Tariff effects: An overview Consider two hypothetical countries, Alagir and Ertil. Both countries produce iGadgets, and...

Tariff effects: An overview

Consider two hypothetical countries, Alagir and Ertil. Both countries produce iGadgets, and the price of iGadgets is higher in Alagir than in Ertil. If Alagir and Ertil open to trade, producers in would be more likely to lobby their government for an import tariff on iGadgets in order to protect themselves from foreign competition.

Which of the following statements about the effects of the tariff compared to free trade are correct? Check all that apply.

The tariff benefits producers in Alagir.

In Alagir, some workers at retail and shipping companies that import iGadgets lose their jobs.

The tariff will not reduce the price differential between Alagir and Ertil.

The extra cost of iGadgets gets passed on to products and services using iGadgets in the production process.

As a result of the tariff, the price of the imported iGadget always rises above its domestic price.

Expert Solution

As a result of a tariff the domestic price level in Alagir increase this benefit the producers. Thus tariff benefits domestic produces in Alagir. This statement is correct.

Free trade increase job in retail and shipping companies that import iGadgets because of high quantity of import. But a tariff reduces the quantity of import. Thus the workers in retail and shipping companies that import iGadgets will lose jobs. This statement is correct.

A tariff in Alagir increases the price of import items and reduces the price difference between Alagir and Ertil. This statement is incorrect.

Tariff increase the price of iGadgets. This extra cost due to tariff is passed in the form of high price on the firms using iGadgets as input. This statement is correct.

A country imports a product because the foreign price is lower than the domestic price and gain from trade. Import take place since the price difference between domestic and rest of the world exit. Thus a tariff does no impose at a rate which increases the price above the domestic price. This statement is incorrect.

Rahul Sunny answered 6 months ago

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