Trade & Open Economy · intro
What moves on the Tariffs & Protection (Small Open Economy) diagram
A higher tarifftariffA tax on imports, raising their domestic price. raises the domestic price above the world price, expanding domestic production, contracting consumption, and shrinking imports while creating production and consumption deadweight losses.
The flat line is the world price: what imports cost before any tarifftariffA tax on imports, raising their domestic price..
A trade dispute escalates and the government raises the import duty sharply.
The effective domestic price line lifts by the full tarifftariffA tax on imports, raising their domestic price..
Domestic producers supply more, consumers buy less, and imports get squeezed from both ends. Government collects revenue on what still comes in, but the two deadweight triangles are pure loss.
Examiners ask this as: trade war, tariff rises, protectionism, import duty, domestic price rises.
Other scenarios on Tariffs & Protection (Small Open Economy)