Trade & Open Economy · intro
What moves on the Tariffs & Protection (Small Open Economy) diagram
Removing a tarifftariffA tax on imports, raising their domestic price. drops the domestic price to the world price, expanding consumption, contracting protected production, widening imports, and recovering the tariff's deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen..
Start behind a tarifftariffA tax on imports, raising their domestic price. wall: high price, small imports, protected local industry.
The agreement scraps the tarifftariffA tax on imports, raising their domestic price. and the price line falls to the world level.
Consumers buy more at the cheaper price; the least efficient local production exits.
Imports widen and the old deadweight triangles are handed back to consumers as surplus.
Examiners ask this as: free trade agreement, fta, tariff removed, trade liberalisation, cheaper imports.
Other scenarios on Tariffs & Protection (Small Open Economy)