Trade & Open Economy · intermediate
What moves on the Tariffs & Protection (Small Open Economy) diagram
A higher world price raises the domestic price for a price-taking economy, increasing domestic supply and cutting consumption without generating any tarifftariffA tax on imports, raising their domestic price. revenue.
This is a small open economy: it takes the world price as given.
A global supply disruption sends the world price of this good sharply higher.
The domestic price line rises with it, even with no change in trade policy.
The quantity effects look like a tarifftariffA tax on imports, raising their domestic price., more domestic production and less consumption, but here no government collects any revenue. The money leaves the country.
Examiners ask this as: world price rises, global shortage, import costs rise, commodity spike, terms of trade.
Other scenarios on Tariffs & Protection (Small Open Economy)