Question

What differentiates a "large country" from a "small country" in the analysis of the effects of a tariff?

What are the consequences of the difference between being a "small country" and being a "large country" upon the world price when a tariff is imposed? What does this imply about the advisability of imposing a tariff on the tariff-imposing nation's welfare?

Answer 1

Part A

In the analysis of tariff effect between small country large country, the basic difference is that the policy of the small country does not affect the world price, but the policy changes of the large country affect the world price.

Part B

Suppose that the large importing country implements tariff against its imports that leads to an increase in the price of the domestic market and a decrease in the price of the rest of the world. That means the price of importing country raises and exporting country will fall.

Under the small country case, the country’s import share is very low in the world market. So they cannot affect the world demand for the product, so it unaffected by the world price.

Part C

The tariff effect on the importing country depends upon on the summation of consumer, producer and government surplus. The net effect of the tariff is depended upon positive terms of trade effect, negative production and negative consumption. So it has both negative and positive elements. Thus, the net national welfare depends on both these negative and positive elements. The tariff imposing a large country will improve the nation’s net welfare. And tariff imposing small country will reduce the nations net welfare.