A small country imports industrial goods and exports agricultural goods. Both industry and agriculture are perfectly competitive.

A small country imports industrial goods and exports agricultural goods. Both industry and agriculture are perfectly competitive. A new minimum wage law raises wages in industry but not in agriculture. However, all workers displaced from industry as a result of the new, higher wage find employment in agriculture. Is an import tax on industrial goods the best way to deal with any resulting problems? Why (not)?

USE OF APPROPRIATE DIAGRAMS TO ANSWER EACH QUESTION IS ENCOURAGED.

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Expert Solution

As a result of the rise in wages in industry, manufacturers started reducing the labor force in the manufacturing industry. As a result many of the labors lost their jobs. However, all workers displaced from industry find employment in agriculture.

As a result of the import tax on industrial goods, the imported goods become more expensive and thus the demand of such goods reduces in the market. Due to this customers would be inclined towards products manufactured in Home country and thus the demand of domestic goods increases. In order to suffice the increased demand, the suppliers again need to supply more and thus the industrial production increases, which would require more labor force in the industry.

The goods supplied are not sufficient in the home country, so there is shortage of supply. By importing the goods, the supply would increase. Once the tariff is imposed on the imported goods, the price rises and thus the demand of imported goods come down.

Rahul Sunny answered 1 year ago

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