Question

Suppose a country removes an import tariff. Answer the following questions and show them in one nice big diagram.

a. What is the effect on imports, exports, and net exports? Explain the reasoning with reference to your diagram.

b. What is the effect on net foreign investment and the exchange rate? Explain the reasoning with reference to your diagram.

c. What is YOUR opinion on tariffs and other restrictions to free trade? Carefully discuss.

Answer 1

If a country removes an import tariff a. Imports of good and services of that country will increase ,it will decrease the price level of good and services. Therefore consumption of people will increase in the nation. It will reduce the exports of nation . Because as a result of removing import tariff , foreign goods become cheaper as compared to domestic goods. So consumption of foreign goods will increase. Thereby import will increase and export will decrease. It will reduce the net exports of nation. b. As a result of removing import tariff, net foreign investment will increase. Because trade restrictions are removed. As a result of net foreign investment increase. As imports increase and export of domestic nation falls, exchange rate of domestic nation will depreciate. The price of domestic currency in terms of foreign currency will rise. It will reduce the value of domestic currency. c. Tariff and other restrictions are the tax or duty imposed by one nation on the importing goods and services from other nations. Tariff is imposed to protect newly established domestic industries from foreign competition. It will protect the infant industries in the domestic nation. As a result , government will enjoy high revenue due to import tariff . It will increase the production of domestic country. It will increase the profit of producer due to higher producer surplus.