Question

Explain the general equilibrium analysis of a Tariff in large country by the use of the free trade offer curves:

a) Illustrate the effects of tariff in a large country

b) What is the meaning of the optimum tariff and retaliation

Answer 1

a) We can analyse the effect of a tariff in a large country with help of following offer curve of the country:

When a large nation imposes a tariff, its offer curve shifts or rotates towards the axis measuring its importable commodity by the amount of the import tariff. After tariff, the importer want to change tariff in high prices. High prices affect world market prices of large nation. Imposition of a tariff by large nation reduces the volume of trade but improve the nation's terms of trade. This tends to rise and fall of welfare depends on the effect of trade. A reduction in trade volume will reduce welfare and an impovement in terms of trade will increase welfare.

b) Normally, when a tariff is imposed, the terms of trade of the country improve . But the tariff rate should be within a limit. If excessive tariff is imposed total gain resulting from improved terms of trade will not be large enough due to decline in the volume of trade discussed above. An optimum tariff is a tax designed for maximizing the welfare of a country. Optimum tariffs are found in international trade.optimum tariff implies the intersecion of the opposite country's offer curve at a point which is tangent to the imposing country's highest community indifference curve. Tibor Scitovsky and Harry G. Johnson analyses that "The retaliation takes the form of the imposition of an optimum tariff , on the assumption that the other country's tariff remain unchanged", and attention is confines to cases in which each country's demand for imports as a function of its terms of trade is elastic, so that the imposition of a tariff by either country reduces the total volume of imports it receives.