suppose that from an initial equilibrium position in the offer curve diagram country 1 imposes a...

suppose that from an initial equilibrium position in the offer curve diagram country 1 imposes a tarrif on country 2 export good at the same time that consumers in country 2 change their tastes toward wanting more of 2's export good. illustrate and explain the impact of these 2 simultaneous events on country 1's volume and terms of trade . assume that both countries offer curves are elastic throughout

Expert Solution

Offer price is used to analyse trade equilibrium.It simply shows the nation's willingness to export and import at various relative commodity prices.

If country 1 imposes tariff on country 2 export good it means that prices of goods provided by Country 2 will be more in country 1.

And at the same time if consumers of country 2 want more of goods that are exported by 2 then two conditions may happen :

1.There will be scarcity of those goods in country 1 because of more demand in country 2 itself.

2.Prices of goods will be higher in country 1 which are exported by 2.

Terms of trade is the ratio of average price of export by average price of imports. It measures the relative competitiveness of countries

In context of country 1,when tariff will increase and demand of exported goods by country 2 in its own country increase then it will raise the price of goods in country 1 which it is importing. It will deteriorate terms of trade. Ultimately, consumer gods became expensive.

Rahul Sunny answered 2 years ago

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