Prices will go up more in a large country that imposes tariffs relative to a small county that imposes tariffs.

A. True

B. False

Explain in 2-3 sentence.

Expert Solution

Option B. False.

When a large country imposes an import tariff on imported goods, then it experiences an improvement in the terms of trade while a small country does not.
This is because, in a large country when tariffs are imposed, imports fall and it leads to lower prices.
When prices are lower, there will be only a smaller loss in consumer surplus and at the same time, there will be smaller gains in producer surplus.
But in smaller countries, prices will go up more and hence there will be a greater loss of consumer surplus and greater gains of producer surplus.

Rahul Sunny answered 2 years ago

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