Question

When a small country engages in free trade, what will be its domestic price?

Where can you find the increase in total surplus when a small country engages in free trade?

If a small country puts a per-unit tariff on an imported product, will the world price of the product change? Why?

If a large country puts a per-unit tariff on an imported product, will the world price of the product change? Why?

Answer 1

a) If a small country engages in free trade with large countries whose price are comparatively very less for goods. Consumers from small country will import goods at very less price which will make domestic price also less in long run such that when domestic market is independent in long run, they can compete for imported goods aspecially on pricing.

b) When a small country engages in free trade, consumers will find imported goods cheaper. It will raise consumers surplus as they have to pay less price than the domestic price.

c) If a small country puts a per unit tariff on imported products, it would never affect world price because tariff would not be much larger that consumers stop purchasing imported products because small country is not independent and cannot complete the demand of their domestic consumers.

d) If a large country put per unit tax on imported products, it will not change world price because imports of large country is comparatively very less of their exports.