Question

Explain how a tariff reduction leads to an increase in the quantity of imports and a decrease in equilibrium price.

Explain how trade barriers raise wages in protected industries by reducing average wages economy-wide.

You have been placed in charge of trade policy for the U.S. Suppose corn is a crop that is doing well and the export market is beginning to expand. Corn production is considered an infant industry. Corn producers come to you and ask for tariff protection from cheaper corn grown in Canada. What sorts of policies will you enact and why?

Answer 1

ans 1 This is the opposite case of the Work It Out feature. A reduced tariff is like a decrease in the cost of production, which is shown by a downward (or rightward) shift in the supply curve.

ans 2 trade based on comparative advantage raises the average wage rate economy-wide, though it can reduce the incomes of importsubstituting industries. By moving away from a country’s comparative advantage, trade barriers do the opposite: they give workers in protected industries an advantage, while reducing the average wage economy-wide. Trade barriers raise the price of goods in protected industries. If those products are inputs in other industries, it raises their production costs and then prices, so sales fall in those other industries. Lower sales lead to lower employment. Additionally, if the protected industries are consumer goods, their customers pay higher prices, which reduce demand for other consumer products and thus employment in those industries