards)
What is a tariff?
A tariff is a tax on imported goods, designed to increase their price and reduce imports, protecting domestic producers.
What happens to the domestic supply curve when a tariff is imposed?
The domestic supply curve shifts upwards by the vertical amount of the tariff, reflecting the higher price needed to compete with imports.
In a free trade diagram, what does Pw represent?
Pw represents the world price without tariffs. It’s lower than the domestic equilibrium price.
What is the effect of a tariff on price?
The price rises from Pw to Pw + Tariff. Domestic producers increase supply, while domestic demand contracts.
What is the vertical distance between the world supply curve (Sw) and Sw + Tariff?
The size of the tariff – the tax per unit on imports.
What are the effects of a tariff on quantities?
Imports fall (difference between Q2 - Q1 narrows).
Domestic supply increases from Q1 to Q3.
Domestic demand falls from Q2 to Q4.
What is tariff revenue?
It is the area of the rectangle formed by the tariff value × quantity of imports after the tariff (Q4 - Q3).
What are the deadweight welfare losses of tariffs?
Production inefficiency: Domestic producers produce more (Q1 → Q3) at higher marginal cost than foreign suppliers.
Consumption inefficiency: Consumers buy less (Q2 → Q4), reducing total surplus.
What are the arguments for trade protectionism?
Protecting infant industries
Preventing dumping
National security
Preserving jobs
Improving the trade balance
What does ‘excess demand’ mean in the context of a tariff?
It’s the gap between quantity demanded and supplied at the new higher price. It shrinks after a tariff is imposed, reducing imports.
How does a tariff support infant industries?
A tariff raises the market price (from Pw to 𝑃𝑤 +tariff
Pw+tariff), allowing domestic supply to increase from Q1 to 𝑄3. This gives infant industries protection from foreign competition while they develop.
How do tariffs combat dumping?
Dumping involves foreign firms selling below cost (COP). Tariffs raise import prices, reducing the ability of dumped goods to undercut domestic prices and allowing domestic firms to stay competitive.
How do tariffs affect domestic employment?
As domestic supply increases from q1 to q3 , more labor may be required to meet the increased output. This can help protect or even grow employment in the protected industry.
How do tariffs address low-cost foreign labor concerns?
Countries with lower labor standards may undercut domestic wages. Tariffs raise the price of these imports (e.g. from Pw to pw + tariff) reducing their quantity (from q2- q1 to q4- q3) and giving domestic firms a better chance to compete.
How do tariffs generate government revenue?
Government collects tariff revenue from remaining imports:
Revenue = Tariff per unit × Imports (Q₄ − Q₃)
This appears as a rectangle on the diagram.
How do tariffs help the current account (CA) position?
By reducing imports (smaller import gap from q2- q1 to q4- q3), fewer goods are purchased from abroad, potentially improving the trade balance (exports - imports), helping the current account.
